MoneyTalks: Harley Grosser reckons these 3 ASX stocks are cash machines fit for beating inflation
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Money Talks 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 Harley Grosser – the founder and managing director of Capital H Management, managing director of ARC Funds (ASX:ARC), and non-executive director of Motio (ASX:MXO).
“With ultra-low rates, the last 10 years has belonged to growth, often at any cost with no regard to cash burn,” Grosser said.
“But we think the next 10 years will belong to cash machines.
“Investors will look for company profiles with growing, predictable cash flows and sustainable margins.
“If we are going to remain in a more inflationary environment, and we do think that is likely to be the case, you don’t just want to sit on cash long-term.
“You want to own growing predictable earning streams.”
Grosser added the market correction is probably now complete – inflation may have peaked and with it rate expectations, meaning it is time to search for bargains.
“We believe businesses with predictable cash flows, pricing power, and sustainable margins will trade at a premium.
“While you need to be cautious, micro-caps are now presenting phenomenal opportunities, in many cases rivalling what we saw during the COVID sell-off.”
EVZ is an engineering business with three divisions that deal in steel storage tanks, stormwater drainage systems, and support for power generation and renewable energy.
“We think most of the upside will come from the Brockman operating unit, which supplies steel storage tanks and contributes over 60% of group revenues,” he said.
“For EVZ overall, based on contracts they already have in hand, we expect significant revenue growth, from about $60 million in FY22 to revenue exceeding $100 million in FY23 and work in hand is likely to remain greater than $100 million through FY23 and FY24.”
The key thematic is fuel security, Grosser says.
“In a normal year nobody thinks we’re going to suffer a severe fuel shortage, but it’s increasingly becoming a risk with countries like Sri Lanka literally running out of fuel.
“The catalyst for EVZ is the Australian government’s efforts to boost fuel reserves.
“Through the Boosting Australia’s Diesel Storage Program and Defence Fuel Transportation Program, the Australian government has allocated more than $1.4 billion to fuel storage.”
Grosser said EVZ has already received some of those contracts, which accounts for their expected revenue growth.
“We also believe EVZ will capture a share of the remaining seven to be awarded, which are worth as much as $60 million each,” he said.
Another potential cash machine is AHQ, which owns and develops metallurgical coal, used in steel making.
“If they hit their targets, the numbers for AHQ are really quite silly even assuming a coal price lower than spot,” Grosser said.
The company has cleverly acquired a portfolio of metallurgical coal assets at exceedingly attractive valuations and is now ramping up production at a time of record prices.
“Premium metallurgical coal is still over US$350 per ton. If prices go even higher, that would be all upside and if they drop there’s plenty of margin of safety,” Grosser explained.
AHQ has given guidance that it will produce at a run-rate of one million tons per annum this quarter, and Grosser believes it will hit 1.2-1.5 million tons in FY23.
“We have confidence in the new board and executive team and its ability to successfully increase production volumes, despite earlier delays.
“Jon Romcke, the new CEO, has done this before at Stanmore Coal.
“Even using fairly conservative estimates, they should have circa $300 million in free cash flows in the next 12 months.”
The market cap is about $200 million, so the numbers are highly attractive if they hit their targets, Grosser said.
“Even with the volatility of coal prices, we think they are worth three to five times more than their current value.”
Grosser said Capital H Management has invested in PTG since pre-IPO.
The company provides SaaS CRM software to 42 per cent of real estate agencies in Australia and New Zealand and is working to tap adjacent opportunities and expand internationally.
“PropTech Group is very well placed for the current environment because it can grow organically from operating cash flows,” he said.
“The market has absolutely smashed anything tech related, and we traded this stock actively through the tech sell-off.
“But given the declines, tech is now a happy hunting ground for us, and we’ve been buying PTG at these levels.
“The company has been investing every dollar in rapid growth, but it has a top-notch management team and board.”
Because of the reinvestment into growth, PTG has been cash flow neutral.
Grosser thinks that if PTG turned off growth spending, EBITDA margins would be well north of 30%.
“If PTG can successfully start generating free cash while still growing it will make the stock very appealing to the market,” he said.
“In the most recent quarter, PropTech Group reported year-on-year annualised recurring revenue growth of 56% and year-on-year recurring cash receipts growth of 69%, so this company is a strong performer. “
While PTG has been caught up in the tech sell-off, whenever an entire sector sells off by 70-80% it is worth taking a close look, he said.
“We think the time start doing so is now, and PTG is a great example.”