Fundies’ top 5: medtech, payments and aeronautical

From a creator of medical products at the forefront of infection control, to a caravan-maker reborn as a modular building specialist – a handful of niche companies were tipped among the most compelling post-COVID investment opportunities at a recent ORAH Fund event.

Professional stock-pickers from top-performing asset managers including Yarra Capital Management , Centennial Asset Management, Wentworth Williamson, L1 Capital and Pengana Capital participated in a professional investor webinar earlier this month. Each participating investment specialist was this year asked to detail one of their portfolio picks, a handful of which are revealed and discussed briefly below.

The ORAH Fund is a fund of funds aiming to produce risk-adjusted returns in excess of a composite benchmark comprising 50% of the MSCI World and 50% of the ASX 300 Index. Established to benefit charities supporting Jewish-related causes, all management and performance fees charged by the ORAH Fund are donated to charity.

A replay of the full panel session is available on this link (video only) and a summary of the investment ideas is available below.

Nanosonics (ASX: NAN)

Katie Hudson, Yarra Capital Management

Nanosonics is the market leader in infection prevention for medical devices such as ultrasounds. With less than 20% global market share, there is plenty of room for growth from its existing markets and through expansion into new countries including Japan and China. The company’s revenue model is compelling. While large inflows from the sale of its devices to hospitals are attractive, from our perspective the real value driver is the recurring consumables revenues which are linked to the daily use of their devices.

Nanosonics has a highly scalable manufacturing process, requires little capital for growth, generates very strong free cash flow, and is investing in R&D for growth. With a net cash position, its balance sheet is in great shape at a time when many companies face a funding squeeze. Events of the last few months are certain to leave the world’s healthcare professionals even more focused on the importance of best practice in infection control. Medical authorities around the world are driving the adoption of new technologies, and rising paranoia post COVID-19 is set to further accelerate this trend. As the market leader for medical device disinfection, Nanosonics is a clear beneficiary from the acceleration of this structural trend.

BidEnergy (ASX: BID)

Matthew Kidman, Centennial Asset Management

Recession or not, COVID or not, we like niche businesses that have global reach across global markets. One of these is BidEnergy, which specialises in electronic bill management for utilities. Not just energy but water and others for companies who pay a lot of bills, sometimes hundreds if not thousands of them. They’ve grown out of Australia and New Zealand and have a global footprint in the US and UK now.

BidEnergy uses its AI and electronics to not only manage and pay bills for clients but also to save them money by getting the right utility products for them. COVID hit them hard in the US but they’ve got traction again. We think it's a great growth story about getting a niche and owning it globally. The AU$128m market-cap company announced a loss of AU$6.9m on 30 June 2020 but big things are expected over the next two years.

Fleetwood (ASX: FWD)

James Williamson, Wentworth Williamson

We invested a meaningful proportion of our cash reserves into Fleetwood earlier this year and the share prices performed well during the September quarter. This business highlights just how inexpensive some of the small industrial stocks on the ASX are, and that one doesn’t have to pay sky-high multiples to find companies with good growth prospects. Fleetwood was a market darling several years ago with one of the largest caravan manufacturing businesses in Australia under the Camec, Windsor and Coromal brands.

It has since moved into the modular building business which was primarily focused on providing accommodation solutions to mines around the country. When the mining boom ended, Fleetwood suffered while cheaper caravan imports also started to take market share and the share price fell over 90% from 2013 to 2015. Since then, management have been on a long journey to turn the company around. The modular building business is, in our view, the jewel in the crown with potential to grow substantially over the next couple of years. So far in the eastern states of Australia $15 billion has already been set aside for schools and $6.7 billion for prisons, with Fleetwood already winning many of the initial contracts.

SAFRAN (SAF.FP)

Mark Landau, L1 Capital

French aeronautic giant Safran is a good example of a stock that had a major hit to their earnings or business models due to COVID-19 and fall into the ‘COVID-19 losers’ category. We expect many of these stocks will recover most of their losses over the next year as COVID-19 vaccine and treatment progress becomes tangible.

"Safran's key asset is its jet engine parts and maintenance business that is one of the highest quality aerospace businesses globally. Global travel demand continues to grow strongly (excluding the COVID-19 interruption this year) and Safran typically puts through price increases of 5-6% p.a., reflecting their best-in-class products and entrenched position with customers. Safran's parts are critical to the ongoing maintenance of their fleet of CFM56 and LEAP engines, which dominate the narrow-body market. We expect earnings will "take off" in coming years on the back of recovery in flying activity, continued price rises and a 2b euro cost out program.

Telstra (ASX: TLS)

Rhett Kessler, Pengana Capital

It’s a really boring stock and nobody likes the management, but I’ll go with Telstra. It has the best mobile network in the country. The mobile division is the most important for Telstra, and subscribers continue to grow. Despite a period characterised by intense competitive activity, Telstra has remained competitive in the market, continuing to grow its mobile subscriber base throughout the year.

As we near the end of 2020 and the start of a new year , the threat of a fourth mobile operator appears to have been removed, and remaining operators have been heavily impacted by the government’s decision to ban Huawei for use in 5G infrastructure. Telstra has a first-mover advantage in 5G and having substantially restructured its mobile product offering over the past 12 months, enters this improved environment in a position of strength. It’s certainly not sexy but it’s OK.

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