Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, The Montgomery Fund portfolio manager Joseph Kim tells how he sees value buys across many ASX sectors.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Joseph Kim: We're a well-diversified quality portfolio with a value lens.
MF: What are your two biggest holdings?
JK: It's Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) at the moment.
MF: What are your two biggest active holdings?
JK: Our biggest active holdings at the moment are Sydney Airport Holdings Pty Ltd (ASX: SYD) and Reliance Worldwide Corporation Ltd (ASX: RWC).
So [Reliance] is a global producer of plumbing fixtures. Their main market is in the US but they also have operations in Australia and Europe. Their signature product is something called push-to-connect. When you have a pipe burst, you can quickly fix it — you've got this brass fitting, you put it in between and you click both ends of the pipe together. And you've got a seamless waterproof fixture, which doesn't require a plumber to come in and solder or crimp.
In the US, you can do your own plumbing… They've got this dominant market position — it's called SharkBite. And the brand is synonymous with this push-to-connect product.
There's enormous strength in that brand name. And the penetration is still fairly low. I think they're about 15% to 20% penetration relative to solder, relative to crimp. You have this enormous market share potential over time because the plumbers use it and they recognise the time-saving benefits.
MF: What do you think of Sydney Airport after the recent acquisition offer?
JK: If you look at where the share price is trading, it's trading below the bid price. I think without that bid there… it's likely that the share price will be lower than where it is at the moment.
So you've got to take that into account, but I think there's an expectation that a lot of these big super funds have longer term time horizons. They're not investing for 6 to 12 months, they're investing for 20 to 30 years and you're matching your liability stream. If you're a super fund, it's not about, "Well, what's my percentage return over a period of time?" You have to pay out your super liabilities and you're duration matching.
In our game, you've got this moving benchmark that you're trying to beat — so sometimes you have to think about… what's an investment idea that's going to win in the short term.
But these guys are like, "Well, in 10 years time, I'm going to have this liability. And what's a dependable income stream that I can bank upon to provide that income stream?"
So you've got this difference in duration. That's all to say, look, there's an expectation that there'll be a higher bid, I would say. We'll see how that plays out.
Obviously, if there's no higher bid, then it's likely that the share price will fall from where it's at, I'm not sure how much. But it's still an extremely quality asset and I think globally, if we look at the global experience with COVID generally, there's an acceptance that we'll get out of this with widespread vaccination. From that perspective, there's clear long-term value there.
Hottest ASX shares
MF: What are the 2 best stock buys right now?
JK: The two best buys? So I actually struggled with this. One of them started really well, that's the problem.
We bought Resmed CDI (ASX: RMD) before this wider Koninklijke Philips NV recall. So I'm not sure how much further upside there is in the short-term.
We got in there, the wider recall came out and so we've done very well out of that. Now, clearly, the market is well aware of those.
I'm not saying we're going to be selling Resmed because we think there's this enormous opportunity for them to grab a 20% market share going forward. I think that's what most people expect. It's a quality business, we want to see the earnings come through and if they deliver and grab even more share then it's going to be even more valuable.
So one of the companies I wrote about is a little gold mine called Capricorn Metals Ltd (ASX: CMM). Since I wrote about it, it's actually come off a little bit, but again, this is one of those 6, 12-month investment horizons where they're just commissioning this new mine in WA called Karlawinda.
The management team is top-notch. So the guys are ex-Regis Resources Limited (ASX: RRL). If you look at what Regis did back in 2010 to 2013, 2014, they did a tremendous job generating shareholder value. Generally, there were lower grade gold deposits, but they're very low-cost operators. It's very cost-focused, it's a huge amount of skin in the game.
These guys have done it in the past. It's a relatively low-risk project. It's not so gold price-dependent, but in terms of the investment thesis, it's very much a re-rate story because once they're fully up and running, it'll look very cheap. It'll generate significant cash flows.
MF: Because Resmed has already gone up, is there another 'buy' you'd like to mention?
JK: Look, there's one I really like, this little business called Codan Limited (ASX: CDA). I'm a big fan of that one. Now it's waiting for the next catalyst.
Let's say it's got a little bit more integration risk because they bought a couple of businesses in the last 6 months. But if they can get those acquisitions right, get them humming, yeah, there's a small upside.
They've got this metal detection division, which is growing extremely well. They've seen [a] pickup in volume, they've been able to push through price increases and they're the number 1 player. Their products have better reviews than competitors. They've just gone into the recreational side of things. So more coins, et cetera.
They're doing really well. The communications division, which has generally been a bit small, they've just gone out and bought 2 businesses to complement their existing business at a reasonable price — which means that if they execute on some of their targets, then you're looking at a much bigger, more valuable business in the next 6 to 12 months.
We won't know for a little while because they're just bedding those businesses down. But it's one that I think is definitely worth watching.
