3 Aussie equities to watch |
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11/06/2020
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<p><strong>Lex Hall: </strong>Hi, I'm Lex Hall for Morningstar. Welcome to another edition of "3 Top Picks." Today, I have the pleasure to be joined by Philipp Hofflin. He is a Portfolio Manager on the Australian equities team for Lazard Asset Management. And he's got a few interesting picks for us today.</p>
<p>Good morning, Philipp.</p>
<p><strong>Philipp Hofflin:</strong> Good morning.</p>
<p><strong>Hall: </strong>The first one on your list today is Computershare. Let's go with that first of all. Why are you interested in that one in particular?</p>
<p><strong>Hofflin: </strong>Look, firstly, it's a very well-managed company as you probably know. It's one of the great Australian success stories in going global. There have been many victims in that process but there have been some successes and Computershare is one of those…</p>
<p><strong>Hall: </strong>So, it's a company that basically – they manage – it's a share registry, is that…</p>
<p><strong>Hofflin: </strong>That was the original part, share registry, but that old manner of sort of related and adjacent businesses now and they also now do mortgage processing in the United States. You might be aware that they have a lot of banks that originate mortgages often. They don't want to service them themselves because they don't have the right scale. So, they hire mortgage service companies which then send the letters and follow up and do all the sort of things that you need to do to service a mortgage. And that's one of the areas that they’ve moved into.</p>
<p>The reason why the stock fell very dramatically and pretty much halved – it fell – is that as a part of their business they hold a lot of fund balances. So, for example, companies send their dividends to Computershare and then they get distributed to the owners. But there is a bit of a lag. So, money sits in their accounts at various times and it's quite a significant amount. You're talking about – US$15 billion sits there all the time from capital raisings that haven't finished yet and all these various corporate transactions in which they are involved. And the share fell in part because people said, oh, look, that interest income that they derive from that is now lower because rates are lower and that is indeed true. But I think the market completely overdid that and in fact, considering in Australia all these capital raisings and all these corporate activities in response to the virus is actually very positive for them. Very broadly emphasized, Computershare is not a balance sheet financial. So, it's not the case that like for a bank or insurance company that you have a balance sheet that can cause problems. It's not a balance sheet financial. So, it's really just a service business that was treated very harshly in that original sell-off. So, it's one business I think that still looks very good.</p>
<p><strong>Hall: </strong>Okay. All right. Second one on your list is QBE. Tell us why you are considering that one today.</p>
<p><strong>Hofflin: </strong>Yes. So, QBE is a balance sheet financial. So, it is somewhat riskier stock than the other two that I'm going to talk about. But I'll just go a bit into history. In the first quarter, you know, when their results came up in February, the stock ran quite hard up to $15 and it ran because the company was talking about the fact that the premium rate cycle is really starting to firm up. That is, the price that the insurance companies get for their products. And to provide some context there, there was an enormous cycle following September 11 and the losses that everybody incurred then. And the QBE share price ran all the way up to $35. And then, there has been a long downswing. And the downswing has been much longer than they usually are. But there were signs in that result that finally the cycle is in fact turning.</p>
<p>We then went into the crisis and because QBE is a balance sheet financial, it has $23 billion of investment assets. It was sold off quite hard; pretty much halved in terms of share price. The company came out and said, yes, they had taken a US$500 million hit on their investment book which is about $23 billion large and there are also some claims that are going come through – your concern was particularly initially about business interruption insurance, but I think they have been able to show to the market that really the losses there are limited because pandemics are not really covered by those sorts of covers. They've raised some money. But what has become very clear in the last sort of two-three months since then is that the premium rate cycle isn't just firming, it is really taking off. We just saw some reinsurance renewals. They were the strongest since that phenomenal year in 2002 straight after September 11. And that is an enormously important driver for the profitability for these companies. And if you go back in history, there is a regular cycle.</p>
<p><strong>Hall: </strong>And the final name on your list today is in a very different sector. It's Alumina. Tell us why've got your eye on that one.</p>
<p><strong>Hofflin: </strong>Yeah, look, Alumina again, share price pretty much halved. It's a pretty high-quality business. So, they are in bauxite alumina which are the precursor products for aluminum which is then produced in the smelters. So, they are upstream which is the first really important point. Upstream businesses like that tend to make much better returns than the downstream. Sort of think iron ore versus steel, right? Steel is a terrible industry; iron ore is great. The key to a good alumina business is you need key bauxite, you need low energy costs and all that needs to be near a harbor because it's bulk. In Western Australia, they have that in spades. They own – they are actually a holding company. They own 40% of the AWAC joint venture with Alcoa.</p>
<p><strong>Hall: </strong>Alcoa, yeah, in the U.S. Yeah.</p>
<p><strong>Hofflin: </strong>Yeah. That business has been around – those assets have been around for a long time. I don't think they are quite in the Pilbara quality, but they are very low on the cost curve, very high-quality assets. The holding company has no debt whatsoever. So, there is no debt in this business which is a great start. China is short bauxite and alumina, they are long aluminum. And as you probably are aware, in commodities it's always good to be long whatever China is short because their demand is so great. It is a commodity producer and the alumina price goes up and down a fair bit. But on sort of a normalized basis and on an equilibrium place, this looks really cheap.</p>
<p><strong>Hall: </strong>Okay, fantastic. Well, that's a very good insight. Thank you very much for that. Thank you for sharing your thoughts with us today, Philipp.</p>
<p>I'm Lex Hall for Morningstar. Thanks for watching.</p>
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