Where Airlie sees resilience (and 3 ASX stalwarts it is backing)

A bullish outlook for Australia’s best-known healthcare stock, one of the largest ASX-listed companies, was among the insights shared by portfolio manager Emma Fisher in Airlie Funds Management’s latest quarterly update.

The European headquarters of blood plasma firm CSL Limited (ASX: CSL) was one of several offshore site visits Fisher made during the quarter.

“CSL has been a phenomenal success story for Aussie investors, but it’s been quite ‘range-bound’ over the last few years, with the share price between $250 and $300, driven by a decline in returns,” she says.

Fisher also notes the company has shelled out a staggering US$6 billion in CAPEX over the last five years. And CSL’s return on invested capital has declined by 10% during this time – down to 20% in 2022, from 31% in 2018. She attributes much of this situation to rising costs in CSL’s core plasma collection business, with increases across:

• The amount it pays plasma donors in the US.
• Its fractionation capacity, paid for by the CAPEX mentioned above, and
• The $18.8 billion acquisition of pharmaceutical firm Vifor.

Given these factors, why then has the Airlie Australian Share Fund been increasing its exposure to CSL? As Fisher explains, it’s because many these three things are reversing.

The donor fees that rose more than US$100 during peak-COVID – when people were reluctant to leave their homes and donate plasma – are now reverting back toward their pre-COVID level of around US$60. And Fisher believes these declines have further to run.

“And now they’ve spent all that CAPEX, and a lot of it is invested in state-of-the-art manufacturing capacity, so returns are going to improve as those assets come online,” says Fisher.

Her recent visit to the CSL Vifor operation has also solidified her thinking around the value the acquisition brings to the group, via its primary intravenous iron product, “which is a product that can and probably should be used a lot more.”

“We think it’s an exciting time for CSL and it’s a pretty clean earnings recovery story from here,” says Fisher.

The appeal of insurance

Another standout from her research trip are observations around QBE Insurance Group (ASX: QBE), which is a recent addition to the Airlie Australian Share Fund portfolio.

With Europe a key part of the company’s international book, the time Fisher spent in London and other parts of the region emphasised their surprising resilience.

“They took a lot of their pain last year and there’s now a sense of relief,” she says, referring in part to the improving energy crisis, as households bounce back from the situation of last winter.

Fisher concedes QBE has been regarded as a perennial underperformer but says many of the company’s problems have been in its North American operations, with its international business consistently strong.

“Underwriting is key, with the attitude toward risk in these businesses set by this team. From all of our meetings, it was pleasing to see that QBE has such a wonderful reputation and is able to attract such talented underwriters,” Fisher says.

She also calls out the positive impact that this stage of the insurance cycle will have on QBE, following the protracted period of insurance premium rises over the last few years.

“And we’re expecting that to continue, that’s the feedback we’re getting. Insurers also have the kicker of higher interest rates working through their investment book,” Fisher says.

Banking sector outlook

Zooming out to a broader sector level, Fisher also provided her view on Australian banks in the context of what occurred among the US’s Silicon Valley Bank, Signature Bank and Europe’s Credit Suisse.

“You can never say never with the banks, because they are such highly geared vehicles. But on the face of it I don’t see much risk of contagion for the Aussie banks,” Fisher says.

“That said, we’ve got to be aware that we’re pretty late in the tightening cycle and this is the point in the cycle where things start to go bump in the night. We’ve seen that recently with SVB and Credit Suisse.”

Fisher and her team regard the events that unfolded offshore as “quite idiosyncratic” but also note they have highlighted the importance for banks having low-cost, “sticky” deposit franchises. For years, these have been bolstered by ultra-low interest rates and in more recent times the Reserve Bank of Australia’s Term Funding Facility – which was wrapped up in mid-2021.

“Now that’s ended, they’ve got to replace those with other funding sources. And now this more recent banking crisis in the US and Europe has increased wholesale funding rates, which again highlights the importance of sticky deposit bases, as a source of lower-cost funding,” she says.

The Airlie team regards Commonwealth Bank of Australia (ASX: CBA) as the standout among Australia’s biggest banks, given it has the strongest deposit franchise.

“But we remain significantly underweight the big four banks,” says Fisher.

“We appear to be staring down at the very least, an economic downturn. They’re incredibly levered vehicles, so it’s probably not the point of the cycle where you want to be a hero in terms of some of those downside risks.”

What’s behind resources’ resilience?

Turning to resources, where commodity prices have remained highly resilient given the negative macroeconomic backdrop, Fisher discussed where she sees opportunities in the space.

There has been a big focus on the demand-side factors driving commodity prices – China’s reopening as it abandoned zero-COVID measures a prominent example. But Fisher believes the supply-side dynamics is playing a more important role in the investment returns delivered by resources companies.

Mineral Resources (ASX: MIN) is a long-time portfolio holding of the Airlie fund, which Fisher calls out as one of its top performers. She believes its performance over the next decade will be driven largely by the lithium price.

Pointing to the demand-side versus supply-side factors, Fisher notes the conflicting signals.

“The demand-side signals look quite weak. You’ve got prices falling, Chinese EV sales disappointing, and the rest of the world worried about what a recession might mean for EV demand,” she says.

“But supply-side signals look quite positive for pricing over the long term,” Fisher says, pointing to Wesfarmers as an example.

A producer of chemicals for decades, management has now flagged delays of more than three years in bringing online its new hydroxide plant, “and we’re seeing that across the industry,” Fisher says.

She sees strong evidence to suggest supply won’t come online in a linear fashion, with further scope for problems. In turn, Fisher believes this will mean higher commodity prices for longer, which will benefit Mineral Resources.

What lies ahead

Ending her discussion with a broader macro view, Fisher emphasises the extreme levels of commentary and noise around markets currently.

“So, if we are going into a recession it’s going to be the most well-heralded, anticipated recession of all time,” she says.

“But we like this kind of environment because in that volatility you can find opportunity.”

And in this climate, they’re even more focused than ever on the financial strength of companies in their portfolio, where they’re looking for businesses with net-cash balance sheets. 

For further detail, you can watch the whole video below

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Airlie seeks to identify Australian companies based on their financial strength, attractive durable business characteristics and the quality of their management teams. 

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