Unconventional thinking on three conventional businesses
A large part of investing success is psychological - the ability to override the human emotions of greed and fear in the face of market volatility. In 2018, we experienced the worst December on record since the Great Depression, but since then the Australian and US stock markets have rebounded strongly. Unfortunately, many investors took their cue from the price action and more money left US mutual funds in December than at any time since the Global Financial Crisis. It’s little wonder that the average mutual fund investor underperforms the S&P 500 by about 3% a year - a staggering number when you consider the impact the power of compounding has over the long term.
The question facing investors now is: are we at the peak? Is the market about to roll over? Unfortunately, no one knows. It’s true we are late in the economic cycle and there is a plethora of risks to worry about. Notwithstanding, overall equity multiples look reasonable and compared to long-term government bonds they look very attractive.
Private equity is flush with cash, consumer sentiment is likely to rebound post the election, tax cuts are coming, interest rates seem likely to be reduced, high iron ore prices will bolster the budget and APRA has lowered the lending criteria for banks. The potential worst-case scenarios with respect to the housing market, political environment and domestic economy have been tempered compared with just a few months ago.
We think there are some attractively priced stocks available that should deliver attractive returns over the medium term. We tend to favour investments that have some idiosyncratic appeal that at the same time might not be considered conventional wisdom. Some of these companies are small, so they fly under the radar of most analysts.
Here are a few of those companies which are trading on undemanding multiples.
QMS Media (QMS)
QMS Media is an outdoor advertising media company which controls a portfolio of digital billboards, digital sports venue screens and, subject to completion, a 40% interest in NZ Mediaworks. The sports business is a leading player in in-game sports advertising and is at the leading edge of monetising global sport brands through venue technology. QMS’ leading technology in sports allows the streaming of different advertisements on its digital screens into different markets, significantly enhancing the revenue potential for sporting venues that have a global audience.
The broader digital billboards business has benefited from strong demand for outdoor advertising as customers become attuned to the improved customer engagement with digital screens at a time when the traditional media landscape has become disrupted by online alternatives, e.g. Facebook, Google, Instagram, etc. The CEO of QMS owns a substantial stake in the company and recent corporate transactions have been done at multiples nearly twice that at which QMS trades. QMS trades on c6.6x consensus FY19 EV/EBITDA multiple.
Zenith Energy (ZEN)
Zenith Energy designs, installs, and manages off-grid power generation plants for hybrid energy solutions. The company has won a number of significant projects over the last year.
The business provides an attractive alternative to mining companies, where mining companies contract to buy power in a subscription-like agreement. In mining, you literally make sure you pay for your power before you pay for anything else - if you want to keep the lights on. The average term of ZEN’s power purchase contracts is 7.7 years.
The Chairman is a significant shareholder and the company recently provided FY20 EBITDA guidance where they forecast 38% growth over the previous year. Trading on just 4.9x EV/EBITDA with a solid pipeline of potential work, the company is well-placed to continue to grow after a recent capital raising strengthened the balance sheet.
Austin Engineering (ANG)
Austin Engineering supplies customised equipment to large global mining clients, mining contractors and original equipment manufacturers. The company has recently strengthened their balance sheet after selling a number of non-core assets. The company is very well-positioned to benefit from the replacement cycle at a time when mining companies are enjoying elevated commodity prices. The company trades on just 6x EV/EBITDA.
It wouldn’t be a surprise to see any of these names in the cross-hairs of private equity over the next few years.
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John runs MA Financial Group's listed equities funds business. He has over 20 years’ experience at both UBS and Moelis advising institution investors and hedge funds. John is the author of Mastersinvest.com.