Top pick for a growth economy

Chad Padowitz

Talaria Asset Management

The monetary and fiscal stimulus poured into the global economy, in particular the US, over the last 12 months has seen our team find new opportunities for growth and returns. Reliance Steel (NYSE:RS) is a perfect example.

A typical ‘capital allocation-champion’, Reliance is characterised by a long history of generating exceptional returns on incremental capital. Historically, capital deployment has been via highly accretive M&A, investments in new greenfield facilities, and good capital management. Given its low levels of debt, Reliance should have no issues continuing to fund these initiatives, which have all contributed to very strong growth in Book Value/Share.   

Source: Company Reports, Talaria

As part of our investment process, we spend a lot of time diagnosing a company’s earnings quality. One particular area of focus is the trend, nature, and size of accruals (the discrepancy between booked profits/costs and cash into the business) because after all it is the cashflows we own not the profits, and it helps us assess how aggressively accounting standards have been applied. As numerous corporate collapses can attest to, accounting is a notoriously grey area!

In the case of Reliance, we believe its earnings quality is solid, with a history of conservative accounting policies. One example of this is when presenting earnings, very few cash costs are stripped out by management as one-off items. 

This means that after adjusting for the volatility in working capital flows, there is almost no cash shortfall between EBITDA and operating cash flows.
   Source: Company Reports, Talaria

Room for improvement

An examination of Reliance’s executive remuneration structure also gave us comfort in the business, as it is very much aligned with the goal of creating value for shareholders. As part of our work on Governance we regularly assess management’s Key Performance Indicators (KPIs) given how important these are in driving management’s actions.

We also consider Environmental and Social issues when weighing all investment decisions at Talaria, and feel there is room for improvement for Reliance here. 

For starters, we would like to see greater transparency on their Total Recordable and Loss Time Injury Frequency Rates as measures of workplace safety. We would also like to see greater disclosure on its energy intensity and environmental footprint, particularly regarding water intensity, greenhouse gas emissions and any reduction targets. 

We’re not suggesting that Reliance is underperforming in these areas, just that more insight on their performance would be appreciated, and in our view in the best interest of the company.

Strong ESG credentials are vital not only for good corporate citizenship but also in identifying those companies that can deliver sustainable growth for shareholders. We are encouraged by the industry’s growing interest in this area, while constantly looking to improve our own. 

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The information in this article is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) for the Fund and consider whether the product is appropriate for you. Wholesale Units in the Talaria Global Equity Fund (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. A copy of the PDS is available at australianunity.com.au/wealth or by calling Australian Unity Wealth Investor Services team on 13 29 39. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication.

Chad Padowitz
Co-Chief Investment Officer
Talaria Asset Management

Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 20 years’ experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase the...

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