Greencape's three top picks

-- | 13/05/2020

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Glenn Freeman: I'm Glenn Freeman for Morningstar. And I'm joined today by Jonathan Koh from Greencape Capital to talk about the three top picks.

Jonathan, thanks for your time.

Jonathan Koh: No worries, Glenn. Thank you for having me.

Freeman: You are just going to talk through a couple of names here. You've got quite an interesting mix of companies within the tech sector. The first one that you're going to talk about is in the real estate space.

Koh: Yeah. So, what I want to do is talk about REA and how we continue to like how that company is positioned. I mean, for us it's been a great business model for a long time. It's capital light; they've got good margins, strong market position and above all, it's run by an excellent management team. Fair to say that we were waiting for a rebound in listings to come through in the first half of this year and it was starting to happen. But with COVID-19 and the situation there, obviously open for inspections, auctions and the like, it becomes a bit of an issue. So, that sort of uplift in recovery is probably now down to a timing issue. But in the current situation, importantly, there is no need to raise capital given that balance sheet is in a strong position. So, you can take that issue off the table. And one thing that we were always sort of conscious about is that it had an ability to flex its cost base. And we saw that through the post Royal Commission bank lending standards tightening that occurred. And so, you had volumes drop off there, but you had a really a good outcome from a cost perspective and we are seeing that today also where…

Freeman: It's actually able to adjust the costs that it incurs as a business?

Koh: Exactly, yes. So, the recent update provided some guidance on that and you saw that they are looking to target operating cost to be 20 per cent below their prior period.

Freeman: And you've got – and the second company is within the financial planning software space.

Koh: Yeah. So, IRESS is one which – their business model is subscription based. And so, in this period, that's a really positive aspect. When we talk to management – and they've had briefing so far to the market – it's really clear that nothing has materially changed for them. Their revenues aren't volume based and software for financial planner is pretty critical, particularly post Royal Commission where you really have to just for everything you're doing, track everything you're doing and manage your client through that sort of lifecycle. So, that's a positive for us. And one thing that we've noted also – they've really sort of put their best foot forward as it relates to growth options as well. So, there's a few growth options there that we're liking, whether it'd be in Super Admin and also over in the U.S. where they continue to execute well with their Xplan rollout.

Freeman: And lastly, you've got the – turning to a global company now, you've got a chip manufacturer.

Koh: Yeah. We do like NVIDIA. It's a really interesting company and one which we came across as we were researching (XDC). And those who have heard of NVIDIA would probably associate it with computer games and they do have a dominant position there. And we've seen the rise of e-sports and that's obviously highlighted by what's happening at the moment where the gaming market has been a really strong sector. But what we are particularly interested in is actually the data center market and the role that NVIDIA plays in AI, machine learning and that's something which we see as a multi-year structural growth area.

This report appeared on 2022 Morningstar Australasia Pty Limited

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