This is not investment advice. Do your research before taking a position in any of the securities mentioned in the post below.
Following on from my previous post, today's post covers the screening process for ASX All-caps. Admittedly I have a skew towards larger businesses here because screening smaller caps often takes a bigger investment of time to research (i.e more management exposure needed) and it is interesting to hear a point of view of well-covered companies
Four VERY different companies on the ASX which do not meet my screening filter are Pro Medicus, AMP, South 32 and ARB Limited.
#1 $PME - A great Aussie tech success story, however, the >100x P/E suggests no competition or contract delays...
Overview of $PME
Pro Medicus has been an absolute darling of an Aussie growth stock. For those who know the stock, I will be brief:
$PME provides imaging software that gives radiologists/clinicians the ability to view 2-D, 3-D, and 4-D medical images, as well as a picture archive and communication system (PACS). It also provides Radiology Information Systems (RIS) proprietary medical software for practice management
In terms of where they make their money today, it is split up as follows
82% is from PACS and 12% from RIS
74% of revenue is from US, 20% from APAC and the remainder from Europe
The labels that they are known for are under the “Visage” brand (e.g. Visage RIS, Visage RIS/PACS, Visage 7, and Visage Ease names.)
Nuances to $PME business
Broker consensus is that $PME will achieve 20-25% NPAT growth over the next 2-3 years, which is marginally weaker than 2021 earnings (33%) but very strong. However, from a valuation standpoint places $PME as expensive given at a >100x P/E
My reason for not investing in $PME is more than the fact it has a 5x Price-to Earnings Growth ratio, my concern is actually two-fold: in the medium term, there may be delays in contract wins and in the long-term, it is likely but not certain, that the will have the best RIS/PACS offering. I would prefer a cheaper price for a 'likely' outcome.
Increasingly, there are several competitors and some of them are making a level of traction (e.g. Ambra Health)
AI will play a leading role in this space, and I am not certain which company will be the leader in this push
Visage remain best in class, however, there does appear to be some rather rudimentary flaws in them (e.g. Ambra Health search function or user guidelines are considered superior to theirs)
Trading at this multiple, the market could punish the business for there being a delay in contract commencement (as you can see these are sticky long-term deals)
On a more positive note: The interesting things about this business include
It is one of the few growth businesses with no need for re-investment and pays a dividend
>56% of the ownership is owned by two founders (Sam Hupert/Anthony Hall) and they are generally incentivised to think longer-term
Conclusion: $PME is an incredible business with a founder-led culture and limited capex requirements. Despite all that, I feel that winning these clumpy contracts takes time and a short-term correction is likely at >100x P/E or CF. Additionally, I am not yet convinced that competitors cannot disrupt them with better AI or better tech (particularly given their market share is not yet dominant). At a more attractive valuation and/or greater market share I would be more inclined to take that gamble.
#2 $AMP - Surely AMP is a value play right? In my opinion - I still do not consider it appealing until after the spin-ut
Overview of $AMP
The AMP name has been around for >170 years and is a household Australian brand, however, today they essentially have three parts;
AMP Bank (solid grower, with weaker NIM)
AMP Capital/Private (best part, but fed by the Advice/Wealth business)
Wealth Management (the worst part, laden with BOLR and Class Actions)
The recent announcement to separate into Private Markets (Collimate Capital) and AMP Ltd by Jun 22 will change the face of this business
The restructure has been painful to date with dis-synergies evident (e.g. Life sale earnings loss, impairment charges on the spin-off, as well as upcoming listing costs for Collimate Capital).
Nuances to $AMP business
AMP one is different to some of the other companies covered in this article
Firstly - there are a few Aussie fund managers who I greatly respect who have recently bought AMP <$0.9/share given its deep discount to NAV
Secondly - I can understand how they arrive at a valuation above today's $3.1bn market capitalisation (e.g. the below would imply >$3.6bn)
Despite all this, the number of changes makes it difficult to forecast earnings because there are a few different elements at play
Ability to properly cut-costs and retain talent (c.$150m planned over 2yrs)
Whether the Advice business can break-even, after remediation, once the Capital business is carved out
Whether star employees will stay at Collimate and/or if enough shares are thrown at them
Whether the remaining FUM of Collimate will be as desirable now their Infra debt business has been sold
Why I may consider investing in the Funds part
After the de-merger, the obvious possible winner will be the Collimate business. Impressively, these funds have a very diverse investor base, however, the question remains whether they will be market-leading in Real Estate/Infra equity
Either way, it is great to see that their cost base will be much more competitive with the remainder of the market
Conclusion: $AMP's demerger has the capacity to unlock a lot of value. However, given the weakness of the Advice business, lack of advantage in the Bank and the uncertainty around how the spin-off will be priced... I am waiting on the sidelines for this one. This is something I will re-visit post-merger
#3 $S32- As a weakling in resources companies - This is actually quite a hard(er) business to understand and I classify it as "too hard"
Overview of $S32
For any that do not remember, South32 Limited spun out of BHP in 2015 when BHP decided it wanted to focus on 4 pillars (Iron Ore, Copper, Coal and Oil).
7-years on, it turns out that that BHP wants to dispose of their petrol operation too (selling to Woodside) and generally simplify their operations
The strategy for $S32 was - anything that does not fit BHP's 4 pillars = $S32's portfolio
This strategy proved to be a good decision because these big organisations often do not fairly value non-core assets in a commodities downturn. One only need to listen to an interview with Owen Hegarty to understand that the majors (BHP, RIO etc) made a number of errors disposing of 'non-core' assets for cheap
Simplifying things as much as possible - the business is driven by the operations of alumina, met coal, manganese, nickel, silver, lead and zinc.
Nuances of $S32
Generally, there is a lot of good assets within $S32, which are located at the lower end of the cost curves and these assets have been sourced from around the world (Australia, Southern Africa, North America, and South America). Split out is shown below
Whilst I understand there are diversification benefits to a basket of commodities, it is challenging to understand the $S32 business. For example
Production levels for each product type: Will the recent weak Manganese output continue. Can the Mozal mine be extended?
Progress and strategy for exploration spending: Is Sierra Gordo a good acquisition, will Hermosa commence when expected and/or should they be running low net cash holdings?
Outlook for commodity prices: Alumina/Aluminium being the most important commodity - what would drive it Alumina from >$360/tonne? Are they investing today in the right base metals?
I confess I am weaker on resources companies, however, this leaves me a bit confused...
Conclusion: $S32 spin-out from BHP was a great call. However, it requires a large amount of bandwidth to know how various factors will perform in the S32 portfolio as opposed to some mining houses where the valuation is 2-3 assets. As such, I just put this one in the "too hard basket". Investors in $S32 could be successful but it does require genuinely understanding a complicated business
#4 $ARB - This is a great business; fully priced. Unlike $PME - my fear is not a rise in competition but the execution of US expansion and cash conversion
Overview of $ARB
The iconic Aussie brand - ARB designs, manufactures, distributes, and sells motor vehicle accessories and light metal engineering works in Australia, the United States, Thailand, the Middle East, and Europe
They have a vertical integration model and a big range of products, which has brought with it huge customer love (as seen below)
Not only that - but they operate in a space where there are tailwinds in terms of how many people want 4x4s
Also and I do not think that the transition to EVs to curtail that demand level in the immediate term (unless a leading EV player completely designed their own line of suspension and accessories)
Nuances behind $ARB
Firstly, before I start on the company, I consider the long-serving board of $ARB to be one of the greatest things about ARB (c.17yrs service/68yr average age). This is why Bennelong has been a long-standing investor in the company
For the company itself - the premise of my concern is quite simple and has three parts:
they have operated in the US for 11 years now and yet cash generation from the US has actually been quite minimal. This is despite the business being ripe for market share in the US
2. The prevailing operating environment is strong - (e.g. PBT margins of 25.3% in 1H22 vs. 18.5% average seen over 2009-19) and even then the business is trading on a very high multiple of >40x
3. Cash conversion is quite poor because in the last three years they have had to spend >$75m on capex and $35m on acquisitions. Although this will drive growth - it is hard to know whether today's strong margins are due to capex or the market being hot
Conclusion: In terms of Brand Equity - I would say ARB is up there with Australia's best (e.g. Dominos, Breville or REA). That being said, I would say the culmination of a) slow traction in the US b) historically high margins c) lower cash conversion/higher R&D spend has meant that I do not think it is appealing to buy this business on >33x earnings/op cash flow. Even founder Roger Brown thought it was overpriced at $49 and sold 1m shares. Notwithstanding this - it is an amazing business and I would definitely consider it on a more attractive multiple or if it gathers traction in the US.
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