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MoneyTalks: It’s time to bet the farm on fundamentals and quality
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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 Marc Whittaker at Investors Mutual Limited.
What’s hot right now?
Marc says, what, aside from Stockhead? I say, Marc. You’re a legend.
A moment of reflective mutual contemplation/appreciation, and he says, it’s not hot, but rising interest rates and rising inflation should refocus investors’ attention right now on fundamentals and quality.
That is: what are the cash flows that a company produces and what are the barriers to entry/competitive and moat/resilient demand that supports this ability to generate cash flow?
“With the selloff in loss-making technology and other speculative companies, the focus should be on companies with real assets, real cash flows, ability to pay dividends, pricing power and strong balance sheets, that are attractively priced, and can do well in an inflationary environment,” he adds.
Trends
Marc says it’s the agricultural focused companies which have many of these key criteria.
“Also note that during times of inflation, soft commodities and agricultural assets have historically outperformed, and this is likely this time around as well.”
Top picks
Meet the only scaled branded consumer goods company on the ASX.
Here is a portfolio of brands with strong market positions. I’ll round a few off because I see them at the local – Dairy Farmers, Dare flavoured milk, Yoplait, Vitasoy and er, Bega.
This is a company which has the ability to pass on price increases to compensate for higher input costs – the fact they are branded means they have greater scope to put up prices. Of note is the recent acquisition of the Lion Dairy and Drinks business which offers significant cost and revenue synergies.
There’s surplus assets they can sell to further improve the balance sheet; it’s the second largest procurer of milk in the country which gives scale and diversity as well.
Trading on 18x FCF in FY23e and a div yield of 2.5% which will grow from here.
Is the leading aquaculture producer in Australia.
The group is currently accounting for circa 50% of domestic salmon production.
Salmon farming industry is attractive. Salmon is yummy. The sector is moving to a rational duopoly structure with the recent acquisition of main competitor Huon by JBS. Add to this, global salmon prices are moving higher; also there’s very strong, growing demand and there’s constrained supply.
Increasing environmental controls are likewise increasing the barriers to entry. Tassal is well positioned and are utilising their IP in salmon to expand into prawn farming at scale to supply the unmet demand in Australian grown prawns. Also yummy – prawns have a shorter working capital cycle which means cash comes in the door more quickly which is great for cash flow.
FCF generation to increase materially post-salmon capex and enter the shorter working capital cycle in prawns. Marc says this one is very attractively priced.
Trading on PE: 12.6x; FY23e – yield 4.5%, market yet to appreciate the favourable change in market structure as well as much stronger outlook for free cash flow.
As our own Josh Chiant has pointed out before, stockfeed supplier Ridley Corp has been on the up and up since hitting a low point at the start of the pandemic. This low key stock, Josh says, is one of the better non-Fortescue stock picks in the Tattarang stable.
Andrew ‘Twiggy’ Forrest paid ~$12 million between August 2020 and February 2021 to amass a substantial stake in the $543m agristock, which is sitting close to record highs at $1.70, up 49.12% over the past 12 months.
Then Josh said this, we couldn’t stop him.
“The supplier of Cobber dog food reported a barking mad 124.4% increase in NPAT to $22.6 million in the first half of the year.” Nice.
Marc calls it, Australia’s leading provider of animal nutrition solutions.
Now, given the strength and health of Australian agriculture at the moment, Ridley will benefit from a strongly performing customer base with growing demand. What’s more, Australian agriculture is corporatising, and as it does, scale suppliers will become more important and Ridley is quickly emerging as one of the most scaled providers in what is still a largely fragmented industry.
Helmed by a high-quality CEO who’s lifted standards. Improved business culture, earnings quality and growth prospects. There’s solid organic growth in the post and opportunities to reinvest in high returning self-help initiatives. Marc adds that near net cash balance sheet also provides options around growth and accretive M&A.
Trading on PE: 14.0x FY23 PE, yielding 4.3%
The views, information, or opinions expressed in the interview in this article are solely those of the writer 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.
