This article first appeared in the AFR on 13 April 2023
Why does BHP hold a top spot in the portfolio?
BHP has been a long time holding in the portfolio due to the company’s best-in-class assets, excellent capital allocation and strong management team. It also has relatively robust ESG credentials versus its peers.
Shorter-term, China’s reopening plus strong seasonality in iron ore will be supportive, and over the longer-term, growth is favourably centred around “future facing commodities” including copper.
Do you expect any Aussie names to benefit from the China reopening theme?
Stocks in our portfolio that should benefit from a rebound in Chinese consumption are IDP Education, Siteminder and Treasury Wine Estates. IDP should benefit from the return of Chinese students.
Siteminder stands to gain from the resumption of outbound tourism from the Chinese market, reporting a surge in bookings through their platform following the relaxation of travel restrictions. Similarly, Treasury Wine Estates should also see the benefit of the resumption of outbound Chinese tourism, with the high margin duty-free channel estimated to represent at least 5 per cent of Penfolds sales on a pre-pandemic basis.
What’s your view on the big banks as rising interest rate tailwinds begin to fade?
We’re currently underweight in the big banks with conditions as good as it gets, confirmed by CBA calling out at their recent result that net interest margin securities hit their peak in October. Not only is the rising interest rate tailwind beginning to fade, but earnings growth for the banks will be challenged by a cocktail of rising competition for both deposits and mortgages, increasing funding costs and slowing household activity.
Can CSL climb back to $300?
Comfortably, we’re almost there. CSL is the largest overweight position in the portfolio and is a long-term compounder, worth well north of $300 on a long-term view with sustainable growth in its revenues, profits and cashflows.
CSL was constrained on the donor supply side by COVID-19, however, donor patterns have now normalised. It will continue to benefit from strong long-term plasma demand and take share in the highly concentrated plasma market, benefiting from superior collection economics versus its peers.
CSL always faces fresh competitive threats in some form, and the latest threat from Argenx’s Vyvgart is manageable in our view. CSL’s continued innovation has been core to their enviable track record of double-digit earnings growth – with a long R&D pipeline and various products in phase 3 trials.
What’s a stock you like that (most) people haven’t heard of?
One stock in the portfolio, that not many are invested in, is GQG Partners. With a tightly held register and being ex-index because of liquidity constraints, it isn’t widely owned.
GQG has top decile performance, very healthy fund inflows with risks to the upside on consensus numbers, and plenty of capacity to grow FUM to multiples of where the business is today. But despite all this, the stock is trading cheaper than most asset managers in the space, which have mixed performance and are experiencing substantial net outflows.
Which stock in the fund is most undervalued by the market?
QBE Insurers is in the sweet spot of rising premium rates and a supportive interest rate cycle underpinning investment returns. QBE also has various self-help levers, and management has been doing a good job in restructuring and repositioning the business over several years.
We’ve seen strong execution to date in rightsizing the business, improving risk management and expanding returns and margins. Notwithstanding an improved risk profile and earnings growth, the stock is still on a very undemanding 9-times earnings multiple.
Which stocks do you think make attractive takeover targets?
We’ve seen some activity in the healthcare space recently (HLS Healthcare, Estia Health) and also some bids in mining as well (Oz Minerals, Newcrest, Mincor Resources, Liontown Resources).
Gold is the most fragmented sub-industry in mining, so there always tends to be more deals in this space as players look to build scale. Miners are more cashed up this cycle but most, especially the majors, are acutely aware of the level of value-destructive M&A which occurred at the peak of the last cycle, and so we’ll likely see more incremental bolt-on acquisition activity versus the large transformational deals.
Beyond this, further M&A will very much be stock-specific, where there is some competitive moat or advantage being underappreciated within current share prices by shorter-term cyclical pressures. Beaten-up cyclicals could begin to look attractive as economic conditions deteriorate and earnings trough across the sectors, but I’m not sure we’re there yet.
Favourite local bar or restaurant? What’s your go-to order?
Our favourite place if we are heading out is Alphabet Street in Cronulla – you can’t go past their roti murtabak, massaman lamb and apple martinis.
Any podcasts or TV shows you’d recommend that you’ve enjoyed?
I’m a bit late to the party on this one, but I’ve been really enjoying Succession. As a media analyst, I love the real-life parallels in this.
