MoneyTalks: Three rate-agnostic ASX heroes for uncertain times

MoneyTalks is Stockhead’s regular drill down into what stocks investors are pondering 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 Bell Direct market analyst Grady Wulff, on three specialist, concentrated ASX stocks any cunning investor will want to consider as we head into the unknown of 2H 2024.

Economic uncertainty? The ASX has a few stocks for that

2025 is around the corner, says Bell Direct’s Grady Wulff. Here, the analyst cobbles together three disparate buy recommendations from within the ASX consumer discretionary, mining and property sectors.

“The question isn’t whether inflation eases or when rates will fall. The focus in uncertain economic times is simple. Strength, balance sheets and flexibility,” Wulff says.

“As we enter the new financial year markets are sitting at all time highs, macro-economic data is driving rate outlook, and investors are cautiously searching for investment opportunities in the current market landscape.”

Wulff said some of the themes to look for heading into FY25 include diversified AI exposure, gold exposure, healthcare, REIT and copper.

“These are the key themes and areas showing attractive returns and outlook in the new financial year,” she said.

While many portfolio managers are uncomfortable taking on new miners and consumer stocks while commodity prices are under pressure, and while the Reserve Bank of Australia fumbles with sticky domestic inflation, Wulff says a blanket ban on ASX businesses within either space ignores the hidden and undervalued pockets of the local bourse.

“Many investors are avoiding the retail and consumer discretionary space in the current high-interest rate, easing retail spend environment, however there are some companies that can withstand downturns in economic activity like Accent, Lycopodium and RFF have proven.”

“We’re already into 2H 2024 and now is the time to prepare for what’s ahead.”

Accent Group (ASX:AX1)

Wulff says Accent Group is a footwear and sports clothing retailer and wholesaler which owns/operates a number of footwear businesses in the performance, comfort and active lifestyle sectors.

“From a financials standpoint, AX1 is a leap above most retailers in the current market landscape.”

In 1H of FY24 the company reported total sales rose 2.7% on the PCP to $810.9m, the opening of 72 new stores, and a reduction in inventory.

“Some of the brands you’ll recognise under the AX1 umbrella include the Athlete’s Foot Australia, Platypus, and Hype, while AX1 also owns a number of mono-branded retail stores for Hoka, Timberland, Stylerunner and more.”

Accent Group also holds the exclusive distribution rights for a number of leading international brands across ANZ including Sketchers, Reebok, Vans, CAT, and Dr Martins.

“One thing you’ll notice about Accent is the younger demographic target through many of its brands.

“This is one key factor that boosts the company’s viability to withstand economic downturns as younger consumers are less impacted by cost-of-living pressures; think first retail job, no rent, no food to pay for, no insurances etc = any money earned is spent on the latest retail fashion trends for this consumer group.

“AX1 also came out last week to advise the exit of 17 Glue Stores due to underperformance, which investors welcomed with an 8% rise in the company’s share price on the date of announcement.

“Accent is known for its strength in assessing store returns and exiting underperforming outlets in a timely manner.”

Wulff says at a time when rivals like City Chic Collective (ASX:CCX) are rationalising, AX1 is beefing up.

“Accent Group is preparing to launch their Nude Lucy brand into the states for the first overseas expansion of the brand as global demand for affordable ath-leisure wear ramps up.

“And management plays a huge part in the success of AX1 as Brett Blundy, one of Australia’s best known and most successful retail entrepreneurs, stands as non-executive director of the company.”

Lycopodium (ASX:LYL)

Lycopodium provides engineering and project delivery services in the resources, infrastructure, and industrial processes sectors.

“While companies operating in the mining space are generally tied to fluctuations in the commodity cycle, Lycopodium reduces downside risk exposure to downturns in cycles by not owning the assets it provides engineering services for.”

A rise in the number of miners around the world requiring engineering services, growing profits and earnings, and solid dividend payments places Lycopodium on the radar for investors in FY25, Grady says.

“While companies operating in the mining space are generally tied to fluctuations in the commodity cycle, Lycopodium reduces downside risk exposure to downturns in cycles by not owning the assets it provides engineering services for.

“Boasting names including Woodside Energy Group (ASX:WDS) , BHP (ASX:BHP), Newcrest Mining (ASX:NCM), Rio Tinto (ASX:RIO), and Newmont Corporation (ASX:NEM) as some of its many clients, Lycopodium has built a global presence with credible mining giants.”

In conjunction with its core engineering services business, Wulff says Lycopodium also operates a Process Industries division focused on the Australian manufacturing industry, which is experiencing market traction in its rail offering.

“From a financials standpoint, the company has experienced ongoing strength over time.

“Since 2019, LYL has more than doubled its revenue to over $327.57m in FY23, doubled its return on equity to 42.83% in FY23, more than doubled its profit after income tax to $45.58m in FY23, more than doubled its EPS to 117.72cps in FY23 and almost tripled its dividend to 81cps fully franked in FY23.”

From 2023, Lycopodium’s dividend yield of 6.03% places it in the top 25% of Australian dividend paying companies.

Rural Funds (ASX:RFF)

Rural Funds Group is a listed agricultural REIT with a portfolio focused on almond orchards, vineyards, cattle, cotton and macadamias.

Over the last few years investors have been cautious of the REIT sector amid work-from-home policies and declining retail spend impacting the performance and tenancy rates of physical real estate assets.

The sector has comeback from 2020 lows to trade 25% higher over the last year, driven by opportunities in the data centre and industrial warehousing REIT space.

Rural Funds Group offers an alternative, yet still attractive, investment in the REIT sector through owning and managing the agricultural properties a number of listed companies including Select Harvests (ASX:SHV) and Treasury Wine Estates (ASX:TWE) tenant.

The A-REIT boasts a solid dividend yield of 5.9% with dividends sitting consistently at 11.7cps and are expected to rise over the coming financial years.

A key strength of RFF is their Weighted Average Lease Expiry, which stands at 12.8 years. This provides secured revenue for RFF over a longer period than the average REIT, with most of the RFF tenancy contracts having incremental 2.5% increases over the duration of the lease.

Over H1 FY24 RRF property revenue rose 12.4% primarily due to rental income earned on first tranche of macadamia developments and lease indexation. Earnings also jumped 19.5% or $11.6m driven by property revaluations, and the company made a profit after tax of $43.754m.

With Australia’s growing population and higher migration down under, increased demand for the produce of Rural Funds Group’s tenants also adds to stronger outlook for the company over coming years.

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.