Which company could double its earnings in just five years?

Macro may be a useful tool but it's bottom-up stock picking that makes the good investor great. As 2022 recedes into the distance, 2023 will likely be the year where the effect of interest rates on earnings will materialise. So which companies will make the grade and which ones are worth avoiding?

In this edition of the Analyst Forum, we've gathered five of Wilson Asset Management's equity dealers and analysts - namely Shaun Weick, Sam Koch, Will Liu, Cooper Rogers, and Will Thompson to do just that. 

They will deliver their verdicts on 18 global and local companies spanning a wide range of sectors and investment strategies.  

Edited Transcript

Camilla Cox: Hello, welcome to WAM Vault. My name is Camilla and today I am joined by Will, Cooper, Sam, Shaun and Will. Thanks for joining me guys. 

Sam, are you worried about the impact of the weaker consumer on Temple & Webster (ASX: TPW)?

Sam Koch: Temple & Webster is a BUY  for us. It is an online furniture company that is run by one of the best management teams in the small-cap market. Yes, a weaker consumer and a weaker housing market are worth monitoring. 

However, we see their relative value offering, their dropship model and also their prudent cost management will lead to outperformance and take share during this downturn. 

You only have to go back to 2018 when the last housing market downturn happened and they actually saw an improvement in growth profit margins as a result of the product mix shift. Our thesis on Temple & Webster is simple. We see that they have been comparable to their high sales period during coronavirus lockdowns last year and now we should be able to see sales growth returning to the business and a re-rating occurring over the period, so Temple & Webster is a buy for us.

Camilla Cox: Will, are people still spending as much on their pets as they did in lockdowns and do you think CVS Group (LON: CVSG) is a buy?

Will Liu: Yes, I think people are still going to spend on their pets, so CVS Group is a BUY. They are a vet services provider in the UK. They are one of the largest companies consolidating the sector. The pet industry is an industry we continue to really like. 

There is an increased humanisation of pets and we have seen the pet population massively increase post the pandemic. If you look at survey data, most people would actually rather save on themselves than save on their pets which is quite interesting, I think that holds fairly true and then if you look at the management team they have done an excellent job. 

They have just had a capital markets day. They are talking about 4 to 8% organic growth and doubling earnings before interests, taxes and amortisation (EBITDA) over the next 5 years. They have done an excellent job of attracting and retaining talent which is pivotal in these service businesses where people are incredibly important, so CVS Group is a buy.

Camilla Cox: Shaun, talk to us about Premier Investments (ASX: PMV), buy hold or sell?

Shaun Weick: We have Premier Investments as a HOLD at the moment but almost a buy purely on the basis that we do have some reservations or concerns about the general consumer environment. 

In Premier, you are backing the best retailers in the country in Solomon Lew and Richard Murray. It is really the strength of the balance sheet that positions the business well going from here. We think they are really well placed to make what we think will be a transformational third-pillar acquisition. So for us, it is a hold but we are excited by the mergers and acquisitions prospects here.

Camilla Cox: Cooper, people are calling Hurricane Ian an opportunity in the US. Is there more to it? Talk to me about Johns Lyng Group (ASX: JLG).

Cooper Rogers: Camilla, we never really like to celebrate catastrophic events but I agree with you that it is definitely an opportunity for Johns Lyng Group and their recently acquired reconstruction experts in the US. 

They are setting up their business in Florida and this is a great opportunity for them to stamp their footprint over there. It is also no secret that catastrophic events are also contributing to the revenue line for Johns Lyng Group in Australia and we think the revenue of catastrophic events is going to impress in FY2023. 

Investment in the US is needed as Johns Lyng Group sets up existing companies like Makesafe in reconstruction experts’ key areas across the US. However, we expect this investment to lead to revenue synergies in FY2024. So Johns Lyng Group is a BUY for us.

Camilla Cox: Sam, talk to us about Breville (ASX: BRG).

Sam Koch: Breville is a HOLD for us. It is a great group of brands, but from our perspectives, it is really one of those companies that benefited from the Coronavirus. There were a lot of people at home buying coffee machines and the like, so we are waiting for that really to normalise before getting a little bit more excited about the company. It is a hold.

Camilla Cox: Will, we are pretty upset that Netflix (NASDAQ: NFLX) is putting ads in the middle of our shows, so are they a buy, hold or sell?

Will Liu: Yes Netflix is a SELL for us. I actually think the industry is just becoming increasingly competitive. We have seen a lot of new entrants whether it be HBO, Amazon Prime Video, ESPN etcetera. It is just becoming a little bit of a crowded space and it is increasingly harder to differentiate yourself, so there is further investment in content needed to keep staying ahead of the curve. 

We think the company is probably closer to maturity than a lot of people think. And that is evidenced by their ad-based business model which they have recently introduced. It is quite telling when they previously say don’t expect us to introduce ad-based revenues because it means we are closer to penetration, so Netflix is a sell for us.

Camilla Cox: Shaun, if you read the media headlines the airports are under a bit of pressure. Can Tourism Holdings (NZE: THL) benefit from this?

Shaun Weick: Absolutely. Get out there and get amongst it. Tourism Holdings is a BUY for us. They are the largest RV operator across Australia and New Zealand following the recent regulatory approval of the merger with Apollo. 

We think both domestic and international tourism will remain very strong over the coming 12 to 18 months. You look at the culmination of the softer Australian dollar and the ongoing shift we believe will occur from goods towards services. 

We think this business can generate over $80 million of profit after tax. 

They have recently upgraded the cost synergy which provides another level of support to that and it is trading on a sub-ten times price to earnings (PE). The balance sheet is in great shape. Great management team. We see expansion into North America as a medium-term opportunity for these guys, so yeah we like that one. It is a buy for us.

Camilla Cox: Will, it has been a tough year for biotech names. Aroa Biosurgery (ASX: ARX) buy, hold or sell?

Will Thompson: Aroa Biosurgery is a BUY. Aroa Biosurgery develops, manufactures and then distributes medical products. Its product is, with a fear of oversimplifying, just a really high-quality band-aid that you would use if you were in a bad motorcycle crash and you lost quite a bit of skin on your leg. 

It is actually quite a developed industry, however, they have come up with a new type of organic produce. Next year there are a few regulation changes which could really benefit them. They recently posted some strong sales numbers and actually showed that there is some cash generation as well, so we think next year is going to be a big year for them, so it is a buy.

Camilla Cox: Cooper, we all love a glass of wine, how about Australian Vintage (ASX: AVG)?

Cooper Rogers: Australian Vintage is a HOLD for us. It has completed its pivot from a low-margin bulk wine producer to a higher-margin pillar brand-focused company. 

It has also taken a massive step into the home consumption arena which is a fast-growing segment for the company through its new brands Rescued Spirits and Mr Stubbs. The company is seeing increased pressure from inflation and its competitive nature in the UK which is one of its major markets and is tying up a bit of cash on the working capital sheet. 

Although we think the company is extremely cheap at these levels, it is a hold for us through this period.

Camilla Cox: Will, back to you. What are your thoughts on the recent LGI (ASX: LGI) IPO?

Will Thompson: It is one of a handful of IPOs which is a non-mining company this year. It is really interesting, it is a gas abatement company. Essentially, think about where all your rubbish and landfill goes, they take the methane out of that area. Methane is 26 times worse for the environment than carbon dioxide and then they turn that into energy which is supplied back into the market. 

So the end revenue is from both the energy and then they earn revenues from carbon credit. They are doing some really interesting investments where they think they can increase profitability by putting a battery in the system, so that is where the capital is going. Really well-managed, and has a great Chairman, so it is a BUY.

Camilla Cox: Sam, PointsBet (ASX: PBH) recently made a bit of a splash with Shaquille O’Neal and the marketing campaign. Are they a buy, hold or sell?

Sam Koch: PointsBet is a SELL for us. We think there are a number of earnings headwinds over the next couple of years that will impact corporate bookmakers. Sub-scale corporate bookmakers like PointsBet are facing increased taxes in Queensland and in other states. It is experiencing increased competition from the likes of existing entrants with Tabcorp upping its game and also Beta rapidly scaling into the market as well and gaining share there. So PointsBet is in a really tough spot. 

They are trying to manage towards profitability but at the same time trying to stay relevant in Australia and expand into the US which has been falling behind expectations lately, so it is a sell for us.

Camilla Cox: Will, there is a lot of volatility in bond markets. What are your thoughts on Tradeweb Markets (NASDAQ: TW)?

Will Liu: Tradeweb Markets is a HOLD for us. It is a great high-quality business. It benefits from the increasing electronification of bond trading which is a long-term secular growth opportunity. 

The reason why it is a hold is that we have seen bond and credit spreads widen. We have seen interest rates go up, and liquidity tighten. That has left a lot of bond investors on the sidelines, so trading activity has been more muted and volumes have been slightly disappointing. At the same time, investors are positioning for shorter-duration portfolios. 

As rising rates go up, the take rate on shorter duration portfolios for Tradeweb is less so these are some of the headwinds that Tradeweb Markets is currently facing. We are looking for some of those transfers reversed before we get a little bit more constructive because we do think it is a great opportunity but it is a hold for us for now.

Camilla Cox: Shaun, Lovisa (ASX: LOV) buy hold or sell?

Shaun Weick: Lovisa is a HOLD purely on valuation grounds for us. The business is shooting the lights out at the moment. We do think that the upcoming trading update at the AGM will highlight that the store ride is tracking well ahead of expectations, but purely a hold now for valuation.

Camilla Cox: Cooper, what about Calix (ASX: CXL)?

Cooper Rogers: As Will mentioned before, we are really liking these green angle technology companies and Calix is a really exciting company. It has technology that has attracted Heidelberg Cements into an agreement. This technology reduces CO2 emissions in cement and lime manufacturing by 90%. 

Its other projects include a lithium cell project that is a joint venture with Pilbara Minerals (ASX: PLS) and it also has a zero-emissions steel technology ZESTY. The ZESTY project has just attracted a $1 million grant from the Australian Government. 

We think these things show that Calix has some impressive technology and the Australian Government is ready to back these green projects, so it is a HOLD for us at the moment, but a really exciting company we are keeping an eye on.

Camilla Cox: Will, Lithium has had a very hot year. What are your thoughts on Global Lithium Resources (ASX: GL1)?

Will Thompson: Yeah we like Global Lithium. I think I have previously said that we would rather be exposed to the producers in this high-price environment. However, we really like the assets that they have. They have recently gone from 80% to 100%. 

Mineral Resources (ASX: MIN) is on the register and they are great capital allocators, so we like investing alongside them and we think management is really strong. We are really excited to see the results they are going to have in the back half of this year into next year. They will have a resource update and some drilling updates, so it is a BUY.

Camilla Cox: Sam, the blockage in global supply chains is starting to ease, how is this affecting Mainfreight (NZE: MFT)?

Sam Koch: Mainfreight for us is a HOLD. It is one of these extremely high quality businesses that we are attracted to but have benefited somewhat from the Coronavirus, so we are trying to pick our entry point. In a nutshell, effectively it has this awesome workplace culture that really drives its success. 

They realised early on that the decision, or the competition actually happens at a local level rather than at the corporate head office level and they decided to decentralise decision-making and decentralise accountability. 

Effectively the branch owners feel like owner-operators in their own jurisdictions. Now that has really been able to help them role out aggressively around the world whilst ensuring that there was no deterioration in the economics of the model, however having said that high freight rates have significantly impacted or improved the economics of the business in the short term so we are waiting for that to normalise before getting a little bit more excited. It is a hold for us.

Camilla Cox: Will, US technology companies had a really tough reporting season, SAP (ETR: SAP) buy, hold or sell?

Will Liu: SAP is based in Germany and we are still finding value in technology companies despite the US names stumbling a little bit in the last quarter. SAP is a really attractive business. 

Their key platform, the enterprise resource planning platform, touches around 77% of the global transaction revenue, so they are mission critical in all their customer’s technology stacks. 

So we think SAP is amidst a successful transition away from licence revenue to recurring cloud base revenue and we think this is a great opportunity that is under pressure by the market given it has had a mixed track record of success previously under different management teams, but we think as a result this gives you a great opportunity. 

As they transition to the cloud, they should be in a position to deliver double-digit operating profit growth next year. The cloud backlog which is a great leading indicator for revenues to come is accelerating which is really positive. The management team has realigned the organisation, they are delivering ahead of their mid-term ambitions and they have actually just announced a new Chief Financial Officer, he has come from Airbus, a great pedigree as well. SAP is a BUY from us.

Camilla Cox: Shaun, the borders are open but do the international students want to come back? Is iCollege (ASX: ICT) a buy, hold or sell?

Shaun Weick: iCollege is a BUY from us and the students definitely want to come back. The recent quarterly update highlighted that enrolments are at records and are now exceeding pre-Coronavirus levels. 

Going forward, we think what the market is missing on this stock is really around the incremental operating leverage capacity within that iCollege as it is filled which we think will drive earnings upgrades. The balance sheet is in good shape. We think they will undertake acquisitions from here, so that is a strong buy from us.

Camilla Cox: Cooper, what are your thoughts on Predictive Discovery (ASX: PDI)?

Cooper Rogers: I couldn’t leave without at least pitching one commodities company! Predictive Discovery is a gold company based in West Africa and it has stumbled upon one of the most significant discoveries in recent times over there. It has a 4.2 million ounce gold resource and it is also continuing its drilling. 

It has hit gold intercepts 225 and 375 metres below its current optimised pit shell, meaning that this deposit could keep going down a lot further. 

We think it is really exciting and love the management behind the team. It has $50 million in the bank and it is going to continue aggressively drilling while carrying out its scoping study activities, so Predictive Discovery is a BUY for us.

Camilla Cox: Will, we will end with you. Telix Pharmaceuticals (ASX: TLX) - is it a buy, hold or sell?

Will Thompson: Telix Pharmaceuticals is a HOLD for the moment, but a buy or hold because it interestingly posted two really good numbers but it is up 50% in a month. 

A month ago, it posted its Illuccix sales and Illuccix has done really well as its first entry into the market. The market is getting competitive, there will be a third competitor coming into the market at the end of the year. It is cautious around that and that is taking up a fair bit of its capital. 

The company recently announced a new kidney imaging producing some positive studies. It will have to go for Food and Drug Administration approval and that looks really strong. 

So that is why I am probably more on the buy side, but just waiting to see what happens with Illuccix for now, so it is a hold.

Investing in 2023

In this year's WAM Vault video series, our investment team discuss how they are utilising the proven investment processes to identify new opportunities in the market and share their outlooks for investing in 2023. You can find out more here.