Where this fund manager sees value in unloved sectors of the ASX

Tuesday's interest rate hike by the RBA is just the latest illustration of the persistence of heightened inflation, both at home and abroad.

But Auscap CIO Tim Carleton remains upbeat, emphasising his view that core inflation in the US has peaked and is declining. He reflected on the current global macro environment, his outlook, and what these factors mean for Australian equity investors in a recent webinar.

Carleton believes Australia’s economy is in far better shape than many others, attributing this largely to the “remarkable job of saving” done by our citizens since the GFC and again during the COVID downturn.

“Households are still earning more than they are consuming and have a positive savings ratio...yes, it’s come down from elevated levels, but it remains positive,” he said.

Source: ABS, Auscap

The terms of trade boom

Though the financial press focused heavily on some parts of the commodities space amid strong iron ore and lithium prices, the “unprecedented terms of trade boom” we’re currently experiencing is largely ignored.

“To put this in context, the boom we saw in the immediate aftermath of the GFC peaked with our terms of trade producing about a $15 billion terms of trade surplus,” Carleton said.

“At the moment, we are running north of $150 billion per annum – more than 10 times the size of that previous boom, so it’s very significant.”

This is just one of several reasons Carleton believes Australia will avoid a recession – alongside the Federal Government’s ongoing fiscal expansion and our bond market that is vastly different to that of the US.

At current levels, Carleton described the cyclically adjusted price-to-earnings ratio of Australian equities as fairly valued, contrasting with the expensive and cheap valuations in the US and UK, respectively.

How is Auscap positioned?

With its value-conscious approach, Auscap seeks to take advantage of situations where market sentiment is exceptionally bearish. In line with this, the Consumer Discretionary sector is one that Carleton emphasises, noting the fund holds several “decent positions” in retail.

JB HiFi (ASX: JBH)

Describing this as “one of the best quality retailers in the market,” Carleton pointed to JBH as an example of a stock that has been underestimated by many investors.

“Analysts have a material decline in earnings for this company on a go-forward basis, but we are more positive than the broader analyst community,” Carleton said.

Though he accepts a pullback from current earnings is almost certain, he emphasised that this is already reflected in the current share price.

“From this point, if the news is incrementally positive, we think you’re getting a very attractive opportunity to buy into one of the best quality retailers in the market.”

Source: Auscap, FactSet

Nick Scali (ASX: NCK)

Another consumer discretionary stock, Carleton said he expects the 2023 financial year will see the furniture retailer produce another earnings record. And again, he believes this is being largely overlooked by the broader market.

Source: Auscap, FactSet

Mineral Resources (ASX: MIN)

The Materials company is favoured by Auscap primarily because of its lithium business, with Carleton and his team visiting several of its West Australian mine sites late last year, including its Wodgina and Mt Marion operations.

Underpinned by EV market fundamentals, “We expect lithium demand to continue to explode for the next decade,” Carlton said.

“It’s hard to see where the world will find sufficient lithium to satisfy demand on a go-forward basis, which places Mineral Resources in a reasonably enviable position as a top five producer at the bottom of the cost curve.”

Some other names from various sectors were called out by Auscap’s newly appointed deputy portfolio manager, Will Mumford.

Nib Holdings (ASX: NHF)

Mumford believes the investment community’s outlook for declining profitability from the health insurer is “overly pessimistic.”

Against the consensus, he’s bullish on the firm’s private health insurance businesses in Australia and New Zealand into FY2024, “given the incredible net migration Australia’s currently seeing and the strong outlook for travel and tourism.”

Auscap’s confidence in the stock is also supported by NIB’s position as one of the few publicly listed health insurers that are actively participating in the National Disability Insurance Scheme.

Carsales.com (ASX: CAR)

The online automotive marketplace has increased its average advertising yield to $148 from $68 in the last seven years. But far from being tapped out, Mumford believes there’s still significant room for further growth, given the firm is still only taking a 0.4% cut of the total value of each vehicle sold in the platform.

He also emphasised Carsales’ dynamic pricing model will bring further benefits as it is rolled out across the firm’s international businesses – Trader Interactive in the US and Brazil’s Webmotors.

“Currently more than half of Carsales’ revenue comes from offshore, with significant room to grow,” said Mumford.

Eagers Automotive (ASX: APE)

A global automotive retailer, Eagers owns 11% of the local market and is a long-time holding of the Auscap fund.

Mumford believes only part of the post-COVID boom in vehicle sales is reflected in the firm’s revenue figures. “So, we think the downside risk to profitability is quite low in the coming years.”

He singles out Eagers’ recently inked partnership with China’s BYD as one of its most exciting developments. The nation's largest EV manufacturer, BYD recently surpassed Volkswagen in topping the nation's overall automotive sales.

For all the insights from Tim Carleton and Will Mumford, click here to access the full webinar. 

This article was first published for Livewire Markets on Thursday 8 June 2023.