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 Prime Value Asset Management portfolio manager – equities Richard Ivers. 

 

What’s hot right now?

For Ivers it’s all about small caps and in particular the ASX small industrials sector. He said the S&P ASX Small Ordinaries index “looks interesting” as it has underperformed large caps by ~20% since the beginning of 2022.

“This relative performance is more extreme in the small industrials sector, which excludes mining companies,” he said.

The S&P ASX Small Industrial Index has underperformed the Small Ordinaries since the start of 2022.

“In fact the Small Industrials Index is 7% below its pre-Covid level, one of the few assets classes that has not been boosted by the large stimulus provided over the last three years,” Ivers said.

“This means that small industrial valuations are now at a deep discount to large industrials, i.e. the forward price earnings multiple (PE) is 20% lower.

“We are finding many high quality businesses with resilient earnings streams of long duration trading at very attractive valuations.”

Ivers said the three small industrials sector stocks he likes balance an attractive valuation with relatively defensive earnings stream.

 

Top picks

Kelsian Group (ASX:KLS)

The bus and tourism operator recently expanded following the acquisition of  All Aboard America Holdings (AAAHI)  in the US for $US325 million ($487 million).

KLS said AAAHI is a leading provider of passenger motor coach services to corporate, government, education, LNG, and tourism sector customers in the US and provides a strong entry point into the large market.

The acquisition was partially funded by a capital raise completed in April,  which raised gross proceeds of  $232 million.

“This deal was value accretive with significant potential upside in the short and long term yet the stock has been weak as it digests the associated equity raising to fund the deal,”  Ivers said.

“The majority of Kelsian’s earnings are highly predictable with long term contracts yet it trades on FY24 PE of only 15x, a significant discount to the small industrials of ~17x.”

 

AUB Group (ASX:AUB)

Ivers said the insurance broker benefits from rising inflation and insurance premiums as this increases their revenue, but they don’t have the same level of cost increases.

“So revenues and profit margins are rising,” he said.

“Additionally insurance brokers are not exposed to the capital risk of fires, floods and other catastrophes like the insurance underwriter.”

Ivers said AUB is another one that completed an offshore acquisition but this one was announced one year ago.

“With the passage of time, it is now clear the acquired business – Tysers –  is performing better than expected,” he said.

“Like Kelsian, it took time for the market to digest the equity raising and become comfortable with the acquisition. In AUB’s case, this is well under way now with the stock price starting to reflect the value accretion from the deal.

Ivers said insurance is a non-discretionary product with volumes solid through the economic cycle which means AUB’s earnings are similarly non-cyclical.

“With the positive tailwinds of rising premium and acquisitions we expect AUB to deliver strong earnings growth over the next couple of years at least,” he said.

 

Seven Group Holdings (ASX:SVW)

SVW owns and controls multiple businesses including Westrac, Coates and Boral.

“Coates and Boral in particular will benefit from the strong outlook for infrastructure spending over coming years,” Ivers said.

“Boral also has the benefit of new management undertaking significant changes to deliver operational improvement and better returns.”

He said Westrac is ~35% infrastructure and ~65% mining exposed as the licensed CAT dealer in WA and NSW/ACT.

“There is a strong pipeline of machinery orders and rebuilds along with a growing product support business which provides further earnings visibility,” he said.

“We think there’s upside to consensus earnings expectations and the valuation is attractive at these levels.”

 

The KLS, AUB, SVW share price today:

 

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee 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.

Read MoreIndustrials

Featured Companies

You might be interested in