Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Redpoint Australian Equity Income Fund portfolio manager Max Cappetta names three ASX shares he'd buy right now, which all pay out dividends.
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The Motley Fool: What are the three best stock buys right now?
Max Cappetta: First one is Orora Ltd (ASX: ORA) — a packaging company.
They operate in about 70 countries. Key markets are, obviously Australia, but also North America. Now, for people that may not know the company name, there's every chance that you interact with Orora many times every day, because they provide bottling and caps, aluminium beverage cans, soft packaging boxes, and cartons. They're really the dominant player in Australia.
They're less dominant in North America. And I think this is the interesting part of their business because being able to grow their market share in North America really gives them an interesting growth runway over the next couple of years.
Now the company has a stated payout ratio of around 60% to 80% of their net profit after tax (NPAT). So at the moment, with the share price having fallen down recently, it's at a pretty attractive yield of 4.5%. That's unfranked, so you do get that cash dividend yield and look, it's about 30% below its pre-COVID price of $4. We think that this looks pretty attractive for a globally diversified business that is quite defensively positioned overall, in providing all of this packaging across a range of markets and products.
MF: It's fallen about 8% just in the last couple of trading days. No concerns there?
MC: It really wasn't about the company. It was more that really one of the brokers downgraded their view to hold. I actually think … there's probably a little bit of an overreaction, and that this probably presents a really good buying opportunity for a business of this quality, given their cash flow and their profitability.
MF: And the second one?
MC: The other one is sort of related, Endeavour Group Ltd (ASX: EDV).
Again, people may not recognise the company name — but you've probably done business with them many times, particularly if you've been to a Dan Murphy's, or to a BWS, or if you've actually gone into one of their 340-odd hotels that they own around the country.
Endeavour was spun out of Woolworths Group Ltd (ASX: WOW) last year, and, at the moment they have 75% of their revenues derived from beverage distribution and 25% comes from their hotel portfolio. We think that it has this real interesting balance of operating within public venues, as well as beverage supply to venues and retailers.
It's not as strong [as Orora] in terms of its gross yield. So again, for income-focused investors, as we are in our Equity Income Fund, the gross yield is 3.2%. That does include franking credits.
The other thing is it has been a standout performer so far in 2022. While the market has gone backwards, it has actually risen to $7.80 from around $6.80 at the start of the year. We still find it attractive. We think that the benefits of it now being a standalone entity enables management to clearly focus on converting really what is their absolute market-leading position into profit margin improvement in the years ahead.
MF: Does the market like it because it expects the hotel side of the business to grow now that people are more out and about in the post-lockdown era?
MC: Yeah, absolutely. And I think this was one of the real interesting standouts for this business over the last couple of years, whereby when public venues were obviously constrained through COVID, they actually picked up more in terms of their retail and distribution of beverages through the retailers of those beverages.
So what we see is that there is this nice diversity, and as we're starting to see people obviously get back out and about in hopefully a post-COVID world, then they do actually pick up that incremental uplift through having that portfolio of around 350 venues around the country.
MF: Your third pick?
MC: The next one is WiseTech Global Ltd (ASX: WTC). This is one in the IT sector. Yes, it has actually fallen along with the broader IT sector over the last few months. But, for those that don't know WiseTech, it is a global logistics software business.
I think one of the real things that we like is their very impressive history of being able to grow revenue and to actually improve their profit margins year on year.
Even today, it's not the kind of company that you would call a valuation pick — it trades at around 80 times next year's earnings or FY22, which will be reported shortly. But it does have a global dominant position.
The thing that we like is that it has been able to grow its profits faster than the growth in its revenue, and that's a really nice metric that you want to have behind some of these growth stocks, because that's what the market really wants.
Now, in terms of the fallback in its price, it is now probably back in line with its pre-COVID highs. However, its profit expectations for financial year 2022 is actually about three times what it earned in the financial year ended 2019.
MF: Wow.
MC: It has had this really great profit expansion, but as I said, even today it does trade at a forward PE of 80 times. There obviously still [are] massive growth expectations for the company. But if you think about it, if they can triple earnings again, over the next three to five years, we don't actually expect that it'll be trading at 25 times earnings in three years' time because just those profits have multiplied.
So, yes, there is risk in terms of interest rates in the broader IT sector, continuing to weigh on that valuation. But obviously the one thing that we like is that it is a profitable business. We see that there's profit growth through a market-leading position. As I said, their ability to grow profit faster than revenue, if they can maintain that, then for people that are looking for that IT growth thematic within their portfolio.
It also pays a dividend, albeit very low yield.
We think it could be one to keep an eye on, given how far it's fallen back to date.
MF: For these tech businesses, once they get to that maturity stage where they do make a profit, it's much easier going than earlier stages, isn't it? Because they've got their product already made and it's just scalable at the press of a button?
MC: Absolutely. That's exactly right. And that's one of the key things that we do like about the business, that software is very scalable. And if we do start to see supply chains, cargo movements, et cetera, returning back to normal, I know we're still talking about higher inflation, which means higher interest rates and maybe lower global growth, but if you are taking a longer-term view, then it's a stock that you'd say in that industry would be worthwhile having exposure to.
