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, Alphinity Investment Management portfolio manager Elfreda Jonker reveals which ASX shares she'll happily sleep on for years to come.
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?
Elfreda Jonker: I know the last time when we chatted, I think we talked about Goodman Group (ASX: GMG) being one and I guess that's probably still one, but I'll give you another one today.
And that's Metcash Limited (ASX: MTS).
So that's quite probably a little bit more controversial to hold for four years, but really it's a consumer staple company. Predominantly they do grocery, liquor, and [a] hardware wholesale business. It's in the consumer staples space, which is generally speaking the more defensive side of the market.
Effectively, why we like it is they've got these three verticals. The largest one is the food business. So they've got a really big IGA network, really benefited from that through COVID, but have actually managed to maintain that market share post-COVID as well. So they really have spent a lot of money improving those stores. The next leg is really they're the largest independent liquor supplier in Australia, which is quite a relatively defensive business and that continues to do well.
Then the third vertical leg, which is the one we're actually the most excited about, is that hardware business — particularly a business called Total Tools that they bought, which is definitely exposed to the construction environment and can be a little bit more cyclical.
But the way Metcash has structured the business is that I think they've been very clear in driving a number of different growth strategies. They will be spending a lot of money and, particularly in this environment, we think it is a business that they can leverage a lot from higher food inflation. They've got a relatively fixed cost base. So anything that they can do in order to boost that top line of theirs, either through price or volume, is really, really positive for them if they can manage to maintain those costs.
We think, overall, it's a solid company, high-quality business model, and a very strong management team. We really rate the new CEO Doug Jones. And if you look at the balance sheet, it's strong enough to really help drive this big cap-ex spend that they really want to do now.
At the same time, we don't see it as being super, super expensive. It's definitely not, it's trading on a forward PE ratio of 13 times and the five-year average is around 14. So it's pretty much in line with the long term average, but we do think that you can still see nice earnings upgrades coming through over the next number of years given the strategies that they've put in place.
That's one that we would hold for the next four years. Let's hope that it doesn't come to that!
