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, Elvest Co portfolio manager Adrian Ezquerro tells what he'd do with a trio of ASX shares that have plunged in 2022.
Cut or keep?
The Motley Fool: Now let's take a look at three ASX shares that have fallen a heap recently, to see whether you'd buy or stay away.
The first one is Hansen Technologies Limited (ASX: HSN), which has dropped more than 20% since reporting season. What are your thoughts?
Adrian Ezquerro: Hansen's a stock I've followed for a long period of time. Over 10 years now. And I agree, it's certainly been a topical stock coming out of reporting season.
For those who are unaware, it's a utilities billing software company. It's got a fantastic long-term track record with an owner-manager again at the helm. In fact, I think its compounded EPS [earnings per share] is close to 20% per annum over the past 15 years. Been [an] incredible performer.
Specifically the FY22 result, the result itself was in line with expectations. But I think the outlook largely disappointed. So we're looking ahead in terms of management guidance to slightly lower margins, probably more modest top-line growth than what may have been expected.
But really, the reaction for us, to a degree, provides potential opportunity.
History suggests Hansen excels in executing really value accretive M&A. They've done it for many years, have got a great playbook and they've added a lot of value for shareholders over the past 10 or 15 years.
As they're currently placed, they've got a strong balance sheet. We think in this market maybe vendor expectations might be becoming a little more realistic and the business is on a circa 7% free cash flow. We remain pretty optimistic on Hansen's prospects.
In this market, of course, it pays to be patient. Take your time. We'd say it's probably a buy for a moderate position in a diversified portfolio, particularly for investors with a pretty long-term time horizon.
MF: The next one is online fashion retailer City Chic Collective Ltd (ASX: CCX). The share price has lost almost 70% this year.
AE: It's always nice in hindsight that you can look back and say that prices have clearly stretched for what we think is still a pretty good quality business. I think it's done well to get a growing position of emerging leadership within its niche, which is plus-size ladies' fashion.
As you say, it's largely via the online channel. We think we've now got a pretty good foundation to grow its business and that's on a global basis. Like Hansen, we think it's not without risk, but it's probably a buy for small to moderate weight in a diversified portfolio.
I think the current market price of about 12 or 13 times forward earnings more than fully accounts in value for some of the concerns related to its inventory balance.
More on that: the recent result was topical in that FY22 earnings were largely in line with previous guidance, but inventory was clearly higher than what was expected and that's clearly spooked some investors.
Management did flag strategic investment in inventory last year, and that was particularly around non-seasonal or evergreen clothing that will sell regardless of the time of year. And it did that from our discussions largely as it sought to diversify its supply chain.
Once upon a time it was almost exclusively procuring product out of China, and I think in our view it's quite sensible to seek to diversify that. Now there's a ring around southeast Asia where they're procuring product. And in order to secure that, they've had to put in initial orders from really different suppliers.
Now management have actually guided to a running down of that inventory over the coming year, and this "we feel" will be a powerful driver that will release strong free cash flow if and when achieved.
Certainly one to watch and we're leaning towards a buy at this point, City Chic.
MF: The third one is Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), which has painfully dropped 43% year to date.
AE: Yeah, I'd suggest it's a hold. If you're in there, for what it's worth, I'd probably hold on.
I mean, it was a very clear COVID beneficiary and they were really forthright about that. Basically said that hospitals were anxious about the potential impact and the strains that they might feel as a result of the impacts of COVID. The CEO himself actually said that they had 10 years' worth of demand pushed into two years. They ramped up production and fulfilled that need. Clearly, there's a bit of a glut sitting within their customer base. It was a clear COVID beneficiary and I think the recent difficulties and a subsequent share price reaction reflects the unwinding of the trends that we saw through COVID.
Earnings [are] now being rebased to perhaps a greater extent than what consensus was expecting, yet it's still trading at a pretty significant premium in terms of earnings multiples, et cetera.
To be fair, I think Fisher & Paykel is a high quality business, it's really well placed with a strong brand and product set that's been around for a long period of time. It's got a great track record of execution. While I'd say it's a hold on valuation grounds and while this excess inventory sort of pushes its way through, it's certainly something I'd be very happy to have on the watch list of interest for the coming year or two.
