*Originally published in Livewire 7/11/16 – Contributing comments by Romano Sala Tenna, Katana Funds Management.
Over the past week Livewire has run a feature on generating alpha through effective investment idea generation and screening. We learned that there is no substitute for meeting with as many companies as possible. Valuable ideas also come from advisers, other investors, monitoring buying and selling of company insiders, attending conferences and reading widely. We also got an insight into the quantitative and qualitative filters that are applied to screen these ideas. So we’ve read the theory, now it’s time to see the processes in action. We asked our five contributing Managers to each share a stock that has recently passed their filters. Insights provided by OC Funds Management, K2 Asset Management, Katana Asset Management, Bennelong Australian Equity Partners and Totus Capital.
Shaver Shop ticks all the boxes
Robert Calnon, OC Funds Management:
Our recently launched OC Micro-Cap Fund added specialty retailer, Shaver Shop Group, (ASX:SSG) to the portfolio after its August market update. The OC team met with Management several times before the July IPO including a site visit to its flagship Melbourne Central store, and cross-checked our analysis of the business with various contacts in the retail space. Cameron Fox, a former Gillette executive, who has been in the business for 10 years, has a material stake in the company and is clearly passionate about the products SSG sells. He is ably supported by a strong management team including a highly rated CFO in Larry Hamson. Shaver Shop operates a relatively straightforward business model (high street retailing), has strong brand recognition, and a long-term track record stretching back to when it was founded in 1986.
Ongoing earnings growth to rerate Think childcare
Nick Leitl, K2 Asset Management:
Think Childcare Limited as a company is well placed to deliver strong shareholder returns. The company owns, manages and operates 35 premium childcare facilities with a clear focus on centres located within 100km’s of Melbourne CBD. The company recently delivered a strong set of results for the Half Year 2016 of Revenues +19% and Profits +45%. The key growth drivers come from their successful strategy execution, targeted at improving occupancy and efficiency in its current portfolio, complemented by further acquisitions. With favourable industry dynamics and a proven strategy, management has the opportunity to grow the business substantially. The company trades on a 1year forward PE-14x and a ~4.5% Fully Franked Dividend Yield. We feel this represents compelling value and the ongoing delivery of earnings growth will prove to be the catalyst for a re-rating.
Michael Hill looking cheap after ASX listing
Julian Beaumont, Bennelong Australian Equity Partners
Michael Hill International is a recent addition. It operates the Michael Hill jewellery stores in Australia, New Zealand, Canada and USA, and a new store format with Emma & Roe. Because it had been listed on the NZX for some time, it has a long track-record from which it can be judged. It’s a high quality retailer, with good profitability, a disciplined store roll-out plan and other growth plans, and in our view, a very capable management team. The opportunity presented because few were looking at it, which meant that the strength of the business and management, as well as its solid growth prospects here and overseas, were underappreciated, and its shares accordingly traded at an attractive valuation.
Premier passes the ten-point checklist
Romano Sala Tenna, Katana Asset Management: (VIEW LINK)
Premier Investments Limited (PMV) is the most recent investment addition to our portfolios. Of the ten key criteria that we mandatorily assess, none is more important than management and more difficult to assess or qualitative in nature. In the case of PMV, we see arguably the best and most successful retail team in Australia, headed by industry veteran Solomon Lew. Furthermore, we see an extraordinary alignment of interests, with the key staff owning approximately 42% of stock on issue. PMV also boasts an attractive valuation, which is ostensibly underpinned by double-digit earnings per share growth over our 3 year forecast period. PMV scores well in respect to operating cashflow and also quality of earnings, which can prove problematic for retail stocks. Return on equity and liquidity are also both reasonable. And given our pre-disposition with capital preservation, the balance sheet is essential to every investment thesis. PMV rates highly in this regard, with net cash approaching $200m plus circa $300m in Breville Group Limited (BRG) stock.
Smartgroup: high yield, low valuation
Sam Granger, Totus Capital
One stock that has recently passed our filters is Smartgroup (SIQ). This is a business that has high reputational barriers to entry. It is capital light and generates a significant amount of cash. Furthermore, the Chairman has been buying material amounts of stock on market as recently as one month ago. We see regulatory risk as significantly reduced for the sector post Federal Labor’s May announcement of its support for the current FBT regulatory regime. Putting this all together, we can’t find any businesses of comparative quality trading at 13.5x CY17 earnings with a 5% dividend yield.