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, SG Hiscock portfolio manager Hamish Tadgell explains why he'd currently buy three particular ASX shares.
Hottest ASX shares
The Motley Fool: So having said the investment environment has permanently changed in 2022, what are the three best stock buys right now?
Hamish Tadgell: We're bottom-up investors at the end of the day. Our three best ideas coming out of reporting season would be, one, Cooper Energy Ltd (ASX: COE).
It's an east coast gas producer, well positioned I think to participate in the current structural shortfall in east coast gas, and particularly in Victoria and the energy transition to a lower carbon economy.
It's had a difficult couple of years with the commissioning of a gas plant — the sole gas plant — which AGL Energy Limited (ASX: AGL) operated for them down in Gippsland. [It] has seen the company not meet its production targets, but we think that's turning the corner. Recently they've taken control of that gas plant. [Cooper] bought it off AGL, and ramping up production, and there's a series of catalysts that we see over the coming 12 months, which I think positions that company very well for a strong re-rating.
MF: For an energy company, the share price hasn't lit the world on fire this year, has it? But that gives it upside?
HT: The backdrop is incredibly attractive. The thematic is incredibly attractive. Now east coast gas prices 12 months ago were probably at $6 to $8. They're now $10 to $15, and we don't see them coming back in a hurry.
More to the point, we think that Cooper's going to have a lot more gas to sell over the next 12 months than they did the last 12 months as a result of fixing some of the plant problems that they've had.
MF: Your second ASX share to buy?
HT: The second one would be Chorus Ltd (ASX: CNU), which is the NBN equivalent, if you like, in New Zealand. It's a virtual monopoly operating the New Zealand fibre network. It's got some 88% or close to 90% of the fibre market in New Zealand.
It's clearly benefiting from the strong continuing demand for data and streaming, which was only reconfirmed through COVID and with people working from home and watching more Netflix Inc and all those sorts of things — the demand has been increasing for those services.
More importantly, the stock's moving from building out the network and the pretty high CapEx over the last four or five years, to [now] becoming an operating asset.
So the CapEx hump, if you like, dropped significantly this year, and we see very strong free cash flow for this stock starting to emerge over this year and the next number of years — and a growing dividend.
When you look at it, it's trading on a free cash flow yield of 8% to 9% on nine times EV to EBITDA. Look at some similar assets. This is a social infrastructure asset, a high-quality asset. Unity Group, which was recently bought by private equity, sold around 20 times EV to EBITDA. And then I look at something like Transurban Group (ASX: TCL), which again, is a high-quality social infrastructure asset, perhaps a little less regulatory risk, but it trades on 23.5 times.
[Chorus] trading on nine… looks incredibly cheap to us for what I think will be a very strong, free cash flow and good dividend growing stock over the next number of years.
MF: And your last pick?
HT: I'd say Qube Holdings Ltd (ASX: QUB). It's Australia's largest integrated provider of import, export logistics. And these are highly strategic assets with very strong, sustainable, competitive advantage, long-term contracts and importantly, pricing power, which I think will be increasingly important in the inflationary environment we're in.
It's proved actually to be a remarkably resilient business over the last 12 months. Its results just last month just showed that despite COVID, inflation, extreme weather events, supply chain disruption, labour issues, and China lockdowns, it's still produced very resilient earnings and growth.
And more to the point, with the company having recently sold, over the last 12 months, sold out of Moorebank. So it was developing a big industrial park up in New South Wales, and a lot of people were concerned that it was really a property play and they'd overstretched their balance sheet a bit, and concerned about the debt levels. Well, they sold that, returned quite a bit of that capital to shareholders, but also paid down quite a bit of their debt.
We see them incredibly well positioned to continue to grow over the next couple of years. At the end of the day, Australia is an island — it's dependent upon imports and exports, and this company's the largest provider of those services. And we think it's an incredibly well-managed business, very well diversified, and it's got some good strong growth prospects over the next few years.
MF: It also gives out a dividend, doesn't it?
HT: Yeah, it does. It's not a high dividend — it's probably only 2% or 3% yield, but it's really a growth stock.
It's, in our mind, a GDP+ type business. The diversification… it's in every part of the economy: retail, mining, agriculture, you think about anything basically that comes in or goes out of Australia, they handle it. So it's a real proxy for the economy, but also [has] been a very good allocator of capital over time and made some very good bolt-on acquisitions.
