Wilson Asset Management (WAM) was established by Geoff Wilson in 1997 and today comprises three listed investment companies — WAM Capital (ASX: WAM), WAM Research (ASX: WAX), and WAM Active (ASX: WAA) — and one unlisted fund. The recent merger of Premium Investors with WAM Capital has boosted total funds under management (FUM) to around $700 million. Since inception in August 1999, the flagship WAM Capital has achieved a return before all expenses, fees, and taxes of 18.5% per annum.
In the final installment of our three-part interview (see Part 1 and Part 2) with Chris Stott from Wilson Asset Management (WAM), Chris talks about three specific investment ideas and provides some insights into his thinking around each purchase.
Q: Chris, you recently purchased M2 Telecommunications (ASX: MTU) could you describe your investment thesis please?
A: M2 is one of our research driven ideas. We've followed the company for many years and viewed the purchase of Dodo as a potential catalyst for the stock. We believe there are more acquisitions available to M2 through industry consolidation and that consolidation will benefit its pricing ability through increased market share.
Q: How do you assess the risks associated with M2? What could go wrong with your thesis here?
A: The acquisitions of Dodo and Primus have increased debt levels. So, high debt levels are a risk; increased interest payments also have decreased free cash flow (FCF) which means less flexibility within the business.
Q: What metrics do you put the most weight on to value this business?
A: We use price-to-earnings (PE) multiples and FCF multiples primarily.
Q: You recently bought 5% of Gage Road Brewing (ASX: GRB). What was your investment thesis here?
A: We view Gage Road as an undiscovered story. It is a contract brewer which has Woolworths as a key client (it produces Woolworths' private label beer) and as a key shareholder.
The company is currently investing for future growth with the recent capital raising being part of that process. Our thesis assumes the capital expenditure needs decrease in financial year 2014. In other words the company goes ex-capex in FY14 which will drive returns higher into that year and beyond. The balance sheet is strong — low debt. On our numbers the PE is less than 10 times. And there is good fixed-cost leverage in the business.
Q: What's your assessment of potential risks associated with Gage Road Brewing?
A: Well, we actually view Woolworths' 25% investment in Gage Road as a positive and I'd suggest that this minimises the risk, however key customer risk is present.
Q: What metrics do you use to value this business?
A: We take a blended average of growth over the next two to three years and apply a multiple to those averaged earnings.
Q: Chris, you've owned Sunland Group (ASX: SDG) for around one year now, what was your investment thesis at the time and is it still relevant today?
A: When we purchased Sunland it was trading at around a 60% discount to net tangible assets (NTA). Today we still see compelling value with a 25% discount to NTA. Our thesis incorporates the view that, with the company refocused on domestic opportunities and signs of a pick-up in the Queensland housing market there is a catalyst present for the stock to re-rate. [Ed note: Since the interview the discount has closed with the stock up around 25%]
Q: What's your assessment of the risks and what could go wrong with your thesis here?
A: The litigation issue is pretty well documented. The company has already set aside $7 to $8 million in the accounts should it lose the court case. So while there are some unknowns or risks they are taken into account in the NTA valuation.
Q: Often LICs trade below, sometimes significantly, their Net Tangible Asset (NTA) backing. WAM's three LICs are all trading pretty close to NTA, which I suspect makes you happy. Currently quite a number of LICs are trading at a premium.
Is this unusual? I was wondering if there was a reason for it — perhaps the chase for yield has spilled over into the LIC space?
A: Yes, I think you're right. It is probably partially a result of the yield chase, but that it right across the market over the past 12 months.
I think it also is partly in response to changes in regulations relating to the Future of Financial Advice (FOFA) legislation. FOFA makes it more attractive for financial planners to recommend LICs to their clients, which is benefiting the LIC sector as a whole.
Thirdly, changes made to laws regarding the payment of dividends by LICs have made dividend payments easier and more stable, which is of course enticing to investors.
[Ed note: Once a month the ASX publishes the NTA of all LICs, along with their premium or discount (Fools can find the latest list here: https://www.asx.com.au/products/market-update-managed-funds.htm
Q: Some fund managers talk of "eating their own cooking". In other words, having the majority of their wealth invested in the funds they manage, so their decisions have a very real impact on them and not just their investors.
Can you tell our readers if the team at WAM have invested meaningful funds into the LICs they manage?
A: The short answer is yes. We do "practice what we preach". A material portion of my wealth is invested in the WAM funds. Geoff is a major shareholder in each of the LICs. We also have a Staff Incentive Scheme to improve the share ownership amongst the team to align interests.
Q: Chris, you've answered a tonne of questions, just a few quick ones to finish off if you don't mind. Any book recommendations or commentators you'd suggest following?
A: Alan Kohler is very good. Anything by Michael Lewis – Liars Poker, The Big Short. I find Richard Branson inspirational – he's a brilliant entrepreneur.
Q: It's a big task being CIO, how do you relax and clear your head?
A: I have a seven month old – time with my family is important. Squash and golf are my sports.
Q: Discounted cash flow (DCF) analysis or multiple analysis?
A: Multiple.
Q: How does China's infrastructure and housing boom play out in the next few years?
A: I think China will slow to sustainable levels. Ghost cities are something to watch….
Q: Who wins: Prime Minister Gillard or Mr Abbott?
A: Mr Abbott.
Q: And what really counts: Who wins the Grand Final?
A: Do you mean AFL or NRL?
Q: It was actually a trick question!
A: Well I'm a Sydney boy, but I'm AFL. The Swans –back to back!
Q: What advice would you give to our Fools who are out there making investment decisions for themselves?
A: I would say that the best knowledge wins. Create a wide network of contacts. These contacts can be fund managers, stockbrokers, or the owner of your corner store but look for any way to give yourself an edge.
Q: That's great advice Chris. Thank you for your time.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
