Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Eley Griffiths portfolio manager Nick Guidera nominates the ASX share he would be fine to be stuck with for many years.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for 4 years, which stock would you want to hold?
Nick Guidera: Last time I said Temple & Webster Group Ltd (ASX: TPW). I don't disagree with that… It has had a good run. It's pulled back. It's been relatively volatile during the lockdown that we had, which I probably didn't foresee when we spoke last time.
I don't back away from that [pick]. But for interest, I've brought another one to the table.
Beacon Lighting Group Ltd (ASX: BLX). This historically has been a small retailer based in Victoria that has been selling lights across Australia with a fairly consistent rollout story and one that has been subject to the housing market and whether people are willing to spend money on new lights. What's changed I think is that this business has… managed to dominate the lighting category.
There [are] very few independent lighting retailers left in Australia that aren't either high-end or in the market that perhaps Beacon doesn't necessarily view as appealing. There's a solid rollout strategy still to come in Australia of incremental stores into markets and changing the way their stores operate.
But what has changed with Beacon is the opportunity for them to move into the trade sector. If you're familiar with the company Reece Ltd (ASX: REH), Reece is probably one of the quiet achievers of the Australian stock market over many years — slowly moving from plumbings, into bathroom supplies, into effectively the whole water category. Now [it's] dominating that sector to the point where there is no other real major retailer that competes with them in that space.
Beacon has historically targeted the consumer with their lighting business. If you're an electrician, you used to ask a consumer to go and pick your lights, and then they'll install them.
There's typically been electrical wholesalers that have sold different parts of behind the wall technology. Beacon's decided that they're going to go after that trade opportunity, not into the electrical wholesale realm completely, but offering things like cables, for example, that would sit behind the wall that an electrician would have to install to connect the lights. Encouraging electricians to come into a room, changing their opening hours to make it more appealing for tradies to access, having a tradie entry point, opening tradie accounts and marketing into that space. They've increased their total addressable market from being a consumer-facing lighting business into a trade business.
At the same time, they're looking at international expansion. They've recently given some commentary around their interests in the US market. You have seen Reece successfully make a large acquisition in the US a number of years ago to expand their Australian footprint into the US.
I don't think you're going to see anything like that in the near term from Beacon, but it adds further optionality for the business. We'll have an interesting business over the next 4 years. Certainly, it's a consumer discretionary business, so it is subject to consumption cycles and markets, but ultimately it has killed the category and eradicated most of its competitors.
Regardless of how many people are building houses or operating their lighting, [there's only a choice between Beacon and] a relatively inferior range at Bunnings for people to buy lights for their new homes. That will continue regardless of what your view is on the housing cycle.
When net migration returns, we should see strong underlying demand for new household formation, which should provide an incremental support to the housing market, but taking the cyclical element to the stock aside, you've got a really strong fundamental case of growing stores, growing trade footprint and international expansion.
MF: Looking at the share price graph, it looks like there was a huge re-rate upwards last month.
NG: I think the market is starting to catch onto the opportunity that Beacon has around trade. They have talked about it for probably a year or so, but what subsequently changed is they've started doing presentations to the market at a number of conferences, which talk to the opportunities they have around expansion. And I think that's certainly providing the market with some excitement around what the future earnings profile might look [like].
MF: Beacon also gives out a handy dividend as well?
NG: Yeah. Well, that's the thing. It is a retailer that generates relatively good cash. They've got a good amount of inventory on hand, which means that while the freight costs are certainly causing issues to retailers they have been able to offset some of that with the Aussie dollar strength. They're helping their gross margin a little bit. You've got a really good, strong, private-label business within the business. Their brand is becoming more well regarded across the industry. They've also got an online business as well. They're not just relying on a bricks-and-mortar store footprint.
