MoneyTalks: Here are a few stocks playing into post-COVID investment trends and with ‘free options’
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MoneyTalks is Stockhead’s regular recap of the ASX stocks and sectors that fund managers and analysts are looking at right now and in this edition we’re looking at post-COVID investment trends.
Today, we hear from John So, co-founder and portfolio manager at VP Capital.
We last spoke with him just prior to the market crash in February 2020. Things have changed a lot since then.
“I think pre-COVID there was more tendency to deploy capital into companies [which] traded at high multiples,” he told Stockhead.
“Whereas obviously we’ve seen companies like Afterpay (ASX:APT) or Xero (ASX:XRO) retreat and capital being redeployed into consumer facing businesses, banks etc. which are facing tailwinds from a combination of low interest rates, the inability to travel, the fact that people haven’t had any big ticket spending items in 2020 and a high savings rate which is a function of not spending money in 2020.
“So I think the targeted opportunities of most professional investors have changed a bit.
“That’s not to say the tech side of the market hasn’t changed but it’s a medium-term proposition relative to some of these companies that may have a more immediate re-rating.”
So noted there were multiple post-COVID investment trends including the acceleration of electric vehicles, pent up consumer demand being unleashed and increased business lending.
And it is even better when a stock has a business undervalued or not valued at all by the market, meaning when if you purchase the stock you are essentially getting a “free option” on those assets.
Take the first pick for example.
VP Capital has been watching the acceleration of electric vehicles and decarbonisation story closely, but in the absence of a pure-play EV maker on the ASX (for now) the next best thing is battery metals.
IGO is one of the few large caps in that space but So argues the market doesn’t realise just how much of a foot in the door it has.
“It [IGO] is not trading at a particularly cheap valuation if you just look at the nickel asset but I think what you’re getting is a free option on the stake they bought in Greenbushes,” he said.
“Obviously lithium prices have been quite low in the last 12 months so that hasn’t been really a profitable venture.
“I think you’re picking up Bollinger and Greenbushes together which is a great theme for a reasonable price.”
So was also a fan of the deal IGO did when it sold its 30 per cent stake in the Tropicana gold mine to Regis Resources (ASX:RRL) for over $900 million.
“I think that was probably slightly ahead of market expectations, the price they achieved,” he said.
“That’s a good outcome as that’s an asset that’s not one of their core focuses and it’s had mediocre quarters to say the least.
“That’s been the position they’ve been in for some time, we continue to hold it and continue to take a positive view on it.”
Nickel is another commodity tipped to be part of the electric vehicles story.
While many nickel plays are purely upstream, So thinks this one is also midstream with its nickel production facility in Indonesia.
“I think it’s an opportunistic time to get into Nickel Mines because it’s got a consistent production base, not withstanding it fluctuates from quarter to quarter – it’s been sold off after the March quarter,” he said.
So also thinks the market is discounting the upside from the Angel Nickel project in Indonesia which it has accumulated a 50 per cent stake in.
“That’s going to take some time to develop but they already own 50 per cent of it and when they move to the development phase of that you’re picking up a consistent sustainable nickel asset that plays in that same theme as IGO Group for a very reasonable valuation and reasonable multiple,” he said.
Another post-COVID occurrence is pent-up consumer demand being unleashed on industries disrupted by COVID-19 the most.
“We’ve seen at retailers and hospitality people are coming out to spend. Many [stocks] have re-rated so it’s finding the ones probably benefiting from that consumer behaviour but their share prices haven’t reflected that,” So said.
“One is Retail Food Group; it owns a series of brands and franchises [and is] very well established in the country.”
While the company has had franchise and balance sheet issues, So says these were resolved with an equity injection.
“The stock was sold off as part of the COVID lockdown but hasn’t made a recovery like a lot of these other retailers,” he said.
“When you buy RFG (if revenue returns to pre-COVID levels) you’re buying at less than 10 times earnings potentially – not demanding in this market but I think that’s relatively good value.”
While many investors would know this stock as a BNPL player and might think BNPL is a post-COVID investment trend, So thinks this isn’t really the driver of profitability in the near term.
“Humm is doing a lot of financing for agriculture and industrial sectors and a lot of these commercial banks have moved out of these business lending sectors in the last year or two, especially with COVID coming in, so companies like Humm have stepped up and entered this market and a lot of the book value relates to sectors of this sort of agriculture,” he explained.
“Profitable investment has been made in the industrial space. Some of the financing is truck drivers and so forth so I think you can reasonably expect the current earnings to be sustainable and probably with a little bit of growth in the next few years.
“And based on the first half earnings, you’re buying this business for less than 10 times [earnings] just off the back of that core, consistent stable growth segment of the business.”
This is not to say its foot in the BNPL door is to be ignored. But So argues the market has been doing just that.
“You’ve [also] got the consumer-based side including BNPL which you’re picking up for free from earnings perspective, so again relatively good metrics,” he said.
“Even without BNPL it [Humm] is not expensive. In fact it’s inexpensive and in the meantime you’re getting [a] BNPL business which continues to grow at a revenue line but not earnings line because it’s not earnings positive.
“But you’re picking up the other business for close to zero so compared to other BNPL companies there which have high growth and deserve to command a high revenue multiple, nonetheless you’re picking it up close to zero – that’s like a free option on it I think.”
John So has nearly a decade of experience in investment banking, corporate finance, equity capital markets and project finance, where he has worked on over $8bn of transactions, mostly for corporate clients. During this time, John also spent six years as a natural resources corporate finance specialist. In February 2018, John co-founded VP Capital and has been managing wholesale funds since.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees 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.