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, Monash Investors portfolio manager Sebastian Correia reveals the ASX share he'd hold for years, and the one he wished he had for years.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?
Sebastian Correia: That question, we've been asked that in a variety of different ways before. It's often the kiss of death for stocks.
A lot can change in four years, right?
Back in 2018, I don't think many of us would've predicted we'd have a global pandemic, or, even before it ended, the biggest conflict in Europe since World War II.
But look, all exogenous risks aside, I'd be happy to hold Johns Lyng Group Ltd (ASX: JLG) for four years because of all the points I mentioned above. It ticks all the resilience points that I just mentioned around the pricing power, cash flow generation, and it's got strong tailwinds behind it. It's got an untapped North American market, which is about $100 billion at a much higher margin.
Climate change-influenced weather patterns are provided as a tailwind. I don't like to factor that in my forecast, but that's also just something to have on the back burner. And because of inflation, if they can pass on those pricing costs, they can maintain their margins and therefore be even more strongly positioned to take advantage of any opportunities that come up in the market to acquire.
It's got a couple of adjacencies — strata management, for example. I'm very sceptical about synergies when management mentions them, but there's a lot of plausible synergies I think have the potential to be exploited if they so choose. So there's a lot there that you could get excited about.
The one thing about John Lyng is that… the market realises it's a high-quality stock, and therefore it could trade at a higher valuation than I would like. With OFX Group Ltd (ASX: OFX), it's so easy to get that upside, right? With JLG, they have to execute against the expectations that they've set, but they've been able to do so for so long in the past. Having spoken to management several times, I'm quite confident that they can do that subject to some other crazy thing that would happen in the markets, like another war or something.
MF: The share price has cooled off a little bit this year.
SC: Yes, exactly. The CEO, Scott Didier, bought another million dollars worth of stock on-market, I think, two weeks ago. So he obviously sees that it's been oversold, and I would tend to agree.
And the last thing I'd mention on that one is just that four years, based on current information, is a long time.
When I'd spoken earlier around Monash, when they set it up, they had developed or observed a broad suite of recurring business situations and patterns of behaviour. This is one of them that informs our idea generation. That is, John Lyng consistently exceeded consensus earnings to expectations over the years.
For example, in December 2019, the analyst consensus revenue forecast for financial year 2022 was about $465 million. By the next year, so by December 2020, this forecast for that same year… had grown by 23% to $570 [million]. Then three years on, by December 2021, that same year FY 2022's revenue forecast had grown by 70%.
So each year, the analysts are forced to increase their earnings, or the revenue expectations in this case for the stock, because they just happened to hit their milestones so successfully.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
SC: Yeah, I've got plenty. It's a part of being a fund manager.
Balancing conviction in a position while the price stands against you is quite hard. So at Monash, we've developed almost like a pre-mortem selling discipline that I'm exceptionally strict on following. So if the facts of the investment thesis change, even for a stock that I absolutely love, I don't really have too much difficulty in selling to protect our investors' capital.
So I don't really have too many regrets in that regard, but I have quite a few opportunities that we knew about but failed to buy in at the time and ended up being multibaggers.
The one that came to mind, when I thought about your question, was an extremely valuable lesson to me. It happened back in October 2019. And it involved a telecommunications company called OptiComm.
OptiComm, before it got taken over by Uniti Group Ltd (ASX: UWL), constructed and maintained an alternative network to the NBN, arguably superior. The beauty of the business was that the residential developers would pay OptiComm to come in, and build, and integrate its network into the development project. After the completion of the project and the residents moved in, OptiComm would then earn recurring revenue by providing the internet connectivity through an approved list of retail service providers that they managed.
So it was a phenomenal business model. In essence, it was getting paid to build an asset that they controlled, and from which it received recurring revenue. When someone else pays for your cap-ex, and you get to cop all revenue on the property…
MF: Daylight robbery!
SC: Yeah, exactly. So I was quite convinced at that time that it was going to be a success. And I did the DCF [discounted cash flow] valuation modelling and did all the due diligence, and it was well above our investment hurdle of 60% upside. But we didn't buy because we had some concerns around a large chunk of stock that was going to come out of escrow in the next few weeks or something like that.
And that was when it was about $3. And in less than a year, it more than doubled, before being acquired by Uniti Wireless Group at a premium.
Luckily, I can say I learned from that mistake because I did a lot of due diligence into Uniti when they acquired that. And we took a stake in Uniti… But oh, how I wish I could have been in there from the beginning.
