S&P/ASX 200 Index (ASX: XJO) shares can be quality businesses that are trading at a good discount. The investment team at the Contact Australia Ex-50 fund have outlined three businesses that look unmissable.
The Contact fund managers believe that investor sentiment domestically remains "too negative". They noted that economic uncertainty is not new – there's "always something to worry about and the bear case is often easier to believe."
Higher interest rates are creating "headwinds" for valuations and consumer sentiment, but Contact also pointed to several positive signals including:
- Unemployment at record lows, a "critically important metric"
- Earnings expectations have "moderated significantly", particularly in consumer-facing industries where consensus forecasts now expect a significant reduction in year over year growth
- Cash positions remain above average for a lot of investors, which would help in a market decline
The fund manager thinks that investing in quality businesses for the long term will continue to do well. Contact believes that market multiples are not "excessive by historical standards", particularly in the S&P/ASX Small Ordinaries Index (ASX: XSO) which suffered in 2022.
With that in mind, there were three ASX 200 shares that it pointed to in its latest monthly update.
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Ampol Ltd (ASX: ALD)
Ampol describes itself as the nation's leader in transport fuels. It was previously called Caltex Australia. It supplies the country's largest branded petrol and convenience network (with 1,900 branded sites, including around 690 company-operated retail sites), as well as refining, importing and marketing fuels and lubricants. Across its retail network, it serves approximately 3 million customers each week.
It also has a growing presence in New Zealand as the owner of Z Energy Limited. It sells approximately 40% of all fuel volumes across the country. Ampol also owns a 20% equity stake in Seaoil, a fuel company in the Philippines.
Contact said that Ampol recently reported a "solid" quarterly update, which highlighted the "continued improvement in retail shop and fuels profitability". It continues to generate "sound refining margins" as well.
The fund manager said that Ampol is trading on a single-digit price/earnings (P/E) ratio multiple and a fairly high dividend yield. The investment team believe it's "attractively priced".
Deterra Royalties Ltd (ASX: DRR)
Deterra owns royalties, with its key exposure being to iron ore which relies on the BHP Group Ltd (ASX: BHP) mining area C (MAC) royalty. Deterra receives an ongoing royalty of 1.232% of Australian free on board (FOB) revenue from the MAC royalty. Plus, it receives extra revenue for increased annual mine production above a certain level.
Contact said that the ASX 200 share is benefiting from strong iron ore prices, despite the production of mining area C being marginally below expectations.
The fund manager pointed out that Deterra generates "outstanding" returns on capital and offers a "compelling income stream"
TPG Telecom Ltd (ASX: TPG)
TPG is a telco that owns a number of brands including TPG, Vodafone Australia and iiNet.
Contact pointed out that Vodafone Australia announced price increases for its mobile plans.
The fund manager noted that the ASX 200 share's lowest-priced plan had increased by 13% to $45 per month with no additional data.
The investment team also said that the mobile market is now "more rational and operators are delivering average revenue per user (ARPU)". Contact said this bodes well for earnings stability.
