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, Maple-Brown Abbott portfolio manager Phillip Hudak names two ASX shares to buy that are under the radar of investors.
Hottest ASX shares
The Motley Fool: What are the two best stock buys right now?
Phillip Hudak: First of all, I'd say Ridley Corporation Ltd (ASX: RIC).
Ridley has transitioned from a turnaround story with the closing of underutilised mills, lifting plant utilisation, lowering costs, and developing new products. We believe that the company looks to be transitioning to the early stages of the upgrade cycle. We believe that the company has multiple potential earnings drivers, including further supply chain rationalisation.
Second of all is small project efficiencies, as well as the potential of market share gains coming through. The balance sheet is looking more attractive with a buyback in place for this current financial year. The company's experienced a reasonable re-rate, however, we see upside to earnings and upside to balance sheet flexibility coming through.
MF: There has been quite a re-rate in share price just over the last three months, hasn't there? What was the catalyst for that?
PH: The company actually has a strong strategic vision over FY '23 and '24 that they've actually outlaid to the market, as well as the stepping stones in relation to those earning drivers coming through there.
Also, the balance sheet is in a lot better condition from the previous management there, and this provides the company with a lot more optionality, either via a buyback or the potential of acquisitions to further grow earnings going forward.
I suppose from our perspective, while there are the stepping stones to see earnings growth, there are key risks, including the recent floods as well as agricultural seasonality. Although Ridley is less volatile as compared to other agricultural stocks — commodity price fluctuations and continuation of supply chain disruptions, there are signs that these are easing.
MF: Great, and your second pick?
PH: Second pick is Boss Energy Ltd (ASX: BOE). This is a uranium producer.
Before I discuss the company, I would like to touch on the industry structure and the environment. Energy security has been a key concern that has emerged over the past six to 12 months. Particularly given the geopolitical tensions, notably between Russia and Ukraine, has increased the focus on energy security across the world.
This has become particularly important in the uranium space, particularly given that 45% of uranium production comes from Kazakhstan and a similar level of material processing is from Russia. The shift to renewables, notably wind and power, has had some shortcomings with providing reliable base load power during the transition period.
In addition, public and political sentiment has changed regarding nuclear [power]. Some examples include nuclear being recently included in the EU taxonomy in addition to the halting of nuclear power plants closures in the US and Europe, the restart of idled nuclear power plants in Japan, and the ambitious Chinese rollout of new reactors going forward.
There is a significant shortfall of supply forecast by the World Nuclear Association, with restarts required into the middle of the 2020s. The current spot price is below the marginal cost of production and so far suppliers have been reasonably disciplined in relation to restarts and waiting for prices to recover to make a reasonable return over the cycle.
Specifically to Boss, Boss Energy offers a low-cost restart operation in the uranium-friendly jurisdiction of South Australia. There is existing infrastructure in place and less risk in relation to cap-ex blowouts versus other mining companies out there that would be starting from scratch. The company's well positioned to take advantage of the current rising uranium market environments with offtake contracts to be signed.
There's fast-tracked production expected by the end of calendar year 2023, and expected to produce 2.45 million pounds per annum going forward. There's attractive return metrics. It's a low operating cost with an all-in sustaining cost of $25.60 per pound versus the spot price, which is roughly around that $50 mark coming through there.
The key risk for this company, in addition to the sector, is another nuclear disaster similar to Fukushima or Chernobyl which would set the industry back a decade.
MF: I see the share price shot up about a year ago. Was that because they announced that they were going to restart the site?
PH: Yeah, a year ago there was positive sentiment regarding the sector. You actually had the Sprott Physical Uranium Trust, which has entered the market and effectively has been buying surplus pounds in the market, which had a positive catalyst for the uranium price, as well as positive announcements from an industry perspective in relation to public and political sentiments changing regarding nuclear.
