Four post-Brexit UK growth opportunities

Since the global financial crisis, central bank monetary policy has suppressed interest rates, leading to the greatest search for income in investment history.

As the yield on government gilts plunged to historic lows, premiums rose for UK stocks paying decent streams of income. Now, as global growth stalls, and fresh uncertainty is unleashed through Brexit, we have entered a new phase: the great hunt for growth.

The financial crisis is now seven years behind us, yet the growth engine is still stuttering. Despite further interest rate cuts on the horizon as well as a resumption of quantitative easing, the UK and other developed economies continue to exhibit low rates of actual and nominal growth.

Deflation remains a constant risk as countries such as China seek to export their surpluses into overseas markets.

In this low-growth and uncertain environment, where deflation threatens, investors will pay more for those companies that can produce growth.

The question is where can post-Brexit growth-hunters still find opportunities without paying a premium?

Fortunately, there are a number of UK companies trading at attractive valuations, which offer compelling long-term growth prospects.

These companies share a number of commonalities, including high margins, high returns on capital and strong cash flows.

Compounding these attractive returns offers investors the chance to have superior long-term returns in a difficult environment.

ITV

A classic growth compounder, ITV is still the dominant free-to-air channel in the UK, with a growing production unit operating more globally.

High margins, cashflows and returns on capital show the quality of the underlying business. Shorter-term worries of a slowdown in the UK and long-term structural issues look misplaced as it begins to increase its viewership.

Furthermore, the recent special dividend left the balance sheet virtually unlevered and capable of more special dividends or acquisitions.

Upside on retransmission revenue from satellite operators or that it might be a potential acquisition target from operators such as Liberty or BT have not been factored in into the share price.

Patisserie Holdings

Retail "roll-out" stocks are one of the classic growth stock "must-haves" given their high potential rates of growth and Patisserie Holdings is no disappointment.

The core Patisserie Valerie brand continues its roll out and the format has further developed from the high street into Debenhams, service stations and other locations.

Such retail stocks have low roll-out costs, rapid paybacks and good cashflow characteristics given their cash/payment terms.

The company also has a number of other smaller brands in the early stages of potential roll out which adds to the growth mix.

Management is high quality and backed by serial entrepreneur Luke Johnson as chairman. As cash builds in the business, special dividend or acquisitions are a possibility.

Morse

The number two in the home collected credit loan market, Morse is a classic compounder in an unloved market. The company earns high returns: over 20% on equity despite a virtually unlevered balance sheet.

The company's restructuring could also drive returns higher as it modestly gears up, cuts costs further and takes advantage of current regulatory uncertainty to buy up smaller competitors.

The operating cash dynamics are therefore attractive and the company is committed to paying out the majority of earnings in dividends, which we view as a rational capital allocation choice.

Eckoh

Eckoh is the UK's market leader in secure payment and customer contact solutions. It is also growing strongly in the US.

The key driver of demand is the increasing risk of fraud at contact centres where customer credit card information is seen and therefore vulnerable.

In this area, Eckoh has a market-leading solution in Haloh, which "tokenises" data, preventing call centre operators seeing it and thus improving security.

The company has an unbroken growth record from 2009. Over the last three discrete years it has posted over 20% growth, and this is forecast to continue for at least another three years.

Our view is there is still much further to go in the UK, but we see the US at the real opportunity standing at eight times the UK's market size.

This is a poorly followed company - we believe an 'incubation' investment could have great potential.

Philip Harris is fund manager of the EdenTree Investment Management UK Equity Growth.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.