Industrials, smart investing & real estate: The Companies and Markets Show
The Companies and Markets Show covers three main topics: the contrasting fortunes of UK industrials Diploma and Essentra, the mechanics of retail stock trading in the UK (RSP system vs. direct market access), and the state of real estate markets amid geopolitical uncertainty. The episode examines how the US-Israeli war with Iran is creating fresh economic headwinds across all three sectors.
Summary
The episode opens by noting that the industrials sector, recently viewed as a safe haven from AI disruption, is being reassessed following the outbreak of the US-Israeli war with Iran. Diploma (DPLM) is highlighted as a top performer, with shares rising 20% after its latest trading update. Analyst Valeria Martinez attributes much of this success to Peerless, a 2024 acquisition that distributes specialised aerospace fasteners (nuts, bolts, rivets) to major manufacturers like Airbus and Boeing. Peerless is growing at 13-14%, well above its 9% historic average, driven by a decade-long backlog in commercial aircraft orders. Another US acquisition, Windy City Wire (acquired 2020), supplies low-voltage cables for data centres, benefiting from AI and cloud infrastructure buildout. Organic growth excluding Peerless remains above the company's 5% financial model target, rebutting the 'one-asset story' concern. Diploma trades at around 27x forward earnings, reflecting its quality compounder status. By contrast, Essentra (ESNT) has struggled for years but is showing early signs of recovery after shedding its packaging and filters divisions to focus on small plastic injection-moulded components. Full-year results showed sales growth across all three regions on a constant currency basis, and management confirmed guidance while targeting a rebuild of margins to historic mid-teen levels. Essentra trades at around 14x forward earnings, pricing in a fairly bleak scenario and offering recovery upside if management delivers. The Middle East conflict was flagged as a potential demand headwind for European industrial markets.
The second segment explains the mechanics of UK retail trading. The RSP (Retail Service Provider) system, used by platforms like Hargreaves Lansdown, Interactive Investor, and AJ Bell, routes orders to competing market makers (e.g., Peel Hunt, Winterflood, JP Morgan, Jane Street) who return competing quotes. The system delivers an average price improvement of around 25% over the displayed bid-offer spread. Importantly, market makers do not charge platforms per trade nor pay for order flow (unlike the US practice used by platforms like Robinhood), so dealing fees charged to retail investors reflect infrastructure and technology costs rather than direct trade execution charges. An alternative, Direct Market Access (DMA), used by neo-brokers like Trading 212, routes orders directly to trading venues and offers no guarantee of execution within the spread but may achieve prices closer to the midpoint. Some platforms also 'deal as principal,' crossing internal buy and sell orders using their own inventory. The segment also addresses growing fragmentation across trading venues, which risks reducing liquidity and price discovery on central exchanges like the London Stock Exchange, potentially widening spreads for retail investors. On share ownership, the hosts clarify that retail investors are beneficial owners (entitled to dividends and voting rights) but not legal owners — the platform holds legal title — meaning companies like Barclays only see the platform's name on the shareholder register.
The final segment covers real estate, drawing on Hugh Moorhead's attendance at the MIPIM property conference in Cannes. Despite ~20,000 attendees showing relative optimism and a focus on rental growth fundamentals rather than interest rate speculation, the hosts note this may underestimate the threat of an energy price spike feeding into inflation, bond yields, and debt costs. The UK housing market faces renewed headwinds, with spring selling season optimism undermined by rising mortgage rates and deals being pulled. House builders like Vistry are cutting prices to complete sales, pressuring margins. In the London office market, core sub-markets (City, West End, Canary Wharf) remain healthy, but peripheral areas like Hammersmith, Aldgate, Old Street, and Whitechapel are seeing weaker demand. Companies like Derwent London and Helical, looking to dispose of assets in East London, may struggle to achieve book value. Savills' $700m acquisition of US real estate investment bank Eastill is flagged as a surprise move aimed at boosting dealmaking capabilities and US market share to compete with CBRE and JLL. The episode closes with scepticism that property industry participants are thinking deeply enough about AI's long-term disruption potential, though proprietary data advantages and the physical necessity of certain asset classes (housing, healthcare, logistics) are acknowledged as partial defences.
Key Insights
- Diploma's Peerless acquisition is the primary driver of its recent earnings upgrades, growing at 13-14% versus a 9% historic average, underpinned by a decade-long order backlog at Airbus and Boeing that gives Peerless near-guaranteed forward demand visibility as an approved supplier to almost every major aerospace company.
- Diploma's Windy City Wire division is benefiting directly from AI infrastructure spending, supplying low-voltage cables to the data centre buildout, demonstrating that traditional industrial distributors can have indirect but material exposure to the AI capex cycle.
- In the UK RSP trading system, market makers compete to fill retail orders and on average deliver a 25% improvement over the displayed bid-offer spread, and crucially do not charge platforms per trade nor pay for order flow — unlike US platforms such as Robinhood where payment for order flow is a major revenue stream.
- Retail investors using UK platforms are beneficial owners but not legal owners of their shares — the platform holds legal title, meaning the underlying company only sees the platform's name on its shareholder register, and voting rights passage to retail investors varies significantly by platform and product type.
- Increasing fragmentation of UK equity trading across bilateral venues, dark pools, and central exchanges risks reducing liquidity and price discovery on the London Stock Exchange, which matters for retail investors because their displayed bid-offer spreads are sourced from that exchange.
- Real estate professionals at MIPIM were notably willing to 'look through' Middle East conflict disruption and focus on rental growth fundamentals, but the hosts argue this may be underestimating how an energy price spike could transmit into inflation, higher bond yields, and increased real estate debt costs.
- Essentra's CEO told the hosts that the company has a plan to rebuild margins to historic mid-teen levels now that one-off system transition costs are easing, but also acknowledged that rising geopolitical uncertainty in the Middle East poses a risk to European industrial demand in the near term.
- Savills' ~£700m acquisition of US real estate investment bank Eastill was described as a surprise move that no one anticipated, aimed at competing with CBRE and JLL on large real estate transactions in the US market where Savills has historically been underweight, though retention of Eastill's dealmakers in a more corporate environment remains an open question.
Topics
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