The Buy Side Brief: Industrial Yield

Goldman Sachs says a combination of yield + growth (industrial yield) has significantly outperformed a pure high yield strategy in the past 15 years. We ask three fund managers what’s one stock in your universe that best fits the bill of yield + growth and why will it continue to flourish? Responses come from Responses come from Nick Leitl from the K2 Australian Absolute Return Fund, John Campbell of Avoca Investment Management and Ed Prendergast from The Pengana Emerging Companies Fund.
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Spotless Group well placed to deliver growth and yield for investors

Nick Leitl, Senior Portfolio Manager, K2 Australian Absolute Return Fund

We believe that Spotless Group Holdings is well placed to deliver investors a combination of growth and yield given their exposure to the growing demand for outsourcing.  Spotless is the leading provider of outsourced facilities services and laundry and linen services with revenues 1.2x higher than its closest peer. Their recent result highlighted their strong position and positive industry dynamics with $950m of contract renewals and $350m in new contract wins. The company is on track to deliver both earnings and dividend growth that is approaching double digits for each of the next 3 years, which we find extremely attractive in the current environment. Despite the favorable outlook, the company trades on a 1year forward PE 13.5x and a Yield of 5.4%, which represents a 20% discount to both its International peers and Australian Industrial companies. Given this, we feel investors will be rewarded as the company continues to execute their strategy within a growing sector.

HFA offers strong yield and opportunities for earnings growth

Ed Prendergast, Senior Fund Manager, Pengana Emerging Companies Fund

HFA Holdings is a stock which provides a strong yield and opportunities for medium term earnings growth. The company operates a hedge fund-of-funds in the USA called Lighthouse Partners which manages US$8.5bn and was formed 16 years ago. The key funds have shown a return of over 5% p/a over the past ten years, with very low volatility, which has created a loyal customer base. The medium term growth opportunities lie primarily in fund performance (which grows the overall fee base), additional investments from endowment funds and other institutions, and new products. The company recently became debt free and expects to pay out up to 90% of EBITDA in unfranked dividends. This high payout ratio places the stock on an estimated dividend yield of around 8%.

National Storage fits the bill of ‘industrial yield’

John Campbell, Portfolio Manager, Avoca Investment Management

NSR is Australia’s leading owner and supplier of self-storage for both the consumer and small commercial markets. NSR is a REIT yielding around 6% for FY 16 with what we believe to be high single digit / low double digit EPS / DPS growth into the medium term. This growth comes from a combination of sources: 1) Slowly improving its average centre occupancy from current 70% to 80% plus over time; 2) Continuing to grow average rental rates above CPI as they have successfully done for the last five years; and 3) Making yield-accretive acquisitions utilising its circa $80m in debt capacity (acquisitions are typically done at initial yields of 8% plus vs funding costs of 4-5%). Self-storage may not be exciting but in undertaking the same broad strategy as NSR, Public Storage Inc – the largest listed self-storage operator in the USA –has outperformed the S&P 500 by 18% over 1 year, 25% over 5 years, and 270% over 10 years.

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