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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, Discovery Fund portfolio manager Chris Bainbridge and Mark Devcich run their eyes over three ASX shares that are now heavily discounted.
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 is now a bargain buy or if you'd stay away.
The first one is Aussie Broadband Ltd (ASX: ABB), which has almost halved since last Easter. What do you guys reckon?
Mark Devcich: We feel like it's a buy… To be honest, it got extremely overheated and they did a merger last year with Over The Wire and we feel that's a strategically a smart thing to do because it gives them more exposure to business and enterprise, and the core Aussie Broadband business was more residential focused.
But the valuation did get overcooked really. The fall in share price hasn't really been due to execution issues, it's more just been a devaluation derating. So we feel like there's another one with a founder-led management team, they've got a name to take their market share for NBN residential to 10% from the current 7%, so that's a more than 50% increase.
There's also some pretty favourable dynamics in the NBN space right now. You may have seen that the NBN wrote down the value of the network by $31 billion recently, and that was driven by changes to the prices they charge the retail service providers. That's extremely beneficial to players like Aussie Broadband, who have to pay the NBN for access to the network. And what that's going to mean is once these changes come through in 1 July, [which] is the expected time frame, there should be substantial margin uplift.
In particular, it's very favourable for Aussie Broadband because what's happened is [NBN's] proposed to take off consumption charges. Because Aussie Broadband gives higher speed plans, and higher usage customers, they're actually going to benefit more than a regular telco. We don't feel like consensus is properly factoring in the benefits that could come from this change in NBN pricing into the '24 financial year.
MF: The next one has just been a shocker. Megaport Ltd (ASX: MP1), which has lost about 65% over the past year or so?
Chris Bainbridge: It's probably a short-term sell from us.
So what are the reasons for that? At Discovery, we operate a risk management system for both stocks and the portfolio, and at a stock level, that risk management system operates with red flags and amber flags. So we categorise certain things as red flags and certain things as amber flags. If it presents a red flag, it requires us to reduce the position, depending on its quality, by a certain amount.
Now, an unexpected CEO exit is a red flag. As we saw, Vincent English unexpectedly exited the company earlier this week, so just based on our system, we've been reducing the position on the basis of that.
More concerning is Vincent's exit post the exit of Rodney, who was the chief revenue officer last year and then they had more turnover at the company's secretarial level. It's always concerning when you see management changes because we're only seeing the tip of the iceberg.
MF: The third one is Domino's Pizza Enterprises Ltd (ASX: DMP), which also halved over the past year. Bargain buy or stay away?
CB: Again, short-term sell from us.
Domino's is a company which starts to deliver over footy season. The surprising result was the fact that same-store sales declined in the first half of '23 more than expected and then became significantly more negative in the first several weeks, down 2.2%. What's a real concern there, first half of '23 had the football World Cup in Europe, and that should have been really supportive [of] same-store sales.
So for them to deteriorate more than expected suggests that the business is really struggling.
Now, clearly, consumers have pushed back against some of those measures intended to pass on the inflationary costs. But abandoning that, Domino's will probably need to assist franchisees on margins. For example, maybe they defer the advertising contributions that franchisees usually pay, so they'd probably have to do that whilst facing higher input costs themselves as a business.
What does that mean? We can see in the results they've had to slice — pun intended — their same-store sales targets and at the same time, there are still rollout plans. So short term, it's probably cooked.
Long term, we believe that there's a great business there. Long term, it's a great business, but short term, no.
