Market Matters’ 8 stock picks for 2022

Investors love hearing what professional stock “frothers” think about the market at any given time. They especially enjoy learning what stocks are on their Buy lists – which Market Matters delivers via its regular updates. In this latest webinar, principal James Gerrish brought together eight analysts who delivered the same number of stock picks from their bulging books of Aussie equities.

Part of stock broker Shaw & Partners, the following analysts were quizzed by Gerrish recently during a rapid-fire Q&A:

• Jules Cooper and Danny Younis – Technology
• Aiden Bradley and David McFadyen – Industrials
• Peter O’Connor and Michael Clark – Resources
• Jono Higgins and James Bisinella – IT.

Diving straight into the stocks, let’s throw to the commentary from the analysts themselves. Note: the share price indicated for each of the below stocks is as of the market open on Friday 10 December.

Gentrack (ASX: GTK)

Analyst: Jules Cooper
Target price: $5
Current share price: $1.74

GTK provides customer information software to energy, gas, and water utility companies. It is billing software, a critical component in ensuring utility companies get paid.

Cooper said GTK was a $6 a share company in 2018, before raising money for an acquisition. Currently, he regards the stock as a “slightly contrarian play,” the market pricing the $170 million business for ongoing headwinds from IT expenditure in the UK. But he believes the stock has seen its “darkest hour”.

Cooper notes around 50% of GTK’s revenue is exposed to the UK, where a “succession of negative events” have knocked the company’s share price. These events include a new regulatory price cap introduced in 2018, which squeezed GTK’s margins earned from wholesale energy markets.

Recapping the opportunity, Market Matters' Gerrish said: “We like this pick and believe you can play GTK with less than 10% risk, which is fairly conservative at this end of town."

South32 (ASX: S32)

Analyst: Peter O’Connor
Target price: $5
Current share price: $3.80

The analyst spoke about the various “future” materials its customer base is producing, including manganese and the shift away from coal.

“It’s becoming a clean, green and future-facing portfolio, which is important in the current context,” he said.

O’Connor tips around 20% growth from Aluminium, similarly strong growth from Copper, and between 10% to 15% growth in Nickel, and is confident in the long-term potential into the middle of the next decade.

Highlighting the stock as a fully franked dividend payer, he also urges caution for investors regarding the stock as an income player, noting the fragility of current payout ratios, which are unlikely to be sustained over the long term.

Management consistency is a key strength O’Connor highlights, particularly since the company’s spinoff from global miner BHP Group.

In closing, he said: “S32 is trading at a discount to its fair value, it's paying you a dividend yield to cover your holding costs, and it's got growth opportunities and is future facing.”

Global Data Centre Group (ASX: GDC)

Analyst: Jono Higgins
Target price: $3.03
Current share price: $1.89

“We think this is one of the cleanest valuation arbitrages in the market,” said Higgins.

GDC operates data centres alongside a portfolio of passive investments across the data centre space. Notably, this includes a large stake in AirTrunk, which GDC jointly owns alongside Macquarie Infrastructure Group. An unlisted vehicle, AirTrunk is around five times the size of NextDC, the largest DC operator in the Asia Pacific region.

With good free cash flow and a healthy balance sheet, Higgins sees good tailwinds for data demand. And he regards GDC management among the top three teams of companies it follows.

“Near-term, we expect a number of acquisitions in this data centre space and see the company continue to grow, with significant upside from here on in.” As a guide here, he alludes to the growth of between 40% and 50% in the data-driven core businesses of the likes of Google, Amazon, Facebook, and Microsoft.

Audinate (ASX: AD8)

Analyst: Danny Younis
Target price: $9.04
Share price: $10.06

“We listed this stock about four years ago at $1.22. It's now trading at about $10. So, it's done incredibly well, and we think it could double from here,” said Younis.

Operating in the professional audio-visual place, it’s a key beneficiary of the worldwide transition from analogue – and the “many metres and kilometres of cables” this requires – to faster and more efficient digital audio networking. This is favoured because of digital’s far superior (lower) latency and drastically cheaper implementation costs.

“This technology has become the global default standard in digital audio networking and is where all installations are now moving,” Younis said.
“We like Audinate because it provides a 360-degree offering across hardware and software, video and audio.”

Looking back over the past few years, Younis estimates the company was around three times ahead of its competitors in terms of product volume. “It’s now 19 times ahead and competitors have fallen by the wayside,” he said.

With a huge addressable market and only around 7% or 8% market share currently, the forward runway is huge. Younis also points to the firm’s $65 million in cash and gross margins of more than 75%.

And AD8 is founder-led, a management structure that is always enticing for investors, founder Hayden Williams taking the reins as CEO in recent years.

And the firm’s list of partners is impressive. “Every major global original equipment manufacturer in AV – Sony, Bosch, AudioTechnica, Bose and others – have signed on to use this technology in the future. So, it’s an adoption trajectory”

“The firm will be a major beneficiary of the COVID reopening,” said Younis, particularly as face-to-face events across the vast range of events that were scuppered by lockdowns and social distancing measures ramp up again. This snapback will be particularly pronounced in the US and Europe markets, which are within AD8’s footprint.

In terms of risks, Younis calls out the widely documented microchip shortage but regards this as little more than a short-term speed bump, the company having successfully reshuffled its supply chain in the interim period.

Blackstone Minerals (ASX: BSX)

Analyst: Michael Clark
Price target: $6
Share price: 54 cents

A battery metals development company focused primarily on Asia Pacific markets; the firm is also rapidly increasing its downstream operations.

Key aspects called out by Clarke include its partnership with the likes of resource tracking and measurement firm Circulor, a world leader in the category. He also notes the firm is trading at a market cap of around $200 million, versus a far larger scale based purely on its “upstream economics” (the extraction of lithium and other battery minerals, excluding its downstream refining operations).

With operations in Northern Vietnam, which is shaping up as a globally significant source of Nickel, Clarke highlights Blackstone’s first-mover advantage here.

“The company’s also got access to low-cost hydropower. And there’s no shortage of potential partners, with Vietnam located close to China, South Korea, and Japan,” he said.

“That's the heart of Asia's rapidly expanding lithium-ion battery hub.”

Retail Food Group (ASX: RFG)

Analyst: David McFadyen
Target price: 14 cents
Current share price: 7 cents

RGH operates a large franchise network in specialty foods, with six brands including Donut King, Brumbies Bakery, Michel’s Patisserie, Gloria Jeans, Crust and Pizza Capers,

“This isn’t the company you’ve read about in recent years,” McFadyen said, the firm facing regulatory investigations and a crushing debt burden.

“It’s been a wild five years but in 2019, the company brought in a new management team focused on turning around the business,” he said. Since then, the firm has undertaken a $194 million recapitalisation and bolstered its balance sheet.

“And the brand network remains very valuable, with solid customer propositions, broad geographic diversification and offshore expansion potential,” said McFadyen.

“You don’t see many Donut Kings in the CBDs, but they’re dotted all over the landscape and have a very sticky customer base.”

Management has driven a genuine “franchise-first” strategy – such as putting an additional $30 million of gross margin back into the franchisee group – funded by efficiency gains at head office, improved rental terms and targeted marketing campaigns.

“Despite the prevailing narrative (of regulatory concerns and class actions), I think these efforts remain at the forefront of management's focus,” he said.

The major issue currently weighing on the business is a multi-year investigation by the ACCC into historical matters which escalated into legal action about 12 months ago, alongside a class action that was lodged recently by some former Michel’s franchisees.

“There could be large financial penalties to come, but I think RFG has a solid balance sheet to manage that and a strong case relative to the public narrative,” said McFadyen. He notes the regulator has withdrawn several of the substantial allegations and the class action is yet to gather any real momentum, the company repeatedly emphasising it wants to reach an “early and reasonable resolutions” to the issues.

McFadyen regards the company’s shares as trading at a discount of between 50% and 60% relative to competitors within the Australian market.

In closing McFadyen’s assessment, Market Matters Gerrish highlights it as “a beaten-down, dirt-cheap stock with solid turnaround potential.”

Top Shelf International (ASX: TSI)

Analyst: James Bisinella
Target price: $2.32
Current share price: $1.48

One of Australia’s largest and fastest-growing premium spirits companies, TSI’s product line includes NED Whisky, Grainshaker vodka and an all-new category under the Australian agave brand (agave is better known as tequila).

Bisinella notes management has spent around $35 million on a state-of-the-art distillery in Victoria. The company also boasts $500 million worth of products that are either in maturation or planned between now and the 2026 financial year (whisky in oak and Agave planted).

“So, you're getting all of this for a company with a market cap of just $100 million,” the analyst said.

“We believe today's share price somewhat reflects the whisky and vodka brands, but it’s missing the potential of that Agave project, which is the third-largest spirit market in the US.”

TSI’s Agave product is launching in 2023, led by Trent Fraser, a pedigreed manager in the space who previously worked for $500 billion luxury brand Louis Vuitton Moet Hennessy and built the company’s top five global “super-premium” tequila brand, Volcan.

“We think he could replicate that success at Top Shelf, with structural tailwinds for the group including the fact that about 80% of beer and wine consumed in Australia is locally produced, however, spirits are at just 8%.

The China opportunity is another key opportunity for the group. Australia currently only exports about $4 worth of booze per capita, versus around $120 for the UK and $14 for New Zealand. Bisinella regards this as creating huge scope for further sales growth.

“TSI trades at a 70% discount to its peers and if it doesn’t rerate, we think it could become an M&A target alongside the likes of Four Pillars Gin, Little Creatures and Mountain Goat.”

Eleanor Investor Group (ASX: ENN)

Analyst: Aiden Bradley
Target price: $2.70
Current share price: $2.28

For one of the small numbers of locally listed commercial property firms, Bradley emphasises the continued bright outlook for the sector. This has so far been driven primarily driven by low interest rates, but it has been a strong-performing sector for well over a decade.

Solid institutional demand is an additional driver for the next few years, as corporate investors correct and boost their long-term underweight allocations to the sector.

“We expect outperformance to continue going forward,” said Bradley, not so much on interest rates but the heightened interest of foreign buyers. Though Bradley notes performance is unlikely to meet the outperformance seen in more recent times, he’s still very positive on the commercial property sector.

Key areas to watch:

• neighbourhood retail assets,
• industrial,
• medical
• agriculture,
• suburban office, and
• domestic hotel, tourism, and leisure.

CBD office space is his least preferred category in the sector, alongside retail.

Two of the major listed fund managers in the space Bradley highlights – which are preferable exposures for retail investors, because of the complexities of the sector that can be hard to get your head around, are:

• Centuria (ASX: CNI)
• Eleanor (ASX: ENN)

He describes the latter as the “smaller and cheaper” of the two, being less established, which gives, in Bradley’s view, more potential upside.

With strong and growing FUM, he regards ENN as likely to grow its current FUM of around $2 billion to around $18 billion over the next few years, which is where its larger competitor Centuria now sits.

“It’s only on about 13 times earnings versus 20 to 25 times for others in the space and offers a yield of around 7%,” Bradley says.

Make informed investment decisions

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