At today’s WAM Funds presentation, Chief Investment Officer, Chris Stott, shared some of the key themes and holdings from their current portfolio. He covers their views on the Australian economy, mining services, and retail. He also discusses a company that hadn’t received a visit from an analyst in two years.

Australian economy

10 years on from the GFC, the economy is still patchy and still deleveraging. Rates still at a record low, and according to the RBA itself, unlikely to go anywhere soon. Stott says rates will eventually move higher, but only slowly.

A lack of wages growth is keeping inflation below the RBA’s target band, and he sees no stimulus for rates to move higher.

The East Coast, particularly NSW and Victoria, are expanding rapidly. He expects WA to follow over the next 3-5 years.

Mining services

Having recently visited Hong Kong and after speaking to people ‘on the ground’ in mainland China, Stott expects no hard landing for the Chinese economy. This is very positive for the mining services sector.

As a result, he now believes we’re entering the next mining boom. A word of caution though; it won’t be anything like the last one. He sees continued improvement each time they visit Perth, and continue to gain confidence in the recovery.

On the back of all this, he says that mining services is the sector that they’re most overweight.

Infrastructure

Another theme they’re attracted to is infrastructure construction, which they think should be strong in coming years. They referred to a popular chart from CIMIC (below), showing the significant pipeline of major constructions in the coming years.

The WestConnex project is the largest construction project since the Sydney Harbour Bridge. When combined with the arrival of Sydney’s second airport, and Amazon setting up shop in the area, he said the South-Western Corridor of Sydney could be the fastest growing part of the AU economy over the next 5-6 years.

Amazon

Amazon is coming, and in a big way. Stott says that in a recent visit to Seattle, a friend admitted he does 85% of his regular shopping on Amazon, and had the receipts to prove.

Electronics and whitegoods are where Amazon is likely to focus in the beginning, which is likely to bring significant margin pressure for JB Hifi and Harvey Norman.

Stott thinks Amazon will be great for consumers, but hard for other retailers. Unsurprisingly, they’re underweight retail.

Key holdings across their portfolios:

Afterpay (APT) was one of their best performers over the past 6 months. They provide and online lay-buy service. They have relationships with over 10,000 retailers in Australia, and have been very successful at adding new merchants. The company has been consistently updating revenue guidance, and remains a core holding.

Virgin Australia (VAH) is the #2 airline in Australia behind Qantas. When they met with CEO, John Borghetti, he told them they were the first fund managers to talk to the CEO in 2 years. Stott thinks investors have forgotten about Virgin due to low free float (approx 10% of shares on issue). In addition to being forgotten and unloved, the domestic airline market is the best it’s been for a long time. Ticket prices are rising, the company is deleveraging, and earnings have been re-based. He believes it could surprise on the upside. There has also been discussion of a delisting recently, which could be a positive catalyst for the share price.

Reckon (RKN) has been a portfolio holding for a few years now. The company recently sold a key division, APS practice management software. The sale price was $180m, but the company only had a $135m market cap at the time. They’re now left with their cloud software division, which is producing $15m in EBITDA per year. There should be a large special dividend to come from the asset sale. WAM are expecting the dividend to be 80c per share, with the current share price sitting around $1.50.

Seven Group (SVW), not to be confused with Seven West Media, is Kerry Stokes’ investment vehicle. One of its major assets is WesTrac, which is the distributor of Catarpillar heavy equipment. The WesTrac business is leveraged to the mining services recovery. Seven Group also owns 100% of Coates Hire, which is levered to infrastructure construction. Management are guiding to 5-10% earnings growth, but they expect higher.

Nine Entertainment looks attractive at 12x earnings. They recently upgraded earnings, and are they positioned to do well. Stott points out that they will win the ratings war this year for the first time in a decade. A couple of hit shows – Married At First Sight, Ninja Warrior – have helped to drive ratings. The Ashes cricket series has recently begun, which should be a ratings winner. Strong ratings this year means higher prices next year. Finally, the media reforms finally passed parliament recently, which will open up the industry for consolidation.

Emeco (EHL) is a mining services that primarily provides rentals of heavy earth moving equipment. Most of its operations are in Australia. Stott believe this is the stock on the ASX most highly levered to the improving mining cycle. The balance sheet is deleveraging, utilisation rates are improving, and earnings are on the up.

Pacific Current Group (PAC), formerly known as Treasury Group, is a ‘fund of funds’ funds management business. They have seen rapid inflows into some funds in their portfolio recently. He believe it’s quite cheap at current prices. Trading on a PE of 14, with 15-20% growth expected over the next few years.