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, 1851 Capital portfolio manager Martin Hickson analyses what he would do right now with four small-cap ASX shares.
Cut or keep?
The Motley Fool: Let's take a look at three ASX shares that have plunged this year, and see if you think they're a bargain to buy now or if you'd stay away like the plague.
First up is Frontier Digital Ventures Ltd (ASX: FDV).
Martin Hickson: FDV, share price down just over 50% so far this calendar year. What they do is they own a number of real estate portals through southeast Asia, Latin America, and Pakistan… They're basically the realestate.com of a lot of those emerging markets. They've got a number of portals in emerging markets.
The reason why the share price has been so weak is it's been caught up in that overall [slide of] technology stocks. We like it. We've been buying more recently.
They've recently announced to the ASX that they plan to list both their Pakistan asset, which is Zameen, and their Latin American assets they plan to list on the NASDAQ. Our valuation for those two assets alone gives a valuation north of $1. Their shares are trading at 70 cents, and you've got those catalysts in terms of potentially listing or spinning out those assets and IPOing them separately, which should provide a strong readthrough for the overall valuation of Frontier Digital.
Again, it's trading at a very cheap price, and with catalysts, it could potentially rerate the current share price.
MF: Let's get your thoughts on DGL Group Ltd (ASX: DGL), which has also roughly halved this year?
MH: It's gone from $4.50 to $1.50 over the last six months.
Despite that strong share price fall, we're still not a buyer of DGL. We think that since listing, they've grown too quickly, they've made too many acquisitions too fast. From the outside, it's hard to understand how much integration has gone on with a lot of those acquisitions.
If you look at their FY22 results, as well, there's a couple of big one-offs that drove their earnings. They were a big beneficiary of the higher AdBlue prices around Christmas time. They were also a big beneficiary of the lead price through FY22. We think some of those things won't repeat this financial year.
The most recent result, they delivered a very poor cash flow outcome. There's been high staff turnover. They've been through three CFOs since listing 18 months ago. There's a few reasons there that's really keeping us on the sidelines at this point.
MF: The third one is familiar to a lot of people, Beacon Lighting Group Ltd (ASX: BLX), which is down about a third this year.
MH: Yeah. As the name suggests, they're a retail lighting company. The share price has been weaker around fears of a potential slowdown or a recession in Australia. That will obviously impact their retail lighting business.
The reason why we like it is they've also got two other parts of the business, which we think can support their earnings in a potentially overall weaker consumer environment.
They've got a trade business which represents around a quarter of the company's earnings, and that's growing very strongly. What they're doing there is they're selling lighting but also electrical products to electricians in that trade space, and they've got offers like free three-hour delivery for tradies.
That's a point of difference, something that can take share in that trade space. They've also said that, in three years' time, they're targeting that trade business being half their earnings. If they can get to that outcome, from 25% today to 50% in three years, that will be a very strong tailwind for the overall earnings of the company.
They've also got an international business where they're selling products internationally, particularly into the US, and again, that's growing quite strongly. They're taking share in the American market. Again, that will support the company's earnings in a potentially weaker consumer environment.
MF: Fantastic. Is that one you hold?
MH: We do. We hold Frontier Digital and Beacon.
The ASX share for a comfortable night's sleep
MF: If the market closed tomorrow for four years, which stock would you want to hold?
MH: It has to be something with defensive earnings, given the current volatility and uncertainty across the world, so something like an insurance broker, like PSC Insurance Group Ltd (ASX: PSI), that's very well-managed, high levels of insider ownership, and they're obviously benefiting from the higher insurance premium rates cycle that we're seeing.
The cyberattacks that we've seen here in Australia in recent times [are] only going to be a further tailwind for insurance premiums, and PSC Insurance are likely to be a beneficiary of that. That's one that I'd be comfortable holding over that four-year period.
