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, Glenmore Asset Management portfolio manager Robert Gregory explains why he loves two particular ASX shares at the moment.
The Motley Fool: What are your two biggest holdings?
Firstly on Stanmore. That’s a company that I’ve followed for a long period of time. Funnily enough, the current management chairman of Bowen Coking Coal Ltd (ASX: BCB), Nick Jorss, actually used to be heavily involved with Stanmore.
Stanmore is a company I’ve known for a long time. Back in about October last year, they announced the transformational acquisition where they bought two coal assets off BHP Group Ltd (ASX: BHP). The two assets, South Walker Creek and Poitrel, they [are] both coking coal mines. BHP [were] going through a process of exiting certain coal assets and these two came up for sale. Stanmore acquired them at what I felt was a quite opportunistic price at around US$1.2 billion.
So what they did is to transform Stanmore into a small cap coal producer with assets of reasonable quality and suddenly vaulted them into a completely different investment proposition.
South Walker Creek has a mine life of in excess of 25 years capacity of 6.3 million tons per annum. Poitrel, a bit smaller, 4.3 million tons per annum, [a] shorter mine life around 10 years, but still quite substantial.
The really positive part of these assets is actually where they sit on the cost curve. So South Walker Creek would be in the first quartile, Poitrel would be somewhere in the range between first and second. So what that means is that even obviously right now they’re benefiting greatly from favourable coal prices but, even in periods of much weaker coal prices, we still believe that those mines will make money.
That’s a really positive thing to think about for the future years. So post that deal, they will have debt of around $700 to $800 million, but we believe that will be amortised quite quickly over the six to 12 months, just coming from the very strong cash generation from those two mines.
It’s worth pointing out that even though the deal was actually announced back in November last year, it was quite a protracted settlement. So Stanmore actually only took ownership and gained access to the cash flows on the 3rd of May this year. So there’s been quite a period of months of waiting to see whether the coking coal price would stay robust once Stanmore took ownership but, increasingly, it has stayed at very healthy levels. So we’re now in a situation where Stanmore is generating very significant free cash flow.
I really would stress that you shouldn’t be looking at the valuation based on the current coal price because it’s extremely high and it’s not realistically going to stay at these levels. But for what it’s worth, at current coal prices, it’s trading on an [enterprise value] EV to [earnings before interest, tax, depreciation and amortisation] EBITDA of around 1.3 times.
At a long term hard coking coal price of around $150, $160 per ton, we have the EV to EBITDA around five times. So that the valuation stacks up, there’s going to be good amortisation over the next 12 months.
The other interesting thing with Stanmore is that now that it’s the new owner of Poitrel, is that there’s quite a bit of speculation that the next coal asset BHP will sell is Daunia. And if that does proceed, Stanmore is very well-placed to be the bidder that can bid the most for Daunia, on the basis that Daunia is adjacent to Poitrel. They certainly have the most scope for synergies versus other bidders.
So there’s probably going to be more. South32 Ltd (ASX: S32) [is] talking about selling some coal assets. There’s going to be some more coal assets to be sold, so that’s something to watch.
At the moment, for the assets Stanmore has, it’s quite an attractive price.
MF: And why do you like MA Financial?
RG: So that’s a financial services company. It has operations in funds management, corporate advisory equity, capital markets, and more recently it bought the business of Finsure off BNK Banking Corporation Ltd (ASX: BBC) for $145 million back in December last year.
It listed in early 2017 and, in fact, the Glenmore Fund’s actually been invested in the stock pretty much ever since [initial public offering] IPO and it’s really generated a really strong track record of delivering [earnings per share] EPS growth. I think management’s very good.
They started off mainly as a corporate advisory and corporate recovery-type business with a small asset management business, but they correctly identified that asset management is a high-quality earning stream. So they’ve expanded quite aggressively into that part of the business since that 2017 period.
We’re now at the stage where the asset management business is by far the dominant earnings contributor at around 70% of group EBITDA.
Whilst its asset management… it’s not really like a Magellan Financial Group Ltd (ASX: MFG) or Pinnacle Investment Management Group Ltd (ASX: PNI) funds management business. It’s more sort of niche products, such as real estate credit, hospitality funds, some venture capital, bit of private equity. It does have some equities, but a lot of the products it creates [are] quite niche products, designed specifically for high-net wealth investors.
And because they’re quite niche in nature… the fee pressure is not as fierce as it is for say, more mature types of categories, such as long-only Aussie equities, for example.
So the fee structure is quite favourable and they’ve now got assets under management of about $7 billion. And I think there’s a very significant performance fee capability from that $7 billion. I think even at this point, it’s probably undervalued by the market, that performance fee capability or potential.
At the recent AGM, they called out their credit funds as getting the majority of their recent inflows, just due the defensive nature of these products and also the current equity market volatility. But generally speaking, all the various products they have in the asset management business are performing well.
Corporate advisory and equities, that’s doing well. That’s probably a bit lower growth than the asset management business, but still generates very good cash flow and it provides a lot of good ideas, I think for their asset management business, in terms of where they can spot opportunities to add value for the client base.
Just on Finsure: So that’s a business that they acquired last year for $145 million. It was founded in 2011 and provides a range of services to mortgage brokers based off its proprietary tech platform called Infinity. Infinity is essentially a platform that lets brokers select original process mortgages and other types of loans. Currently, [it] has about 12% market share, which has grown quite steadily over the last five years.
One favourable industry tailwind that Finsure has, is just that our mortgage brokers continue to win market share whilst the major big four banks are losing shares. So that should help their earnings. I think that the Infinity platform is very solid.
Lastly, MA Financial has its own lending division, including now owning a 100% of MKM, and I think some of the data and insights they get from owning Finsure are likely to be quite helpful in terms of tailoring certain products and for their own lending business. There’s synergies for the lending business medium-term.
[It] recently affirmed guidance for CY22 of 10% to 20% EPS growth. The valuation is still quite attractive at [price to earnings ratio] P/E about 16, 17 times.
MF: Yes, I was going to say the share price has dropped a bit this year, so is it a reasonably attractive entry point at the moment?
RG: Yeah, I think it is.
I think some of the stock price declines come from just a general de-rating, the market, some of it from sell-off in financial services stocks.
I think [with] the asset management business performing very well. I suspect some investors may have concerns around Finsure just being vulnerable to weaker mortgage, home loan activity. That’s a reasonable concern just given where the Australian home loan market is tracking right now with raising higher rates.
Realistically, that’s probably produced a slightly softer earnings outlook for Finsure over the next 12 to 18 months, but I don’t think it takes anything away from the medium-term opportunity from Finsure, which is still a very good business growing in a very big market, being the Aussie home loan market.
MF: What are the two best buys you’re seeing at the moment?
RG: Well, look, to be honest, they’re actually the two best buys.