Four opportunities as the pandemic fog clears

We have made significant adjustments to our portfolio of quality Australian and global listed companies as the disruption of the pandemic gradually clears.

We search globally for investments because the Australian share market is concentrated in financials and materials stocks, and lacks exposure to potential global growth sectors such as healthcare and information technology. But despite this global search, several Australian companies made the grade. 

In this wire, I discuss four of our recent purchases and reveal what got our attention and why we like their prospects.

An undervalued media asset

Here, There & Everywhere (ASX:HT1) is an Australian media company with headquarters in Macquarie Park, Sydney.

HT&E owns Australian Radio Network, one of the nation's leading broadcasters. Its stations  include KIIS and WSFM, which have consistently generated industry-leading ratings and revenue share.

HT&E has a number of other assets, most notably a 25% shareholding in Soprano Design, a fast-growing communication software platform.

We established a position in HT&E for the portfolio at the start of 2020-21. Initially our view was that the market was under-appreciating the value inherent in the portfolio of assets, particularly Soprano Design, and the quality and resilience of the core ARN business.

Although radio advertising markets have been slow to recover to pre-COVID levels, the trajectory is positive. ARN has maintained its ratings advantage over competitors while continuing to win market share.

We believe several catalysts have helped realise value for HT&E shareholders.

The market has come to appreciate the value of the Soprano Design shareholding, particularly after a bid from Norwegian-listed Link Mobility (NOK: LINK) valued the business at $560 million.

Ultimately the transaction did not occur, but the bid raised awareness of the value in HT&E’s shareholding and we expect HT&E will consider monetising its holding in the future.

Meanwhile, Soprano Design continues to grow profits and generate strong cash flows.

HT&E recently settled a long-running dispute with the Tax Office for $71 million. This compares favourably with the $190 million the Tax Office had been pursuing and which many analysts were factoring into their valuations.

Following the settlement and the recent sale of HT&E’s 4.8% shareholding in Ooh Media (ASX: OML), HT&E will hold net cash of about $150 million.

When considered together, and despite the recent strong run in the share price, we feel the core radio business remains attractively priced.

We believe HT&E is well placed to benefit from a broad-based recovery in advertising as the effects of COVID ease. The business is also well placed for any further industry consolidation.

Sharing in the oil recovery

Oil Search (ASX: OSH) is an oil and gas resource company with 98% of its exploration, development and production assets in Papua New Guinea.

Oil Search runs all of PNG’s oil-producing fields and holds a 29% interest in the PNG Liquefied Natural Gas Project, which is operated by ExxonMobil and exports LNG to major markets in Asia.

In September 2021, Oil Search and Santos Limited (ASX: STO) announced their plans to merge, with a potential change of control through Santos's majority stake in Oil Search.

The key driver of Oil Search’s performance during September was the strong appreciation in energy prices due to an emerging global energy crunch.

Oil prices (Brent crude) have pushed through US$80 per BBL, thermal coal prices have hit US$250 per tonne, and spot LNG prices have rocketed to more than US$35 per MMBTU.

This is quite a turnaround, considering prices bottomed at US$2 per MMBTU at the height of the COVID-19 pandemic in 2020.

Demand for oil is recovering and is almost back to pre-COVID-19 levels. It is likely to increase further as border restrictions gradually ease, allowing aviation and other forms of transport to recover.

In gas markets, European storage is historically low going into winter, and China has been increasing imports due to a shortage of electricity brought on by low coal supplies.

Similarly, Brazil has had to increase imports of LNG due to a lack of hydro-generation.

With new oil and LNG supply delayed due to the turmoil in markets over the last couple of years, combined with increasing emphasis on environmental, social and governance factors and capital discipline pressures on producers, we anticipate a period of cyclically higher energy prices.

In our view, this puts Oil Search in a favourable position as an oil producer. Factoring in the risk associated with ESG, we believe our position in Oil Search will materially benefit the portfolio.

In response to ESG pressures, Oil Search has initiated an energy transition review and has targets to reduce emissions by 30% by 2030 and reach net zero by 2050. It also aims to have a positive social and health impact in PNG via the Oil Search Foundation.

Backing out of building

Persimmon (LON: PSN) is a leading UK house builder, serving the local market across the UK.

In September, we sold out of Persimmon and used the proceeds to increase the portfolio’s position in Ferguson (LON: FERG).

We still have a positive view of Persimmon and the strategy of its new CEO, but UK house price growth expectations have started to moderate. Enquiries from new buyers have also fallen. We believe this points to more subdued price growth in the coming months.

We also see evidence of increased competition in some of Persimmon’s focus areas, which may make it difficult for the company to grow faster than the market. We believe there is greater potential in alternative positions such as Ferguson.

Ferguson is the world’s leading value-added distributor of plumbing and heating products, and is listed in the UK and US (NYS: FERG).

In September 2021, Ferguson reported excellent full-year results, with accelerated growth throughout the year and more than 23% like-for-like US revenue growth in the fourth quarter.

For the year ending 31 July 2021, US organic revenue grew 12.8%, comparing favourably to its Australian-listed peer Reece (ASX: REH), which reported revenue growth of 9.5% for the year ending 30 June.

A merger brings opportunities

ICON (NASDAQ: ICLR) is a contract research organisation that provides outsourced services to pharmaceutical, biotech and medical device companies to run clinical trials, aiding in the development of devices and drugs from discovery through to approval.

In our search for quality global exposure, we recently bought back into ICON, which recently acquired PRA Health Sciences, a fellow contract research organisation and global healthcare intelligence partner.

The combined company is an equal number one or close number two to IQVIA (NYSE: IQV), the market leader.

The acquisition also increases ICON’s geographic reach by bolstering its presence in Japan and China.

PRA brings know-how ICLR didn’t have, including mobile health technology to manage the decentralised trials that became essential during the COVID-19 pandemic and represent the industry's path forward.

Also, the PRA data network will allow the enlarged ICON to source patient volunteers for clinical trials. Data allows ICON to better identify customers for clinical trials, saving time with patient enrolment.

Similarly, PRA's strength in the Asia Pacific region allows ICON to talk with its customers about offering services in new areas.

We believe the larger ICON will also be able to cross-sell new services to its existing customers. We see ICON growing its earnings per share in the mid-teens for the next few years, with a backdrop of strong industry growth and demand for outsourced clinical trials.

We acquired ICON at a discount to IQVIA and believe we could gain 30% on our purchase price. Given management’s track record with good cost control and governance, we are confident they will be able to integrate the acquisition with minimal disruption to the existing businesses.

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