High-performing fund manager Wilson Asset Management (WAM) has revealed two ASX shares that it rates as buys within the WAM Research Limited (ASX: WAX) portfolio.
WAM operates several listed investment companies (LICs). Two of those LICs are WAM Capital Limited (ASX: WAM) and WAM Leaders Ltd (ASX: WLE).
One of the LICs is called WAM Research, which looks at smaller businesses on the ASX.
WAM describes WAM Research as a LIC that invests in the most compelling undervalued growth opportunities in the Australian market.
The WAM Research portfolio has delivered gross returns (that's before fees, expenses and taxes) of 15.7% per annum since the strategy changed in July 2010, which is superior to the S&P/ASX All Ordinaries Accumulation Index return of 8.9% per annum.
These are the two ASX shares that WAM outlined in its most recent monthly update:
Inghams Group Ltd (ASX: ING)
The focus of WAM Research this month was two food businesses. The first one, Inghams, is the largest chicken business in Australia and also in New Zealand. It supplies major retailers, food service distributors and wholesalers with chicken, turkey, stock feed and dairy feed.
WAM explained that the volume of demand for chicken and poultry products has remained high across Australia. The fund manager said that the price of chicken is more affordable compared to other protein sources like seafood and red meat.
One of the biggest costs for Inghams is the chicken feed, so the recent record crop in Australia is leading to higher grain volumes and could lower costs for the ASX share over the medium-term.
In November 2020, the company gave a trading update that said trading volumes in the first quarter of FY21 were up 6.3% year on year and up 7.5% quarter on quarter. There was growth in both Australia and New Zealand.
Bega Cheese Ltd (ASX: BGA)
Bega Cheese is the other business covered by WAM Research in the update.
WAM said that Bega is Australia's leading dairy and food company, producing 236,000 tonnes of dairy products each year.
The fund manager is attracted to Bega's shift of its production and volume to higher up the dairy value chain, which reduces the risks associated with commodity markets.
The acquisition of Lion Dairy & Drinks will double Bega's annual revenue to $3 billion, strengthening the ASX share's market position in the dairy market. It will also lead to a big increase of the Bega distribution network.
Lion Dairy & Drinks manufactures and sells many household brands in Australia including Dare, Farmers Union, Big M, Dairy Farmers, Yoplait and Pura. In the twelve months prior to September 2020, Lion Dairy & Drinks generated normalised earnings before interest, tax, depreciation and amortisation (EBITDA) of $56 million, excluding synergies.
Bega is expecting to be able to find at least $41 million of synergies per annum, primarily from milk network optimisation, indirect procurement and a corporate reorganisation. It's expecting double digit earnings per share (EPS) accretion in FY22.
