EGG, SGF, ZBRA: Foraging for the unloved gems

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Lex Hall: Steve Johnson is chief investment officer at Forager Funds Management. It's a fund that seeks to unearth unloved gems as they put it. They have two funds, one Australian and one International Shares Fund. I thought today we'd check in with Steve to talk about two Australian names and one international name.

Steve, g’day, and welcome to Morningstar again.

Steve Johnson: Hey, Lex. Great to be back.

Hall: The first name on the list, we mentioned it in the first video that we did, is Enero Group. The ticker is EGG. They provide marketing and communication services in Australia and around the world. What else do you see there that you like?

Johnson: We've owned this business for 10 years in our Australian Fund. So, it's been a core holding for a very long period of time and it's in a better place than it has ever been at the moment. They own advertising agencies and a lot of people probably know that it's been a very difficult industry. It's being disrupted by technology. But they are in a very good place within it. They have some tech PR businesses that are growing quite nicely and some tech implementation and marketing businesses as well that are doing well. So, they are in the right part of that marketing industry and in the growing part. But most importantly, they have locked onto an advertising platform. They've owned this business for a long, long time, but it has really taken off over the past three or four years. It's growing something like 100 per cent per annum. And the business is taking Google Shopping ads and putting them on publishers' websites and taking a clip of the ticket in between. So, they get paid for success. If someone buys the product, Google pays them a fee for that and the person who owns the website gets a cut as well. It's only got 18 employees, but it's growing very, very quickly and it's a really scalable business. That's the piece of Enero that makes us very excited even still at today's price, despite it being up a lot over the past 12 months.

Hall: OK. Fantastic. Second name is SG Fleet. The ticker is SGF. And as the name implies, I imagine that's a corporate vehicle leasing company.

Johnson: That is correct. And we currently have almost 15 per cent of our Australian Fund is under active takeover offers. It's pretty common in our part of the market that when we buy something at attractive prices, someone else comes along and wants to buy it and SG Fleet is currently in a trading halt talking about doing an acquisition of its own, which would be very significant. Our thesis in this car leasing space, we also own Eclipx, has been that consolidation is going to be hugely, hugely beneficial. You can basically run the two companies together with the same amount of corporate costs. We think that could be $30 million to $40 million of cost savings by putting the two businesses together. SG Fleet is talking about buying LeasePlan. And in the context of a business that's making $100 million today, that's a very significant amount of money. So, I think the consolidation – it's not just SG Fleet, but you'll see a deal announced there over the next couple of days that's going to be really important for that business, but it also says to you that Eclipx, which is one of the competitors, is an attractive asset as well and probably either gets bought or buy something else itself.

Hall: All right. Steve, well, let's turn to the International Fund and one of the names that you mentioned today is Zebra Technologies. They are a leading provider of automatic identification and data capture technology.

Johnson: Yeah, it sounds complicated, but it's actually really simple and almost every Australian has probably interacted with a Zebra product. When you're at a Bunnings or a BWS, those devices that the person in the store is carrying around are made by Zebra. And three years ago, the perception of this business was that it was a device manufacturer that was right for disruption, and it was trading at 12 and 13 times earnings. And Harvey Migotti, portfolio manager on our International Fund, it only just started at Forager, and he said, look, this is the perception of the stock. The reality is this company is providing essential logistics infrastructure for all these businesses. It's far and away the best in the sector. You're buying it at 12 or 13 times earnings and not only is it not going to get disrupted, but I think this business can grow at 10 per cent or 15 per cent per annum.

He's been very, very right about that thesis. I think it started to become more of a mainstream thesis in that it's turning up in the share price these days, but it's been a core holding for us over the past few years and one that we want to own for a very long time to come because this thematic around tracking your inventory, doing it more efficiently is only becoming more and more important as all of these retailers want to become omnichannel, they want to do click and pick up, they want to do curbside pickups. You need to know where your inventory is. You need to be able to find it quickly and you need to be able to get it to the customer in a hurry. So, all of these solutions that this company is providing are becoming more and more important.

Hall: OK. So, that's Zebra Technologies, the ticker is ZBRA and the two names we mentioned previously were SG Fleet, SGF, and Enero Group, EGG. Steve Johnson from Forager, thanks very much today for your insights on some very interesting stock ideas.

Johnson: Great. Thanks for having me.

Hall: I'm Lex Hall for Morningstar. Thanks for watching.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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