Quality compounders are companies that consistently achieve earnings growth and generate high returns on invested capital across different economic cycles. Approximately one-third of the Forager International Shares Fund consists of these businesses, which continue to execute, but still trade at attractive valuations.
One of the quality compounders to do well in the last financial year was building materials company CRH (NYSE:CRH). Its portfolio of “heavyside” materials, including aggregates and cement, is benefiting from increased funding in the US to restore the country’s deteriorating infrastructure. CRH also has significant pricing power from the very localised nature of heavy quarried materials, where expensive transport costs limit the shipping radius. Another part of our thesis was that following the company’s move to a US primary listing (from Ireland) last September, investors would start to close the discount that CRH has historically traded at versus North American peers. Whilst the discount has slightly narrowed, CRH still trades at around a 40% discount. There is still value to be realised. CRH added 1.4% to Fund returns last financial year.
Installed Building Products (NYSE:IBP), a market-leading insulation installation and distribution company, contributed 1.3% to the Forager International Shares Fund returns during the last financial year, despite a tough housing environment in the US. The company increased revenue by 5% in 2024, a year where broker estimates suggested the company would struggle to grow at all. Management’s strategy of buying small competitors and rolling hem into the group, improving buying power and removing overhead costs along the way, continues to add value for shareholders. While our investment thesis is playing out exactly as we’d hoped, very substantial share price appreciation means the value on offer is not what it once was. Wild fluctuations in Installed Building Products’ share price have given us plenty of opportunity to add to Fund returns over the past few years. We have reduced our weighting to this high-quality but cyclical business significantly over the past year as the share price more than doubled, and would look to add again on any weakness.
APi Group (NYSE:APG) continued its strong contribution for the second year running, adding 1.4% to Fund returns. The business was founded in 1926 as a small insulation distribution company and has grown organically and through acquisitions to become a market leader in safety and specialty services. APi Group continues to acquire smaller competitors and benefit from various secular tailwinds. Management has also proven its ability to integrate and turn around larger acquisitions such as Chubb, which has increased its scale and boosted returns since the company acquired it in 2022.
The Biggest Contributor - An Emerging Quality Compounder
Zeta Global (NASDAQ:ZETA) was the top contributor to the Forager International Share Fund during the last financial year, adding 2.1% to portfolio returns. With a limited public company track record, it took some time for the market to appreciate the growth potential and execution of this data-driven marketing technology company. The company’s ‘one-stop-shop’ marketing platform combines client data with proprietary data to generate customer insights used in multi-media marketing campaigns across SMS, email, display ads and social media.
Despite the challenging macroeconomic environment, Zeta has grown about 25% annually due to the usefulness of its proprietary data. Perhaps counterintuitively, its larger customers often view depressed business conditions as an opportunity to increase spending on the platform while their competitors are in a weakened state. Whilst the share price has appreciated more than 100% over the past year and we have reduced the Fund’s holding, it is still valued at a discount to peers and offers plenty of upside should management continue to execute.
This is an excerpt from the Forager International Shares Fund section of the June Annual Report