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 offers his opinion on a trio of ASX shares that have plummeted recently.
Cut or keep?
The Motley Fool: Let's examine three ASX shares that have been devastated this year, and see if you think each of these fallen stars are now a bargain to pick up or if you'd stay away.
The first one is Whispir Ltd (ASX: WSP), an ASX growth stock which has plunged almost 80% year to date.
Phillip Hudak: It's currently a challenging environment for Whispir. There is, I suppose, a unique difference between Whispir's sort of SaaS model as compared to many other players out there. Transactional revenue, which is volume-based, represents about three-quarters of the revenue of the business as compared to platform and services, which makes up the remaining part. This makes the business highly volatile to movements in volumes and can materially impact Whispir's revenues.
You've seen that actually come through from the pandemic-related messaging volumes, which boosted volumes from state health departments in the first half of FY22, and those volumes are mean-reverting. Even when you strip out the temporary boost that came through, the underlying growth potentially is limited and coming through from there.
While the company has cash on hand and they're pretty confident on the business reaching positive EBITDA, we believe it's actually going to be a challenging environment, at least in the short term for the company.
MF: Fair enough. Next one is retailer Dusk Group Ltd (ASX: DSK), which is 39% down since the start of the year. I believe they sell candles, don't they?
PH: Yes, they do. Dusk is a really interesting company, and looking at the FY22 result, the training update that was provided was reasonably strong, although we acknowledge that they were cycling lockdowns in the PCP.
The company noted that there's been recent evidence of customers trading down, although remains reasonably confident going into the Christmas period. Interestingly, gross margins are holding up, which is pretty similar to the commentary received from other retailers with the exclusion of Baby Bunting Group Ltd (ASX: BBN). Unlike most retailers, Dusk has a better inventory balance compared to other retailers in the space.
The risk of having to aggressively discount in a potentially slowing market is maybe less of a risk compared to other retailers out there in the space. Thus market cap is underpinned by a net cash position, and it's got a pretty healthy dividend coming through.
There's no question that the macro conditions are expected to weaken here in Australia, although in the short term, the market is very bearish [on] retailers, and companies like Dusk are probably better positioned than other companies in the sector.
I suppose the key risks for the company include consumer confidence, the shift we are seeing from spending on products to services by consumers, and the potential risks around comping more challenging like-for-like sales going forward.
MF: The third one is a transport company, isn't it? Kelsian Group Ltd (ASX: KLS).
PH: That's correct, yes.
It's been an interesting journey for the company. If you look at even going back to, I think, mid-2021, the stock was trading over $10 and the market factored in a number of NSW privatisation bus contract awards, which didn't eventuate for the company. And the share price's subsequently fallen materially there.
The most recent results, the business has been impacted by labour issues and rising fuel costs, although the bus earnings are defensive with potential upside to come through with contract renewals and extensions.
In addition to that is the medium-term growth that is expected to come through from the tourism recovery. And this is supported by positive commentary from recent peers providing positive trading updates.
I suppose the key risk for the company is failure to renew bus contracts and further cost pressures coming through for the business.
MF: Great. And that one also gives out a bit of a dividend as well, doesn't it?
PH: Yep.
