Talking Stocks Part 1 – with Senior Investment Analyst Sam Koch and Investment Dealer Will Thompson, hosted by Camilla Cox.
Transcript
Camilla Cox: Hello and welcome. My name is Camilla Cox. I’m a Senior Corporate Affairs Advisor here at Wilson Asset Management. Today, the small cap team have joined me, Will and Sam. Welcome. Let’s chat through a couple of stocks that you’re focusing on at the moment.
We’ll start with you, Will. Emerald Resources (ASX: EMR), they recently had the bullseye takeover. Are you bullish?
Will Thompson: Emerald Resources, we’re really bullish. Morgan has, yes, bought this bullseye. Finally, it’s taken a lot of time. Morgan is the CEO. There was a few different intricacies within that and it was complex, however now it simplifies the story. They’re going to have a second asset in Australia within probably 18 months, while also they’re producing asset in Cambodia, which is a low cost producer at $900 per ounce when the gold price is currently trading at $2 ,400 USD at the moment, so it’s a great margin.
They’re going to use that cash flow to fund all their growth. We think that could be a 400,000 ounce producer within a couple of years and on that basis it’s cheap.
Camilla Cox: Sam, Nick Scali (ASX: NCK) just raised some capital to fund their expansion into the UK. What is your outlook on them now?
Sam Koch: Yeah, Nick Scali is the renowned furniture retailer that we all know operating in Australia and New Zealand. It’s founded, owned and operated by the Scali family and they’ve been very successful in Australia. Ever since listing for a dollar a share it now trades at $15 a share. They have recently announced their acquisition to the UK alongside their first capital raising as the company listed on the share market. We believe this could be an absolute cracker for the business. If you look at the playbook, effectively what they did with the plush acquisition recently, where they were able to turn that business around, strip costs out and really improve the operating performance of those stores. We think there’s an opportunity to do the exact same in the UK.
What’s their edge? Nick Scali is effectively buying the best product at the best price and is ruthless on costs.
If they play that same playbook in the UK into a much bigger market, we see a lot of opportunity there. It’s trading at 15 times PE. Offshore retailers trade at around a 25, 26 times PE a year. The catalyst for us to potentially close that gap is execution in the UK.
Camilla Cox: Will, Judo (ASX: JDO) is a small Aussie bank. They’re trying to challenge the big four. What are your thoughts about them?
Will Thompson: Judo can be a complex story, but to keep it simple, they are challenging the big bank. They’re exposed to loaning to the small and medium enterprises in Australia, which are actually high quality businesses, and its business bankers are really focusing on working with the managers and CEOs on helping the company expand for growth. We think they’ve got an edge on the big four because the big four are too worried about risk and making sure that they’re not going to lose money. Whereas, Judo are focused on losing money, but they’re also trying to help these businesses grow. And for that, they charge an extra margin and a higher margin. We think that there’s going to be some volatility in the net interest margin over the next couple of quarters. However, as you get to the back half of FY25, it’s going to look really good. We think that investors will start to see the earnings potential quite soon. So yeah, we’re bullish.
Camilla Cox: Sam, Supply Network (ASX: SNL), they’re basically keeping trucks on the road. Why do you like them?
Sam Koch: That’s a great summary. Supply Network is an aftermarket provider of parts and services to the commercial vehicle market. As you said, they literally just keep trucks on the road. We really like them. So this was founded and owned by Chairman Harry Forsythe back in the late 1980s. And it’s just been this beautiful compounder where they’re actually generating the highest organic growth in the market. the best margins and the best return profile versus all the other peers.
Now what’s their edge? They deeply understand the customer. This customer isn’t necessarily price sensitive, they don’t want to nickel and dime on a penny here and there. They care about making sure that the truck is still on the road delivering the essential services for Coles and Woolworths and the like day in day out.
In order to do that they understand that delivering best service and the best availability of stock is key. We believe this undervalued and under research company is similar to like the strong compounders in the US like O ‘Reilly and also ARB here listed domestically. Those companies trade on 25 to 30 times earnings. We believe that a similar multiple can be attained for Supply Networks over time and the catalyst is continued execution and earnings upgrades.
Camilla Cox: Will, next on the list, LGI, Landfill Gas (ASX: LGI). Do you like these guys?
Will Thompson: Yeah, we’re really bullish LGI. We’ve been an investor in it since the IPO. To keep it simple, they essentially just debate gas and turn it into energy. And councils want them to do this because it lowers their carbon emissions. Then they are able to make money off the energy prices and they can earn accues which is carbon credits and they can also sell into the energy market. Where the real upside is which we’re most recently excited about is the ability to put batteries around every landfill which means they can make the most of the price volatility. They’re going to be selling energy into the market at a higher price and that should result in higher earnings. It’s going to take some time, it’s going to be three or four years but what this business looks like in three or four years could be great.
Camilla Cox: And Sam, Paragon Care (ASX: PGC) recently announced that merger with CH2, what do you think the outlook is there?
Sam Koch: Great question. Paragon Care is actually a distributor for medical devices and it has announced the merger with CH2 which is a wholesale pharmaceutical distributor which effectively makes sure that all of our medicines is in pharmaceuticals for us to buy. CH2 is a fascinating business and it’s actually 50% owned by the current CEO. He’s grown that from zero revenue in 2016 to over $3 billion in revenue as at now. And a lot of their successes come down to really managing working capital tightly and providing, probably the industry’s lowest price. As a result of their significant share growth, they’ve been able to demonstrate significant operating leverage and we believe the combination of the two will see further growth as a combined business and also potentially upgraded revenue and cost synergies into the future. We are bullish on paragon care and for the merge entity as well.
Camilla Cox: Fantastic. Sam, Will, thank you for your time and insights and thank you for watching.
