‘High quality’ ASX company that has all of Sydney as customers

Ask A Fund Manager: Glenmore Asset Management’s Robert Gregory picks a stock that’s so reliable he’d be happy to be forced to hold it for four years.

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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 nominates the ASX share he’d rely on for years to come, and shares his biggest regret.

The ASX share for a comfortable night’s sleep

The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?

Robert Gregory: The stock I decided on — it’s a great question — is Transurban Group (ASX: TCL).

That’s a company with quite a large portfolio of toll roads. And I, in thinking [the market] would be shut for four years, I tried to think about a company that, firstly, was a high quality business and had really good prospects for earnings growth, but also one that had a pretty low risk of having its earnings being disrupted by industry change, technological change, competitive pressures, that sort of thing.

If Sydney Airport had been listed that may well have been the one, but with Sydney Airport now taken over, Transurban’s the one that I feel would give me the most amount of comfort. It’s got across its portfolio of toll roads, it’s got a weighted average concession life of around 30 years.

It has great optionality with its existing asset base where a toll road might have a concession for, say, 20 years. But then in return for say, Transurban spending growth cap-ex on that toll road to deal with increased population and increased traffic, often the government will extend the concession by five years or seven years or that sort of thing. So in doing that, that’s very NPV [net present value] positive for Transurban and it just pushes, it extends out that length of cash flows that they received from the toll roads. [Transurban] had a history of doing that.

Also with inflation being so high at the moment, one positive is their toll escalations are inflation-linked. That really is: A, it’s very helpful in the high inflation period and B, it’s very supportive of future distribution growth.

Despite some people not being happy to pay to drive on a toll road, I actually think the value proposition is very strong in terms of saving drivers time. Also, toll roads have a history of seeing above GDP traffic growth.

MF: I live in Sydney, where practically everyone is a customer of a Transurban, so I completely understand.

RG: Yes.

Looking back

MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.

RG: Yeah, the one I landed on was Dicker Data Ltd (ASX: DDR), which the fund’s owned for a long period of time. I definitely didn’t exit it completely in the second half of 2020, [but] I did reduce the position recently aggressively on valuation grounds.

It was a stock that had been in the fund really since early 2018, having first invested around $3. And we were trimming around that $9 to $10 range, and really the company’s performing extremely well operationally, but the valuation modules had expanded very significantly since that first point of investment at $3.

So the stock went from probably trading on about nine to 10 times [price to earnings ratio] P/E up to about 26, 28 times. [It’s] still performing very well, but on valuation grounds decided to reduce it.

And look, the company’s just continued to perform extremely well.

It’s a value-added IT product distribution distributor that has a very strong management team, a very strong competitive proposition versus its peers who are often Australian satellite offices of large multinationals and perhaps don’t quite have that strong laser-like focus on Australia and New Zealand that Dicker Data has.

The other thing with Dicker Data, they’ve just benefited from continued sector growth in markets, being the IT software sectors where there’s just this very strong above GDP spending from consumers, small business, medium business, large business. So they’ve definitely had some tailwinds, but yeah, that’s one that in hindsight I regret having trimmed.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Dicker Data Limited. The Motley Fool Australia has positions in and has recommended Dicker Data Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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