The themes that excite Geoff Wilson, and how WAM is playing them

Love or loathe them, listed investment companies remain an important part of the Australian retail market mix despite the flak they’ve (in some cases, deservedly) copped in the last couple of years. But if you can find those with sound business cases, good investment teams and decent fees, LICs and LITs are worthy portfolio inclusions – especially for investors seeking tax-effective, income-yielding structures.

Geoff Wilson AO, the Wilson Asset Management founder, chairman and CIO, is among the most prominent local figures in this space, regularly fronting the financial press and championing causes that stir him (and his thousands of shareholders – the “WAM family” as he calls them).

Wilson recently assembled stock-pickers from the small and mid-cap focused LICs in WAM’s stable of eight for a quarterly update. Given the ongoing lockdowns across NSW, this webinar highlighted the triumphs (and trials) of video-conferencing technology and Australia’s NBN, drawing together team members working in different parts of the state including Greater Sydney and the mid-north coast and south coast regions.

In this wire, I provide an overview of some of the key highlights including the companies that drove returns in FY21. The team also reveal a selection of WAM's undervalued growth stocks for the year ahead, lessons learned from the laggards and the WAM investment team's top picks for the road out of COVID.

A vintage year for Micro-caps

Among the LICs singled out was WAM Microcap (ASX:WMI), which Wilson lauded as having had “a vintage year”. Headed up by lead portfolio manager and portfolio manager Oscar Oberg and Tobias Yao, it spanked the Small Ords 27% return, delivering investors a 53% ROI.

Speaking about WAM Capital and WAM Microcap, Oberg highlighted the funds’ performance was cemented within the first four months of the financial year, driven by e-commerce retail and healthcare companies. Conceding some of the portfolios took a hit when the vaccine was announced in November, given the higher allocations toward lockdown winners at the time, he said the team has since shifted focus toward reopening plays.

Some examples of the more “COVID defensive” stocks to which they boosted allocations earlier in the pandemic are:

• Furniture and homewares retailers Temple & Webster (ASX: TPW) and Adairs (ASX: ADH)
• Radiology and pathology company Healius (ASX: HLS).

Positioning for an inflection point

Oberg and his team have since shifted allocations to reopening plays including the following companies, largely because of their high exposures to the UK and US:

• Financial firm Virgin Money UK (ASX: VUK)
• Fashion retailer City Chic (ASX: CCX)
• Fund manager Pendal Group (ASX: PDL)
• Plumbing supplies company Reliance Worldwide (ASX: RWC).

Looking ahead, Oberg sees an “inflection point” coming in the next one or two months.

“Despite the fact we’re seeing cases in NSW and Victoria hit very high levels, we are getting vaccinated faster than anyone had previously expected,” he said.

“Seeing a reopening of borders before Christmas, we’ve been repositioning the portfolio accordingly.”

In response, his team has sold down its allocations to the more defensive, so-called “COVID beneficiaries” in the technology, healthcare, e-commerce and specific retail sectors. On the flipside, it has increased its holdings of tourism, construction and building materials companies.

Growing exposure to pre-IPO companies

Focusing on WAM Microcap (ASX: WMI), portfolio manager Tobias Yao discussed the LIC’s increased interest in the pre-IPO space, where its growing allocation is underpinned by the capital raising completed early in FY21.

Having invested in 10 of these companies, four have already and listed and others are planning IPOs in the near future. They include:

Data centre operator and bitcoin miner Iris Energy, the largest of the remaining pre-IPO companies – having recently sought between $200 million and $300 million in a capital raising – is planning to list at the end of calendar 2021. “That could be quite material to the portfolio,” said Yao.

Furniture and homewares retailer Brosa and commodities exchange and data company Xpansiv are also expected to hit the ASX boards this year or next, as part of what Yao regards as a “very healthy pipeline of listings coming through.”

Stocks tipped to deliver exceptional value

Wilson then leaned on stock-pickers from each of the LICs for a few growth companies they believe remain undervalued by the market.

Shaun Weick, a senior equity analyst, cited IPH Group (ASX: IPH), an Australian intellectual property service firm. Having Invested in the stock at $2.10 a share in 2014, shares were trading at about $10.50 at the onset of the pandemic but sold off sharply on concerns of a slowdown in global patents.

But Weick and his team began accumulating more of the stock around May this year, expecting an uptick in patent-buying trends along with an easing in the US currency headwinds facing the company.

“Management has also highlighted a desire to pursue further acquisitions, which provides a potential near-term catalyst for the business,” he says. Weick believes IPH has around 15% upside on current fundamentals, even before factoring in the potential acquisitions.

Sam Koch, an equity analyst, highlighted local telecommunications firm Swoop (ASX: SWP), citing its 10-15% revenue growth and rising margins.

“We’d liken it to a mini Uniti Group (ASX: UWL), which has a market cap of more than $3 billion versus Swoop's $300 million valuation,” Koch said.

Yao’s undervalued growth stock pick is theme park operator Ardent Leisure (ASX: ALG). He sees further upside primarily on the back of its momentum in the US.

“And over the next six months, like all of our other reopening trades, we believe domestic tourism will flourish, which will benefit Ardent’s Australian assets, Dreamworld and SkyPoint,” he said.

Yao sees around 40% upside to the current share price.

In a similar vein, Oberg named Event Entertainment (ASX: EVT), which operates hotel brands QT and Rydges alongside Thredbo Ski Resort, Event Cinemas.

Having owned it since May 2020, the primary catalyst for Oberg is the company’s $2 billion of property assets, which he doesn’t believe is factored into the share price.

“We calculated that property was worth around $12 a share – which was the stock’s share price at the time, meaning we were getting the entire operating business, which was delivering $100 million of earnings pre-COVID, for free,” he said.

“The catalyst played out and the property assets were revalued upwards, and the share price has risen as a result.”

He sees around 30% upside in Event’s share price, expecting it could head as high as $20 a share.

“Anything to confess?”

A half-joking Wilson also exhorted his team to share a few of the less successful stock picks they’ve made in the last year, and what they learned from the experiences.

Oberg singled out Costa Group (ASX: CGC), which owns avocado farms across Australia, as his “gift” to the portfolio.

“We bought the shares thinking we’d see tailwinds from lower water prices and improving yields across their farms, expecting an earnings upgrade,” he said. But this bet didn’t pay off, the AGM instead bringing an earnings downgrade.

“We exited at around $3.30 and took a hit on the stock. But we think it looks appealing now that it’s back around $3 a share, so we’re doing the work on it again, he said.

Yao concedes he made a “buy one, get one free” mistake on API Pharmaceuticals (ASX: API), having missed out on both sides of the trade.

Having bought into the stock at what he regarded as an appealing discount, Yao underestimated the negative effect COVID lockdowns would have on the firm’s storefronts in central business districts. This prompted an earnings downgrade from API’s management instead of the lift he had been looking for.

“We cut our losses and probably lost between 10% to 15% as part of that initial investment,” Yao said.

“And unfortunately, a few days after, Wesfarmers (ASX: WES) made an offer for the entire business, so we missed out on the upside there too.

“The lesson is perhaps we were a little bit early getting into the stock and didn’t properly size the investment proposition.”

Koch singled out his purchase of payments company EML Group (ASX: EML), which he added on the anticipation of recovering foot traffic in malls around the world.

But in May, the company hit regulatory issues surrounding one of its acquisitions, Prepaid Financial Services, which was caught up in a cartel scandal in the UK and Ireland.

“Re-evaluating the risk-reward within this payments business as well as how well EML management had done its due diligence on the acquisition, we exited the position shortly afterwards,” Koch said.

Across the team, other companies in tourism, construction and building materials loom large in their targets at the moment. And in the travel and entertainment sectors, they have a positive view on firms such as:

• oOh!Media (ASX: OML)
• United Malt Group (ASX: UMG)
• Flight Centre (ASX: FLT)
• Corporate Travel Management (ASX: CTD).

A replay of the full investor call can be accessed here

Education

Geoff Wilson's 5-coin system for teaching kids about investing

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