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Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Perennial Value Management portfolio management director Stephen Bruce explains why he currently loves 3 particular ASX shares.
Hottest ASX shares
The Motley Fool: What are the 3 best stock buys right now?
Stephen Bruce: I just touched on iron ore — we think it'll be potentially a really good trade over the coming 6 months or so.
Another one would be United Malt Group Ltd (ASX: UMG), the malt company. It's been a terrible laggard the last year or two. It was spun out of Graincorp Ltd (ASX: GNC) and it was meant to be a defensive business. It would be defensive in an economic downturn, but unfortunately, COVID has caused significant disruptions to its business — pubs being closed has affected the types of beer that get drunk in pubs versus drunk in your living room, et cetera. And some of its supply chain issues have hurt them as well.
But we think as we go into next year, some of that's going to start to get resolved and the earnings are going to bounce back. But what's really quite interesting is that the global malting industry is really undergoing a lot of consolidation. And we've seen some transactions at prices that would value UMG sort of closer to $6 than the mid-$4s where it's trading now.
So that's one where we think [we] could do really well. Simply from our recovery and reopening, but then with the potential of corporate activity on top of it.
MF: I see United Malt's price to earnings (P/E) ratio is reasonably high. Are you guys concerned about that at all?
SB: I guess if you look at the P/E ratio just on this year's earnings, it's still depressed. But if you look out to say 2023 when earnings start to get more normalised, it's starting to look more attractive. When you're thinking about it from a corporate point of view, 12 times EBITDA [earnings before interest, taxes, depreciation, and amortisation] is a level that transactions are being done on and that compares to, I think, UMG's trading about 8 times.
Virgin Money UK CDI (ASX: VUK) is another unusual stock we like. It's the biggest challenger bank in the UK, used to be owned by National Australia Bank Ltd (ASX: NAB) till it was spun out a couple of years ago. It's really well placed to take market share in the UK banking market, we think, and the Virgin brand's attractive to a younger banking consumer cohort.
And they've been investing in a pretty slick IT front-end to make them sort of easier to deal with and more efficient. And the UK banking sector we think overall is poised to do really well because the economy — the most recent headlines have been a bit negative — but by and large that economy has come out of COVID very, very strongly.
Importantly with inflation, where it is there, it looks like the Bank of England is going to be one of the first to start raising rates and that's really good for bank profitability.
MF: And your third ASX share pick?
SB: I suppose Independence Group (IGO Ltd) (ASX: IGO) is an interesting one. It's had a really, really strong run, but if you're a believer in the electric vehicle thematic, then potentially there's still a lot of upside there.
They just announced that they were trying to acquire Western Areas Ltd (ASX: WSA). And when you look at Independence Group, there's a couple of high-level things [that] make it really attractive. Firstly it's got basically the whole suite of the metals, being copper, nickel, lithium, and cobalt. So pretty much everything you can put into a battery, they make.
An increasingly important thing [is] simply being located where they are. In Australia, it's just an easy geography where you've got high levels of good regulation, high ESG standards, low levels of political risk and it's easy to get things done. Although it's not the cheapest place to do business, it's a safe place to do business. I think over time that'll become increasingly appreciated by investors.
MF: Is it ironic that in this ESG era that many miners are still quite buoyant because you still need those raw materials to create products like batteries?
SB: Absolutely. I think people have to be pragmatic about what is required, like to say mining is bad as a blanket statement is obviously not right and not practical either.
