MoneyTalks: 3 services stocks in strong demand AND primed to catch post-inflation tailwinds

MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Tamim Asset Management head of Australian equity strategies Ron Shamgar.

What’s hot right now?

Shamgar says Tammin Asset Management are “cautiously optimistic” on the outlook for equity markets this year and expects the market to perform well in the face of uncertainty as investors have all but priced in the worst of the inflationary downturn.

“In our view, we expect to see these returns start playing out from the middle of this year as both the current rate hike cycle comes to an end, and inflation continues to fall significantly,” he says.

“In other words, we see the first half as volatile whilst the market performance will be more skewed to the second half of the year.”

On that note, Shamgar says one of the key criteria that Tammin Asset Management looks for when investing is companies operating in industries with strong tailwinds.

“These companies I’ve picked not only benefit from strong demand for their services but also make execution easier for their management teams.”

Top picks

IPD Group (ASX:IPG)

IPG is a national distributor and service provider to the Australian electrical market where the management and/or board owns 30% of the company.

The business’s share price has been stellar over the past 12 months, Shamgar says, but the company is flying under the radar and is positioned to benefit from structural tailwinds in years to come.

“As the world continues to take steps towards reducing carbon emissions, one area of business that is expected to experience exponential growth is the electric vehicle (EV) market,” Shamgar explains.

“As a vertically integrated provider of end-to-end solutions to the Australian EV market, IPD Group is in a prime position to take advantage of this trend.

“While EV charging solutions currently account for a smaller part of IPD’s business, this is expected to change rapidly in the coming years after acquiring Gemtek Group in 2022, a turn-key energy management and EV solutions provider to expand its offerings in the electric vehicle charging market.”

From Shamgar’s point of view, IPG is the only profitable, dividend paying EV exposure on the ASX.

“Our FY23 estimate is for $15 million NPAT – the company also has $23 million net cash on the balance sheet with catalysts including FY23 guidance, strategic acquisitions, and EV division (Gemtek) progress,” he says.

Close the Loop (ASX:CLG)

Close the Loop is a global provider of waste recycling and packaging.

The company listed on the ASX less than two years ago and has made several acquisitions since, Shamgar says.

“CLG has built a network of 260,000 global collection points for recycled waste.

“This network, together with years of R&D and IP in new solutions for recycled waste, have established a strong moat for the group.

“The company is currently experiencing strong demand from many industries including print, makeup, supermarket, electronics, pet food, batteries and many more, as these industries are required to have a sustainable footprint for their manufactured goods.”

During March, CLG completed a transformational acquisition of ISP Tek based in the US, which Shamgar says is a fairly young business but growing fast and highly profitable.

The business provides electronic refurbishment and full lifecycle recovery and sales of laptops, PCs and printers for large OEMs such as HP, Dell and Microsoft to name a few and to complete the $100 million deal, CLG raised equity at 33 cents, took on some debt and issued shares to the Vendors.

“On a pro forma basis, the deal is over 100% EPS accretive to CLG and transforms the company into a $200 million revenue, $43 million EBITDA and $24 million NPAT company,” Shamgar says.

“Following the deal CLG will have $36 million of net debt which we believe can be paid down quickly from free cashflows over the next 18 months. “

Overall, Shamgar says he sees CLG as another ‘founder’-led business with significant industry tailwinds and an undemanding valuation of 4.8x EV/EBITDA and 7.5x PE for FY23.

“We believe once the market digests the deal and new shares on issue, the shares will re-rate to our valuation of 55 cents.”

Helloworld Travel (ASX:HLO)

HelloWorld is a travel retailer and wholesaler in Australia and NZ, operating through a network of 2,100+ travel agents.

“Cruise ticket sales are a big part of earnings and we have seen a strong rebound since COVID as the older demographic customer base regains confidence to travel again,” Shamgar explains.

“The CEO of HLO is the founder of the company and owns 20 per cent of the business plus over the last six to nine months there has been significant developments that we see as positive.

“The first is HLO sold its corporate travel division to Corporate Travel Management (ASX:CTD) and the second development saw Qantas exit their holding in the company thus improving liquidity in the stock.

“As of the 1H23 result, HLO now has a balance sheet with $56 million of net cash and a $75 million holding in CTD.”

Tammin Asset Management sees several short term catalysts could send HLO shares into a re-rate towards a valuation of $3.00+, Shamgar says.

“These include a potential profit upgrade in April, a selldown or an in-specie distribution of CTD shares to HLO shareholders, and a possible acquisition or capital management initiatives thereafter.

“Pre COVID, HLO shares were trading as high as $6.00 a share but the stock continues to lag its larger peers.”

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