8 conviction calls from Future Gen (May 2019)
Some of the industry’s leading fund managers took to the stage today as part of Future Generation’s Investment Forum, with each manager sharing their top stock idea for the year ahead.
If you were unable to tune in, you can watch this valuable series of snappy presentations here, alternatively, I have summarised the key points for you here.
First up we heard from Jun Bei Liu, Lead Portfolio Manager at Tribeca Investment Partners, who nominated Bravura Solutions (ASX:BVS) as her stock idea.
Bravura is an industry-leading provider of software solutions and services for the administration of superannuation, pensions, life insurance, investment, wrap, private wealth and funds administration. Its partners include household names such as Fidelity, Prudential, Mercer and Vic Super, and Westpac. The list is growing and typically it has been winning 3-5 new clients each year.
It is in a lucrative industry with high barriers to entry, and is well positioned for structural changes caused by regulatory changes. The stock has been climbing strongly since the start of 2018 when it was $1.77, to trade north of $6 today with a market cap around $1.5 billion.
Jun highlighted that the nature of its contracts means that visibility on its revenue streams is good. Margins are good, with EBITDA growing at 20% pa over the last 5 years, and expected to keep growing in the high teens. While the business started here and has quickly established as the lead player in the UK, plans to move into the Asia Pacific and European markets create new opportunities.
Adrian Warner is the Managing Director and Chief Investment Officer of Avenir Capital shone the spotlight on what he described as ‘one of the cheapest companies in the world, trading anywhere today’. The company is General Motors (NYSE:GM) which is on a remarkably low 5.5 times PE.
GM has several business divisions, including the ‘Cruise’ division, which represents around 38% of the current valuation of the business. Adrian noted that stripping that out from the valuation led to a PE of an ‘incredibly cheap' 3.7 times.
Yet there is a solid looking business here today. A painful journey through the GFC triggered a brutal rationalisation which included slashing head office costs, cutting the workforce, selling the European business, and exiting the African and Indian markets, leaving the resulting organisation far leaner.
The core business is primarily from pick up trucks, not cars, which is less cyclical, and has a very loyal customer base. However, its autonomous car business is in the top tier with Google’s Weimo, creating huge upside potential as this business matures.
The price is currently $37, and Adrian summarised to say that his target price is $63, which would still only put the business on a PE of 10.
Bringing the focus back to the ASX, Ronni Chalmers, Chief Investment Officer of CBG took a look at fast fashion favourite, Lovisa (ASX:LOV), which has defied the retail sector headwinds and more than doubled since the start of last year, to give it a market cap of $1.2 billion.
Ronni focused on the success - and future potential of - its offshore expansion, which has already seen the company grow its footprint from 224 to 360 stores, an increase of more than 50%. It's still early days in key markets like the US, Spain and France with store counts in the single digits there.
Part of the business’ success is borne out of the low price point of goods, typically less than $25, shielding it from retail sentiment.
Alison Savas, Portfolio Manager at Antipodes looked the profitable world of enterprise resource planning (ERP) technology.
ERP helps businesses increase productivity by bringing together corporate functions like human resources, finance and inventory management, letting a company function efficiently, and manage its customers and suppliers.
This market is worth $100 billion, and her nominated stock pick, SAP (SAP.DE) has 25% of the pie, more than double its main competitor. So while SAP is the incumbent, it has solidified its position through the release of a significant product release, ‘S/4HANA’.
S/4HANA provides an improved ERP and adds to its capabilities with a CRM function as well, to create an end to end system, keeping users in the ecosystem.
New products typically have a ten-year life cycle, and Alison emphasised that this was just ‘at the foothill’ of that and that the business was set to harvest the benefits of this investment. While not giving targets, Alison noted that the stock was cheap relative to its peers, and relative to its historical average.
There has been strong investor interest in the infrastructure thematic in recent years, given the long and deep government infrastructure pipeline.
Blake Henricks Portfolio Manager at Firetrail Investments focused on Downer (ASX:DOW) in his stock pitch, as designer, builder and manager of urban infrastructure projects, examples of which include the ANU student campus, the MCG and Auckland jail. These are small scale and manageable, so Downer is not in the basket of infrastructure companies that have bitten off more than they can chew.
Blake highlighted the unusually high cash flow conversion of 90%, and also sub-market multiple of 15 times. As for what could close the multiple, it is facing some near term catalysts, namely 1) the potential sale of its mining division, 2) the sale of its Royal Adelaide hospital, both of which would improve the company’s metrics.
Qiao Ma, the PM in charge of Cooper Investments’ Asian Tiger Fund, who we spoke with recently, looked at one stock leveraging the global trending in gaming, the widespread playing cloud-based games as a recreational and competitive activity. This is a huge and growing industry. While the world soccer final had 50 million viewers, a popular game, League of Legends had 70 million viewers.
Huya (NYSE:HUYA) operates as a game live streaming platform and offers interactive video broadcast services including e-sports, music, reality show, entertainment genres, talent shows, and anime and outdoor activities. Its audience is in China, and it attracts over 100 million users to its site each month.
The US$4.4 billion business is listed in the US and based in Guangzhou, China and is a US$4.4 billion company, and is Qiao’s pick. She described it as a ‘classic platform business’, growing by a virtuous circle between viewers and broadcaster. The company is already profitable, and with Tencent holding 30% of the company, it has strong backing.
Justin Braitling, CIO at Watermark, picked EML Limited (ASX:EML) a provider of gifts cards and reloadable cards, which has seen its stock climbing steeply this year. While it intrudes at $2.40 today, Justin’s valued it at $3.00.
The gift card business is seeing tailwinds from regulatory change that take gift card management out of the hands of malls, and to a dedicated provider. EML is running 1200 programs across 32 countries.
The reloadable cards, are commonly used in sports betting, with around half of Australia’s gamblers using one. There has been a seismic shift in the betting industry, with legislation in the US changing to make sports betting legal there. EML could be a preferred vendor to supply this new market, and if so, the US segment of EML’s business in a few years could be larger than the entire business is today.
Martin Hickson, Lead Portfolio Manager at Wilson Asset Management, finished off with why they believe Think Childcare (ASX:TNK) is such an attractive proposition.
The Australian childcare industry is at a critical ‘inflection point’, where supply is falling due to tighter credit and demand is increasing due to increased government subsidies. This translates into higher occupancy rates and earnings.
Martin concluded succinctly to say that: ‘We believe that over the coming years that as they execute on their strategy, continue converting their centres to the Nido brand, and continue to increase occupancy levels, we think the Think shares can trade at $2.40, which is 45% above where they are trading today. So this is why we think Think Education is one of the best micro caps and why over the last four months, we have bought 4% of the company.’
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