Avoiding the crowds and finding value

Vince Pezzullo

Perpetual Asset Management (Australia)

Over the past 18 months, we have demonstrated a higher allocation to large cap Australian securities in line with the view that in many cases large cap stocks currently represent better value relative to small or mid cap stocks. Small and mid-cap stocks have rallied considerably, and we believe that large caps, such as the banks have been left behind.

The major banks have recently upgraded provisions for remediation costs relating to their advice businesses and we are of the view that the provisioning has been based on a worst-case scenario. We consider that the banking sector has reached the peak of its regulatory oversight, and while there is a risk that a change in government may see renewed focus on the sector, this is likely to be tempered by a need to maintain appropriate access to credit. Telstra also represents good value with its focus on simplifying the business and removing cost.

PIC also has a 6.0% exposure to Woolworths Group Limited (ASX:WOW). The core supermarkets business remains dominant within the Australian and New Zealand operating environment, with both countries characterised by a largely duopolistic and increasingly rational marketplace dynamic. Latest quarterly sales outcomes have WOW back in ascendancy after a weak start to FY19, and together with good cost management should allow meaningful bottom line profit growth going forward.

More generally WOW continues to refashion its portfolio of businesses. Under this current management team, the Masters misadventure has been closed down and the petrol business sold with proceeds to be distributed to shareholders via an off-market buyback over coming weeks - in itself significant at around 4% of issued capital. Other actions are yet to transpire, most notably resolution of Big W’s future (where we note 3Q19 sales growth of +2.6%) and new undertakings into convenience and online are yet to hit the bottom line.

Moreover, WOW’s balance sheet remains in a healthy and robust state at around 15% net debt/equity. While WOW market valuation has improved some 15% over past year, we believe there is more to come, principally through the additional profit from improved operating leverage. Presently, WOW is trading around market multiples far better than market growth in a stable staple duopoly. 

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Our strategy is to create a concentrated and actively managed portfolio of Australian securities with typically a mid-cap focus and global listed securities. Find out more by clicking 'contact' below, or hit 'follow' to be the first to receive our latest Livewire insights.

Vince Pezzullo
Deputy Head of Equities
Perpetual Asset Management (Australia)

Vince is the Deputy Head of Equities at Perpetual Asset Management Australia and is the Portfolio Manager for Australian Share, Geared Australian Share and the Perpetual Equity Investment Company Limited (ASX:PIC).

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