Spotting the 'covid winners'

-- | 16/02/2021

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Lex Hall: Hamish Tadgell is a portfolio manager at SG Hiscock where he oversees the SGH20 equities fund. He is here today to discuss a few top picks in companies which span telecommunications, data centers and one name which is a diversified industrial and investment group.

Haimish, welcome back to Morningstar.

Hamish Tadgell: Thanks, Lex.

Hall: The first name on the list today is Uniti Group and it's a specialist in telecommunications. Tell us why you think this has got a bit of room to move.

Tadgell: So, it's a company that hasn't been listed on the exchange that long, but we think it's a COVID winner basically. Data connectivity has been a big theme through COVID. Uniti Group is the number two really wireless provider in Australia behind NBN. And over the last 12 months, the company is really transformed from the number three player to the number two player but bought OptiComm in November and has recently also bought into—or bought Telstra's Velocity business, which basically is a national business covering about 160 sites. And why we like Uniti in particular is that it's really a vertically integrated player doing greenfield installations through to reselling those through Telstra or through Velocity now and it's also got the ability to sell in the wholesale and the retail market. So, NBN can only sell on the wholesale market. And this company received structural separation from the ACCC, again in late last year. And so, we think it's a company that's going to grow very strongly over the next few years. It's in an industry which is consolidated, and we think that wireless connectivity is really a social infrastructure these days, bit like the utility bills. Everyone—like water everyone needs it and I think COVID has only highlighted that.

Hall: Okay. And the next one is a specialist in datacenters. It's Nextdc. The ticker is NXT. Tell us about Nextdc.

Tadgell: This has been sort of a longstanding holding in our portfolio, but clearly again, COVID has highlighted I think the importance of data and connectivity and digital online. Nextdc is one of the companies mostly (indiscernible) to this in our view. They are one of the premier datacenter providers in the country and national. And they have a lot of the contracts with the likes of Microsoft and Google and Telstra. But they also provide datacenter storage for a lot of small and medium enterprise businesses as well. They have got a very strong growth profile ahead. They've been investing very aggressively in the industry. But I should say that that's only on the back of contract wins. And there is a bit of a lead time between when you win a contract and it comes on. It can take sort of two years to build these datacenters. But again, we see them as very much critical social infrastructure. And the value of that we think has increased through COVID.

Hall: Okay. And the final name on the list is a diversified industrial and investment group, and that Seven Group Holdings.

Tadgell: Yeah. We see this company as sort of a triple play, if you like. It is a telecoms analogy. But Seven Group owns the Caterpillar franchise in Australia. So, it services a lot of the trucks and excavators and all those sorts of things at the mining industry but also are used for infrastructure building. So, we think of it very much is leveraged to the volume growth, but not necessarily the price so much in terms of the mining space. And clearly, it's a beneficiary of the fiscal stimulus and a lot of the East Coast infrastructure projects that are going on at the moment.

The other key business it has is Coates Hire, equipment hire business which rents out all manner of things to really civil and construction industry, you know, barriers, trucks, lights, all those sorts of things.

Hall: Yeah, one of those names that you see all over the place really.

Tadgell: Yeah. And again, it's very leveraged to the pickup in fiscal spending, and we think with a lot of the mega projects that have started over the last few years it's benefiting from, but a lot of the smaller projects that the government has announced in the last budget, which should kick off and roads projects in particular over the next sort of 12, 24 months, we think it will be a beneficiary.

The other thing is, the company owns some two significant holdings—one in Beach Petroleum, which is really a play on the East Coast gas market, and we are quite positive on the energy market at the moment. It's clearly been through a tough patch with COVID, but we think it is recovering and we think that East Coast gas demand will continue to be pretty strong over the next 12, 24 months as the economy starts to recover. And it also has a 20 per cent holding in Boral. I mean, Boral is a company which has gone through some difficulties, particularly with the U.S. assets and in the acquisition made of Headwaters. But we still think it has a very good domestic franchise and we think that it's the biggest provider of gravel and aggregates into road construction. It's also quite leveraged to sort of the residential construction market which has been soft we—it looks like prices are recovering and we think that that should hold up okay over the next sort of 12 months. But it's got—it's brought very well into that and we think that will be in its growth as well.

This report appeared on 2021 Morningstar Australasia Pty Limited

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