Category Investments

Companies you've probably never heard of but can't live without

20 August 2021 Old Mutual Wealth

Since the market crash in March 2020, the phrases “disruption” and “global supply chain” have become household terms. Seeking stability and sound companies that promise to deliver value over the long run, investors have realised that the networks between suppliers and manufacturers can offer unique and exciting investment opportunities.

In some cases, these solid fundamentals are found in business-to-business companies that most people have never heard of but can't live without, says Old Mutual Wealth Private Client Securities research analysts Tasneem Samodien and Victor Mupunga.

The analysts say that high quality, business-to-business companies displaying dominance in their respective supply chains due to their superior supplier bargaining power are well positioned for sustained strong performance. "What one finds with these types of companies is that because of the uniqueness of their offering or the cost of switching from one supplier to another, they tend to dominate market share.

"These types of companies tend to supply entire sectors with critical parts or key components, offering investors broad exposure to industries poised for growth," says Samodien. According to the analysts, Givaudan and Taiwan Semiconductor Manufacturing Company (TSMC) are two such companies.

"Swiss-based Givaudan, which commands 25% global market share, owns the ingredient formulations used in many consumer products, such as Colgate, Unilever, Procter & Gamble and L'Oréal, ensuring its clients cannot easily switch between ingredient manufacturers. As a result, Givaudan holds an advantageous position in the value chain, with strong negotiating and contracting power," says Samodien.

She says that since listing in 2000, Givaudan has widened the gap between itself and its competitors. "The business has two divisions and seven product lines. Fragrances and flavourings for food and beverage companies account for 56% of sales, with the remainder going to household products.

"Importantly, there is a 50-50 split between multinational customers and smaller players, with a good geographical spread. Following the growth in global consumption, the global flavour and fragrance industry is expected to grow at a compound average annual growth rate of 5% over the next five years," says Samodien.

TSMC is another example, says Mupunga. "Boasting a global market share of over 50%, the dedicated foundry produces chips for some of the most well know companies including Apple, Samsung and Nvidia.

"By separating the manufacturing from the rest of the chip-making process (design and marketing), TSMC had created a niche and an eco-system of companies dependent on their business," he says.

Due to the critical role that TSMC plays in enabling product development within its customers' businesses, manufacturers are willing to share detailed roadmaps of their future plans, enabling TSMC to better serve them. "In this way, the group is regarded as an independent partner rather than a supplier by its clients. This foundation of trust with a wide range of customers is a valuable moat keeping out competitors," he says.

Mupunga says the group's dominant market position is validated by its impressive performance over many years. "Revenue and earnings per share over the last fifteen years have grown at an average compound rate of 11.4% and 12.2%, respectively," he says.

However, says Mupunga, one of the group's most pronounced risks is its geo-location and the danger of protectionism from the West. "TSMC has partly responded to these threats with plans to open a facility in the US. Given TSMC’s unique market position, investors have rewarded the company with a premium valuation relative to its peers. In our view, this premium is justified by TSMC's market dominance and strong fundamentals," he says.

Ultimately, say the analysts, when looking for solid investments, a thorough analysis may lead one to somewhat unexpected and surprising companies. However, both Samodien and Mupunga hold that strong players with solid fundamentals and a dominant position in the global supply chain provide a compelling investment case, especially during times of uncertainty.

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