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MoneyTalks is Stockhead’s regular recap of the stocks, sectors and trends that fund managers and analysts are looking at right now and in this edition we’re looking at the ‘growth or value stocks’ debate.
Today we hear from Michael Steele, co-portfolio manager at Yarra Capital Management’s Smaller Companies Strategy.
Yarra began 2017 following the management buyout of Goldman Sachs Asset Management’s Australian-focused investment entity where Steele worked for nine years prior to that.
Yarra’s Smaller Companies Strategy is focused on stocks with a market capitalisation above $250 million but outside the top 100 stocks. It has returned 39.75% in the past 12 months – ahead of the S&P/ASX Small Ordinaries Accumulation Index’s 30.41%.
“The process operates as a bottom up fundamental process, we have a team of 13 investment professionals that feed ideas into the product,” Steele told Stockhead.
“We do bottom up fundamental analysis, we’re going out and analysing industries, we build up our view around those businesses going forward, we do a lot of industry meetings, private equity style due diligence to form our view on those businesses going forward.
“We’re really trying to find companies that have good industry structures, revenue streams that are durable and growing, sustainable cost bases, strong management teams, balance sheets that have got capacity and a margin of safety and also if ESG requirements are met or we can see ESG improvement going forward.
“The product has a long holding period – it typically holds stocks 3-5 years, style neutral, had strong performance over time. Strategy has been in operation for over five years, outperformed by over 7% per annum and also good risk metrics.”
Ausbrokers is one of the ASX’s few insurance broking companies.
“It is an attractive industry in terms of consistent growth overtime, quite defensive growth, increasing premiums over time, increasing complexity for clients with managing risk so increasing demand for products as well,” Steele says.
“Its notable that this business has opportunity to improve execution.
“We’ve had a new management team that’ve come in in recent years, they’re taking a lot of market share and doing a lot better.
“There are better products linked to better pricing, reducing their cost base through consolidating businesses, vertical integration through sourcing the product more direct and they also invest a lot in technology.”
Steele also likes an acquisition AUB made in February 2020, just prior to COVID. It acquired a 40% stake in online distribution platform BizCover for $132 million.
“On a standalone basis Bizcover has strong growth but they’re also using it across their business so there’s hidden value in their technology as well,” he said.
“It’s also a business that can do some bolt-on acquisitions.”
Megaport was only founded in 2013 – being one of a handful of companies founded by Bevan Slattery – but is nearly a $3 billion company.
“Effectively what they do is they have a network where they can connect data centres to the cloud so it’s got very strong end market growth,” Steele said.
While Steele says the need for data storage is hardly new, the shift from physical storage centres to cloud storage is at an early stage.
“It’s a very big opportunity at early stages of that structural shift,” he said.
“What’s noteworthy is they’ve actually got a global network, so they’ve got a big business in North America and they’ve got a leadership position where they’ve got the most points of infrastructure of any company in the market so it is a global business.
“It’s a strong market when you look at growth. What’s interesting is they’ve expanded to now provide data network services across a whole network.
“So they’re not just connecting the cloud to data centres, they can connect retailers, 100 stores to the cloud, so they can provide a data network globally.
“It’s got a leadership position, growth in the cloud. It’s also a business that’s got high quality revenue, it’s 100% recurring, no licence fees, low customer churn. When a customer starts using the product they end up buying more as the product is so good.
“Strong growth on a per customer basis and adding a lot of new customers as well.
“So when you add on each one you have 70% incremental margins as well.”
Steele says the example of his fund’s top two stocks being different styles – one defensive and the other tech (often considered higher risk) – shows multiple investment strategies.
“The smaller companies strategy has balance across styles so we invest in both growth and value companies,” he said.
“There is a degree of balance but we’re still managing quite a concentrated portfolio that only has 40 – that’s concentrated compared to peers. And it’s really low turnover – we want to buy these businesses for the long term.”
And this can mean ignoring short term downturns, including the crash of early 2020.
“When we bought Megaport there were concerns from disruption from COVID-19 and a lower level of transition to the cloud,” Steele says.
“We saw it as a great opportunity. The market is looking at slower growth in the shorter term; we can see there’s great longer term structural growth opportunity.
“Where we can find companies where the market focuses on short term negative, but we see a long term positive opportunities – it creates great opportunities and we call it a timeframe inefficiency we can take advantage of.”
When pressed for one more pick, Steele named this lithium and nickel producer, saying it will be major beneficiary of growth in EVs.
“You’ll see a large uptick in lithium demand as EVs grow.” he said.
“If you look out to the next 10 years to get to 30% penetration of new vehicles being EVs, you need lithium supply to go up 10-fold – so that’s a 10 times uplift and IGO’s a big beneficiary of that.
“It’s an important stock that shows our process. Both mines are located in Australia so we’re not taking on geopolitical risk.
“Their lithium asset has a long life, 30-plus years, and bottom of the cost curve so it’s sustainable at all prices. It’s also one where it’s got a net cash balance sheet.
“We’ve got attractive commodity as you see demand come through, it’s also got volume growth more than double from current production rate. So it’s a high quality exposure, great long term demand and relatively low risk.”
Yarra owned IGO prior to it acquiring Greenbushes and Steele thinks it is being undervalued by the market.
“There’s a perception with Nova nickel that it has only got 5-7 years of mine life but our view is there’s opportunities to increase mine life of the nickel asset and it’s bottom quartile for cash costs,” he says.
“And it’s also had a big uplift from EV demand as well. You can quickly see EV demand becoming 30% of nickel demand over next 10 years.
“So you’ve got Greenbushes which is lithium, but because the nickel asset is smaller, our view is people are looking through it and not valuing it properly – in a structure there’s hidden value and the nickel has clearly been undervalued.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
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