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, Forager Funds Management portfolio manager Alex Shevelev names the three ASX shares he would pick up at the moment.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Alex Shevelev: Forager funds, we're a nimble, contrarian and valuation-focused investor and we mostly look at small stocks. I work on the Australian Fund, and I've got colleagues that do the same for international stocks, the Forager International Shares Fund.
We try to get an analytical edge in the things that we're doing and we try to get a psychological edge. On the analytical side, we try to do work to better understand the future cash flows of a business and where there's potential for those cash flows to be missed by other investors. Then on the psychological side, that's where we can be buying while others are selling for reasons that are different to the fundamentals — that could be market, sector or stock distress. And there's been a fair amount of that this year.
MF: There seems to be some debate among investors as to whether Forager is value or growth orientated.
AS: We don't see those as mutually exclusive groups.
Growth has always been part of value. And I think you've seen in our portfolio, [there are] quite a lot of businesses that may have been traditionally regarded as growing businesses. But we think those businesses present a lot of value and that's why we own them.
MF: Fair enough. Especially this year, when they've been discounted so much.
AS: That's right.
MF: How do you see the market at the moment? Where do you see it heading?
AS: Because it's been a very difficult time over the last couple of years, especially for smaller industrial companies in Australia, it actually is a pretty good setup for the next couple of years.
There are a lot of businesses that have come down quite dramatically in price to levels that are very, very attractive. There are a handful of stocks that we feel are some of the best in our portfolio and some of the better opportunities out there.
Hottest ASX shares
MF: That leads to the next question — what are the three best stock buys right now?
AS: Last time we spoke, we were talking about RPMGlobal Holdings Ltd (ASX: RUL) and it's still one of our largest positions.
It's a mining technology business. It has very low churn with its revenue. It does a lot of very important tasks for mining companies. Some of their products are actually industry standards like, for the maintenance of equipment, for example.
The last couple of years, they've overachieved in terms of revenue growth — they've done a very good job selling more subscription software. This year, they'll actually start to see that come through to profit.
The company's given guidance for the current financial year of profits tripling. And that's quite conservative guidance by a management team who we regard as top notch. And that guidance actually assumes that the new revenue additions, which are an important metric for RPM, will be below last year. But the business looks to be tracking better than that.
We, in fact, got an AGM update just this morning that confirms that the business is doing a good job continuing to sign on its subscription revenue. And all of that is trading at about 17 times earnings next year. That earnings stream is high quality and will continue to grow over time.
Now, it's been an interesting space, as well, for corporate attention. Two of their larger competitors have recently been taken out. Those two transactions imply for RPM… more than double the current share price. This is a business that can garner a lot of attention from potential bidders over time.
MF: And your second pick?
AS: The next one's Tourism Holdings Limited (NZX: THL) and Apollo Tourism & Leisure Ltd (ASX: ATL). These businesses are actually merging and we have owned both of them and continue to own both of them.
These businesses are engaged in the production, the rental and the selling of RVs. This whole space has been decimated by COVID, but both actually came through very well because, instead of raising equity when things got difficult and international tourism stopped, they actually sold the fleet that they had on their books and continued operating.
Now tourism is coming back. Domestic tourism has been very strong for a while. International tourism is starting to come back. Both companies have seen the benefit of that. So, both have upgraded their earnings expectations for the current year recently. Apollo is actually talking about numbers that are higher than pre-COVID, on the strength of higher yields in Australia and their sales of recreational vehicles to consumers in their retail business.
When these businesses come together, which should be in December, this merged entity has a lot of synergies. So, over the last few days, they've confirmed that those synergies are due to be worth NZ$27 to NZ$31 million dollars, which is significant. That's NZ$10 million more than was first anticipated when the deal was put together late last year. So, by the time we get to FY2025 in a couple of years, all the synergies will have come through, the international tourism factor should be back, and the business should be trading on seven to eight times earnings by that point, be much larger and more liquid. And THL, previously only listed in New Zealand, will actually also be listed in Australia.
MF: I see that Apollo's share price has really spiked up in the last month or so?
AS: The merger had to get clearance from both New Zealand and Australian competition regulators — that has come through reasonably recently.
There's also been an improvement in the number of THL shares that Apollo shareholders will get through this process because the Apollo business has been performing particularly well. And generally, the THL share price, in anticipation of all the synergies and the strength of the combined entity, has also been rising during this period.
MF: Your third ASX share to buy?
AS: ReadyTech Holdings Ltd (ASX: RDY) is the third one. It's a bit of a rarity in the tech space: it's a consistently profitable business.
It's been operating in education, employment and government software. They do some very important tasks for the respective verticals that they operate in. And given the difficulty of actually replacing this software, revenue churn is very low. So, once they win a client that client usually stays with them for quite a long time.
The company has talked about growing organically into [the] 2026 financial year, which is some years away, at a rate of 15% plus, a very significant organic growth rate.
The business can increase pricing, that's a part of that. They can sell more to their existing customers. And they've also been winning new customers with the high-quality products that they have for those three spaces.
They've made some really interesting acquisitions in the government space recently, which gives them a bit of a push into the local government space. Then the business has been quite acquisitive historically. So there is the ability to acquire smaller businesses into the existing verticals and potentially push into new software verticals as well.
All of that for, again, a high teens multiple, approximately 17 times earnings next year.
MF: I see that, for a tech stock, its share price has been pretty resilient this year. It's only down like 10% or 15%.
AS: That's right. Mostly that is because this business has remained profitable over that period and has been underpinned by some solid free cash flow.
