Buy Hold Sell: 5 stocks for the reopening

Wasn’t the reopening trade a 2020 thing? Perhaps for some, but not so for us down here in the Lucky Country. 

With mid-October flagged as the reopening date, the anticipation is palpable. And no wonder! Melbourne is now on track to break the world record for most days spent in hard lockdown.

But with vaccination rates marching higher and warmer weather on the forecast, now seems like a good time to dust off the reopening trade ideas.

In this episode of Buy Hold Sell, Ally Selby asks Perpetual’s Nathan Hughes and Australian Ethical’s Mike Murray to share their views on five ways to play an economy ready to reopen.

And there is one stock, in particular, that has them excited. 

Note: This episode was filmed on Wednesday 15th September 2021. You can watch or read an edited transcript below.

Edited Transcript 

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm your host, Ally Selby. And if there's one thing on every Australian's mind at the moment, it's the end of lockdowns. For those in New South Wales, "freedom day" could be coming sooner than we thought with a date pencilled in for mid-October. And to discuss the companies that could flourish in this environment, I'm joined by Nathan Hughes from Perpetual and Mike Murray from Australian Ethical. 

IDP Education (ASX: IEL) 

First up, we have IDP Education, which provides the world's leading English language test. Mike, I might start on you. Is it a buy, hold or sell?

Mike Murray (SELL): I can definitely see why people would be attracted to this stock as a play on reopening. There's no doubt they will get very good growth as part of a reopening trade. We've always just struggled with valuation with this name. I think you're probably paying about 50 times, even on recovered earnings. They certainly have shown a good degree of resilience through the downturn. I think it's a quality business, but it's a sell for us.

Ally Selby: As you mentioned there, it had a pretty good year considering borders were closed. Its share price rose around 70% over the past 12 months. Nathan, over to you. Is it a buy, hold or sell?

Nathan Hughes (SELL): I tend to agree with Mike, and it's a sell from me. I would point out that I've been on the wrong side of this stock, pretty much since the day it listed. It's been a tremendous growth story and obviously has a lot of desirable attributes, great market share, great balance sheet, generates a tonne of cashflow. Student placements will recover as border mobility opens back up, but I just can't make the valuation stack up.

Domain Group (ASX: DHG) 

Ally Selby: Staying on you Nathan. Next, we have Domain Group. It's been a pretty volatile ride for shareholders over the past 12 months. Is it a buy, hold or sell?

Nathan Hughes (HOLD): Domain's a hold. Fundamentally, real estate portals are great businesses with really strong network effects. And whilst Domain isn't the market leader, it is a very strong number two. We see a reasonable outlook for revenue growth, so listings will take a dip at the minute. But we think they'll pick up nicely once we're out of lockdown, but I think there'll be pricing growth there, as well. The one query, again, is the price you're being asked to pay, but I think it's in the hold zone for us.

Ally Selby: Over to you, Mike. Is Domain a buy, hold or sell for you?

Mike Murray (BUY): It's a buy for us, Ally. I agree with Nathan, the economics of this business are very strong. And I think that's true across REA and Seek, and these sorts of businesses. And probably what stands out for us, in this case though, is they're still earning a lower margin than REA and they have a lower share of that revenue pie, so we're backing them to improve their margin and take more of that share through time.

Webjet (ASX: WEB)

Ally Selby: Now, we are going on a plane and going absolutely anywhere. Webjet, it's share price has lifted about 50% over the past 12 months. Mike, I'll stay with you. Is it a buy, hold or sell?

Mike Murray (HOLD): We're a hold on this, Ally. I think it's an interesting company and I definitely think it's a reopening play. I just wonder how much of the heavy lifting has already been done. There are probably twice as many shares on issue now than there were a couple of years ago. The enterprise value would have recovered back to really pre-COVID levels. And so I don't really want to pay the current price for it, but it's an interesting business.

Ally Selby: Nathan, I'll definitely be booking a holiday once lockdowns are lifted. Is Webjet a buy, hold or sell for you?

Nathan Hughes (SELL): It's a sell, and I'd echo Mike's thoughts actually, but with a slightly different take on the outcome. I think there's no doubt they'll enjoy a really strong recovery. But I think those salient points Mike made around the enterprise value and just how much of the recovery is baked into today's share price. There are a lot more shares on issue and there's also some convertible debt on the balance sheet, as well, so that gives me some pause. The other thing I struggle with, just a trend we've seen in a lot of industries, is a lot of businesses are going more direct to consumer and controlling their own distribution. And so, from that perspective, I just wonder about the long-term sustainability of Webjet's B2B model.

Healius (ASX: HLS) 

Ally Selby: Okay, next up we have health care company, Healius. It has a $3 billion market cap and its share price has risen around 45% over the past year. Nathan, I'll stay with you. Is it a buy, hold or sell?

Nathan Hughes (HOLD): Healius is a hold. It's a really interesting one because they're benefiting at the moment from pretty high COVID testing volumes, and this is a pretty profitable business. We'd expect that to taper off over time. But at the same time, we think that'd be good for their base business as people get more mobile and are more willing to go and get checked out, and go and get things done that they might otherwise be putting off. I think the sustainable improvement plans that they're putting in place will lead to margin growth over the medium term. And the balance sheet's in really good shape post the sale of the medical centres' division. So it's a hold for us. We think it's reasonably valued and should be a pretty defensive grower on the other side of the COVID lockdown.

Ally Selby: Mike, as Nathan mentioned, its profits were up about 179% in its report in August. Is it a buy, hold or sell for you?

Mike Murray (BUY): It's a buy, Ally. And I say that even though the company has done well. We really like the fact that they've simplified their business. They've moved out of the more capital intensive medical centre part of their business. And pathology is a fantastic business, we know that it scales very nicely. And they've probably done a bit better in the day hospital acquisition, that they made in Montserrat than we would have expected them to do. The balance sheet is attractive, and the multiple is still reasonable compared to some of the other companies like Sonic Healthcare (ASX: SHL), that we look at. So it's a buy.

Genworth Mortgage Insurance (ASX: GMA) 

Ally Selby: Last up we have Genworth Mortgage Insurance. Its share price recently tanked after it announced it would have to write a new proposal for a deal with CBA. Mike, is it a buy, hold or sell?

Mike Murray (BUY): It's probably not your typical reopening trade, but it is a beneficiary of rising house prices, more generally. We think the company is conservatively provisioned and reserved and trades at about a 40% discount, with net tangible asset backing, which as I said, we think is conservative. So it's a buy for us.

Ally Selby: Over to you Nathan. It has quite a lot of cash on its balance sheet to withstand any fallout from loan delinquencies. Is it a buy, hold or sell?

Nathan Hughes (BUY): I think Genworth's a buy. As Mike pointed out, it trades at a big discount to NTA and I'd echo those sentiments. I think it's conservatively stated they've written off some deferred acquisition costs last year and bumped their provisions quite considerably. I know that the company is as conservatively reserved on a per-policy basis as it ever has been. And that's been ticking up despite pretty good claims performance over the period of listing, really.

Now, bearing in mind that it is at the pointy end of the housing market and these are high LVR loans that they are insuring, so it's not without risk. But they do price for it. And they have been upping prices consistently. So I think there is a lot of value embedded in the back book. The CBA contract issue is an issue, but I think when you're buying it for 0.6 times tangible book in the first place, you're not pricing in any future business growth, anyway. And you're actually pricing a pretty severe outcome for claims, which we can't say definitively, but we think is pretty unlikely. So I think there's a lot of value in this stock.

Ally Selby: Well, that's all we have time for today. We hope you enjoyed this episode of Buy Hold Sell. If you did, why not give it a like. And subscribe to our YouTube channel - we're adding new content every week.

What stock are you playing for the recovery?

Mike and Nathan are both backing Genworth Mortgage Insurance as a winner for the economic recovery. But what do you think? Let us know what stocks you are backing for the reopening in the comments section below. 

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