Buy Hold Sell

Buy Hold Sell: 3 undiscovered gems (and 2 overhyped duds)

Fri 14 Apr 23, 9:24am (AEST)


  • Typically less researched than their large-cap counterparts, small-cap companies can easily rise to 'market darling' status.
  • Yarra Capital Management's Katie Hudson and Prime Value's Mike Younger for their analysis of three undiscovered gems. Plus, they also name and shame two overhyped duds.

0:00 - Intro

0:21 - Is AUB Group (ASX: AUB) a buy, hold or sell?

2:07 - Is Propel Funerals (ASX: PFP) a buy, hold or sell?

3:49 - Is Kelsian Group (ASX: KLS) a buy, hold or sell?

5:25 - Katie Hudson's overhyped dud: Neuren Pharmaceuticals (ASX: NEU)

6:41 - Mike Younger's overhyped dud: Pro Medicus (ASX: PME)

Note: This episode was filmed on Wednesday 5 April 2023 and first published for Livewire Markets on Friday, 14 April 2023. You can read an edited transcript below:

Edited Transcript 

Chris Conway: Hello and welcome to Livewire's Buy Hold Sell. My name is Chris Conway and today we are joined by Prime Value's Mike Younger and Yarra Capital's Katie Hudson for their analysis of the darlings and duds of the small-cap arena. 

First up today we have AUB Group. It is the old Austbrokers and it's Australia and New Zealand's largest insurance broker network. Mike, starting with you, is it a buy, hold or sell?

AUB Group (ASX: AUB)

Mike Younger (BUY): AUB group is a buy for us. Volumes are incredibly resilient and we need no further example than the recent COVID shutdowns to highlight that one of the last things businesses will turn off is their insurance. At the same time, the premium rate cycle is very strong, but it also seems like it is elongating as climate change creates more frequent weather events and that's pushing up the cost of insurance, which AUB will pass through or take a clip of those premiums that it sells to its clients. Trading at just a mild premium to the market, we think it's a buy.

Chris Conway: Katie, the share price has risen about 13% over the last 12 months. For you, is it a buy, hold or a sale?

Katie Hudson (BUY): It's a buy, but we also recognise it is a market darling. It is very well owned by small-cap managers and I think the benefits, as Mike described, of the insurance broking network are well understood by investors. So that premium means the inefficiency is not as strong as it might be for other companies. But I do agree with Mike. It is a fantastic part of the market. If you think about the value chain for insurance, the insurance broker has the low capital-intensive part.

They have the benefit of the premium increase, but they don't have the claims inflation that the poor old insurers are bearing. So it's definitely the attractive part of the value chain in insurance. And as Mike highlighted, they're benefiting from that climate trend as well. I think the Tysers [UK insurance broker] acquisition they made is de-risking pretty quickly and they also have the opportunity to buy more of their existing businesses where they own less than 100%, and that tends to be pretty low risk and certainly very high returning.

Propel Funerals (ASX: PFP)

Chris Conway: Next up, we have Propel Funerals. It has steadily been taking market share in recent years and last time out its net profit after tax was up more than 40%. Katie, for you, is it a buy, hold or sell?

Katie Hudson (SELL): So that one's a sell for us. It's not a stock that we're hugely in favour of. Certainly, that sector is growing structurally, death rates will continue to rise for the next three or four years before they start to plateau and then will be more challenging as that age cohort starts to roll through the system. The big issue for us is we think the sector is over-earning. They make 70% gross margins. A lot of that is because they charge very high prices for the coffins. We're starting to see some new entrants coming into the market, Bare, for example, that have a simpler lower-cost model. We think that's going to change the economics for the industry over time and we're cautious as a result.

Chris Conway: Mike, the share price is down around 5% in the last 12 months. It's all a bit morbid, but is it a buy, hold or sell for you?

Mike Younger (BUY): For us, Propel's a buy. We like the long-duration nature of the growth profile. So from the volume side, that ageing population is going to see an acceleration in the death rate over the medium to long term. And on the pricing side, these companies have shown an ability to continue to increase prices year in and year out, which is really because the service is quite price inelastic. We've seen recently a bid for the major competitor InvoCare (ASX: IVCat a PE of 35 times. Propel trades at about 23 times earnings, but it also has latent capital on its balance sheet from an equity raise that it did a couple of years ago, such that it can buy businesses that would add 20% to the current earnings base.

Kelsian Group (ASX: KLS)

Chris Conway: Next up we have Kelsian Group, formerly Sealink Travel. It operates transport services in Australia, the UK and Singapore. Mike, for you, is it a buy, hold or sell?

Mike Younger (BUY): Kelsian is also a buy. I'm sounding like a bull here, but management has a great track record, which over time has meant that they've been able to build quite a strong market share in the Australian bus industry. At the same time, you've got contract structures that are really favourable, particularly around inflation protection and also not having any fare box risk. And the electrification of the bus network is one that we think provides long-duration growth for the industry as a whole because it's one way in which governments can try to get those gas-guzzling cars off the road. So, a buy for us.

Chris Conway: Katie, the share price is down around 14% over the last 12 months. For you, is it a buy, hold or sell?

Katie Hudson (BUY): It's a buy for us as well. We agree with Mike that the long-duration nature of those contracts is a really attractive industry. Outsourcing from governments to the private sector should mean they should see structural growth over time. You mentioned the share price is down. I think a lot of that is to do with the fact there's been a fair bit of labour disruption in their workforce. That's put some pressure on margins in the short term.

With the labour force starting to normalise, with migration starting to improve, we think they should get that margin benefit back over the next 12 or 18 months. And, of course, they've made a really interesting acquisition, their first foray into the US - they've actually been doing work over there for five years. They know the market well. We think over time that will be a really compelling growth strategy for them and we think it looks really interesting. So it's definitely a buy for us.

Chris Conway: All right. It's time to talk overhyped duds, companies that are likely to face headwinds from here and perhaps have overachieved. Katie, we'll start with you. What have you brought for us?

Neuren Pharmaceuticals (ASX: NEU)

Katie Hudson (SELL): I'm going to call out the biotech sector initially and then I'm going to talk about a company specifically. We just think that the whole biotech sector in the small-cap part of the market is structurally overvalued and overhyped. Certainly, there are a lot of interesting products coming down the pipeline, but a lot of them have a billion or a one-and-a-half billion dollars of market cap and a lot of risk attached to them. Getting a product to market requires commercialisation, it requires distribution, it requires a change in the way a clinical practice operates. And so we think there's a lot of risk attached to these products and these companies that is not reflected in the company's share prices. 

One I call out is Neuren. It has a really interesting new product that they've just got FDA approval for, but the hard part is about to start for them. They've got to change clinical practice. Certainly, we think there'll be a lot of patients who will try the product, whether that will be sustainable and meet expectations about some pretty significant market growth for a $1.7 billion market cap company we think looks challenging.

Pro Medicus (ASX: PME)

Chris Conway: Mike, what about you? What's an overhyped darling and why?

Mike Younger (SELL): For us, it's Pro Medicus. It's a fantastic business and has a lot of characteristics that investors look for - high earnings growth, high margins and low capital intensity. But valuation wise it's really extreme. This is a stock trading at a hundred-odd times PE and it's one of the only tech stocks which hasn't derated over the last 18 months. And to highlight the extremity of that valuation, if you continue to grow the earnings out at the pace that they're currently tracking versus growing out the market growth, it would take over 10 years for Pro Medicus to trade at a market multiple. And so for us, that's very extreme and provides very little margin of safety should something go wrong.

Chris Conway: Well, that's all we have time for today. If you enjoyed that episode of Buy Hold Sell, make sure to give it a like and don't forget to follow our YouTube channel because we're adding great new content every week.

Created By

Buy Hold Sell

Fri 14 Apr 23, 9:24am (AEST)

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