Motley Fool Australia

Fund manager calls stock “extremely undervalued” claims dividends to accelerate for 5 years

Jackpot Money Rain

Yesterday, I briefly covered how the L1 Capital Long Short Fund Ltd (ASX: LSF) is off to a rocky start as a listed invested company, with shares currently changing hands for $1.46 compared to its April 2018 initial public offer price of $2 per share.

In other words the thousands of mum and dad IPO investors who tipped in a giant $1.3 billion between them are 25% underwater in less than a year, despite US and Australian equity markets delivering reasonable returns over the period.

In fairness though one year is not a long enough time to judge the merits of an investment approach and the LSF Long Short Fund had a second-to-none market-thumping track record prior to its IPO.

Yesterday the fund manager named a few stocks it rates as buys including WorleyParsons Limited (ASX: WOR), News Corp Ltd (ASX: NWS), Boral Ltd (ASX: BLD) and French music conglomerate Vivendi as owner of Universal records.

It also claimed New Zealand-based internet services business Chorus Ltd (ASX: CNU) is “extremely undervalued” as it is set to reap the returns of years of heavy capital investments in building out fibre-optic networks required to provide internet services.

As a dark fibre provider Chorus is similar to something like TPG Telecom Ltd (ASX: TPM) in Australia that still has a growing corporate internet services business.

However, according to LSF, Chorus has spent more than 10 years and NZ$6 billion building “one of the world’s best fibre networks…up to 10x faster than Australia’s NBN”.

As I’ve covered before the economics of dark fibre businesses are also attractive due to the high gross profit margins once the initial capex is sunk. This is because the fibre networks require relatively little maintenance (hopefully) and thousands of new customers can be added for minimal extra cost once the upfront investment of laying the fibre is complete.

Given capex “has now peaked” for Chorus’s fibre rollout the fund manager now expects free cashflow to “surge” as dividends accelerate for the next 5 years.

This makes sense assuming LSF’s analysis is correct as free cashflow is basically operating cashflow less capital expenditures (now met for Chorus) and commonly much of it is paid out as dividends, rather than saved for a rainy day.

At the end of the day investing is not rocket science and share prices almost always follow free cashflow and dividends higher or lower over time as such Chorus could be worth a look.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Related Articles…

Latest posts by Tom Richardson (see all)