Twelve pro bono stock picks from Australia’s top fund managers

After a fairly stable corporate reporting season, investors are now setting their sights on the remainder of the new financial year and buckling down for the ‘storm clouds’ of a global recession.

Despite this uncertain outlook, six fund managers at some of Australia’s largest investment firms have given their best stock picks for the years ahead.

Six fund managers at some of Australia’s largest investment firms have given their best stock picks for the years ahead.Credit:Louie Douvis

These investors all manage funds on a pro bono basis for Future Generation Australia, an investment firm that does not charge fees and donates 1 per cent of its assets to not-for-profit partners. Since 2014, the fund has donated $65 million to various charities which support at-risk youth.

Don’t forget, The Age and The Sydney Morning Herald analyse stocks each Wednesday through our Long and Short of It column.

Eley Griffiths Group – Ben Griffiths

Stock 1: Playside Studios Limited (ASX: PLY)

Playside Studios is a rapidly growing video game developer with an expanding library of self-published games as well as those developed with major international studios like Disney and Pixar.

The video gaming industry is variously described as being larger (in terms of total revenue opportunities) than music and movies combined and is forecast to continue its strong growth trajectory.

Through the company’s 10-year journey, management has built up a sizable corps of development staff and a rich game portfolio, as well as taking the business into new arenas, such as game publishing and Web3/metaverse.

Stock 2: Cobram Estate Olives Limited (ASX: CBO)

Cobram has had a wretched start to listed life, battling to trade above its initial trading day levels seen in August 2021. Investors are overlooking the intrinsic value of the business, including its olive groves, its brands and its US opportunity.

Cobram accounts for over 70 per cent of Australia’s olive oil harvest and 50 per cent of supermarket sales in the category. Expanded mill capacity combined with increasing orchard maturity, higher net prices/litre and tight cost control will conspire to see a continuing solid performance from the business.

Plans are well advanced on replicating the model in the US with an enormous market opportunity before them.

Firetrail Investments – Kyle Macintyre

Stock 1: Resmed (ASX:RMD)

ResMed is a market leader in treating breathing-related conditions such as sleep apnoea. We estimate that sleep apnoea affects more than 80 million people in the US and the number is growing due to lifestyle factors.

Sleep apnoea is a key focus for health professionals given it can lead to other health-related problems if left untreated. However today, 80 per cent of people with sleep apnoea are left undiagnosed and untreated.

We believe ResMed is set to benefit from increased awareness and diagnosis of sleep apnoea leading to increased sales of ResMed devices. In addition, ResMed’s largest competitor is currently dealing with a product recall of its devices, providing a near-term opportunity for ResMed to grow its revenue and earnings by increasing its market share.

Stock 2: QBE Insurance Group (ASX: QBE)

QBE Insurance Group is a top 20 general insurance and reinsurance company globally. QBE’s revenue is set to benefit from improving pricing (higher insurance premiums) across the insurance industry, following a few years of larger-than-expected claims.

In addition, QBE earns revenue by investing its float (the money it holds to pay out future claims) in assets such as fixed-interest securities. In a rising rate environment, the assets QBE invests return a higher yield which provides an additional tailwind to QBE revenues and earnings.

We believe the company is attractively valued with potential upside in earnings from better pricing and better returns on its investment portfolio.

Qantas has faced significant criticism from customers in recent months.Credit:Bloomberg

Paradice Investment Management – Tom Richardson

Stock 1:Qantas Airways (ASX: QAN)

Travel spending is rebounding after a two-year hiatus and Qantas is ideally placed to benefit. Recent operational challenges will likely prove transitory, paving the way for increased returns from the domestic duopoly and its enhanced international network. The Loyalty business continues to spread its wings and is an increasingly large component of group earnings.

Stock 2: Challenger Limited (ASX: CGF)

Challenger has a 90 per cent market share of annuities in Australia. Annuities provide a regular income to investors not dissimilar to a term deposit, and while rates were near zero, it was an easy sell, but their product has recently become far more competitive with rates vastly superior to current term deposit offerings. We see an upside to returns as retail demand comes back to annuities.

QVG Capital – Tony Waters

Stock pick 1: HUB24 (ASX: HUB)

The financial services sector has been a growth sector in the Australian economy for decades now, underpinned by compulsory superannuation. This structural growth remains in place providing the potential for significant value creation for service providers in the industry.

HUB24 is at the heart of this trend and will continue to be a major beneficiary. The business provides a software platform for financial planners and advisors to have an all-encompassing, real-time picture of their client’s wealth. While the product itself sounds simple enough, over $500 million spent on acquisitions and development gives the platform award-winning features in both custody and non-custody services, self-managed super capability with client tax outcomes along with numerous API data feeds for a timely up-to-date picture. This makes the HUB platform a best-in-class product where market share gains are likely to continue.

At QVG we pay careful attention to common characteristics in stocks that have delivered “hall of fame” type performance over many years. HUB has these features in spades. Strong organic growth with structural tailwinds, high and increasing returns on funds employed, a strong balance sheet and a competitively advantaged market position vs competitors.

The stock is not ‘cheap’ in a conventional sense, trading on 35x price-to-earnings and 18.5x EBITDA. But neither was CSL, REA or ALU among others at the early stages of their ASX-listed journey. HUB can compound free cashflows at 20 per cent plus for years to come and it’s extremely rare to find companies that can match this. HUB is very reasonably priced compared to the ones that can.

Stock pick 2: Ridley Corporation (ASX: RIC)

Ridley operates two business segments. It provides bulk stock feed to the rural sector in the key categories of dairy, chicken and pork and its other business segment recycles abattoir offtake for ingredients in pet foods and biofuel as well as producing ingredients for aquaculture.

In a recent Ridley investor presentation slide, there was a capital allocation slide that stated a commitment to reinvest cashflows prioritising high return on funds employed whilst maintaining a strong balance sheet and distributing 50 per cent of profits back to shareholders. This would be done to maximise shareholder value with a target of delivering 15per cent returns per annum back to shareholders. Of course saying it is one thing, delivering it is another.

In the financial year 2022 just gone RIC smashed these targets by delivering 70 per cent earnings per share growth, improved a post-tax return on funds employed from 6.8 per cent to 10.9 per cent, paid out 56 per cent of profits in dividends and the balance sheet debt is now almost fully paid off giving the board the confidence to announce a share buyback. Far more importantly, the outlook suggests continued growth both organically and with the identification of significant capital reinvestment opportunities that will deliver returns well exceeding what RIC has achieved to date.

So RIC represents a proposition where they are exceeding shareholder value goals, have a 3-5 year outlook where this is likely to continue and a valuation where even though the market is starting to recognise the progress made, trades on 16x PE and 8.4x EBITDA. With ASX inclusion likely in the next 12 months there is a catalyst for a further positive re-rating in the stock.

Tribeca Investment Partners – Jun Bei Liu

Stock pick 1: Treasury Wine Estates (ASX: TWE)

We love Treasury Wine for its impressive growth profile, strong balance sheet and management that focuses on execution. It has a suite of premium label products that is beloved by its consumer and with geographical diversification, the brand has never been stronger. We project Treasury to grow over 20 per cent in the next 12 months and 15 per cent in the following year.

Despite superior earnings growth when compared to other defensive businesses such as Woolworths, at the current price Treasury represents fantastic value at 20 times earnings, a large discount to peers domestically and globally.

Treasury Wine Estates chief executive Tim Ford is hopeful of a restoration of the Australia-China relationship over time.Credit:Wayne Taylor

Stock 2: Ramsay Health Care (ASX: RHC)

This is probably the last COVID-impacted business that has yet to return to pre-COVID share price levels. We are attracted to Ramsay for its premium chain of well-run private hospitals, its structural defensive earnings growth and near-term sharp earnings recovery from pandemic impacted levels.

Recent private equity bid for the business have distorted the share price and now with price back to closer to $62 represent significant value. Ramsay should be considered an infrastructure-like asset with a current valuation well below fair value. Our view is that the company will be taken private if the price remains at its current depressed levels.

Wilson Asset Management – Oscar Oberg

Stock 1: AMP (ASX: AMP)

The new management team has successfully divested its funds management business (AMP Capital) over the past 12 months and restructured the group. Conservatively has $1.1 billion of excess capital that will be returned to shareholders over the next 18 months through a combination of capital returns and a share buyback which compares to AMP’s current market capitalisation of A$3.8 billion.

A share price of $1.18 a share is at a 10 to 15 per cent discount to AMP’s estimated net tangible asset backing of between $1.3 to $1.4 a share post receipt of asset sales. Execution of management’s strategy can drive a re-rating of AMP’s divisions closer to peers beyond net tangible assets and achieve a target share price closer to $2 a share

Stock 2: Estia Health (ASX: EHE)

Estia is one of the largest aged care operators in Australia which has been hit hard by COVID and the Royal Commission. Aged care is one of the last sectors to recover from 2.5 years of COVID disruption and with a lack of new development, we see a favourable demand/supply situation emerging for the industry.

Importantly the new funding regime post the outcome of the Royal Commission is set to be enacted which will provide certainty to the sector for the first time in six years. Smaller operators are struggling with increased compliance, and we expect Estia to use its strong balance sheet to make accretive acquisitions.

At $2 a share you are essentially paying for Estia’s property and getting the operating business for free. We think the share price is worth $3 a share (a 50 per cent upside).

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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