From garbage collection to race car manufacturing, nine fund managers at some of Australia’s largest investment firms have given their best stock picks for investors looking over the long term.
These investors all manage funds on a pro bono basis for Future Generation, an investment group that does not charge fees and donates 1 per cent of its assets to not-for-profit partners.
High end car manufacturers such as Ferrari are among the top stock picks from these fund managers.
Since 2014, the group has donated $75.9 million to various charities which support at-risk youth and youth mental health and wellbeing.
These picks were provided last week at a philanthropy and investment summit hosted by Future Generation and moderated by this masthead.
Zehrid Osmani – Head of Global Long Term Unconstrained Equities, Martin Currie Franklin Templeton
Company: Ferrari
Ticker: RACE IM
Sector: Automotive
Ferrari has a strong industry positioning in the very high-end car market segment, with an established franchise, brand appeal and high pricing power, as seen from its typical 30-50 per cent price premium compared with peer brands in the high-end sports car segment.
Long waiting lists for products makes the company able to weather short-term cyclical headwinds and be able to continue to optimise its production capacity in downturns, making its sales more predictable over the long term.
Periodic launch of limited edition cars priced at a significant premium also helps the company generate strong demand and interest for its products whilst boosting sales and enhancing profitability, given the premium prices of those limited production cars.
The recent launch of an SUV, the Purosangue, has already run into waiting lists of well over one year and is helping the company address an important segment of the car market. It has chosen to do so with a car at a significant premium, which once again highlights the pricing power of the company.
As a result, we forecast the company to be able to grow at a 5-years annualised rate of around 11+ per cent on sales, 16 per cent on earnings and 25 per cent on free cash flow.
We expect it to increase returns on invested capital from around 28 per cent historically, to 41 per cent within 5 years.
Sales are increasing for Ferrari’s Purosangue model.
Ferrari has more predictable sales than the market expects, and therefore can be seen as a consumer staple, albeit if only a staple of the high net-worth individual.
Strong pricing power enables the company to generate superior returns on invested capital, at 28 per cent and improving to 41 per cent within 5 years on our forecasts, which is significantly higher than the 6-8 per cent generated by the global automotive sector on aggregate.
Ferrari’s brand appeal in the long term is likely to remain, permitting the company to continue to tap into a steady demand from high-end consumers, whilst permitting the company to deliver a steady growth and improving returns profile over time.
This, we believe, has meant the market struggled to capture appropriately in the valuation of the stock, given the compounding characteristics of its cash flow generation.
David Allen – Head of Long/Short Strategies, Senior Portfolio Manager Plato Investment Management
Company: Novo Nordisk
Ticker: NOVOB DC
Sector: Pharmaceuticals & Biotechnology
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Novo Nordisk, company few had heard of outside of Europe ten years ago, is now the largest company in Europe, eclipsing LVMH. The growth potential is phenomenal.
Novo Nordisk have a 90 per cent market share in approved treatments of obesity. Obesity is the 4th largest cause of death globally and is associated with over 240 co-morbidities.
For this reason, the GLP-1 class of drugs are being touted as the Swiss-army knives of drugs, showing promise for diseases as disparate as heart disease, Alzheimer’s, diabetes, depression, and arthritis.
The anti-obesogenic drugs pioneered by Novo Nordisk will be the blockbuster drugs of the next decade, just as immune-oncology drugs defined the last decade.
There is a very real possibility that these medicines will go on to be the best-selling drugs of all time and generate $100 billon revenue a year.
Jacob Mitchell – CIO, Antipodes Partners
Company: Tesco
Ticker: LON: TSCO
Sector: Consumer Staples
Unlike Tesco grocery stores, which are difficult to miss throughout the UK, the company’s business resilience and growth profile have evaded the attention of most investors. Tesco has successfully navigated two key structural sector shifts: discount supermarket competition and online grocery.
In the face of increased competition from the likes of Aldi and Lidl, Tesco has implemented price-matching, which has helped maintain its circa 30 per cent share of the UK’s in-store grocery market.
Other initiatives have helped protect profitability including growing home brand lines (which are more profitable than branded) and expanding its loyalty program.
In online, Tesco.com launched in 2000 and is the clear winner with nearly 40 per cent of online grocery. The UK is densely populated which is key to running a profitable online business.
A Tesco store in Hackney, east London. Picture: Bloomberg
Tesco has coverage of the entire UK and has taken a leaf out of Walmart’s playbook in the US – investing in fulfillment centres attached to large format stores to fulfil online orders. The shift to online hasn’t been materially dilutive to Tesco’s earnings, and we expect the company to continue to win as spend shifts online.
At just 11x earnings, Tesco is an attractive-priced, marketing leading consumer staple. It trades at half the multiple of Woolworths and Walmart in the US.
Jun Bei Liu – Fund Manager at Tribeca Investment Partners
Company: CSL
Ticker: CSL
Sector: Healthcare
CSL has built a world-leading blood plasma franchise over the last 25 years via some well-timed acquisitions and a relentless focus on efficiency and a strong sales and marketing franchise.
Throughout this period, the company has faced numerous threats from competitive therapies and fluctuations in supply and demand which have weighed on investor confidence a number of times. However, history has shown the management team and board have managed through these challenging periods and emerged with a larger and stronger business.
CSL is three globally competitive businesses – blood plasma, influenza vaccines and injectable iron. This provides it with diversified, defensive earnings streams. All three businesses have solid medium term growth prospects.
Jun Bei Liu is the portfolio manager of Tribeca’s Alpha Plus Fund. Picture: Louie Douvis.
With economic prospects deteriorating in the face of rising rates and increased geopolitical threat we expect defensive stocks to come back into favour. And with signs interest rates are nearing a peak, we believe that the valuation pressure for a growth company like CSL should start to moderate.
Historically, CSL has been most attractive during periods of investor uncertainty. We believe we are in such a period, due to concerns over the emergence of new competing therapies across each of CSL’s business divisions.
I am confident these challenges can be navigated, noting that the management team has guided CSL to double-digit earnings growth over the medium term which indicates it is still a growth company.
Nikki Thomas – CFA, Portfolio Manager Magellan Asset Management
Company: Netflix
Ticker: NFLX US
Sector: Communication Services
Netflix is the leading streaming company in the world. The streaming industry continues to take share of entertainment with meaningful long-term growth ahead as the linear TV market erodes.
We expect Netflix to remain in a strong position of leadership even as many others continue to push their existing media businesses into the streaming market.
After a tumultuous 2022, it has moved forward on monetising its significant subscriber base by improving the amount paid by many users who shared passwords and adding an ad-supported tier that allows it to capture more value from its product without the cost being borne by subscribers.
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There has been a great deal of change in the strategy to redirect in a way that will enhance the growth and, importantly, build a strong cash generation powerhouse. The scale opportunity to leverage costs, in particular its content spend, over coming years suggests expanding margins and strong growth in free cash flow.
Long-term margins are likely to exceed 30 per cent (bullish estimates suggest even beyond 40 per cent) from the current 20 per cent it expects to deliver in 2023.
Geoff Wilson AO – Chief Investment Officer and Chairman, Wilson Asset Management
Company: Global Data Centre
Ticker: ASX: GDC
Sector: Financial Services
In FY2023, Global Data Centre announced that it will undertake a value realisation strategy following a review focused on assessing the long-term viability of its current investment structure.
The company will seek to realise the value of Global Data Centre’s existing assets over the medium term through asset disposals. We believe this catalyst will lead to a narrowing of Global Data Centre’s share price discount to net assets in the near term.
Fund manager Geoff Wilson. Picture: Juanita Wilson
One of the Global Data Centre’s investments, AirTrunk, could be subject of an initial public offering which would likely result in a realisation of Global Data Centre’s 1 per cent interest in Air Trunk at a significant premium to carrying value.
We expect the price to continue to track towards its underlying NTA as asset realisations occur. This figure could be between $2.50 and $3.00.
Mark G. Holowesko – CEO, CIO & President at Holowesko Partners
Company: Lloyds Banking Group
Ticker: LLOY LN
Sector: Banking UK
Trading at 5x 2023 EPS with a 6 per cent dividend yield and 60 per cent of book value, Lloyds Banking Group controls a fifth of UK retail deposits.
Retail accounts for 35 per cent of profits at Lloyds, with consumer finance at 22 per cent, commercial banking at 30 per cent and insurance at 10 per cent.
Worries about loans and credit quality are overshadowing the bank’s ability to return cash to shareholders. The bank throws off 200-250 basis points of surplus capital a year.
Over the next two years, we estimate the bank could return 24 per cent of the market value in dividends and buybacks.
Tony Waters – Principal & Portfolio Manager, QVG Capital
Company: Johns Lyng Group
Ticker: JLG
Sector: Industrials
The business is a building insurance and maintenance service provider across a number of different work streams from a building agency for insurers, strata management, state disaster recovery and home services.
JLG has grown EPS 29 per cent CAGR over the last five years. This has come from a combination of both organic and acquisitive led growth.
We see the drivers for this growth still ongoing for some time across all key JLG business sectors. JLG has opened up new territories in New Zealand and the US, which is still very early on in its growth in terms of market share and footprint.
The ongoing services and agency type business model means JLG has delivered returns on capital in the range of 30 per cent. This company look very attractive even on a PER of 22x even if organic growth slows considerably from here.
This also considers the company can’t forecast unforeseeable high weather events which can provide a big bump to earnings. FY23 saw 37 per cent of earnings from high impact weather events.
Outside of these types of events is a very defensive earnings stream from “business as usual” insurance work, strata and home maintenance services.
Bill Pridham, Portfolio Manager, Ellerston Capital
Company: GFL Environmental
Ticker: TSE:GFL
Sector: Waste Management
GFL Environmental is the fourth-largest waste management business in North America and the only one that also provides a suite of environmental services. It has a highly visible earnings stream with growing margins underpinned by strong industry pricing associated with the scarcity of its assets.
Waste management is a big business. Picture: Eddie Jim
It is expanding its recycling capabilities across both Canada and the US as new legislation around packaging waste continues to benefit its positioning. GFL is also developing a new earnings stream in renewable natural gas which will be totally incremental and captured from its existing landfills.
GFL should grow earnings at a double-digit pace for the foreseeable future and this is not reflected in its current valuation.
This article was originally posted by The Sydney Morning Herald here.
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