Talking Stocks – Small to mid-cap team
with Senior Investment Analyst Sam Koch and Investment Dealers Will Thompson and Cooper Rogers, hosted by Camilla Cox.
Transcript
Camilla Cox: Hello and welcome. My name is Camilla Cox. I’m a Corporate Affairs Manager here at Wilson Asset management and today I’m here with the small and mid-cap guys Sam Koch, Will Thompson and Cooper Rogers. Thanks guys.
Will, these guys are pretty well known, Beacon Lighting Group (ASX: BLX). Why do you think they’ve got strong upside potential?
Will Thompson: I think most people would know them as the retailer, so you go and you buy your light fittings or a new light. They’ve also got the ceiling fans so we’re kind of hoping for a hot summer because it usually means that they sell more fans during that period. I think probably the most interesting thing at the moment is during the COVID period they tried to break into the trade segment and trade’s a big segment. You might think of an electrician just going to buy cabling but the electrician will also go and buy a ceiling fan on behalf of the customer or maybe they’re buying a light fitting or switches and there’s a really good piece there where if Beacon Lighting can educate the trade customer instead of buying the cheap fitting, if they can upsell them to the more expensive nicer fitting and then he or she can upsell the end client, there’s a big piece where they can really grow their revenues and grow margins. So, you’ve seen in about three years they’ve gone from probably about $20 million to $30 million, they didn’t disclose it to over $100 million trade sales. So I think we are at a really interesting point right now where trade can continue to grow with the Australian consumer potentially coming back now that interest rates have stabilised and renovations are going to happen. You’ve got this great retail business and I think at the moment when you chat to management they’re still very under-penetrated in trade across all their store network so I think it’s really exciting not just over the next year but the next five years about what potentially that could be.
Camilla Cox: Sam, if we head across the ditch, the team have been pretty keen on New Zealand lately, so what’s your outlook for Mainfreight (NZE: MFT)?
Sam Koch: Mainfreight is one of those global success stories originally founded in New Zealand. From our perspective, the success of this particular logistics company comes back to the fact that they’ve decentralised their business model. That means they’ve empowered each one of their branch managers, whether it’s in Australia, New Zealand, the US or Europe, to take accountability of their decisions and accountability of Profit and Loss (P&L). Ultimately, these branch managers are well-rewarded for their success and Mainfreight discloses how much bonus they actually pay up to the branch managers each year. Now, at the moment, Mainfreight is one of those high-quality businesses that are caught up in a cyclical headwind for want of a better a word. The environment for logistics companies globally with the economy slowing under pressure of interest rates and inflation has meant that trade has come back. From our perspective this is a great time to be adding to high-quality cyclicals like Mainfreight because they’ve been adding capacity during this time and that means on the other side of the cyclical rebound you’ll get a supercharged earnings profile, so we’re really excited about Mainfreight and the opportunity.
Camilla Cox: Fantastic. Cooper, to you, Firefly Metals (ASX: FFM), they’re on the hunt for copper at the moment, so what’s your outlook for them?
Cooper Rogers: Yeah, they are. It’s a company in Canada. We really like the management team there. They’ve proven that they can progress projects into production before, so they’re really out there trying to prove that there’s mineralisation beyond the current resource over there. They’ve just raised $65 million so that’s in the tin and there’s no risk of raising and now they can go out and actually prove that there’s more copper in the ground there. They’re looking for parallel loads and they’re also currently halfway through an extension decline. They’re going to put an underground drill rig and test for more mineralisation below or down plunge of the current mineralisation. So we’re really looking forward to those kind of drill results coming in over the next few months. It also has a resource update, which is happening this month as a catalyst. That drilling that they’re doing now is not part of that, so that’s further upside down the road. We really like the company and the management team and that’s a buy for now.
Camilla Cox: Thank you. Now, we were just joking if the leave balance wasn’t so low, we’d use these guys for a trip booking. Webjet (ASX: WJL), how do you like them?
Will Thompson: Webjet have recently demerged and I won’t go into the bigger Webjet part of the company, but they’ve demerged the OTA business which is the online travel agent. I don’t know about you Camilla, but when I go and look at flights and I’m trying to find the cheapest and most convenient, I go to webjet.com, search and find the flights and often the sort of more value end, so it was your Rex and your Jetstar, it’s actually cheaper to book through Webjet. So this business has been demerged, it hasn’t had a focus within the bigger group for a long time and it’s got new management. They’re going to focus on the branding and on the product offering by doing auxiliary services like insurance, cars and hotels. It’s now sitting with an enterprise value (EV) of about $240 million sitting on $90 million in cash. So there’s potential that they’re going to go out and buy some other things. There’s a really good international piece to it as well and I think it’s totally undervalued by market because everyone wants to look at what’s happening in the big company and this has just been shafted off to the side. So, I think it’s really interesting and it’s an evaluation that I think is quite compelling as well.
Camilla Cox: Fantastic thanks Cooper. Not one we’ve spoken about before on here, Wagners Holding Company (ASX: WGN). What do they do and what’s your outlook for the company?
Cooper Rogers: Wagners is involved in construction materials all up and down South East Queensland so concrete prefabrication works and the likes. They smashed it out of the park in FY2024. They came in with an earnings before interest and taxes (EBIT) of $40 million versus the guide of $31 million to $33 million. So, I suppose the market was really happy with that. There is a perception out there that there might be a bit of an earnings hole in FY2025 because $12 million of that $40 million EBIT came from the Sydney Metro contract, which finished in Q3 last year. However, consensus has come down to meet these numbers. We think the industry is undergone price rationalisation after Boral was swallowed by Seven Group Holdings (ASX: SVW). So, they’re increasing margins and the construction materials business is delivering really well. We expect an increased focus on inventory management and cost discipline across the group to see them outperform consensus numbers in FY2025. An added catalyst on that is if they can win any other precast work or prefabrication work to fill that hole.
Camilla Cox: Fantastic thanks. Will, you’ve previously been quite positive on these guys Playside Studios (ASX: PLY). Is that still the case?
Will Thompson: It is and it’s been struggling a little bit because the market really isn’t happy with how they’re performing in FY2025, but I think it’s so short-term focused and really should focus on 2026. So what Playside do as an example is it’s like a movie developer like Pixar or Disney these guys do it for games. Someone comes up with an idea and then they turn it into a game and they publish it on your iPhone or PlayStation or an Xbox. I think they’re really good and the feedback in the market is that the games they’re creating are really good and as they’ve grown the business away from what they used to do which was more work for hire and now they’re going into doing their own things. They have released a game over the weekend called Kill Knight which has got really good early feedback and then next year they’ve done a few publishing deals. They’re going to be releasing a Game of Thrones game and then they’ve got another one called Mouse. What I like about them is as they mature and as they progress they’re going to be churning out bigger games and the potential for earnings is going to be a lot bigger. So, I think while the investors are focused on how FY2025 isn’t going to be very good, as soon as we get closer to FY2026 people are going to start to value what that earnings growth will be and I think investors will be surprised about how well, hopefully, that earnings growth can go.
Camilla Cox: Sam, Nick Scali (ASX: NCK) are going to the UK and it’s the first time they’ve gone global. Do you think it’ll be a success?
Sam Koch: We do. Nick Scali is obviously the well-known retailer that we’ve talked about in the past. Their ability to gain share locally, ability to actually increase margins and allocate capital efficiencies is somewhat unparalleled in the local market. What actually drives that is their ability to actually buy really cheaply from, with scale, from their suppliers over in China, and they’re going to be leveraging that into the UK as well. Earlier this year, they made an acquisition of Fabb Furniture, 20 or 21 stores in the UK. Having been on ground and through some contacts. It looks like there’s plenty of opportunity to improve the performance of Fabb Furniture. You know, if you look at just the financial metrics versus, I guess, Nick Scali here locally, they’re like apples and oranges. And we see a real opportunity for this to be a 20, 30, 40 store network over time. We believe that Nick Scali isn’t really priced for that at the moment. Trading it probably at a 50% discount to its global growth peers, and should Nick Scali execute principally on product, the stock will ultimately re-rate on gross margins.
Camilla Cox: Cooper, Tasmea (ASX: TEA), they had their initial public offering (IPO) in April, they’ve been performing well ever since, what does the rest of the year look like?
Cooper Rogers: Yeah, we will still get to find out. I suppose that’s a question we’re always trying to answer, but the Tasmea tornado as we refer to it internally has been picking up pace since its IPO in April. It’s been going extremely well. It came out with a business objective to grow organically and also via acquisitions. The company’s proven both those things over the year. So, it’s acquired three companies extremely well and it’s also growing organically around 15%. It’s had a great movement in the last month so we’re kind of looking at its valuation from here. The next catalyst is upcoming AGMs where we expect them to reiterate that organic growth. The thing we really do like about the company is its long-term incentives. Management is incentivised to get EBIT up to $110 million and that’s compared to the last year’s EBIT in FY2024 of $55 million so it’s considerable growth. So management are really aligned with shareholders. Yeah, we think it’s one to watch.
Camilla Cox: Great. Sam, let’s talk about Paragon Care (ASX: PGC) for a moment. The Sigma Healthcare (ASX: SIG) and Chemist Warehouse merger, how could that impact the company?
Sam Koch: The Sigma and Chemist Warehouse merger will be a material benefit for Paragon. Stepping back a bit, Paragon Care has recently gone transformational merger with the unlisted CH2 Clifford Hallam Healthcare. CH2 is a pharmaceutical wholesaler that was founded and run by David Collins. He owns 50% of the business and now owns 30% of the stock on market. What he’s been able to do is grow CH2 from zero revenues in 2016 up to about $3 billion in 2024 through lower price, reinvesting that back into the customer and ultimately driving higher returns. We believe he will be transformational for Paragon, which was once a sleepy medical consumables business. Back to your question around Sigma and Chemist Warehouse. If they merge and that still has to go through The Australian Competition & Consumer Commission (ACCC), we ultimately see a number of independent pharmacies potentially turning off Sigma as a wholesaler and ultimately CH2 is the only independent pharmaceutical wholesaler in the country. There’s Australian Pharmaceutical Industries (API) which is owned by Wesfarmers (ASX: WES), there’s EBOS Healthcare Australia (ASX: EBO), which also has Terry White. CH2 is the ultimate beneficiary of that. So, we believe that the merger is a key catalyst. And then going forward, you’ve got the opportunity for Paragon to continue to grow through synergies post-merger and also better execution in their target markets.
Camilla Cox: Fantastic. Well, that’s everything today. Thanks Sam, Will and Cooper, and thank you for watching.
