Following the free cash flow

Interim results season came to an end in August. Despite a difficult geopolitical backdrop, aggregate full year forecastsⁱ for the portfolio are very similar to where they stood at the start of the year: +5% organic revenue growthⁱⁱ, +8% organic operating profit growth, and double-digit earnings per shareⁱⁱⁱ growth. All holdings are expected to grow organic operating profit for the full year.

The below chart shows the organic revenue and operating profit growth for portfolio holdings^iv over the last three years and the expectation for growth in 2026.

Fundamentals are, therefore, robust. It has though so far been a frustrating year for the fund’s total return – up only +2.2% year-to-date^v with the good fundamental progress of the portfolio companies offset by a continued valuation de-rating.

Though I’ve felt like something of a stuck record on the topic over recent months, the unusually attractive valuation of the portfolio bears reiterating. The free cash flow^vi valuation is as good as it was both in IFSL Evenlode Income’s early days in the 2009-2011 period, and in the depths of the Covid sell-off in 2020. A remarkable fact given how buoyant sentiment is toward other areas of the UK market (banks and resources stocks) and the global market (the AI capex trade).

The fund’s free cash flow yield^vii stands at 6.0% for this year and 7.0% for next. To help frame the quantum of the valuation headwind over recent months, to return to the 4.5% free cash flow yield that the portfolio traded on three years ago, IFSL Evenlode Income’s unit price would need to be more than +33% higher than it is today.

The fundamental algorithm

Looking ahead, we think the prospects for the fund to compound at an attractive double-digit rate are very good. If we think about the fundamental algorithm for the fund (i.e. assuming no change in valuations), the portfolio’s dividend yield^viii is around 3% and the buyback yield^ix is over 2%. These two elements add up to a current annual shareholder yield of over 5%, even if earnings don’t grow. This shareholder yield is sustainable given that it is funded by a 6% free cash flow yield. On top of this, we think the portfolio is very well set to deliver profit growth (before the impact of buy-backs) in the +5-10% range over time. Any valuation re-rating back towards historical averages would be further upside to this fundamental growth algorithm.

The opportunity in long-term quality compounders

The fund’s two largest holdings – Unilever and RELX – are a good couple of case studies to highlight the valuation de-rating we have seen across the portfolio over the last few years.

See below for definitions.^x

Unilever is currently the fund’s largest holding. The chart above highlights the extent of the de-rating of Unilever shares over recent years (very similar in quantum to the portfolio as a whole – moving from a free cash flow yield of 4.4% at the beginning of the decade to 6.1% today).

Unilever is a well-invested, repeat-purchase business and one of the best placed consumer goods companies globally. Portfolio evolution over the last few years – which will culminate in the spin-off^x of the foods division early next year – leaves the business as a faster-growing, higher-margin business centred around the personal care, beauty and well-being categories. More than 75% of Unilever’s revenue is now generated from its global power brands (Dove, Vaseline etc.), and nearly 60% of revenue is generated from its fast-growing emerging market presence (including 17% of revenue from India following the spin-off of the foods business).

Even without any improvement in the valuation, the potential for double-digit fundamental returns is clear – steady profit growth combined by healthy dividends and buy-backs, all backed by an extremely defensive cash-flow stream.

Despite a challenging first half for consumer sentiment and input cost inflation, Unilever is trading very well, with organic sales up +5.8% in the second quarter and full-year guidance^xi raised for the full year. Guidance was raised despite management baking in an assumption that oil will average $115 dollars per barrel for the rest of the year.

RELX is currently the fund’s second largest holding. The chart above is a reminder of the de-rating that RELX has experienced over the last five years (as with Unilever, very similar to the overall de-rating of the portfolio – from a free cash flow yield of 4.4% to 5.7% over the last five years).

We continue to view RELX as an incremental beneficiary of generative AI. We won’t restate the reasons why here as we have written about them extensively in previous investment views this year, but interim results were a clear demonstration that RELX’s front-footedness in harnessing generative AI technology is translating into tangible value for both RELX’s clients and financial results. For the first half, organic revenue grew at +7% and earnings per share grew at +11%.

As with Unilever, and many other positions in the portfolio, RELX’s free cash flow generation is highly repeat-purchase in nature - a very desirable through-cycle characteristic.

New holdings

More generally, we are seeing a great range of opportunities across our universe of competitively advantaged, high return-on-capital, UK-listed companies - from UK-based global market leaders to domestic market leaders, from consumer-facing to business-to-business franchises, and across the market capitalisation spectrum.

We have now fully exited the fund’s holdings in Rotork and Intertek, following their recommended takeover approaches, and used a portion of the proceeds to initiate four new positions – each approximately 1% of the fund and with room for us to build further.

I will finish this investment view by briefly discussing these new holdings^xii.

DiscoverIE
Dividend Yield 1.9%
Free Cash Flow Yield 6.4%

DiscoverIE is a well-managed, return-on-capital focused, niche industrial compounder. The company is a portfolio of around 30 operating companies that specialise in mission-critical, highly bespoke electrical components. DiscoverIE’s team of engineers work very closely with customers on the design process. Almost all components are sole sourced, they represent a very small portion of the total value of the end products in which they sit, and DiscoverIE retains the intellectual property. Once specified in, these components are manufactured and supplied throughout the life of each product's production, generating a high level (>85%) of revenue recurrence from sticky, long-term customer relationships.

Management has focused deliberately on five structural-growth markets that make up roughly 80% of sales: industrial automation and connectivity, security and defence, renewables, electrification of transportation, and medical. End-product examples include components for MRI scanners, wind turbine systems, robotic arms, airport scanners and surveillance drones.

The company has grown earnings per share on average by +14% over the last decade, through a combination of organic growth and bolt-on acquisition, and management see a similar level of growth potential over coming years. Revenue growth, though, slowed in the post-Covid period – which has led to a significant valuation de-rating in the company’s shares. Operating momentum is now improving, with group order growth rising by more than +30% year-on-year in the latest quarter - driven by broad underlying demand from its diversified end markets.

We think the free cash flow yield of over 6% represents an interesting entry point for this high-quality company that offers plenty of cash generative growth potential.

Avon Technologies
Dividend Yield 1.6%
Free Cash Flow Yield 6.4%

Avon Technologies is a global market leader in mission-critical protective equipment for the military and first responders. The company was founded in Wiltshire in 1885 and was a key supplier and manufacturer of gas masks during the Second World War.

Today, the business focuses on respiratory protection (CBRN masks, filters, powered systems and underwater rebreathers) and head protection (ballistic and impact helmets). The barriers to entry are considerable with customer embeddedness, intellectual property and technological excellence all important factors. In advanced respiratory protection, the company has over 90% market share in North America, and more than 70% globally. Avon offers attractive growth potential both within its core US and UK markets, and through expansion opportunities with other NATO and international customers.

A new senior executive team has been in place for the last three years – several were previously part of the Ultra Electronics management team. They are very focused on ROIC (return-on-invested capital) and have made significant improvements to operational and commercial execution. This is beginning to show through in the financials, with ROIC having improved from 14% in 2024 to 21% in the first half of 2026.

As with DiscoverIE, we think a starting free cash flow yield of more than 6% is very attractive for the quality and growth prospects at Avon.

Greggs
Dividend Yield 4.1%
Free Cash Flow Yield 10.9%

Greggs is a leading UK food-on-the-go retailer and an old friend to IFSL Evenlode Income – having been a holding for several years back in the 2010s. We have been following the investment case since exit and have reinitiated a position over recent weeks for three key reasons.

The first reason is we believe management are adapting well to changes in their market, including variable weather patterns and changing diet preferences. The second is that management have made some important tweaks to their store opening strategy, giving us confidence in the more than 25% return on investment that the company generates within three years of a store opening. This has involved a range of simple changes. One example is focusing drive-through sites on industrial estates where returns are higher.

The third reason is the phenomenal free cash flow stream – generated from the aggregation of many low-ticket, repeat-purchase items – including more than one million sausage rolls sold every day. Greggs is also coming to the end of a major capital investment programme that has upgraded and expanded its vertical integrated manufacturing and supply chain facilities – an important factor for its very strong competitive position. The company now has the capacity in place to grow to its targeted 3,500 store footprint over the next eight years, without any further material capital investment. This is leading to a significant step-up in free cash flow generation. Management are expecting to return almost all of the company’s 10% free cash flow yield to investors via a combination of dividends, special dividends^xiii and share buy-backs. Meanwhile, the operating business should be capable of producing steady profit growth – driven by in-store sales growth and new store openings.

XPS Pensions
Dividend Yield 4.9%
Free Cash Flow Yield 8.2%

XPS is a domestic market leader in the niche and esoteric world of pension consultancy and administration. Barriers to entry are high, due to the requirement for very specific domain knowledge and expertise, and client embeddedness. The hassle and risk of changing provider is significant. These factors lead to approximately 90% revenue recurrence. Earnings consistently convert to cash generation, and the current free cash flow yield is at a highly compelling level.

XPS is a well-invested and client-focused leader, which we have confirmed via expert calls with pension trustees. Of the approximately 60 in-house corporate schemes that have come to market over the last five years, XPS has won approximately half of the outsourced contracts. Growth prospects look very well set over coming years thanks to inflation-linked contracts, changing regulations, outsourcing trends and the potential for market share gains. Longer-term, the company is pursuing a bolt-on strategy to ‘follow the pension member’ into the adjacent world of insurance consulting, which will gradually diversify the business.

Following the free cash flow

All four of these companies possess the usual Evenlode features: durable competitive advantages and the ability to grow in a capital efficient way. They also have good growth opportunities, are generating significant levels of free cash flow, and bring interesting diversification to the portfolio.

In addition, we have a good number of other companies on our watchlist with similar characteristics, giving us plenty of other options to broaden the portfolio further - if and when we think it makes sense.

Hugh, Chris M., Ben P, Leon and the Evenlode team
16 September 2026

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