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Experts
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 Merewether Capital managing director and Christian’s second favourite Novacastrian, Luke Winchester.
Winchester says he’s keeping tabs on three specific stocks in the sustainability space.
Although the general ‘sustainability thematic’ has not performed remarkably in recent times, Winchester says there are ASX companies executing well with tailwinds.
“That is what I have found with these specific businesses,” he says.
One of them is Rectifier Technologies, a manufacturer of power conversion modules that has gained traction in the electric vehicle space in recent years as the industry shifts from home alternating current (AC) slow charging to public direct current (DC) fast charging.
His second pick is Laserbond, a business that provides surface coating services for heavy industry and mining to vastly lengthen the service life of heavy machinery, and the lucky third is Vysarn, a hydrogeological drilling (dewatering) company.
Winchster says RFT has a backlog of orders for its RT22 electric charger module, a high efficiency AC-DC power product which uses DC from a 3-phase supply.
“The requirement for modules that can handle the additional power at high efficiencies while remaining compact and able to cool is important and that is where RFT’s RT22 module has emerged as a best-in-class solution,” Winchester explains.
“The company has orders from two key customers worth over US$40 million which they are now beginning to execute.
“The last report showed revenue tripling and profits up more than 800 per cent as supply chains eased and the company was able to start working into the backlog they had accumulated.”
With a $68m market cap and $3.8m net profit in the first half, the business trades on less than 9x earnings assuming a second half similar to the first.
“For the growth being achieved with high margins, high returns on capital and capital light that multiple is far too low,” Winchester says.
“I expect the business will continue to grow strongly not only as their key customers grow, but also the opportunity to win new customers as the RT22 establishes itself in the market.”
In the long term, the business has also explored the opportunity to manufacture its own chargers and has developed preliminary charger models that can shift power back from the electric vehicle to the grid, he says.
“This is an opportunity expected to become extremely large as electric vehicle ownership grows and places a larger strain on the current grid.”
Winchester says the Laserbond process can either be done at the start of the machinery’s life to extend it, or it can be used to refurb the equipment to give it longer usability when normally it would be scrapped.
“The company reported strongly in February, with revenue up 40 per cent and profit up 32 per cent.
“Management has done a fantastic job managing inflationary pressures so far and the business is positioned to thrive.
“Domestically, the strategy has been to acquire smaller surface coating peers in different geographies and implement the Laserbond proprietary process to drive margin improvement.
“So far they have acquired in Queensland and Victoria, with Western Australia now the focus for a target.”
With a $94m market cap and $2m net profit in the first half, Winchester says LBL looks much more expensive than RFT but management expect big lumps of revenue in the second half as they deliver Laserbond systems to customers.
“With a stronger second half the business trades on less than 20x earnings,” he says.
While the hydrogeological segment has traditionally been considered as ‘low quality’, Winchester says Vysarn has optimised the segment for free cash generation by placing its rigs across three long term contracts with major iron producers BHP, Rio Tinto and Roy Hill.
“With the three contracts now in place and operational, the segment is expected to produce $12 million in EBITDA with $3-4 million of that required in maintenance capital expenditure to keep the rigs running, leaving $8-9 million free cash flow,” he explains.
“Management are taking this free cash and looking to flesh out a business as an integrated water services business.
“So far they have acquired two businesses in the test pumping and aquifer recharge space, and entered into a joint venture in the water storage space.”
While early days, Winchester says the initial signs are fantastic with each segment performing better than expected and the potential to drive synergies over time.
At a $40m market cap, the business trades on less than 6x the baseline earnings, perhaps a fair price for the low-quality core segment, he says, but undervalues the progress being made to grow into a diversified provider of water services.
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