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, Atlas Funds Management chief investment officer Hugh Dive names two ASX shares that represent awesome money-making models.
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The Motley Fool: What are the 2 best stock buys right now?
Hugh Dive: So, the two best buys that we're looking at, we actually have been buying these two stocks. This is not a vague idea.
The two things we've been buying the most lately have been Deterra Royalties Ltd (ASX: DRR), and Atlas Arteria Group (ASX: ALX), our namesake, but has nothing to do with me. It's a collection of toll roads in eastern France.
One of the reasons why we like Deterra Royalty Trusts [is] it's a bit of a novel concept. I think it's one of the only royalty trusts listed on the ASX. My background is I started off working in funds management in Canada. Royalty trusts are very popular there. I understand them very well. The way a royalty trust works is instead of actually owning a mine or owning an asset and having to operate it, you just get a percentage of the revenues off it.
Deterra Royalty spun out of Iluka Resources Limited (ASX: ILU) a bit over a year ago, and they get a 1.23% royalty stream off the revenue of BHP Group Ltd (ASX: BHP)'s mining area C.
One of the reasons why I like that is because mining costs are going up at the moment. We all know that. Labour costs are going up. With a royalty trust, that doesn't matter. They just get the percentage of the revenue. So, they don't have to build anything. They don't have to dynamite any iron ore. They don't have to pay any wages. They just get a cheque every month. We like that a lot.
MF: So why do mining companies create these loyalty trusts? Because they just seem like they do nothing and receive money!
HD: Well, for example, Deterra's thing is they own the land. They own the resource.
MF: Oh, they're the landlord.
HD: Yes. BHP came in there. It has nothing to do with BHP. BHP as the operator, the asset, they needed more iron ore. Their existing nearby mines in Yandi were winding down. They needed to expand it, so they've come in and said, "Okay, we'll do this, and you get to clip the ticket."
It's probably not ideal for BHP, but it's very good for the royalty trust shareholders. It's a much bigger asset class, particularly in Canada, and also more in precious metals.
MF: I see. And that's how it links back to your fund.
HD: Yeah, so it's a trust structure. Everything gets passed through, which is great. So, the EPS, earnings per share, equals the DPS [dividend per share], minus a fractional amount. There's, I think, five people in head office. So, yeah, it's a good little asset, and I think the value of that will be realised over the long term too, quite well.
The other thing we've been buying a lot is Atlas Arteria. That is a group of toll roads. It's listed on the ASX. A group of toll roads in eastern France. That bounced back much faster than we expected when the lockdowns were opened in France. Has extremely low cost of debt. Great set of assets. Dividends are growing quite strongly.
It gives a bit of a guidance for Transurban Group (ASX: TCL) shareholders in what happens when lockdowns get lifted. People are not catching the trains, but they're happy to drive, and moving around a lot of goods. Online shopping.
So we like toll roads. And especially where the revenue goes up each year. Automatically increases each 1st of July with inflation. Unlike a lot of companies, where you have to sort of bargain with your customers to increase your prices, with toll roads like Atlas Arteria or Transurban, it's a couple of clicks on a keyboard on the 1st of July and it automatically goes up. There's no bargaining, no sort of anguished meetings. It just automatically increases.
MF: So both Deterra and Atlas are mainly dividend plays. But do you also look at capital growth?
HD: We'll see a bit of capital growth. BHP are expanding their operations on Deterra's assets, so they'll increase. As the revenues and as dividends increase, you'll see the price increase.
So a bit of capital growth. But running an income fund, I'm very conscious of owning companies that have a high and quite stable dividend yield.
Because when I'm writing calls over the top, I've got in the back of my mind, I need it to deliver 7% to investors. And so, there's little tolerance for companies that are not paying strong dividends and stable dividends, because that volatility is difficult to handle.
