3 top picks: miner, insurer, fueler

-- | 19/06/2020

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Glenn Freeman: In this edition of 3 Top Picks I'm talking to Matt Williams at Airlie Funds Management.

Matt, thanks for your time today.

Matt Williams: Thanks, Glenn.

Freeman: Now, for the first of the companies you're going to talk about one of the mining – something from the mining sector.

Williams: Yeah, Mineral Resources. It's a company we've had a long association with. We've been a shareholder since it floated back in 2006 on the market. It's had one of the best track records of any company, be it mining or industrial. In that period it's been – a return on investment of over 20% and they've successfully navigated the cycles. We like it because it's – basically it's quite a unique mining services business in that it's got very much recurring revenue, not sort of tied to contracts or CapEx cycle that a lot of other mining services companies are. And it also has its own mining where it's very cleverly built up quite a good little iron ore business that although when prices are low struggles to earn its keep but at the current high prices does very well. And all of this, it's got a net cash balance sheet and it's hunting around for distressed or new assets that it could add value to. And so, with that in mind, we think it's a good stock for the future. It's a real medium-term kind of stock. It will get buffeted by the iron ore price. But the management, the founder, Chris Ellison, has just shown over the 15 years or so that he is a fantastic capital allocator and we expect him to continue to work his magic.

Freeman: And probably something of a surprise, I mean, given the private health sector, the private health insurers have been knocked around a bit in more recent times, you've got something from that sector as well.

Williams: Yeah, look, it's not the most exciting company and the outlook, as you alluded to, is a bit tough. But Medibank Private we think is a long-term play on basically the increasing – ever increasing spend in healthcare despite the sort of regulatory ups and downs and the current, sort of, participation issues that is has, you know, people dropping out of insurance. The fact is the government needs this sector to survive; it needs this sector to thrive to take pressure off the public sector. And so, really, we think it's linked into the ever increasing spend on health that comes from both private and public. In the meantime, Medibank has a net cash balance sheet; we'll get a dividend from it. It will yield out of a 4% and with franking could take that up to 5% which we think is pretty good in this environment.

Freeman: And Matt, the third company is a fuel retailer formerly known as Caltex.

Williams: Yeah, Glenn, Ampol. It's been an interesting – it's had an interesting couple of years. This company just before the crisis hit it was actually subject of a takeover bid from a Canadian convenience store operator. Unfortunately, it was – in fact – and there was even further interest in the company from another group. Unfortunately, the crisis hit and put paid to all that. And obviously, the fall in the oil price has really pressured their refining business up in Brisbane which has now been put on care and maintenance and the stock fell from a – there was a bid on the table at 35, the stock fell to 21. And it was one of those stocks we added to during the crisis period. We increased our holding and today it's back at around the 27.60 mark.

Look, we think it's a company with some great assets and that was recognised by these bidders and we think that there is a new management team, a youthful and energetic management team that have some fresh ideas, fresh thinking and hopefully we can see them sort of push the business forward. And a first effort with that is that they are going to sell quite a big portfolio of their petrol sites, their retail petrol and convenience sites and that will, we think, be a valuating transaction. It will allow them to reduce debt and potentially we might get some capital management out of that. We think we'll get a dividend at some point in the next six months and I think it's not a bad company to – it's not exciting. It's not going to make anyone rick quickly, but it's a solid long-term business.

Freeman: Great. That's some really interesting food for thought there. We appreciate your time.

Williams: Thanks, Glenn.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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