DNR Capital's eye for gaming, building supplies and software

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Lex Hall: Hi, I'm Lex Hall for Morningstar. Today, I'm joined by Jamie Nicol. He is the chief investment officer at DNR Capital up in Queensland. His fund, the Australian High Conviction Equities Fund, has just been awarded a special mention by Money Management and we like it at Morningstar, too. It's rated Silver. So, I thought I'd check in with Jamie to see why the strategy has done so well.

G’day, Jamie.

Jamie Nicol: G’day. How are you?

Hall: I'm well. Thanks. You guys are known as QARP investors. You chase quality at a reasonable price. Just give us a snapshot of your top 10. What fits that bill?

Nicol: Aristocrat (ASX: ALL), the poking machines and mobile games. It probably trades about 17 times earnings on 22 earnings. We think that's a reasonable price for a business that has got some really strong IP, very difficult to replicate that sort of business, winning market share. Likewise, James Hardie (ASX: JHX), winning market share. It sells building material products which you might think is going at tough right now but that has produced a fantastic result and continue to beat the competition. So, even in a downturn they can continue to grow which is impressive. And you're not paying a huge price for it. It's had a good run but it's still probably—it's in low 20s, so trading below market valuation. A couple of examples.

Hall: OK And one thing that's very interesting about you guys is that you're 75% staff owned. So, you've got a lot of skin in the game. Let's talk about—I know you got out of Vocus in 2016 and saved a lot in money by doing that. You're pretty cool on the WAAAX stocks, the Aussie tech stocks. What's your take on that? How do you justify that?

Nicol: Yeah. Look, we do own Xero (ASX: XRO). So, it's a bit of a case-by-case basis. So, I think, again, tech sector is an interesting sector that's got a lot of growth opportunities. We are big believers in the potential opportunity for cloud software and software-as-a-service as a business model, I think, is tremendous business model. So, we think Xero is about the best one of those and got a big global market in which to grow into and to reinvest into. So, we're quite excited by that one.

I think some of the Australian tech stocks tend to get beat up because of a narrow range of stocks of which to choose from and investors looking to play that sort of thematic will tend to bid up a narrow range of stocks and some of those stocks don't have the quality characteristics of, say, a Xero, which I think has just got a very strong competitive advantage and a real global strength in which to grow into. Some other companies like say Altium (ASX: ALU), it's trying to grow into a much, much bigger addressable market. The size of the market that it plays in is reasonably modest at the moment. So, it's attempting to expand into that. I think for much of the past couple of years people have been giving them the benefit of the doubt. And I think that's the case of the narrow range of stocks you so gravitate to one of the better ones but still had some issues.

 

This report appeared on www.morningstar.com.au 2020 Morningstar Australasia Pty Limited

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