MoneyTalks: Investors are uncertain about sustainable earnings, but this fundie thinks these companies are solid
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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 focusing on stocks with sustainable earnings.
Today we hear from Richard Ivers, portfolio manager at Melbourne-based Prime Value Asset Management.
One trend in the market that has caught his eye is the response of the sharemarket to certain companies’ trading updates – or actually the lack of a response.
“John Lyng Group (ASX:JLG) came up with an upgrade [on Thursday] and the stock hasn’t really moved, Premier Investments (ASX:PMV) [on Friday] came up with an upgrade of about 8 per cent and the stock is flat,” Ivers said.
“Normally when companies come up with earnings upgrades the stock goes up and that’s not happening.
Ivers puts this down to ASX investors being more sceptical about whether a company’s earnings are sustainable, particularly in respect to companies that got a boost out of trends forced by COVID-19.
“So what I think is happening is: There are a lot of short term things but the market is looking through those now and seems to be taking a much more longer term view on these things,” he told Stockhead.
“[It’s] looking out and saying ‘Are these earnings upgrades to a higher level sustainable or is it just a short term sugar hit?’
“And there seems to be more focus on valuations; when in the past (at times) they didn’t seem to matter, they do seem to matter more now.
“And there are things like (the retail sector is a good example) where you’ve had stimulus that has provided a short-term benefit to earnings.
“Kogan (ASX:KGN) came out with a couple of updates in the past couple of months which highlighted things have softened for them and have pretty much halved since then.
“So we’re in a different environment now where you need to look at what earnings [level] is sustainable and are those earnings valued at a reasonable price.”
United Malt Group provides malt to beer brewers and scotch whisky makers.
It used to be a part of GrainCorp (ASX:GRN) until it got de-merged in late March last year which was a terrible time for the industry.
“[UMG] got hit by COVID because the bars were shut and a lot of craft brewers rely on distributing through pubs and restaurants because they don’t have bottling facilities,” Ivers said.
“And so their earnings were down but now vaccines are being rolled out, particularly in the US and the UK, those bars are reopening and the distribution channels for the craft brewers are opening up and earnings are rebounding for United Malt.”
“That’s one that’s a COVID loser that is now a beneficiary of the re-opening trade but it is still trading at a reasonable multiple. A lot of these re-openings are trading at a reasonable multiple.”
This health insurer has been on the opposite end of the spectrum – a winner from COVID but with investors uncertain if it will stay that way. Ivers thinks it will.
“Its number of members grew strongly last year; people are more conscious of their health and so their revenues got a boost from that,” he said.
“Then their costs went down because elective surgery was stopped for a period of time – so you got this big profit uplift and margins increased to a high level.
“The consensus is you sell the insurers and buy the health providers, say the hospitals, diagnostic imaging groups, those sort of ones that were hurt last year but will now benefit.
“But when you look at NIB and just say, ‘OK we know the margin is unsustainable – but look at the long-term margin pre-COVID and what was a reasonable before that’ and you get a good multiple.”
Ivers concluded the discussion by noting it was a good time to be a buyer but investors had to be selective.
“There are still really good opportunities out there to buy really good quality businesses at reasonable prices, you’ve just got to be choosy about it and pick the best out of it,” he said.
“I think it is a stock-picker’s market at the moment because it is really about where earnings will be in the next couple of years and what’s a reasonable price of those earnings?
“And that’s starting to be reflected in the way stocks are priced at the moment.”
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.