David Wilson's watchlist: 4 winning companies set for growth

Having soundly beaten his benchmark – the ASX300 – over most timeframes, First Sentier Investors' deputy head of Australian equities, David Wilson,  is well-placed to assess the local market landscape. And in his view, the latest reporting season marked a return to balance after February capped off one of the strongest periods in more than a decade.

“One-third of companies surprised on the upside, one-third surprised on the downside, and one-third delivered in line with expectations,” Wilson said at a recent First Sentier webinar.

“Overall, we probably had a 1% or 2% decline in earnings expectations, but you’ve still got to view this in the context of fiscal 2021 when we saw EPS grow by 26%. And we expect another 26% growth in EPS over the course of 2022.”

He noted that the price-to-earnings ratio across the local market is currently around 17 to 18 times, “not particularly expensive,” but said investors also have to consider the broad dispersion here.

Wilson also called out the red-hot M&A activity that played out over the course of fiscal 2021. Most recently, we saw the record-breaking announcement that Afterpay (ASX: APT) will be acquired by US payments company Square, alongside other prominent deals including:

• Santos’s take-over of Oilsearch (ASX: OSH)
• Woodside’s acquisition of BHP’s petroleum businesses
• Telstra’s restructuring via the sale of its mobile towers business
• Bids for Iress (ASX: IRE), Sydney Airport (ASX: SYD) and Link Administration (ASX: LNK)
• Seven Group’s (ASX: SVW) manoeuvring up the Boral (ASX: BLD) share register
• IOOF’s (ASX: IFL) completion of its transaction with MLC Group

Macro doesn’t matter much

Wilson says markets continue to fixate on the recovery from the pandemic and are mindful there was a recession last year – while also noting fiscal 2021 was capped off with March and June quarters that were “very strong” and “solid,” respectively.

But he also emphasised that over the last 18 months, his team has taken the opportunity to remove their hands from the wheel, in terms of reducing their focus on economic events.

“It wouldn’t have helped our portfolio. We’re not ignorant on the economy – in 2018 and 2019 we spent a lot of time talking about it, but with the underlying support of the Fed, the RBA and the Australian Government from a fiscal point of view, the ins and outs of what’s taken place in the economy we’ve seen as less important,” Wilson says.

“During this COVID period, we’ve focused more on the strategies and positioning of the companies.”

That said, he also provided some commentary on Australia’s macro outlook.

“There’s a resilience in the Australian economy, despite the fact that we are going to see large declines in retail sales and the negative headlines because of the lockdowns in the September quarter.

“Yes, the lockdowns are costing the economy $2 billion to $3 billion a week, but the stimulus program is putting the same amount back into the economy, and we expect the RBA to remain accommodative.”

Remarking on the renewed – or ongoing – strength of Australian housing, as reflected in the rebound in housing starts, credit growth is another big number he’s looking at. 

Credit growth, as reported by Australian banks currently, is running at between 4% and 5% but is headed to between 7% and 8% for the next quarter.

“Particularly from a housing market point of view, it remains robust. Yes, you’re going to get some bad headlines over the next quarter and maybe even into the December quarter, but the resilience here remains supportive for the market generally,” he said.

Four reporting season standouts

Wilson reflected on a handful of companies in his portfolio that were highlighted in First Sentier’s previous quarterly update:

• Fast-food retailer Domino’s Pizza (ASX: DMP),
• Logistics software firm Wisetech (ASX: WTC),
• Testing and certification company ALS Limited (ASX: ALQ) and
• BHP spinoff Bluescope Steel (ASX: BSL).

All of the above reported impressive net profit figures in fiscal 2021 – Bluescope’s NPAT more than tripling on the back of the booming iron ore price and Wisetech saw this figure climb just over 100% year-on-year.

Alluding to Wisetech’s long-running battles with short-sellers including J Capital Research and most recently Viceroy Research, he says these provided additional opportunities to load up on what he regards as a high-quality stock. “Wisetech, with its earnings up 100% and its goal to be the operating system for global logistics, it remains a real success story.

“We have this cringe where Australians think only American or perhaps European companies can be leaders in tech, but that’s not true. 

We’ve seen this in the past with companies like REA and Seek, with Afterpay and also with Wisetech that Australian companies can do as well as anyone else in the tech space.”

Four companies on Wilson's watchlist

Wilson also called out four more companies that are either already in his portfolio or high on his watchlist.

Steadfast Group (ASX: SDF)

Wilson anticipates the firm, which owns the largest share of Australia’s insurance broking market, will grow its earnings by between 10% and 15% over the next 12 months.

“It’s not in our fund because it’s not a top 100 company, but the way it’s growing it may get there soon,” he said.

“Steadfast’s ROE continues to rise because of the careful way it has grown the business and acquired companies, and it’s now the leading operator in the insurance broking market”

Cleanaway Group (ASX: CWY)

Regarding Cleanaway as the leading waste management company in the local market, Wilson says its balance sheet is the strongest among its competitors.

The company is currently in the middle of a $500 million acquisition of the Sydney-based assets of major French player Suez – a deal Wilson says will be “earnings accretive.” Alongside this scale boost, he also likes the fully integrated nature of the company. Cleanaway’s operations span:

• Suburban rubbish collection across the country
• Commercial waste
• Recycling centres
• An expanding “energy from waste” business.
• Landfill sites.

Oz Minerals (ASX: OZL)

The seemingly insatiable demand for copper is the underpinning appeal of this company – which is the fund’s preferred mining exposure, beating out the likes of BHP and Rio Tinto.

“Bringing on copper mines isn’t particularly easy, you’ve disruptions in Chile and Peru and a lot of sovereign risk if you want to develop the copper deposits that are in places like the Congo.”

“With its South Australian assets and the potential to open a Western Australian mine too, we think it’s very well-placed.”

IDP Education (ASX: IEL)

An international English language testing and student placement company, IDP holds a world-leading position in its field. The company sources clients from around the globe, and even during the lockdowns in its home market, has been able to continue placing students in countries such as Canada and the UK. “We think this is a company that will continue to grow earnings for a long time to come,” said Wilson.

Key takeaways from the First Sentier investors webinar

• FY21 reporting season “far more balanced” than the first half
• First Sentier’s Aussie equities team has abandoned economic data
• The Australian economy is more resilient than you might think
• David Wilson has four companies firmly in his sights: Steadfast Group (ASX: SDF; Cleanaway Group (ASX: CWY); IDP Education (ASX: IEL); Oz Minerals (ASX: OZL).

David Wilson

Deputy Head of Australian Equities, Growth

First Sentier Investors

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