11/09/98 GREAT SCOT--THAT'S A BARGAIN (int'l edition)

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GREAT SCOT--THAT'S A BARGAIN (int'l edition)

It has been a wild ride on European stock markets as sharp corrections followed months of massive gains. Yet Colin W. McLean, head of Edinburgh-based investment firm Scottish Value Management, is snapping up shares in companies ranging from telecommunications to transportation and buying into undervalued closed-end funds and takeover plays. ''There's still a lot of money to be made in equities in Europe,'' he says.
From his airy offices overlooking Edinburgh Castle, the 46-year-old McLean directs the SVM European Growth fund, which earned BUSINESS WEEK's top five-year risk-adjusted rating. Only 60 out of a universe of 500 offshore equity funds received an ''A'' grade. SVM, with a five-year total return of 261.2%, came in at No.1. The sterling-denominated fund has $75 million in assets. In dollar terms, SVM managed to weather this year's turbulence with a return of 3.8% through mid-October.
A former actuary, McLean scrutinizes corporate balance sheets intensely. Since European accounting rules allow companies to fudge net profits, McLean focuses on operating earnings before interest and tax. ''We look for sustainable profitability and margins that can be improved,'' he says. For instance, when British bus operator Go-Ahead Group PLC came to market in 1994, its single-digit margins were unimpressive. But McLean saw more. The company renegotiated wages and invested in new buses, raising margins to 14%. In the past four years, its stock price has quadrupled.
BIG DISCOUNTS. McLean is looking for deregulation and privatization to repeat the trick for other little-known transportation companies. Stagecoach Holdings PLC is a current favorite. Its strong management and Continental expansion plans have helped its stock more than triple in the past two years.
Despite recent market turmoil, McLean believes that privatization will continue to power European equities. His fund, currently 8% in cash, has its biggest position, 5% of the portfolio, in Swisscom (SCM). The Swiss telecommunications company went public on Sept. 5 and is up 25% in local currency terms since then.
Much of his recent investment, however, has been in Spain, Ireland, and Italy, where strong domestic growth, as well as privatization, is fueling earnings. Companies in those countries will continue to do well as the main beneficiaries of Europe's single currency and single market, he says. In particular, McLean likes Bank of Ireland because it has no emerging-market exposure and the local economy is growing at 9% a year.
In Southern Europe, McLean favors undervalued growth stocks such as Telecom Italia. With little competition in its home market, projected 1999 earnings growth of 20%, and a price-earnings ratio of 20, Italy's telephone company trades at approximately one-third the price of British Telecommunications PLC (BTY). He also expects 20% earnings growth for the Spanish utility ENDESA (ELE), which currently has a p-e of 16.
His bargain-hunting style has delivered some big gains. Many British investment trusts, publicly traded closed-end funds, sell at a 20% to 30% discount to their net asset value. So he decided to buy big positions in some and change management. SVM took a stake in the Ivory & Sime Enterprise Capital fund, brought in JO Hambro to liquidate it--and produced a nifty 20% gain. ''The takeovers show that Colin doesn't follow Establishment rules,'' says Adrian Darley, manager of the Gartmore CSF Continental Europe Fund.
WASTE NOT. A contrarian by nature, McLean has tended to avoid some of Europe's best-known names such as Germany's BASF and Volkswagen, which get most of their sales from exports. ''I don't like German banks [or] chemical and industrial companies because they are so exposed to global patterns,'' he says.
But what McLean really hates, say co-workers, is corporate waste. Upon discovering that the boss of British container-leasing company Central Transport Rental Group PLC owned a herd of prize bulls, McLean figured he might be spending more time on his farm than running his business. He shorted the company, which subsequently was sold for a fraction of its peak price. ''Colin abhors extravagance,'' says author James Morgan, who profiled McLean in a 1996 book. In today's uncertain economic environment, McLean's austere ways might just be the fund's best asset.
By William Echikson in Brussels

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