The following article has not been paid for by any parties. No kickbacks or secret bunga bunga parties were offered or exchanged.
2020 whacked Australia’s economy harder than 2001 hit American airport security. But as Australia’s hospitality and travel industries begin a slovenly limp back to normal, the ASX, buoyed by a miraculous NASDAQ rally, has rallied harder than a supercar.
While experts agree it will take years for the ~real~ economy to grow back to 2019 levels, the stock market is currently living in a world of its own. Whether this can be maintained or whether it’s a peach about to go putrid, we’ll leave for the experts.
What’s not up for question is that 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 2020, has been bringing you the top three ASX picks of Luke Laretive, CEO of Seneca Financial Solutions – and his analysis on each one.
We’ve had some fantastic winners (VUL +350%, TIN +100%) and few duds (GSM -58%) but overall, Laretive’s picks have averaged a 40% return over the period (before dividends, franking credits and currency movements) in a period where the ASX200 has increased 14% and the MSCI All World Ex-Aus Index has added 8%.
All figures in Australian dollars (1 AUD = 0.75 USD at time of publishing).
December has seen a distinct shift in markets as vaccine hopes are driving investment managers to consider what stocks will outperform in a synchronised, global economic recovery supported by the loosest monetary and fiscal policy in history. There has been a real rotation from stocks that are beneficiaries from lockdowns and work-from-home (such as online retailers and healthcare) to those stocks that have suffered the most (like travel and commodities).
Looking forward to 2021, the rising inflationary tide should lift all risk-assets broadly. However, given the substantial move in some of the obvious beneficiaries already, Laretive sees the risk primarily skewed to the downside in these typical re-opening stocks, as current valuations are pricing in meaningful operating leverage and earnings growth, which may not eventuate in some of these low-quality, structurally-challenged businesses. Some areas of concern, Laretive says, right now are ‘first order’ re-opening stocks in the Travel and Tourism sectors, specifically those with large international travel exposure, as well as those with companies leveraged to the CBD office markets in the REIT sector.
This said, there is plenty to be excited about. We’ve discussed the tailwind for construction, building materials and home-renovation in many of our stock picks this year and we think this trend continues into 2021. We think some quality growth names have been oversold, and while we appreciate that growth may be more readily available next year (and hence, less valuable) we think it’s important to consider that absolute growth numbers are still exceptionally low looking into CY22 and beyond.
We see value in some of the high return-on-invested capital, well-established marketplace or SaaS-style businesses. Opportunities also abound for quality, well-run leaders to use their lower cost of capital to acquire less well-run, more leveraged competitors, extracting synergies and benefiting from wider geographic exposure to this synchronised global growth period.
With this outlook in mind, Laretive’s picks for December are below:
Airbnb (ABNB) USD $144.71, $86bn Market Cap
In my opinion, perhaps the highest potential disrupter on the planet. With more rooms (over 7m) than Hyatt, Wyndham, Intercontinental, Hilton and Marriott combined and global category dominance that just doesn’t come around too often. There are not too many businesses that have this level of brand awareness and those that do, don’t get 88.5% of their website traffic organically (source: Similarweb). No reason this stock won’t trade on EV/Sales multiples above 20x for many years to come.
In short: Airbnb is a monster, maybe one of the best brands ever created.
Healius (HLS) $3.88 $2.4bn Market Cap
You might remember Primary Healthcare, well this is them, just after a name change a few years back. They’ve largely been in the investment wilderness with a range of issues and shareholders have been much better with a more focused, well-managed peer like Sonic Healthcare (SHL). But now it might be time to take a closer look at HLS.
Last week a big block ($340m) was cleared in the market, which is interesting as that’s been a bit of an overhang on the stock. HLS sold their medical centres business ($500m) – now focusing on specialist diagnostics, day hospitals and IVF which improved their balance sheet, all while putting together a nice little strategy to improve margins over the next few years. All of which, if successful, should see HLS be a net cash business by FY22 (pay down debt) and be paying out a nice 6-10cps dividend. A faster-growing, higher quality, lower debt Healius could trade at a premium to peers.
In short: Hard to imagine right now, given the track record, but looks like the business is moving in the right direction.
Good Drinks Australia (GDA) $0.066 $83m Market Cap
We’ve been a long-time fan of Gage Roads (now, Good Drinks Australia). We like the beers, we like the marketing materials, we like the strategy. It’s struggled from a balance sheet perspective as COVID hit right at the wrong time, just as they were deep in a high CAPEX, low cash flow stage in their growth and maturation as a business.
After listening to the AGM Presentation, management are extremely bullish. GDA appears poised to capitalise on a couple of years of hard work on the east coast this summer. Draught sales on the east coast are already up 70% on the year and since the Atomic Beer Project in Redfern opened, NSW sales are up 48% (despite capacity restrictions). The company is producing record volumes, has variable costs down 13% and the craft segment continues to grow 7-10%pa.
In short: Growing revenues supported by favourable industry trends, expanding margins and increasing exposure to the economic recovery.
All figures in Australian dollars (1 AUD = 0.73 USD at time of publishing).
Ansell (ANN) $40.97 per share, $5.3bn market cap
Ansell manufactures single use gloves, health-industry protective garments and consumables. Suffice to say; they are having a good year. I expect PPE demand to remain elevated for some time and COVID has likely ‘unlocked’ a ‘new normal’ with respect to personal PPE and general sanitation around the world.
Ansell also has the balance sheet to consolidate its leading market position over the next 12-24 months. Somewhat surprisingly, I still see upside risk to both valuation and earnings growth and those two factors put together can result in strong share price performance.
In short: a quality growth business at a surprisingly reasonable price.
CSR Ltd (CSR) $4.41 per share, $2.2bn market cap
I’ve talked about my preference for building and construction material stocks in this column before. My view is that there is a growing body of evidence that these businesses will have a strong tailwind over the next couple of years.
CSR, who manufacture and supply gyprock and a range of other cement-based products, are already proving me right, reporting stronger than expected margins, market share wins and good cost management, as well as an unexpected special dividend.
In short: looks well placed to benefit from a cyclical recovery.
MyDeal.com.au (MYD) $1.18 per share, $300m market cap
You probably have shopped on mydeal.com.au for home or garden products at some point in the last few years. After recently listing at $1.00 per share and hitting $2.20 on opening day, the shares look much more reasonably priced at $1.18.
While most will rave on about the transaction growth and transition to online, what impressed me the most with MyDeal was the quality of the growth. Strong growth in repeat customers, improving conversion, 16% take rate and exceptional new customer acquisition costs. This all translates to MyDeal making more money from every customer than their peers and spitting off fantastic free cash flow.
In short: a high-quality e-commerce business at compelling relative value.
All figures in Australian dollars (1 AUD = 0.72 USD at time of publishing).
Boral (BLD) $4.58
New management, a board freshen up and a strategic review. It’s fair to say: Boral needed it after a period of significant underperformance. Our basic thesis here is infrastructure spending is a tailwind for Boral, and that this – coupled with the “self-help” program that is underway –could see Boral Australia back at its best, offering investors industry-leading returns from a dominant market position. Meanwhile, we don’t see why Boral US won’t be at least an average business. You can see additional blue-sky from divestments and a pickup in the property/construction markets.
In short: The turnaround is underway.
Reliance Worldwide (RWC) $4.12
A bit like Boral, but with more leverage to the home improvement and renovation market. Reliance Worldwide makes and markets push-to-connect plumbing fittings, the stuff behind your toilet and sinks. The plumbers will know what I’m talking about when I say it’s better to push two pipes together into a Sharkbite attachment than it is to solder metal. Anyway, I’m a rubbish handyman but I know a good business when I see one and RWC is a good one. Reported exceptional growth at the Investor Day last week, brokers are upgrading their numbers all over the shop and pondering if this is the start of a multi-year growth period for RWC. I think it is.
In short: Quality business at a reasonable price with accelerating growth.
Vulcan Energy Resource (VUL) $1.10
I’m revisiting VUL again. Lithium price now on the move and increasing activity in the European battery market makes me think the pending pre-feasibility study could be a catalyst for something bigger on the partnership/funding/corporate front. Staying long.
In short: The idea of zero-carbon lithium for the battery market is about as an attractive investment thesis as I could dream up.
All figures in Australian dollars (1 AUD = 0.74 USD at time of publishing).
CDW Corp (CDW-US) $112.59
The leading value-added reseller for IT equipment & solutions in the US, CDW is poised to benefit from IT spending growth for many, many years to come. CDW has outperformed industry IT spend since 2013, growing at 8% vs. Insight at 5% and PC Connection at 3% (over the last 5 years) – all while delivering EBITDA margins on over 8%, vs sub-4% for peers. This is driven by arguably the best culture in the industry, with market-leading revenue & EBITDA per employee.
CDW’s dominant position, industry leading margins and strong sales culture could be leveraged into value-added acquisitions – I think they might be looking at a pure services player, where margins are twice as high and CDW is underexposed, relative to peers. This would be well received by the market in my view. Currently trading on consensus Price to Cash Flow of 14x vs 5 year average on almost 18x.
In short: High quality, proven performer you’ve probably never heard of. Long term growth runway.
New Hope Coal (NHC) $1.15
The coal industry isn’t normally something I’m keen on investing in, but hey, I’ll take my profits and donate them to The Sea Shepard to cleanse my conscience. New Hope shares have been belted as coal prices globally have come under pressure as the globally economy has slowed while supply has grown. However, NHC have got some really good assets, low in the cost curve and rich with high quality coal. The recent management rejuvenation should only assist in further driving down costs, increasing production and growing profits. I see upside to analyst consensus estimates and potential for share price to get a lot closer to $2.00.
In short: Not for everyone’s ethical preferences, but too cheap [to pass up].
Pointerra (3DP) $0.35
The stock has attracted a lot of investor attention since serial entrepreneur Bevan Slattery took a private placement in the company. Most people would assume, by looking at the share price chart alone, that this stock has run too hard, too fast and the proverbial boat has been missed. However, those people haven’t spent hours speaking to management, done multiple calls with customers and clients and spoken with a number of respected 3D data entrepreneurs and technologists like I have.
The reoccurring revenue is growing fast, existing clients are relying on Pointerra more and more (read: spending more with them each month) and importantly, I’m seeing the initial indications of a material network effect. If they continue to grow organically like I think they can, Pointerra might be a $500-1bn market cap unicorn.
In short: You might think the boat has sailed, I’ll call you from my yacht when 3DP ticks over $1bn.
All figures in Australian dollars (1 AUD = 0.72 USD at time of publishing).
Spotify (NASDAQ: SPOT, US $250)
If you are some sort of sicko who thinks Apple Music is an acceptable streaming service, close the browser now. Spotify is the clear global market leader in audio streaming and might just be the biggest winner in a socially distanced world.
We are consuming more audio content than ever, as it’s the only medium where you can get stuff done while you are entertained. SPOT is growing rapidly, it has averaged 32% sales growth over the past 3 years and is forecast to add circa 70 million active users this calendar year.
They generate 90% of their revenue from subscriptions and have disproved the notion that Spotify is ‘discretionary’ and people will cancel their membership in hard economic times (from my point of view, it’s probably the last thing I’d cancel).
In short: Maybe the most exciting tech company under the $100bn market cap.
Breville (ASX: BRG, $27.00)
If you find me another company in consumer discretionary with a 5 year CAGR stat line like this, I’ll be impressed… 12% sales growth, 8% EBITDA growth, 8% dividend growth and 27% free cash flow growth. All while paying down long term debt ($88.7m in 2018, now $17m) and delivering a 21% return on equity. That kids, is what a good business looks like on paper!
Anyway, BRG put out another clinical set of numbers this week which demonstrated their ability to continue to evolve the brand and the business. The company always had great products, but now is investing in technology with IoT-based platforms, supported by relevant content and simplified e-commerce. Watch them continue their geographic expansion and expertly leveraged this tailwind of home improvement / spending more time at home (cooking, making coffee etc.)
In short: One of the great Australian success stories that most retail investors have probably never paid attention too.
Vulcan Energy Resources (VUL, $0.55)
With all the excitement about electric cars and lithium-ion batteries, environmentally-conscious investors often forget that to extract lithium traditionally requires significant amounts of water, energy and ultimately carbon-emissions.
The team at Vulcan are developing the world’s first zero-carbon lithium hydroxide product, extracting lithium, using geothermal energy from brines deep under the earth in the Upper Rhine Valley of Germany, using their proprietary process. The company holds the largest lithium deposit in Europe, strategically located in the centre of the fastest growing market for lithium on planet earth with the likes of Tesla, Northvolt, VW, CATL building hundreds of GWh’s of production capability all around them.
We believe these companies, with support from the local, national and EU government agencies, will be incentivised (both from a marketing perspective, as well as in the form of more traditional government incentives) to source local, carbon-neutral lithium for their factories and that this product would potentially command a premium price over traditional Chinese or South American lithium-hydroxide products.
Seneca clients participated in the recent placement at 40c and look forward to the company releasing the pre-feasibility study (the first time the market will see the project economics) before Christmas. I interviewed the CEO, Francis Wedin, over Microsoft Teams recently.
In short: Exciting development story with an environmental-tilt.
All figures in Australian dollars (1 AUD = 0.71 USD at time of publishing).
Amazon (NASDAQ: AMZN) US$2,961.97
E-commerce remains the #1 pass-time of the locked-down and socially distanced. We can’t spend money on travel, restaurants or experiences (which has been a key investment theme of the past few years, experiences over ‘stuff’) – we are now back on the consumerism bandwagon!
Amazon is primed to capture the vast majority of this shift. It’s growing dramatically outside the US, at very high margins (AWS, media, ad business) and is a now a multi-sector monopoly. If it gets hit with an anti-trust driven breakup, it will only unlock additional value for shareholders in my opinion.
In short: Probably going to get bigger, better and more dominant.
Super Retail Group (ASX: SUL) $8.19
All figures in Australian dollars (1 AUD = 0.75 USD at time of publishing).
SUL owns Super Cheap Auto, BCF, Rebel & Macpac. See above RE: the new consumerism bandwagon. We also can’t travel overseas, so once borders open you’re going to see people doing up their cars, buying caravans and campers and going hiking and camping and 4WD’ing all over Australia.
In the US, LCI Industries recently reported earnings 40% ahead of analyst estimates citing:
“Increased demand for RVs drove accelerated outdoor recreational products sales, which was well ahead of increasingly bullish expectations as we moved through the early part of Q2. In this post-COVID environment, RVs continue to be one of the safest ways for American families to take a vacation. Underscoring this strength, a recent RVIA survey reported that 46M people intend on taking a trip in an RV in the next 12 months.”
SUL is not too expensive 5.6x EV/EBITDA on consensus estimates (vs 5 year average of 7.7x) either.
In short: A rare business in retail with structural tailwinds at a reasonable valuation.
TNT Mines (ASX: TIN) $0.14
I always like to throw in something saucy for the punters. TNT recently acquired a strategically located land package in Utah that is highly prospective for uranium and vanadium (used to batteries). I like management, I like the tight company structure (not too many shares on issue, low market cap, cash in the bank and management alignment) and I like how under the radar this company is… for now. With less-attractive peers valued at multiples of the current value of TIN, results pending and not many shares around, it won’t take much for this to pop in my opinion.
In short: Very high risk, very speculative, very naughty.
All figures in Australian dollars (1 AUD = 0.69 USD at time of publishing).
Credit Corp (CCP) $16.78, market cap $1.13bn
“You’d think collecting debts in a recession would be a tough business, but this exceptionally led, industry-leader is well capitalised (recent cap raising at $12.50) and primed to buy debt ledgers at the best rates in many years. The debt ledger game is a bit like the property market, you make your money in the buying, and with competitors in decline, CCP is poised to benefit from higher margins and subsequently, above-average growth for the next few years in my opinion.”
In short: “It looks too cheap, I think it’s misunderstood by the market.”
Nearmap (NEA) $2.11, market cap $951m
“Despite much skepticism in the market place after a recent downgrade, Nearmap narrowed their guidance in late May. The company also reiterated stable customer churn, reduced cash burn and the release of a new product (AI) – all of which point to the company getting back on track after losing a significant customer and being impacted short term by Coronavirus. Nearmap is the clear leader in aerial imagery here in Australia and has a real and material opportunity in the US, an under-penetrated market. Nearmap’s scalable business model, proven management team and very reasonable valuation make it an attractive investment opportunity in my view.”
In short: “Market has doubts, I’m confident in the management.”
Golden State Mining (GSM) $0.48, market cap $19m
“A speculative pick but with a significant gold discovery (2.2m oz) only 13km down the road (De Grey Mining, DEG.ASX, market cap $737m), and identical sulphide anomalies already identified by the geologists, it could be worth a punt. The company recently raised money at 12.5c and the 10,000m+ drill program begins later this month.”
In short: “Speculative, but some encouraging signs.”
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, it’s Directors and it’s associated entities may have or had interests in companies mentioned. They may have or have had a relationship with or may provide or has 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.
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