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, Forager Funds Management senior analyst Gaston Amoros reveals 2 ASX shares that are currently selling for excellent value.
Hottest ASX shares
The Motley Fool: What are the 2 best stock buys right now? Are there a lot of bargains out there?
Gaston Amoros: Absolutely. So this is interesting. We were having that conversation yesterday and we ended up in a bit of a conundrum. You can either buy a real economy company, but it's going to report [unfavourably] if it's getting disrupted by Omicron and people are not leaving their houses. People are not going to the office. Warehouses are getting disrupted and supply chain costs are going up.
So you can either buy a cheap real economy company at an occasion … when analysts downgrade numbers. Or you can buy a technology business, particularly more on the software side than on the hardware side, and then expose yourself to pressure from compressing valuations, right?
There's nowhere to hide.
Now, to your question… I think one that I think your readers should focus on, maybe is Integral Diagnostics Ltd (ASX: IDX).
Integral is the largest publicly listed operator of imaging centres in Australia. They have 67 clinics. And it's a very defensive business. If you need an MRI of the knee or the brain, you will need to have it. So if you are staying at home because of Omicron or you're scared to go out, then it doesn't matter. At some point, you'll need to have your MRI, or you'll need to have your CT scan or PET scan.
It's currently suffering from markets just cutting the numbers for FY22 on the basis of lower mobility. Elective surgeries have been postponed in many states.
They have a big presence in New Zealand — 15% of the business — and New Zealand is also having a softer lockdown. Omicron is raging, so the revenue line is coming down. And at the same time, you are having cost issues because the employee base needs to use more protective equipment. And just like everyone else, they have wages going up and a bunch of other cost increases.
So at the moment, the margins are getting crunched and the numbers for FY22 are going down, but the numbers in FY23 should not change. And the value of the company should not be down 20% in the span of a couple of months purely because of this — that's an exaggeration.
Clearly, it's a more defensive proposition. It's a very high-quality business. It's a good price. And it's not as high a return as the other ones that we mentioned, but it's one that deserves a place in the portfolio.
MF: And your second ASX share?
The other one that might make sense, a little bit lower risk profile, is Downer EDI Limited (ASX: DOW). Downer is a large company. I think it's $5 billion market cap and it's more on the high-quality value side. I think it trades at 12 times [price to earnings] PE [ratio]. And the management has done a great job of simplifying the business and disposing of the capital-intensive and volatile businesses which were mining and laundries.
What's left is basically a business that runs maintenance of roads, utilities, and facilities, mostly for governments, be it federal, state or local. Say 80% of the business is in Australia, 20% is in New Zealand. So you have little to no foreign exchange risk.
The stock market is punishing Downer for their sins of the past. It's trading at 12 times PE for a business which should be very reliable in terms of execution and in terms of financial performance. So to the extent that they deliver lower volatility of earnings compared to the past. This is a business that should be trading more like 16 times PE or higher. And it's kind of trading very, very cheap for what it is, for the quality of the asset and for the reliability of the execution in the new Downer.
MF: It gives out a nice dividend yield as well.
