Glenn Freeman: In this week's "3 Top Picks" I'm speaking to Randal Jenneke from T. Rowe Price who is covering off three quite distinct companies in different sectors, including ALS, which is in testing across mining and in food services, along with Star Group in the gaming space and IAG, the general insurer.

Randal Jenneke: If you think about how we invest, we are a quality growth investor. So, we are looking for companies that have strong and attractive returns and hopefully, that are improving and companies that are also growing strongly. And all these three companies fit that bill.

So, if you think about what is happening with ALS right now, so this is one of the largest testing companies in the world. They have two key divisions, the first one being commodities testing, so testing for gold companies, for coal companies, for copper companies, for lithium companies; and also, they do the testing for food products, environmental testing. And what we are seeing within both of those two divisions is that the returns are improving, their margins are improving, and earnings are growing strongly. And on the life sciences part of their business, which is that environmental and food testing, that had some issues over the last 12 to 18 months. But now, they are recovering from those and we are seeing that as volumes start to increase, they have adjusted their cost structure and margins are now rising in that part of the business.

But the bit that really excites us is on the commodity side, because you are seeing greater exploration spend by the mining companies and that's really driven by a better price environment but also the fact that now we are also seeing them invest back into exploration as well because their balance sheets are very strong. So, that's driving big increases in sample volumes for ALS. We think the market is missing the strength in that recovery going forward over the next two years.

With Star Entertainment Group, if you think about what this company owns, it owns monopoly assets in key markets of New South Wales, Sydney and also, Queensland, Gold Coast and in Brisbane. And what the company is doing is that it's pursuing a capital light strategy. So, it's using capital from its Asian partners to help develop properties in all those markets. And really, that's about deriving greater traffic through to their casino properties. So, building hotels, building apartments and they are roughly putting in one-third, one-half of the capital, but the real aim here is to get more traffic going down to the gaming force. We think that's a really smart strategy and it's a way to drive higher returns.

So, we like IAG for three key reasons. The first is, the industry backdrop is really positive. So, we are seeing premium rate increase across all parts of general insurance. So, motor and home, which are their really big portfolios and where returns are very high, we are seeing rate increases in the order of 4 per cent to 5 per cent. We're seeing client inflow in the order of sort of 1 per cent to 2 per cent. So, we are getting margin expansion there. We think that that's likely to continue. We are also seeing good rate increases come through in their commercial book in the order of 5 per cent to 10 per cent and that's been a problem for a lot of insurers over the last four or five years. But profitability there is returning.

IAG also are spending time on a cost-out program. That's going to realise benefits in the order of $200 million over the next two to three years. We think we will start to see the benefits of that FY '19 and FY '20. And then also, the companies moving out of a lot of Asian interest. So, recently, they have sold a number of their investments in their Southeast Asian general insurance business. There's a prospect that they could also sell out of their Indian business. And we think that they could return up to $1 billion to $1.5 billion worth of capital over the next two to three years. We think the market is not really understanding that story.

When we look at most of the significant issues that have been highlighted by the Royal Commission, they have either been in superannuation or they have been in life insurance. IAG is not exposed to either of those businesses. So, no doubt, there might be some headlines around some issues in parts of their business, but we don't think it's going to be material. I mean, we've spent a lot of time with the company, exploring these issues and to the best of our knowledge and I think to the best of their knowledge, there's nothing that they think is going to be hugely detrimental to the company that will come out of the Royal Commission.