The following article has not been sponsored by any parties. The author, Luke Laretive, is our resident expert.
The pandemic whacked Australia's economy harder than 2001 hit American airport security. But while Australia's hospitality and travel industries continue to be devastated by border closures and lockdowns, the ASX, buoyed by a miraculous NASDAQ bounce back, has rallied harder than a supercar.
Now, three years after COVID-19 caused an en masse BASE jump, the ASX is once again navigating troubled waters after an unlikely, tech-driven post-pandemic boom.
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Best Crypto To Buy Right Now Best Stable Coins In Market Ethereum Price Prediction Bitcoin Price PredictionSuffice to say, you don't want to be throwing money away right now. So rather than trust your mate's brother's cousin (or your Uber driver who assures you 'there's still momentum'), DMARGE, each month throughout 2023, will be bringing you the top three ASX stock picks of Luke Laretive, CEO of Seneca Financial Solutions – and his analysis on each one.
This article is of a general nature only and does not consider your objectives, financial situation or needs.
You should consider the appropriateness of the information in light of your objectives, financial situation and needs before acting on it and obtain copies of any relevant disclosure documents. Seneca Financial Solutions does not warrant the accuracy or reliability of the information in this report.
Luke Laretive, Seneca Financial Solutions, its Directors and its associated entities may have or had interests in the companies mentioned. They may have or have had a relationship with or may provide or have provided investment banking, capital markets and/or other financial services to those companies mentioned.
Luke provides clients with a weekly note, which you can access here.
In this best ASX shares story...June 2023Australian Finance Group (AFG) $1.74 per share, $469m market capCollins Foods Ltd (CKF) $8.48 per share, $995m market capSarytogan Graphite (SGA) $0.29 per share, $42m market capMay 2023Pilbara Minerals (PLS) $4.10 per share, $12.29bn market capBluescope Steel (BSL) $19.69 per share, $8.76bn market capMonash IVF Group (MVF) $1.20 per share, $465mn market capApril 2023APA Group (APA) $10.29 per share, $12.14bn market capResmed CDI (RMD) $32.85 per share, $32.49bn market capALS Limited (ALQ) $12.97 per share, $6.28bn market capMarch 2023CSL Ltd (CSL) $296.90 per share, $143bn market capDexus Group (DXS) $8.35 per share, $9bn market capVulcan Energy Resources Limited (VUL) $6.35 per share, $911m market capFebruary 2023AUB Group (AUB) $24.15 per share, $2.45bn market capGalileo Mining (GAL) $0.87 per share, $171m market capKingsrose Mining (KRM) $0.07 per share, $53.43m market capJanuary 2023Credit Corp (CCP) $19.65 per share, $1.3bn market capGQG Partners (GQG) $1.50 per share, $4.4bn market capIRESS (IRE) $9.63 per share, $1.7bn market capDecember 2022Dexus (DXS) $8.04Lifestyle Communities (LIC) $19.11Goodman Group (GMG) $18.73November 2022Elders (ELD) $13.00, $2bn market capCollins Foods (CKF) $9.40, $1.1bn market capCredit Corp (CCP) $18.58, $1.2bn market capOctober 2022AUB Group (AUB) $20.28 per share, $2bn market capElders (ELD) $12.41 per share, $2bn market capUvre Limited (UVA) $0.14 per share, $4.4m market capSeptember 2022Mineral Resources (MIN) $61.00 per share, $11.5bn market capGalileo Mining (GAL) $1.12 per share, $220m market capHeramed (HMD) $0.145 per share, $30m market capJuly 2022Collins Foods (CKF) $10.00 per share, $1.1bn market capARB Corporation (ARB) $28.50 per share, $2.3bn market capCredit Corp (CCP) $20.00 per share, $1.4bn market capJune 2022GQG Partners (GQG) $1.58, $4.6bn market capAmcor (AMC) $18.41, $14bn market capAustralian Finance Group (AFG) $1.91, $515m market capAustralian Share Trading FAQs June 2023All figures in Australian dollars (1 AUD = 0.67 USD at the time of publishing)
Australian Finance Group (AFG) $1.74 per share, $469m market capAustralian Finance Group engages in the mortgage broking business in Australia. AFG is the #1 mortgage aggregator in Australia – an attractive market position. Its second business segment is AFG Home Loans, where it offers customers both AFG-originated loans as well as white labelling other lenders’ products. This enables AFG to sell high-margin home loans through its own platform and capture margin uplift.
AFG’s earnings have been depressed after major banks offered cashbacks to fiercely compete for new customers. These cashback offers are being withdrawn from the market so AFG should be well-poised to regain market share. The sell-off in the share price affords investors an opportunity to buy AFG shares on a forecast 7.4% dividend yield, fully franked.
In short: Analyst estimates are too bearish and AFG has been discarded as a low-quality non-bank lender which does not capture the value of the aggregation business.
Collins Foods Ltd (CKF) $8.48 per share, $995m market capCollins Foods, the operator/franchise owner of KFC, Taco Bell and Sizzler stores, has been hit by cost inflation in food input and labour prices and this saw shares drop from $10.50 a year ago to $8.48 today.
Despite the financial squeeze being felt in the household sector, quick-service restaurants typically perform well due to the low cost, time, and effort nature of fast food. KFC’s strong brand and differentiated market position have historically held the business in good stead through challenging economic environments. Recent high-frequency consumer data from Macquarie supported this, with total spending in restaurants and cafés remaining strong and fast-food spending remaining relatively stable.
CKF has been rolling out self-service kiosks with promising sales and take-up rates which should increase the capital efficiency of the business. Trading on under 9x EV/EBITDA, CKF is near a 5-year valuation low, which we feel is unjustified.
In short: Collins Foods offers defensive growth at a reasonable price with upside potential from earnings exceeding expectations.
Sarytogan Graphite (SGA) $0.29 per share, $42m market capSarytogan Graphite hosts the world's highest grade and third-largest graphite deposit located in Kazakhstan. The resource sits at 209Mt @28.5% TGC. Relative to graphite peers, this resource is undervalued. Despite Kazakhstan’s profile as depicted in pop culture, this is a jurisdiction with good access to infrastructure (electricity, water, etc.), people and favourable tax rates.
Graphite is the major raw material in all EV battery types. Unlike bulk commodities like iron ore which require a large amount of upfront capex investment, graphite projects such as SGA’s should result in robust economics when the company moves through feasibility studies. To date, SGA has achieved a graphite concentration of 99.87% total graphite concentration through metallurgical test work. Should they achieve a breakthrough to battery grade standards of 99.95%, shares should re-rate higher.
In short: SGA sits on a large graphite resource, and while undervalued relative to peers for now, catalysts could see shares re-rate over the next 12-18 months.
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May 2023 Pilbara Minerals (PLS) $4.10 per share, $12.29bn market capPilbara Minerals owns the Pilgangoora asset in the Pilbara, Western Australia, accounting for an estimated ~8% of the global supply of lithium. PLS unit costs for hard rock lithium production increased 5% to $600-640/t. A realised spodumene price of ~$4,800/t implies sky-high margins. The PLS share price implies a lithium price of ~$1,600 long-term, substantially below current market pricing (which has already fallen since the turn of the calendar year).
A $2.7bn net cash balance allows flexibility to increase processing capacity from the current 580tpa to 1Mtpa and fund the associated capex from internal cash flows. A maiden 11cps fully franked dividend is the first step in shareholder returns that should increase over time.
In short: High lithium prices due to EV demand structural growth enables producers in tier 1 locations (PLS) a license to print money.
Bluescope Steel (BSL) $19.69 per share, $8.76bn market capBluescope Steel is a value-add steel manufacturer that was spun out of BHP in 2002. A recent 50% upgrade to guidance is instructive for investors, guiding to $700-770m for the second half of FY23 on the back of improved steel spreads. The current share buyback reflects management’s views that the stock is undervalued, which seems like a reasonable view given BSL trades on ~3x trailing EV/EBITDA compared to its 10-year average of 4.7x.
Almost half of Bluescope’s steel production comes from high-margin, value-add metal coating and painted steel. As a result, BSL’s group margins are higher than US peers. Recent painted steel transactions (e.g. Precoat) showcase upside for BSL on a sum of the parts basis.
In short: Strategic assets at a low point in the construction cycle at a reasonable valuation.
Monash IVF Group (MVF) $1.20 per share, $465mn market capMonash IVF is a leader in the field of human fertility services, including IVF procedures. With ~20% market share in Australia, MVF is successfully expanding into Asian markets such as Singapore, Malaysia and Indonesia. MVF trades on an undemanding valuation of 9.8x forward EV/EBITDA versus competitor Virtus, which got acquired on a 12.4x multiple from private equity firm Capvest. Applying the same multiple to MVF would imply a $1.60 share price.
Why would private equity be interested in the sector? Earnings are defensive and independent of the economic cycle and high-value products (expensive procedures, price inelastic demand) mean high margins. MVF has achieved consistent EBITDA margins that have hovered between 22% to 27% over the last 11 half-year reporting periods. Adding fertility clinicians plus the resumption of elective healthcare procedures should provide nice earnings growth tailwinds.
In short: MVF has multiple upside levers with strategic interest in the sector, growth tailwinds and supported by a ~4% fully franked dividend yield.
April 2023 APA Group (APA) $10.29 per share, $12.14bn market capAPA’s stellar record of growing dividends has seen its dividend reduced only once in 22 years since spinning out of AGL. Strategic infrastructure assets have been sought after by super funds and private equity due to their uncorrelated returns and reliable yields. This has seen the likes of Sydney Airport (SYD) and Spark Infrastructure (SKI) being taken off the ASX boards. APA is one of only a few large infrastructure assets left on the ASX, so has some scarcity value.
Despite the noise around the death of fossil fuels, gas still accounts for 27% of primary energy consumption in Australia and consumption of gas managed to grow at a 2% CAGR from 2011-21. Gas has continued to be integral for baseload power in high-renewable states like South Australia, and APA is strategically positioned for transporting hydrogen in its pipelines if this is indeed the way of the future.
In short: Dominant position in Australian gas infrastructure with a 5.6% yield and inflation-linked contracts.
Resmed CDI (RMD) $32.85 per share, $32.49bn market capResmed’s major competitor Phillips is undertaking a product recall, which could affect sales for years. Resmed should be able to keep growing market share in the large and relatively underpenetrated sleep apnoea device market. As the market leader, Resmed enjoys strong pricing power for its products.The stock trades at a discount to its 5-year average valuation and its earnings outlook is improving.
Supply chain issues (chip shortage, freight) that have limited order fulfillments are abating and inflationary cost pressures also look to be easing. Earnings are showing signs of recovering to growth in contrast to the subdued share price performance.
In short: Defensive growth stock on reasonable valuation with earnings tailwinds.
ALS Limited (ALQ) $12.97 per share, $6.28bn market capALS’s recently upgraded earnings guidance is reflective of strong operating tailwinds for the business. Its life sciences division earns stable profits, but the geochemistry business earns high margins, above its peer group. A 15% ROIC over the last 5 years places ALS in good company with some of the best businesses on the ASX.
We think the valuation discount to overseas laboratory peers is unjustified. ALS is the global leader in copper and gold sample testing and benefits from increased volumes from mining exploration and development companies. Tailwinds for copper development due to decarbonisation-driven demand and supply-side issues have supported capital raising and drilling activities which should flow through to the ALS bottom line in time.
In short: Upgrade cycle and leveraged to continued strength in the resources sector.
March 2023 CSL Ltd (CSL) $296.90 per share, $143bn market capTrading on 30x forward P/E, a 23% discount to its 3-year average of 39x, CSL is well placed for outperformance. CSL enjoys global leadership across its flagship Behring (rare & serious disorders) and Seqirus (influenza vaccines) segments, continuing to outperform competitors. The recent acquisition of Vifor has performed well and caused CSL to reaffirm its guidance of $2.7-2.8bn of underlying profit.
Due to the pandemic, plasma collections were down in the US as people could not donate blood. This is now reversing, with plasma collections reaching record levels of +10% above pre-covid levels and growing strongly. CSL uses the plasma they collect for treatments so this is a good forward indicator of immunoglobulin sales growth which should translate to earnings growth for CSL shareholders.
In short: Australia’s leading healthcare share at a good price with an improving macro backdrop.
Dexus Group (DXS) $8.35 per share, $9bn market capThe death of the office is overplayed and Dexus is undervalued as a result, maintaining c. 95% office occupancy across their bluechip portfolio (consistently above market levels). A P/E of ~12x vs a long-term average of 15-16x is cheap, and investors can get paid a 6.2% forecast dividend yield while they wait for the market to catch on.
Dexus has $17.8b of property on the company’s own balance sheet as well as a large development pipeline. On top of this, once the acquisition of AMP’s Collimate Capital completes, DXS will have $44bn in property assets under management, which investors are mistakenly attributing zero value for. 25.6% gearing is low relative to peers and insulates the company from increases in funding costs.
In short: DXS is attractively valued on its own property, with the funds management business thrown in for free.
Vulcan Energy Resources Limited (VUL) $6.35 per share, $911m market capVulcan’s Zero Carbon Lithium project continues to de-risk after recently releasing their Definitive Feasibility Study (DFS). VUL is planning to produce 24ktpa of battery-grade lithium hydroxide from geothermal brines (with renewable energy produced as a co-product). This equates to an estimated after-tax NPV of €2.6bn, or ~A$4.1bn.
The DFS marks a crucial step in gaining credibility with counterparties to finance the construction of the project through to first cashflows. VUL is well-managed and has a large team full of experts in the space (crucial for the upcoming project execution phase).
A large headline capex figure of €2.3bn has scared some investors, but this will be staged across the project. The project’s strategic status in Germany, supported by Tier 1 customer offtakes (Stellantis, Volkswagen, Renault, LG Energy Solutions and Umicore) means it has multiple non-dilutive options, including grants, project finance and debt.
In short: VUL has been oversold on the back of their DFS and has upcoming share price catalysts.
February 2023 AUB Group (AUB) $24.15 per share, $2.45bn market capAUB is an insurance broker with a consistent track record of growing profits (and dividends) for shareholders. A recent >20% upgrade to FY23 profit guidance is instructive for investors, with AUB having meaningful leverage to the rising interest rate cycle, through rising insurance premiums and increased volumes. AUB is trading on 20x forward P/E which is reasonable for the growth outlook and strength of the balance sheet. We prefer AUB to the insurance underwriters (think Suncorp, IAG or QBE), as the benefit from the rising premium thematic, without bearing the risk of an unexpected catastrophe (like the Auckland floods) impacting profits.
In short: High-quality business with tailwinds, trading at an attractive valuation.
Galileo Mining (GAL) $0.87 per share, $171m market capGalileo continues to create shareholder value through the drilling with their growing Callisto discovery. Despite the fact GAL is consistently hitting thick new mineralised zones, they have yet to identify the source rocks, which is often the highest grade and most attractive part of a mining discovery. This project has district-scale potential, with 5km of prospective strike to the north the next cab off the rank to be drilled. Assays are currently pending at the lab for a further 14 holes so there should be no shortage of newsflow over the next few weeks. Circa $20m of cash in the bank and backing from renowned prospector turned rich lister Mark Creasy will ensure Galileo keeps drilling aggressively.
In short: Further discoveries could see the GAL share price move higher.
Kingsrose Mining (KRM) $0.07 per share, $53.43m market capKingsrose has acquired three PGE (platinum group elements) projects over the last two years in Finland and Norway, using proceeds from the sale of a gold mine in Indonesia. The three projects are prospective for platinum, palladium, nickel, and copper. The initial priority is the large-scale Penikat project in Finland, which subject to permitting, will see initial drilling in mid-2023. While speculative, KRM is funded with cash of A$36.7m as of 31 December 2022. From a sub-$20m EV, any exploration success would likely see KRM shares move higher.
In short: Exposure to a funded explorer operating in a favourable jurisdiction.
January 2023 Credit Corp (CCP) $19.65 per share, $1.3bn market capTrading on a PE of 14x, below its 5-year average of 17x and on a dividend yield of 3.70%, Credit Corp looks likely to outperform. At AGM in October, management maintained profit guidance and upgraded their guidance for Net Ledger Purchases. To explain a bit, CCP buys debt ledgers at a discount to their face value and then recovers those debts.
Its earnings are a function of the availability of overdue debts, the price they pay and the amount they can recover. In November, competitors from the US (Encore Capital and PRA Group) reported strong collections and commented on the positive trends in the leading indicators for debt ledger supply, a bullish signal for the year ahead. Importantly, returns (recoveries as a percentage of debts purchased) for both Encore and PRA remained consistent in the key US market.
In short: I think CCP can asymmetrically benefit from rising PDL supply, with recent offshoring and a track record for reliable cost management through the cycle. We think restoring historical margins and an easier operating environment result in a re-rate.
GQG Partners (GQG) $1.50 per share, $4.4bn market capGQG is a global fund manager who through solid investment performance, well-priced products and a strong distribution capability been able to consistently increase funds under management. Net inflows of US$0.8bn in Q3 was an impressive effort, particularly when markets fell almost 10% during that period.
GQG is trading on a forecast dividend yield of 8.5% and a PE of 11x, which is significantly below peers, particularly those with a track record for positive net inflows.
In short: GQG remains well positioned and leveraged to upside in global markets, specifically emerging markets, relative to peers.
IRESS (IRE) $9.63 per share, $1.7bn market capI'll admit that IRESS is a bit of a basket case, but new management appears to have taken their bath and rebased expectations last year. While FY24 consensus is on the high side in our view, IRE is a defensive earner with a dominant market position in a highly attractive industry segment. Your broker uses IRESS, so does your financial planner (XPLAN) and competitors continue to fall by the wayside (see ASX-listed small-cap Bravura Solutions, BVS). The opportunity for this business, if it ever gets its act together, is very large.
In short: On 23x earnings, it's trading below its 5yr average PE and on a dividend yield of over 5%. You'll get the first of those payments towards the back end of Feb.
December 2022 Dexus (DXS) $8.04Dexus has over $44bn in property assets under management including $18bn owned by the company. They invest in office and industrial assets and are developing some of the largest projects around Australia (i.e., Atlassian Centre in Sydney, 80 Collins Street in Melbourne, 240 St. Georges Terrace in Perth.) Dexus is conservatively geared with only modest exposure to rising funding costs (relative to peers). The stock is trading at a 45% discount to book value which implies a c.30% decline in office asset values. These marks seem overly harsh, and completely ignore the value of the group’s funds management business. The stock trades on 12x PE vs a median 15x over the past 10 years and is forecast to pay a 6.47% dividend yield over the next 12 months.
In short: The headwinds are widely known, but in this case, overstated.
Lifestyle Communities (LIC) $19.11LIC is a high-quality, structurally supported business. As the population ages, they build housing communities for downsizers and retirees around Victoria. Settlements appear to be slowing (probably as you’d expect), but the timing of projects should rectify the issue in the second half. Weakening residential property prices will likely limit exceptional performance, but an experienced management team, a well-funded balance sheet and a strong brand should stand the company in good stead until the cycle turns. 15x FY24 EV/EBITDA seems cheap given we expect earnings to almost triple between 2021 and 2024.
In short: You don’t get to buy great businesses, at cheap prices, when they are firing on all cylinders. Get it while it’s on sale!
Goodman Group (GMG) $18.73You probably won’t believe me, but Goodman Group reported rental growth at their Q1 update and guided to 11% earnings growth. The business is STILL growing assets under management at over 26% year on year and generating an exceptional return on equity (ROE%). This level of profitability is unsustainable, but the share price is down c.30% from its recent high and now trading under 19x earnings, which we think is much too cheap for a business riding the e-commerce explosion (19% of all retail sales expected to be online by 2027, 8.4% pa, according to GroupM research.)
In short: The best growth business in the sector.
November 2022 Elders (ELD) $13.00, $2bn market capReports FY22 results on 14 November and we expect a strong set of numbers, towards the upper end of the 30-40% EBIT (earnings before interest and tax) growth guidance. We think the share price performance will be driven by any outlook or guidance for FY23, where we believe market expectations are too conservative (flattish growth on a record FY22 result). Management is targeting 5-10% growth through the cycle and has a 20% return requirement for bolt-on acquisitions, a key part of the strategy and investment thesis. Elders are in a near-dominant market position, with a strong brand and disciplined track record for navigating a highly fragmented sector.
In short: We see value on under 14x PE with favourable agricultural conditions and a range of sustainable growth opportunities to still explore.
Collins Foods (CKF) $9.40, $1.1bn market capThe operator of KFC, Taco Bell and Sizzler reports 1H net profit at the end of November. We acknowledge the inflationary pressures on key cost inputs (food, wages) and the customers (rising interest rates, cost of living) are of concern, we see fast casual dining and takeaway are net winners in a post-COVID lockdown environment. KFC's strong brand and differentiated market position have historically held the business in good stead through challenging economic environments, the balance sheet remains unencumbered and market expectations are low in our view (0% forecast growth) given history of 10% pa growth and demonstrated ability to pass on costs through price rises.
In short: We think we are getting paid fairly compensated for the short-term inflation-related risk at 9x EV/EBITDA and 25% upside to our valuation.
Credit Corp (CCP) $18.58, $1.2bn market capThe seasoned and well-regarded management team are outperforming the market's expectations. At the recent AGM, the company upgraded their purchased debt ledger (PDL) purchase guidance (a key driver of earnings) and demonstrated improving and impressive operational productivity. Market conditions are improving for CCP, and the company is poised to grow US market share materially over the coming years.
In short: a high-quality business, operating in an improving environment, trading at near 10-year low valuations.
October 2022 AUB Group (AUB) $20.28 per share, $2bn market capAUB is an insurance broking business, and while not very sexy, AUB has been a steady performer, generating over 15%pa returns for shareholders since 2007 on 15% pa sales growth and 9% pa profit growth. Insurance premiums are rising rapidly and are one of the few beneficiaries of a rising interest rate and high inflation economic environment, take AUB’s much larger US-based counterpart, Arthur J Gallaher (US: AJG) for example, who recently reported high single-digit growth. AUB is priced for no growth at c. 6x EV/EBITDA vs a long-term average of 11x.
In short: High quality, defensive earner trading at a low-quality cyclical stock valuation.
Elders (ELD) $12.41 per share, $2bn market capAfter reaching highs of over $15 per share on the back of exceptional agricultural commodity prices, Elders has sold off as investors try and anticipate peak earnings. Our channel checks inform us that exceptional profitability in the agricultural economy may continue for longer than expected. The high rainfall experienced across most of Australia should assist with above-average crop yields, as well as livestock production, this is all good news for Elders who were already guiding to profit growth of 30-40% this year. Excess free cash flow could be deployed to accretive acquisitions in line with the company’s stated strategy.
In short: goldilocks conditions for farmers = goldilocks conditions for Elders
Uvre Limited (UVA) $0.14 per share, $4.4m market capWe like the uranium sector and think Utah-focused uranium explorer Uvre Limited has exceptional leverage to its upcoming maiden assay results, expected mid-to-late October.
From a $4.4m market cap, it wouldn’t take much success with the drill bit for the share price to double and with visible, shallow uranium/vanadium mineralisation already reported in 5 holes, as well as elevated gamma radiation levels, the None Such Prospect could deliver, sooner rather than later, for shareholders.
In short: Speculative, but well managed and as likely as anything else at this market cap.
September 2022 Mineral Resources (MIN) $61.00 per share, $11.5bn market capMinRes is expanding production and setting up for a decade-long free cash flow bonanza. Lithium earnings start to really kick next year and should see group EBITDA more than double from FY22’s $1.024bn to c. $2.3bn in FY23. Despite the undemanding valuation of c. 5x EBITDA, we continue to see value in the eventual spin-out of the lithium/spodumene and mining services businesses (which, while barely spoken about continues to perform ahead of expectations.)
In short: The cheapest lithium producer on the ASX.
Galileo Mining (GAL) $1.12 per share, $220m market capGalileo’s Callisto discovery has potentially opened an entire new platinum group elements (PGE) district near Norseman in Western Australia. GAL is about one-quarter of the way through a 2,000m diamond drilling campaign, funded by a recent $20m placement at $1.20 per share. The company have already reported to the ASX significant mineralised zones and while we won’t know grades until the cores go to the lab (4 weeks or so usually), these “massive sulphides” are typically easy to mine and very high grade. We see significant scope for resource upgrade on the back of this recent work by what consider a top-tier management team.
In short: Resource-expansion drilling should add value for shareholders over the next 3 months.
Heramed (HMD) $0.145 per share, $30m market capHeramed developed and distribute a software and medical device which remotely monitors foetal vital signs in pregnant women. The company raised $4m at 13c just last week, positioning itself for the ‘commercialisation phase’ after a period of successful trials and pilots, with the likes of Sheba Medical Center in Israel, Joondalup Health in Perth and the Mayo Clinic in the US.
In short: From this market cap, it wouldn’t take much news for the share price to double.
July 2022 Collins Foods (CKF) $10.00 per share, $1.1bn market capCollins Foods operate the KFC restaurant chain in Australia, The Netherlands, and Germany, as well the emerging Taco Bell brand of stores here in Australia.
Investors have incorrectly assumed that falling consumer demand would see declining sales while rising food and labour costs negatively impact margins.
The stock had fallen 60% on the back of these assumptions, before rallying on the FY22 results, which saw 31 new stores, EBITDA growth of over 14% and improving profit margins across the European stores – a key pillar of future growth.
In short: High quality, consumer-facing business that is less cyclical and more defensive than the average investor appreciates.
ARB Corporation (ARB) $28.50 per share, $2.3bn market capARB is down 60% from its highs as investors believe the pandemic-induced, 4-wheel-drive-mania is over, sales growth has peaked and rising raw materials and labour costs are certain to erode margins.
However, ARB has an exceptional track record for managing costs, having invested early and ahead of the curve in offshore manufacturing capability. Their strong brand loyalty, bedded in a culture of R&D, means they do not face the same price sensitivity as many of their competitors.
In short: We think ARB is a long-term outperformer that's been erroneously thrown out as a low-quality COVID winner in decline.
Credit Corp (CCP) $20.00 per share, $1.4bn market capCredit has a very simple business model. They buy debt ledgers and recover the money. The stock is down c. 60% from its highs on concerns around cost inflation, debt ledger availability and recovery rates as consumers become more and more distressed both here and in the US.
I'm not dismissing those concerns, however, it’s our view that is CCP continuing to expand geographically and continuing to find margin as a result of that scale through investment in offshoring, analytics and technology.
In short: CCP should continue to deliver 16-18% ROE, low gearing, and strong long-term growth as its always done for many years. Beauty is now, you've got a rare opportunity to buy at heavily discounted prices.
June 2022 GQG Partners (GQG) $1.58, $4.6bn market capGQG is a leading fund manager with over $90bn USD under management, a strong performance track record and competitive fees. GQG, unlike many of their peers globally, generate 95%+ of its revenue from stable management fees and it’s because of this stability and scale, GQG has been able to rapidly expand profit margins, now over 80%. This is rare air for an ASX-listed company in any sector.
In short: Trading on a c. 8.0% dividend yield, current pricing offers an attractive long-term entry point.
Amcor (AMC) $18.41, $14bn market capAmcor is the global leader in packaging, their customers are the multinational fast-moving consumer goods (FMCG) companies that populate supermarket shelves around the world. Amcor, like many other industrial companies, is facing a range of challenges as a result of the current macroeconomic environment.
Rising raw materials and commodity prices, labour shortages and freight costs all impact Amcor’s cost base. Unlike many of their industry peers, Amcor’s market position allows the company to pass on price rises to customers, protecting their margins, free cash flow and dividends (which have grown at 8.5% CAGR since 2003).
In short: A high-quality, defensive company offering reliable mid-single digit growth and a c. 3.8% dividend yield.
Australian Finance Group (AFG) $1.91, $515m market capAFG is Australia's #1 mortgage aggregator, and over the past 7 or 8 years has taken dividends from 6cps in 2015 to 17cps in 2022. Yet, here we are today, buying the stock at 2018 prices and on a pretty much all-time high dividend yield of 8.80%. We think concerns about rising compliance costs and commission rate pressure is consistent across the financial services industry and perhaps, overplayed.
In fact, our view is there is adequate evidence to support the idea that AFG can grow margins over time, as higher-margin products are seeing faster volume growth than legacy, lower-margin white-label products.
In short: A reliable dividend payer at an attractive price, with significant potential for a re-rate if they can continue to transition to these higher margin products.
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