Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Datt Capital principal Emanuel Datt gives his thoughts on some ASX shares that have caused much pain for investors this year.
Cut or keep?
The Motley Fool: Now we'll take a look at three ASX shares that have been ravaged this year. First one is Selfwealth Ltd (ASX: SWF), which halved this year before the recent rebound. What would you do with it?
Emanuel Datt: I would say keep. The reason being that, despite the fall in the share price, the company has experienced significant business growth. I think it's probably doubled in size over the last 12 months.
We view the share price performance as being more of a function of basically the outflows or the rotation away from these tech and growth themes, more than anything.
[With] interest rates that are projected to rise going forward, Selfwealth actually has significant leverage to this theme and really benefits from higher interest rates. The reason being is that Selfwealth is actually paid a margin from customers' funds that are held on its platform.
Basically, they received the RBA cash rate plus 80 basis points, and I think last quarter they had about $700 million in customer funds on the platform itself. There's quite significant leverage within the business model to increasing interest rates.
I think that [there's] also a cyclical move in terms of retail traders on the stock market.
It's probably one that will find its way higher than where we see ourselves now.
MF: Next one has been in the headlines recently — Humm Group Ltd (ASX: HUM), which has halved year-to-date.
ED: Yeah, Humm Group. Look, for this, I would probably say sell. Why I say that is that I think every consumer lending or consumer finance company we've seen has experienced decreasing headwinds. I think Humm themselves more or less were trying to hedge that angle as a rationale to [get] the transaction with Latitude Group Holdings Ltd (ASX: LFS) over the line, but ultimately the deal was cancelled.
However, I think that this was probably detrimental to the company overall. Because, ultimately, the expected credit losses will be sitting on Humm Group's balance sheet basically, rather than being incorporated into Latitude's business which was a far greater scale.
Another thing worth mentioning is the fact that the whole board, except the major shareholder, have resigned or indicated that they are going to resign. I think this leads us to, or raises, questions about the governance of the company itself and we've seen there the past six months or so, the entire board has been fairly united against the single major shareholder who was against the transaction.
I think that ultimately… if you're a minority shareholder in the company, ultimately these other directors actually represent your interest, and if they suddenly step off, then who's there to protect your interests against a majority shareholder who may have other motives?
I guess that's why we would say it's a sell, at least until the dust settles a little bit and the company can provide a bit more clarity about its outlook.
MF: There's a lot going on there, isn't there?
ED: Absolutely. It's a big mix but I think the share price has reacted accordingly. I think the whole Latitude [deal] helped the company out over the last three months and now it's reverting back to being in line with all the other consumer financiers out there.
MF: The third one is one that is deep, deep in the red in my own portfolio — Appen Ltd (ASX: APX).
ED: Appen, I would probably call that a sell, as well. I think there's no doubt that there is some value at Appen, in terms of the assets.
I think it was Telus International Cda Inc (TSE: TIXT) that was contemplating making some form of expression of interest. But also we have Blackstone Inc (NYSE: BX) that was rumoured to be running the ruler over the business itself.
Ultimately, I think the segment which Appen operates within, I think there is definitely still a future in it. But I think it's all about being able to profitably renew contracts with its major customers. We just get the sense that there's been a lot more competition in the particular sector.
Telus was also a competitor [in] exactly the same sector, as well. But, ultimately, in the update that Appen put out, they did guide towards materially lower EBITDA. It raises questions for us because, ultimately, if revenues have fallen, that increases the probability of potentially writing down assets and making a big after-tax loss, which the market will definitely not like.
Then again, we would probably say sell just with the assumption that there's no other buyers lurking out there which there very well could be, given the interest the company has attracted in the recent past.
