The ASX files: The value is out there

From the Financial Review – comments on AUB Group highlighted.

Volatility in global markets has not produced a fire sale of quality companies, but experts say there are opportunities if you know where to look.

by James Frost and Sally Patten

Steep and sudden sharemarket sell-offs have proved to be a happy hunting ground for those with long-term horizons.

Investors who gritted their teeth and dived headlong into the local bourse at the nadir of the global financial crisis in March 2009, or the peak of the Greek debt crisis in 2011, were handsomely rewarded for their actions.

This time around, however, many top investors are a long way from filling their boots.

Experts say that most of the suffering has been localised to the moribund energy and resource sectors, with only the slimmest of discounts being offered on companies with brighter prospects.

That’s not to say that bargains can’t be found.

‘No sign of panic’

Auscap Asset Management portfolio manager Tim Carleton has not been surprised by the sell-off, which he says has been overdue and thus far orderly.

“A lot of stocks have been sold off because the fundamentals have actually deteriorated. The energy and materials sectors spring to mind. To some extent they are just playing catch-up to the economic reality,” he says.

Carleton runs one of Australia’s top long/short funds. It returned 26.3 per cent in the six months to December, against a 0.41 per cent rise in the All Ordinaries. He doesn’t identify as a sharemarket bear but believes true value is yet to emerge.

“We were selling into the strength in December and selectively adding to our short positions, so the fund’s cash levels are reasonably high. We are just not seeing a huge number of compelling opportunities from a value perspective.”

Carleton says the companies he is looking at are trading at discounts of perhaps 4 or 5 per cent – roughly where they were trading before the Christmas rally.

The volatility in the key benchmarks is flowing directly from the rout in commodity prices, with little sign of contagion, according to Carleton – and therefore no reason to worry.

“We don’t think there is any sign of panic. If you see some, please call me because that’s when opportunities arise.”

Chris Cahill of Quest Asset Partners agrees that the January sell-off is a long way from a market crash.

“The crazy run-up in late December has unwound and we are back where we started. I think there is a perception that a crash has occurred. I think we have just corrected for the Christmas rally that got out of control with some help from a weak oil price,” he says.

Allan Gray ticks Metcash, Austal

Respected fund manager Allan Gray has produced one of the most enviable track records in Australian equities through a combination of contrarian positions and shareholder activism.

Portfolio manager Dan Abeshouse says that although he can identify a number of interesting prospects, the sharp fall in the oil price has not produced a shopping list of bargains for the firm.

“You need to remember you are buying companies that will be producing cash flows for decades. Whether the oil price is going to be X, Y or Z isn’t going be the critical factor in determining the long-term value of many businesses,” he says.

In keeping with the company’s ongoing search for deep value, Abeshouse singles out embattled independent grocer Metcash as an example of a company that has been oversold.

“I can’t tell you what the supermarket industry is going to look like in five years,” he says.

“But what I can tell you is that if Metcash’s future became more certain, investors would be prepared to pay a multiple more in line with its peers and the overall market, whereas today it’s trading on a PE of less than 10 times,” he argues.

Another stock on Abeshouse’s radar is the shipbuilder Austal.

Austal shares have plunged since early December. Investors deserted the stock on concerns including ongoing cost blow-outs, queries over contracts with the US Navy, and the departure of the chief executive.

“This is another example of a company that has suffered in a skittish market,” Abeshouse says. “But it has almost no debt and is pursuing opportunities with other customers around the world.”

Nicol’s three stocks

Chris Nicol, Morgan Stanley’s Australian equity strategist, has three stocks on his shopping list and is watching a few others closely. Insurer IAG is one of the shares he particularly likes.

IAG shares were hit after a profit warning from rival Suncorp late last year, and are trading at about $5.20, down from an eight-month high of $5.75 in early December. But IAG boasts solid defensive earnings and should begin to benefit from premium rises.

The other two stocks on Nicol’s buying list are Super Retail Group, the owner of Supercheap Auto and sports retailer Rebel, and Sonic Healthcare. The former is benefiting from rising consumer confidence and an improved supply chain.

As for Sonic, Nicol argues that the company is not as exposed as investors fear to the government’s plans to reduce or remove bulk-billing incentive payments for certain pathology and imaging tests. Sonic shares have fallen to about $17.60 from $20.59 since early December.

Baillieu Holt’s picks

Stockbroker Baillieu Holst has several stocks on its radar. Head of strategy Mathan Somasundaram likes annuities provider Challenger on the grounds that it will benefit from market volatility as retirees seek to secure future incomes; insurers Suncorp and IAG; and private hospital operator Ramsay Healthcare.

Ramsay, argues Somasundaram, is set to benefit from expansion into the Asian market and the fact that cash-strapped governments globally will spend less on health, pushing patients into the private system.

Somasundaram admits that Ramsay shares are never cheap, but having fallen to $60 from $68 so far this year they are trading at 26 times forecast earnings for 2016 and are a “good buy”.

Baillieu analyst Nick Burgess points to insurance brokers Steadfast and Austbrokers as two companies whose shares have been oversold.

“The general insurance premium rate cycle has worked against them in the past couple of years but I believe that will turn around in the next 12 months,” Burgess says.

Investors Mutual criteria

Investors Mutual portfolio manager Simon Conn remains focused on “quality companies with recurring cash flows that pay you a reasonable yield”.

In this environment Conn highlights three companies that meet his criteria: insurance broker Steadfast, bathroom fittings importer GWA and listed property trust Shopping Centres Australia.

“Steadfast for example is Australia’s largest SME insurance broking business. While it’s not a high-growth business it is very stable, and yielding just under 4 per cent,” he says.

“GWA is exposed to the later part of the building cycle. It’s been through a difficult transition from manufacturer to exporter, it has a strong balance sheet and is yielding 5.5 per cent.

“Shopping Centres Australia is the Woolworths property spin-off. That means it’s got a long weighted average lease expiry [WALE] and is yielding closer to 6 per cent.”

Quest’s Cahill lists developer Lend Lease, online retail specialist Surfstitch and online comparison site iSelect among his top picks. In the case of Surfstitch, its shares have fallen to about $1.70 from $2.09 in late November. Cahill expects the company to post revenue growth of 40 per cent in the current financial year.

Like Cahill, Nicol is also keeping a watch on Lend Lease, on the grounds that it should benefit from any fiscal stimulus unveiled by the government in an effort to promote economic growth.

“Lend Lease screens well in our filters and is on a price earnings ratio below market industrial average of about 11 times,” Cahill says. Lend Lease shares have fallen to about $13 from $17.50 a year ago.

PDF of article here: AFR – The ASX files – the value is out there – 23 January 2016