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, Tribeca Investment Partners portfolio manager Simon Brown presents the three ASX shares he would buy right now.
Hottest ASX shares
The Motley Fool: What are the three best stock buys right now?
Simon Brown: Yeah, there's a few names that we've been talking about recently. We've liked Champion Iron Ltd (ASX: CIA), which we felt is a green steel play.
It's had a little bit of press recently — we like the fact that the whole decarbonisation thematic is one that's going to endure for a number of years. Green steel is a space that [isn't] really talked about a great deal. There aren't a huge amount of ways to play in that space. But steelmaking is a very carbon-intensive industry and, if we're going to get to net zero, is going to need to be tackled.
We feel like one way of doing that is by higher-grade iron ore and that's what Champion has. It has 65% of its energy needs met by hydroelectric power, which we think is very good. It's in its tier one jurisdiction in Canada. We think it's very cheap, particularly given its trades in relation to some of the more mature and better-known iron ore players such as our Australian-based names in the Pilbara. We think it's much faster growing than that.
It has the environmental attributes that you want as we transition [to net zero] — there'll be more demand for their product.
You've got a play on the stimulation that's going on in China with regards to infrastructure and property spend… [But] we like the stock on a fundamental basis, regardless of what China's doing over the medium term. It's obviously done well lately off the back of the headlines out of China.
MF: The Champion share price has rocketed almost 40% over the past month. That's just because of those macro sentiments, is it?
SB: Yes, you've had the Chinese government come out with some measures to look to support the Chinese property market, which has been going through a very challenging period for 12, 18 months now. So they've released some measures to step in and support that sector. So it's seen sentiment rebound and you've got infrastructure stimulus, which has been put in place to help guide the economy through their zero-COVID and lockdown period.
MF: It's interesting to hear you talk about Champion Iron because we don't hear very much about it.
SB: No, it's not particularly well covered by the market, despite being quite a large market cap. I think the market cap is over $3 billion.
MF: Yes, that's right. What's your second ASX share to buy?
SB: We really like PWR Holdings Ltd (ASX: PWH), which we've held for a long time, spoken about previously, and held since IPO.
We really like the fact that this is an Australian-based company that developed a lot of IP in its area of advanced cooling solutions. They've displayed a really strong tendency to be able to leverage IP into new areas.
Historically they've had a very strong position in motorsport, from Formula One all the way down…, in terms of engine cooling technology. They've been able to take that now and go into aerospace and into the military side of things. That is fairly nascent at the moment but they do have a lot of potential customers they're talking to and looking to provide solutions for. They're proving capability to leverage this sort of IP and technology through the OEM [original equipment manufacturer] space.
They've got a reasonably strong aftermarket as well, which they're looking to expand into more so in the US. They've got a reasonably strong business here in Australia for aftermarket sales but, obviously, a much larger US market there that they haven't really started tapping yet.
So it's a growth company. It comes with those growth attributes in terms of premium valuations. Relative to some of the US stocks within the sectors it operates in, it does trade at a premium. But the return and margin metrics there we think fully justify the premium that it trades at to those other comparable names.
MF: The PWR share price has gone gangbusters in recent times, gaining 29% since the start of October.
And the last one?
SB: A more recent name that we've added to the portfolio has been NextDC Ltd (ASX: NXT).
It's a name that had fallen out of favour with the market and had a reasonably large pullback. [With] interest rates going up, cost of capital going up, and these long duration names within the tech space and seeing a reasonably large de-rate, that's one that got caught up in that sell-off.
But we think it's now down to a level below $10, where you can probably invest with more confidence, given that they have a relatively large installed base of capacity now.
The cost of adding capacity in data centres has gone up quite materially. And these guys are invested well ahead of the curve and now have a fair bit of capacity able to be sold to their key clients at a [lower] cost base.
The market has been a bit impatient because they haven't signed a great deal of new, large contracts recently, but we think that's just the nature of the business. They can be quite lumpy with the large hyper-scale clients. That doesn't mean that they haven't been able to sign a lot of new clients in that government and corporate space. They don't come with the same lengths or size of contracts, but they are quite lucrative.
We expect these hyper scalers are going to need to come to market and sign deals for capacity and we expect at some stage NextDC to announce some of those.
So we think [the share price]'s back to a level that's reasonably good value, particularly in light of a lot of US names that have been historically taken private. We think the valuation stacks up pretty well against where some of those transactions have occurred.
MF: It's a good industry to be in, isn't it? Data centre demand is not something that's going to wane anytime soon.
SB: No… There is potentially an element of data consumption that grew quite materially during lockdowns and during COVID. Even as you pull back to more normalised growth in data generation globally, there's still a reasonably attractive level of growth and a good tailwind to have exposure to.
Read the first part of the interview with Tony here.
