There are some companies that seem to have been around forever, delivering year in and year out.
Just like a trusty car that has done 500,000 clicks but still runs like new, a favourite pair of blue jeans that can't be thrown away, or a reliable childhood friend, these stocks have been woven into the fabric of Australian investing - and most investors, both punter and professional alike, are likely to have run the ruler over these companies' balance sheets at various points in time.
So, which stocks are quintessential ASX names and, more importantly, are they worth investing in right now?
To help answer those questions, Livewire's Ally Selby was joined by Perpetual Asset Management’s Anthony Aboud and WaveStone Capital’s Catherine Allfrey for their analysis of three ASX stalwart stocks (all with 27 years or more listed history).
Plus, they also share one ASX-listed company they have covered extensively over their investing careers that is no longer in their good books.
Note: This episode was filmed on Tuesday 17 October 2023. You can watch the video, listen to a podcast, or read an edited transcript below.
Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and today we'll be analysing three stalwarts with 25 years of history or more on the ASX. Plus, our guests will also be naming a stock that is no longer in their good books. To do that, we're joined by Anthony Aboud from Perpetual Asset Management and Catherine Allfrey from WaveStone Capital. Okay, first up today we have Macquarie Group listed on the ASX back in July 1996. Catherine, starting with you, is it a buy, hold, or sell?
Catherine Allfrey (BUY): I'm going to go with a buy. It's had two downgrades following a record year last year, $5.2 billion, but we are coming to a turning point, so this result will not be good - $1.6-1.7 billion, down circa 30%. But from here, you should see a base form and the businesses that have underperformed - like Macquarie Capital, the trading business, commodities, global markets - should perform better from this turn here, as well as the asset management business. We'll see some good asset realisations in the second half, which will see Macquarie turn. So I'm back on the buy truck with that one.
Ally Selby: Okay. 65% of brokers agree. They rate it as a buy. Anthony, over to you. Is it a buy, hold or sell?
Anthony Aboud (HOLD): I've got it as a hold. I think it's a company you can't back against. They always manage to reinvent themselves. From an analytical perspective, looking bottom up, it's very hard to analyse because every year there seem to be one-off type profits - performance fees or profit on sale of assets or polar vortex, profit from trading, et cetera. So they always manage to get these one-offs. The reason I'm a bit more circumspect about it is, with higher interest rates they do tend to have a lot of longer duration assets both within their funds, but also on their own balance sheet. Having had two decades of tailwind, higher interest rates are probably a bit of a headwind for a lot of those one-off type profits over the next couple of years. So I just think it's going to be harder for them to pull a rabbit out of their hat. So for me it's a hold.
Ally Selby: Next up, we have Aristocrat Leisure, which was also listed in 1996 but was founded long before that. Over to you, Anthony. Is it a buy, hold or sell?
Anthony Aboud (HOLD): I am going to sit on the fence again, sorry. I've got a hold on Aristocrat as well. Over the next short term, we think that the land-based earnings are going to be very, very strong. So we think that there's good momentum and the stock has de-rated. However, over the medium term, there's a few issues that we've got facing Aristocrat. The first one being they have lost a lot of staff, key staff, both in research and development, but also in managerial positions. The second issue we've got is that their competitors actually on land-based have improved and for the first time in probably a decade, they're well capitalised and have got good management, specifically Light and Wonder. And finally, we don't believe there are the same sort of barriers to entry on the digital side as we do on the land-based. And so yes, it has de-rated, it's about 20x PE, but we don't think it's enough for us to get too excited on a risk rate there. We prefer Light and Wonder.
Ally Selby: Even though it's de-rated, the share price is still up around 28% to year to date, and 87% of the brokers who cover the stock rate it as a buy. Catherine over to you. Is it a buy, hold or sell?
Catherine Allfrey (BUY): Well, I think I will stick with the consensus and go for a buy. I think the result's going to be pretty good by the sounds of it. And we like the new acquisition, NeoGames, and the space that they can go into in terms of iLotteries. I agree with Anthony in terms of increased competition, particularly for games like Raid for Aristocrat, but overall at 20x, given its growth outlook, we think that's reasonable for the stock and we still think that it's a buy.
Ally Selby: Okay. Last up for today, we have James Hardie. The stock has been remarkably resilient considering the volatility we've seen in housing over the past three years. Is it a buy, hold or sell?
Catherine Allfrey (HOLD):
It's a hold for me. It's so dependent on what happens in terms of US interest rates. But most households are locked in around 3% interest rates, and if two-thirds of the market for James Hardie is all about renovation/remodel as they call it the United States, therefore that market should get a boost going forward, because a lot of stock - over 44 million homes in the US - are over 40 years old. So that remodel/renovation cycle should be coming through, because there's no way that US homeowners locked in at 3% interest rates are going to move home, because currently the interest rates are around 7% in the US. So for us, we do like it, but it's had a fantastic run and we are a little bit concerned about the consumer outlook in the US being slower, but we're going to sit on the fence at hold.
Ally Selby: Okay. This stock has the longest listed history of all the stocks were talking about today. It was listed on the Sydney Stock Exchange back in 1951. Anthony, over to you. Is it a buy, hold or sell?
Anthony Aboud (SELL): Well, it brings a tear to my eye, but I'm going to say sell. Even longer, I think the company formed in 1888. It's an amazing Australian success story. It has a dominant market position in the fibre cement siding market and is taking market share. There was a little bit of a kerfuffle with the change in management maybe 18 months ago, but the new management team seems to have allayed fears, and the margins and margin outlook in the last quarter were very promising. However, this is a cyclical business. And yes, Catherine is right that two-thirds is R&R, but one-third is new homes, and the 30-year mortgage rate in the US is just under 8%. So I think that's going to result in a downturn in new housing, but also just sentiment towards housing and housing stock and consumer sentiment will turn negative. And when that happens, we do feel that people spend less on their home…but time will tell. We just feel that it is a cyclical company and even though it's a high-quality company, it's still cyclical, and I feel that it's quite well held and that people will probably be surprised by the cyclicality of it at some point.
Ally Selby: We asked our guests to bring along a stock they've covered for quite some time, but it's no longer in their good books. Anthony, what have you brought for us today?
Anthony Aboud: Amcor. We have owned it in the past. The thing which concerns me about Amcor, we feel that it's been, from a capital management perspective, managed as if low interest rates would stay there forever. It's got US$6 billion of debt, which is about three times debt to EBITSA. It's had one or two downgrades. Feels like it falls into the basket at the moment of a company where some of these inflationary pressures are going to start to hit home on the cost side. That's labour, interest rates definitely. On the other side you are seeing volumes, it's a destocking event going on at the moment. We're seeing high single digit decline in volumes at the moment. And whilst it does have exposure to Gatorade and fizzy drink, I also don't think that's a negative. Everyone's worried about GLP-1, what impact it's going to have on people's consumption of fizzy drink, et cetera. I'm not as worried about that, but what it shows when you're as geared as high as that, you don't need any headwinds at the top line. So that's one which we have liked in the past, but we're a bit more on the negative now.
Ally Selby: Okay, over to you Catherine. What stock is in your bad books?
Catherine Allfrey: I don't know if it's in bad books, but I just think that the market is underestimating the impact, that would be AMP. In terms of AMP, 55% of it is the bank, and small banks in Australia are doing it exceptionally tough at the moment. You only have to look at the Bank of Queensland result where you saw a 20 basis point decline in their margin. Yes, AMP have called that out that there will be margin decline in this half. However, the problem is, it is actually accelerating, it hasn't actually stabilised yet. And for small banks also, they're facing the increased cost of cybersecurity as all banks are. But if you have to do that as a small player, as a percentage of your overall cost, that is actually a lot higher. And so we think costs will be higher than the market expects, we think margins will be lower than the market expects. And the other interesting thing is that the buyback is finishing, and so we think it will be unlikely that they'll do another buyback whilst they have these class actions that they're currently mediating, and those class actions they can't provide for. So that's why they need that surplus capital to come back. So for us ,on 13-14x, it's just too expensive given the earnings risk.
Ally Selby: Okay. That's all we have time for today. I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like. Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.
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