One very famous and one very obscure ASX share to buy: fund manager

Ask A Fund Manager: Elvest Co's Adrian Ezquerro names a pair of stocks to pick up right now, one of them you would have hardly heard about.

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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, Elvest Co portfolio manager Adrian Ezquerro explains the two ASX shares he thinks are buys right now.

Hottest ASX shares

The Motley Fool: What are the two best stock buys right now?

Adrin Ezquerro: Good question. It's always topical. I think notwithstanding some of the economic challenges we've just discussed, there's certainly a lot more value apparent now in small caps than there was for much of last year. I could probably talk to a bunch of opportunities that we're pretty excited about but the two I'd highlight to start with would be News Corporation (ASX: NWS) and Fiducian Group Ltd (ASX: FID). 

First thing with News Corp, it's an interesting one. Most of its market value is actually underwritten by its digital real estate division.

That houses a 61.4% stake in REA Group Limited (ASX: REA) and it's also got an 80% ownership stake in Move Inc. That's the owner and operator of in the [United] States. That's the number two portal, much like Domain Holdings Australia Ltd (ASX: DHG) here.

Now, based on things like market share, profitability, margins, competitive strength, we genuinely believe that REA is one of Australia's highest quality businesses and so it's a hugely valuable holding for News Corp and, in our view, that is overlooked. 

But, of course, beyond digital real estate, the business also comprises several other really highly cash-generative business units as well. That's things like subscription video, its Dow Jones business unit, news and information service, and it's also got a strong position within book publishing.

If you look at it in aggregate, we think REA and Move Inc probably have an aggregate value of close to about $14 billion… That compares to News Corp's market capitalisation of about $15 billion. The implied value of the balance of the business, which generated EBITDA of about US$1.1 billion in FY22, is valued at about AU$1 billion — less than one times EBITDA. 

In our view, not only does News Corp house really high quality assets, it's particularly cheap at about 15 times earnings and free cash flow yield of over 8%. Notwithstanding some of the headwinds facing advertising, we're pretty optimistic about the prospects for a solid investment return from this entry point.

The second stop, Fiducian Group, stock code FID, it's another one I think it's worth highlighting because it tends to fall under the radar a bit, particularly in small cap land. It's an integrated financial services provider. It's got three key operating divisions: financial planning, platform administration, and funds manager. 

It's been around for a long period of time. It was founded in 1996 by Indy Singh and despite a pretty incredible track record of self-funded growth, and we think that's a really important driver of per-share value creation, it's got [a] relatively low profile. It's not covered by any brokers, and yet it's done particularly well year-on-year for many years now.

Today it's got about $11.2 billion of funds under management advice and administration. And as that grows, of course, that is a value creator in itself. We think it's pretty unique in this market in that its financial planning division is seen as an enabler of flows to its high margin platform administration and funds management divisions. We say it's unique because conceptually, it's like having a high performing diversified funds management group without any key person risk, combined with a really high margin platform business… and that's all sitting in the one structure. 

The positive long-term performance of the Fiducian funds means that we're seeing great outcomes for Fiducian's clients, to advisors and, of course, shareholders that have benefitted for many years.

As it stands, over two-thirds of Fiducian's funds under advice are on the company's administration funds management platform. That's where a lot of the value is created in terms of earnings. 

The recent results have been good. We think Fiducian will continue growing earnings at double-digit rates in the coming years as they've done for quite a few years in the past. In fact, we're forecasting compound growth in the order of 15% to 20% over the next three or four years. 

Now, a big driver of that, and it's important to call out, relates to the transition of funds under advice from the recently acquired financial planning arm of the People's Choice Credit Union, based out of South Australia. That's added $1.1 billion of funds under advice. We think maybe the market's under-appreciating the impact this will have on earnings over the coming three years. 

To sum up our thinking on Fiducian, it's another high quality founder-led business. It's got strong industry position, bright prospects, and a strong balance sheet. It's a consistent cash generator and it continues to trade at a pretty big discount to our values, so at this level, we remain quite happy holders.

MF: I see it gives out a 4% dividend yield as well, which is handy.

AE: Yeah, and it's consistently paid that as well. If you look at the chart of earnings and dividends over the last 10 years, it's remarkably consistent. The executive chairman owns about a third of the business, so there's a lot of insider ownership, a lot of alignment. They've grown the business both organically and via acquisition, but they haven't issued shares to do that. That's why we feel it's a powerful driver of value creation because it's still under growth and you can see in terms of the capital allocation decisions, they've been really sensible. Again, that often goes hand in hand with a founder leading the business.

MF: That all sounds so good. I wonder why it's so under the radar?

AE: It's relatively small. Market cap is circa $230 million and, as I've just said, there's significant insider ownership, so the free float is relatively low. It's not as liquid, so that may remove certain brokers and funds from considering it, which is fair enough. But for the individual investor that's got a decent long-term time horizon, they might be managing their self-managed super fund, it's probably something worth having on the watch list.

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 no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group 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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