Investing on the ASX has been pretty volatile since the beginning of the year. Some stocks have soared to new highs, while others have plummeted to reach new lows.
All in all, the market really hasn't gone anywhere - which doesn't bode well for the future, considering that we have had 400 bps of interest rate rises over the past 18 months - and it's looking very likely that will become 425 bps in a few day's time.
So where can investors find value on the ASX?
To find out, Livewire's Chris Conway was joined by Martin Currie's Reece Birtles and SG Hiscock & Company’s Hamish Tadgell for their analysis of five stocks both of them believe investors can either buy or hold right now.
That's right, none of the stocks in this episode are sells ...
... But please - FOR THE LOVE OF GOD - do your own research before buying any of the names on this list. Ok? Appreciate you.
Note: This episode was filmed on Wednesday 1 November 2023 and first published for Livewire Markets. You can watch the video, listen to the podcast or read an edited transcript below.
Chris Conway: Hello and welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is Chris Conway, and today we're running the ruler over a handful of stocks that are trading at a discount. Are they ripe for the picking? Or are they value traps? To answer those questions, we're joined by Reece Birtles from Martin Currie, and Hamish Tadgell from SG Hiscock. Welcome gents.
We'll start with you, Reece. The first stock is Cleanaway. Is it a buy, hold, sell for you?
Reece Birtles (HOLD): For us, at best, it's a hold. For a number of years, pre-COVID, it was growing very strongly as an M&A roll-up and really had some growth tailwinds. Since that time, it doesn't really have the opportunities to do M&A anymore to add to it. It's a very capital-intensive business, it's trading on a big premium after that big re-rate over its strong period and there are really quite high expectations of improvement required to get to the price. So we think it's a hold.
Chris Conway: Hamish, the stock is a waste management business, of course. It's down around 13% year to date. For you, is it a buy, hold or sell?
Hamish Tadgell (BUY): We'd probably say it's a buy. We see it as a high-quality business with infrastructure-type characteristics. It has a new management team in there and it's got strong parallels to us of Brambles (ASX: BXB) and sort of the turnaround that's gone on there, in terms of the network business. They've got a new management team that's coming in and I think there are some strong operational improvement initiatives that they're putting in place. Secondly, I think that there's still recovery from COVID going on. They were impacted particularly on the labour side, and I think they're sorting some of those issues out. And thirdly, they have invested in a number of initiatives like FOGO and the like. And the M&A that Reece has talked about, we still think the benefits growth to come over the next few years, so we think it's a buy.
Chris Conway: Next up we're talking QBE Insurance, it's one of the most talked about stocks on the market right now. Hamish, I'll stay with you, buy, hold or sell?
Hamish Tadgell (BUY): We're a buy. We think that QBE's in a bit of a sweet spot at the moment in terms of benefiting from rising interest rates and that's helping improve technical reserves. And for the first time in a long time, that business is also benefiting from the global insurance hardening cycle, which we still think has some way to run. And then thirdly, I think there are some good restructuring initiatives and simplification of the US business that's been going on. Focusing more on the mid-market and getting out of some of the insurance classes that have proved difficult over the recent past.Chris Conway: We're certainly all paying a lot more for insurance. Reece, the stock is up around 16% so far this year, but broker targets still sit well above that. How do you feel about it? Is it buy, hold or sell for you?
Reece Birtles (BUY): It's a buy for me as well. The only thing rising faster than the share price is its earnings. So the PE has actually been falling, it's now on around nine times earnings for FY24. So agree with many of the themes, the premium rate environment has been very strong given catastrophes, and the inflation dynamic has caused the cost of insurance generally to rise. So they're really benefiting from that strong top-line growth. One of the things we really like in this business is the appointment of a really experienced CEO who's really focusing on rectifying the problems in the business. And it's so important for insurance to be on top of the details, to get those claims sorted out and to be in the right line. And then the industry backdrop in the US, with its peers just reporting 10% rate increases, low 90%-type combined ratios, and that would be very positive for QBE's earnings going forward if they continue that.
Chris Conway: So a double buy on QBE. The Lottery Corporation is next up Australia's largest lottery operator, of course, it benefits when those $50 million jackpots hit the airwaves and everyone's out buying a ticket. Reece, I'll stay with you, is it a buy, hold, or a sell?
Reece Birtles (BUY): It's a buy for us. We see it as one of the few ways to play the digital online transition remaining in the market. So it has those long-term lottery licences that give it a monopoly position on the East Coast. Those licences allow it to benefit from that digital transition. They can increase the prices of their tickets, which is great for their revenue, but it also drives bigger pools and drives more customers. And then they're getting better margins as more of their tickets are sold online. So we see it as a nice stable business. It doesn't cause any harm for people to buy a bit of fun, especially in tougher economic times. So we see it as quite resilient and should be able to grow dividends.
Chris Conway: Hamish, the stock is down 2% year to date, but it has fallen from around $5.30 in August to now trading around $4.40. For you, is it a buy, hold or sell?
Hamish Tadgell (HOLD): It's probably a hold for us at the moment, but I agree with many of the things that Reece said. We think it's a very high-quality business and we are attracted to the growth that it has had over a long period of time, generating 3% or 4% growth and higher at times when it's bought out new game releases and the like. We are also very attracted to de-merges as we often think that they allow for the realisation of value that wasn't previously appreciated. But just at the moment, we do think there's a bit of earnings risk in the business. We think over the next six months or so that some of the game sequencing that they're cycling is going to be a little bit challenging. And also just there's some higher costs that we think are coming through in the business at the moment just in relation to the integration, which over time should come out. But there's some investment that's required as the business is de-merged.
Chris Conway: As well as running the ruler over those stocks. We've asked the gents to bring along a strong buy - a stock they believe is trading at a discount and offers compelling upside. Hamish, staying with you. What have you got for us?
Hamish Tadgell (BUY): Look, I'd call out Worley. Clearly, the company has had a good run in the last 12 months, but we think it's coming off a low base and we think there is still a long runway of growth [ahead of it]. Worley historically has been in the hydrocarbon space. It's the biggest or largest engineering consultant globally and employs about 40,000 people.
The company is pivoting towards sustainability. And so over the next two or three years, by 2026, the company is suggesting that 75% of their earnings will come from work in the sustainability and energy transition area. So areas like battery metals, wind and hydrogen and those types of things.
We think that growth is real. We think that they've got pricing power in the current environment and we also think that the government policy backdrop is very favourable. So things like the Inflation Reduction Act in the US, and initiatives here, are encouraging companies to invest in this space, which is then engaging Worley to do various services for them. So we see double-digit earnings growth for this business over probably the next five to six years and trading on 15 times, we think the company could re-rate to 18 or 19 times and is hence a buy.
Chris Conway: Reece, last but not least, what have you got for us? A stock that you think has compelling upside?
Reece Birtles (BUY): For us, it's Flight Centre. It really has not had the full travel recovery, its key segments are in corporate and international and both of those segments have yet to fully recover. And what we'd say is that Flight Centre definitely did not waste the crisis.
So in FY23, Australian travel numbers were at about 80% of pre-COVID, but Flight Centre managed to do 120% of their turnover in their corporate segment because they were winning accounts during the COVID-19 lockdown period and growing their market share in that corporate business.
And then in the leisure business, that has traditionally been quite hard to fix, given their bricks-and-mortar bas. They're running at about 80% of their pre-COVID levels, but with half the staff numbers and about half the number of stores. So they've really managed to drive efficiency in their business.And so even though FY23 was a much better year, FY24-25 is when you'll see the real benefits of that growth in the business that they've managed to achieve.
And compared to Qantas (ASX: QAN), for example, which is overearning on ticket prices and lack of capacity, as capacity comes back, that's really going to help drive the Flight Centre business.
Chris Conway: That wraps up this episode of Buy Hold Sell. Thanks to Hamish and Reece for taking part. If you enjoyed it, make sure to give it a like. Don't forget to follow our YouTube channel because we are adding lots of great content just like this every single week.
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