MoneyTalks: Why Seneca Financial Solutions likes these 3 defensive earning stocks

MoneyTalks 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 investment firm Seneca Financial Solutions CEO Luke Laretive. 

What’s Hot

The S&P/200 Resources Index (ASX:XJRAI) has outperformed the S&P/ASX 200 Industrials Accumulations Index (ASX:XJIAI) by ~27% over the past 12 months and as a result, Laretive believes an opportunity has arisen in some industrial names, particularly non-bank financials.

“We think the narrative of pending earnings downgrades is accurate but doesn’t necessarily apply evenly to all stocks,” Laretive said.

“We favour those companies with defensive earnings characteristics, particularly those we believe will benefit from a higher inflation and higher interest rate environment.

“Some of these companies are, by historical standards, trading at exceptionally low valuations and offer a compelling margin of safety.”

AUB Group (ASX:AUB)

AUB comprises insurance brokers and underwriting agencies operating in ~520 locations around Australia and New Zealand.

“AUB has been a steady performer, generating over 15% per annum CAGR for shareholders since 2007 on 15% pa sales growth, 9.3% pa EPS growth and 12% pa FCF growth,” Laretive said.

“You’ll be (un)surprised to hear, the company has achieved a median 15.7% ROE over the same period.

“We think AUB is a bit overlooked by the average investor, insurance broking isn’t exactly sexy and it’s a low volatility stock, so the perceived opportunity for alpha/outperformance is low however, not from these ridiculously low valuations.”

He said analysis of recent global insurance broker Arthur J Gallaher (NYSE: AJG) is positive, with inflation elevated which is positive for premium rate growth and high single-digit organic growth expected.

“AJG reported premiums in Australia are up 15%, property over 20%, casualty and PI in the teens.”

AJG has outperformed AUB by 48% on a constant currency basis since 1 Jan.

AUB recently announced it had completed the acquisition of leading Lloyd’s wholesale broker Tysers.

“Our view is that AUB’s recent Tysers acquisition, funded by a $350m equity raise at $19.50, has some investors cautious, wanting to see the synergies before they pay for them,” he said.

“However, at these prices ($19.95 today) our view is you are getting more than compensated for what could be an accretive deal that surprises to the upside.

“We value the business at 20x FY24 earnings per share, or close to $30 per share.”

The AUB share price has fallen ~22% year to date but is up ~5% in the past five days.

Netwealth (ASX:NWL)

Laretive sees the independent platform providers in general including NWL,  HUB24 (ASX:HUB) and Praemium (ASX:PPS) as laggard-beneficiaries of the rising interest rate environment.

He views Netwealth as the highest quality, most reliable growth in the sub-sector.

“We think earnings and dividends can sustainably grow at over 20% per annum for the foreseeable future,” he said.

Laretive said a recent trading update indicates NWL is winning market share, with inflows of $2.9bn for Q1 FY22, despite exceptional equity market volatility.

“Equity market uncertainty benefits NWL, as clients and advisers tend to move more funds to cash and this balance (currently 7.5% of FUA) generates more interest margin income for the company,” he said.

“We value the business on 30x FY25 FCF or $14.20 per share.”

The NWL share price has fallen ~31% year to date.

Credit Corp (ASX:CCP)

Laretive believes Australia’s largest debt buyer and collector is simply oversold, trading on 11x PE next 12 months (NTM) versus 5-year average of close to 17x.

“The management team of Credit Corp is one of the best on the ASX and have beaten expectations every year since 2011,” he said.

“Their last guidance was understandably conservative given the environment and has spooked investors despite high single digit NPAT growth.

“The business is still growing but priced like it has rarely been priced before and concerns that purchased debt ledger (PDL) supplies will dry up are unlikely to eventuate in an economic environment where you have over stretched households.”

Laretive said there are few businesses of Credit Corp’s quality with a 5-year average including  45% EBITDA margins, 10% EBITDA growth, 15% ROE that you can buy on 11x PE or a 4.6% forecast dividend yield.

“The stock is worth at least $28 in my opinion,” he said.

The Credit Corp share price has fallen ~50% year to date.

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.