Ask a Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part one of this edition, we're joined by Romano Sala Tenna, co-founder of Katana Asset Management.

The Motley Fool: In November 2021, you told us, "We are seeing some real structural elements [to inflation]… That is going to have an impact on the Australian landscape." That's certainly come to fruition. With interest rates ratcheting up to tame inflation, has that impacted your cash holdings?

Romano Sala Tenna: It has. In terms of our cash weighting, we were up at 38% recently. We've gone back to 30% because we're expecting a short-term bounce. And once we think this current rally's run its course we'll start to build our cash position back up again.

MF: How does that compare to your positioning in early 2021, during the ASX bull run?

RST: We generally hold 15% to 35% cash through the cycle, and only very rarely go above or below those two numbers. So for us to be sitting at 38% is at the very extreme end of where we'd normally have cash.

We're back at 30% at the moment, as I said. But we'd look to build that up to closer to 35% to 40% as we think this current rally runs its course.

MF: Has the higher inflation and interest rate environment changed your investment approach in other ways?

RST: It hasn't had much impact in terms of our weighting across small and large caps. Generally speaking, we don't do a lot in the small-cap space. The vast majority of what we do is in the S&P/ASX 100 Index (ASX: XTO).

At a strategical top-down level, going back six months, with the increased volatility we were seeing then, we did make a conscious decision to reduce illiquid holdings. So, if we were to come in one day and need to increase our cash rating dramatically, we didn't want any anchors in the portfolio that prevented that in terms of liquidity.

Kina Securities Ltd (ASX: KSL) is a great example. A really good company. We are going to own it again at some stage. But the liquidity there was a concern, so we sold our holding.

The major change in the portfolio has been that we normally hold 55 to 65 stocks. We're currently holding 43. That's the smallest number we've held for a long period of time. And that's really predicated on the fact that there are many companies we don't want to hold right at the moment. Great companies with good long-term prospects, but right at the moment, we don't want to be holding them.

We're sitting on a large cash weighting. Once we think we've seen the bottom, there are a lot of companies we'll start to invest in.

MF: Atop Kina Holdings, what other ASX shares are on your watchlist once you're convinced the bottom is in?

RST: For example, the non-bank space is screaming value. All 10% plus yields on a trailing basis, and PEs are four to five times. But they are really in the crosshairs still with what we're seeing here. Because they don't even have what banks have, which is the capacity to use their margin from deposits to fund profits.

We think there are a number of NBFIs, non-bank financial institutions, that are rapidly growing market share and executing well.

There's some like Pepper Money Ltd (ASX: PPM) that will be a big holding in our fund at some stage. Growing at a rapid rate, executing really well, using great fintech, really flexible. We think they'll really hit it out of the park at some point. But we've got to get through the current washout yet before we really start to build a large position.

MF: What do see as the biggest threat for ASX investors in the year ahead?

RST: The washout from central bank policy.

Namely, the impact on consumer spending; the impact on corporate profitability; and the impact on valuations for long-duration assets. Those three things are all directly related to central bank policy and a consequence of inflation.

Those, I think, are the biggest challenges facing our market over the next 12 months.

MF: And what's the biggest opportunity for investors?

RST: I think there are some sectors that have been well and truly oversold. There are some large opportunities in our universe. But you have to be patient. There are a number of cheap sectors, but they are likely to get cheaper.

The non-banks are a great example.

There are also some fantastic long-term consumer discretionary stocks like Wesfarmers Ltd (ASX: WES) or Domino's Pizza Enterprises Ltd (ASX: DMP). Some great long-term opportunities.

We're pretty excited about the next 12 to 24 months. We just think we need to be patient during this phase and make sure we time it as best we can in terms of starting to pick up some of these opportunities.

**

Tune in tomorrow for part two of our interview with Romano Sala Tenna.

(You can find out more about the Katana Australia Equity Fund here.)

The post 4 'fantastic long-term' ASX shares to put on your watchlist: fund manager appeared first on The Motley Fool Australia.

Rising interest rates mean an uncertain time for ASX finance shares.

Yes, for many banks it's an opportunity to increase their net interest margin. But it can also mean higher delinquencies as customers find it more difficult to make their repayments.

The big four banks are always popular but have limited growth opportunities, which is why many professionals stay away from them.

Instead, here's a pair of finance stocks that experts are recommending as buy right now:

'Undemanding' PE ratio equals buying opportunity

Catapult Wealth portfolio manager Tim Haselum told The Bull that he likes the look of Bank of Queensland Limited (ASX: BOQ), despite some headwinds.

"We believe the banks are facing reducing loan volumes, but we aren't concerned about impairments, as households appear to be in sound financial shape."

Last year, the Bank of Queensland fully acquired ME Bank, which Haselum feels is a positive move.

"We like the ME Bank recovery story and see further synergies ahead," he said.

"Potential net interest margin improvements amid the company's undemanding price/earnings multiple presents a buying opportunity."

BoQ shares have risen 6% since its 20 June trough. The stock is paying out a juicy 6.4% dividend yield.

The Motley Fool reported last week that the team at Citi also recommended BoQ shares as a buy, for much the same reasons as Haselum.

"Although its analysts suspect that the bank's revenue growth could slow if rising rates impact lending volumes, it expects cost synergies from the ME Bank acquisition to support earnings and dividend growth."

This ASX share has been oversold for its risks

Pepper Money Ltd (ASX: PPM) specialises in lending to consumers with non-standard credit history.

With an economic downturn looming, perhaps this has scared off investors. The share price is down more than 28% for the year so far, while paying a 6.45% dividend yield.

Wilsons investment advisor Peter Moran reckons the risk has been overstated.

"While a general slowdown in the economy is a potential risk for lenders, we see this as being excessively priced in with the shares recently trading on 4.5 times earnings," he said.

"We retain an overweight rating."

Reporting season impressed Moran, despite the headwinds buffeting Pepper Money.

"This non-bank lender reported a pro-forma net profit after tax of $73.1 million in the 2022 first half, an 11% increase on the prior corresponding period," he said.

"This was despite a 30 basis points fall in the net interest margin."

The situation is expected to improve for the current period.

"We expect increasing interest rates should contribute to a partial recovery in margins during the second half."

The post 2 bargain finance ASX shares to buy (not big banks): experts appeared first on The Motley Fool Australia.

Five companies in the S&P/ASX All Ordinaries Index (ASX: XAO) will see their shares turn ex-dividend tomorrow.

This means that today will be the last day to lock in the latest dividend payments from these ASX All Ords shares.

If you buy shares on or after a company's ex-dividend date, you won't be eligible to receive the upcoming dividend payment.

But to compensate investors, shares typically drop on the day they turn ex-dividend. After all, these dividends are paid from the company's cash reserves.

With the money flowing out of the company's coffers to line the pockets of shareholders, it's left with less cash on its books. So theoretically, the company is worth less.

What's more, some investors will look to offload shares once they've secured the latest dividend.

So, there'll be downwards pressure on these five ASX All Ords shares tomorrow. But there could be elevated interest today as investors clamber to snare these dividends before it's too late.

Costa Group Holdings Ltd (ASX: CGC)

Upcoming dividend: 4 cents
Franking: 100%
Payment date: 6 October
DRP: No
Trailing dividend yield: 3.4%

Costa recently reported its first-half 2022 results, delivering 16% revenue growth and 13% adjusted earnings growth. The company held its interim dividend steady at 4 cents per share, fully franked.

Breville Group Ltd (ASX: BRG)

Upcoming dividend: 15 cents
Franking: 100%
Payment date: 6 October
DRP: No
Trailing dividend yield: 1.4%

The ASX 200 retail share served up a record sales result in FY22 as revenue grew by 19% to $1.4 billion. Net profit after tax (NPAT) lifted 16% with total dividends following suit, up 13% on the prior year to 30 cents per share.

Lovisa Holdings Ltd (ASX: LOV)

Upcoming dividend: 37 cents
Franking: 30%
Payment date: 20 October
DRP: No
Trailing dividend yield: 3.0%

Lovisa pumped out another year of strong growth in FY22 as revenue leapt by 69% to $459 million. Comparable store sales grew by 20% while NPAT more than doubled to $58 million. In response, the ASX retailer boosted its annual dividends by 106% to 74 cents.

Lovisa shares will soon be added to the ASX 200 in the upcoming September rebalance.

MAAS Group Holdings Ltd (ASX: MGH)

Upcoming dividend: 3.5 cents
Franking: 100%
Payment date: 12 October
DRP: Yes
Trailing dividend yield: 1.4%

MAAS Group delivered record pro forma earnings of $125 million in FY22, up 65% from the prior year. Around 60% of this earnings growth was achieved through acquisitions while the remaining 40% was organic. Despite the surge in profit, the ASX All Ords share lifted its total dividends by only 10% to 5.5 cents.

Pepper Money Ltd (ASX: PPM)

Upcoming dividend: 5.4 cents
Franking: 100%
Payment date: 14 October
DRP: No
Trailing dividend yield: 9.2%

Non-bank lender Pepper Money recently announced its first-half 2022 results, printing net interest income of $193 million, up 9% from the prior year. The company grew its loan book throughout the year, with originations up 53% to $5.6 billion.

The ASX All Ords share didn't declare an interim dividend last year. Instead, it paid one dividend at the end of FY21, so Pepper Money's trailing dividend yield is inflated.

Unlike FY21, the company expects future dividend payments will be weighted equally between interim and final dividends.

Annualising Pepper Money's most recent interim dividend spins up a dividend yield of 6.9%.

The post 5 ASX All Ords shares going ex-dividend on Wednesday appeared first on The Motley Fool Australia.

The Pepper Money Ltd (ASX: PPM) share price is gaining another 10% to $1.67 in Thursday trading. It comes the day after the non-bank lender reported first-half full-year pro-forma net profits after tax up 11% to $73.1 million.

The company declared an interim fully franked dividend of 5.4 cents per share. When added to the final fully franked dividend of 9 cents per share, Pepper Money's trailing 12-month total dividends are 14.4 cents per share.

The Pepper Money interim dividend will be paid to eligible shareholders on 14 October 2022. Pepper Money shares go ex-dividend on 14 September 2022. 

Based on the Pepper Money share price today, the stock trades on a trailing fully franked dividend yield of 8.8%. The company anticipates future dividend payments will be weighted equally between interim and final, reflecting the seasonality in the business.

Looking ahead, Pepper Money notes that since the Reserve Bank of Australia commenced interest rate rises in May 2022, the industry has experienced a decline in mortgage applications. The company says it is "well positioned to navigate the current challenging market conditions".

Over the past 12 months, Pepper Money shares have lost 38%, compared to a fall of 6% in the S&P/ASX 200 Index (ASX: XJO). By contrast, fellow financial services company Money3 Corporation Limited (ASX: MNY) shares have slumped 33% in the last year.

The post Pepper Money shares continue to soar; trades on trailing 8.8% fully franked dividend yield appeared first on The Motley Fool Australia.

When a professional investor has 54 ASX shares in his portfolio but singles out one as his pick of the February reporting season, investors need to pay attention.

According to Katana Asset Management portfolio manager Romano Sala Tenna, his team categorises investment opportunities into one of three categories: growth, quality, or (deep) value.

Occasionally he runs into a gem that fits two of those buckets.

However, Pepper Money Ltd (ASX: PPM) is the triple threat that somehow fits all three categories.

"Pepper Money is trading on a PE ratio of five times earnings, has averaged 21% growth per annum for the past decade, and has a high calibre management team and business model," Sala Tenna posted on Livewire.

Second time unlucky?

Pepper Money has had two lives on the ASX. The first incarnation, called Pepper Global, lasted from 2015 until 2017 when it was bought privately.

The current version listed in May last year and has had "a troubled return" since.

"From an IPO price of $2.89 per share, the stock has steadily declined to around the $1.70 mark."

But this just makes it a golden buying opportunity, as far as Sala Tenna is concerned.

"There is a lot to like about this company, and it wasn't a straightforward decision," he said.

"We have been tracking Pepper Money since listing, and finally began building a position around the $1.90 level."

Pepper Money is 'the holy grail'

As a loans provider, one very obvious tailwind for Pepper is rising interest rates, which is expected to come multiple times later this year.

"In the 21+ years that PPM has been operating, it has demonstrated that it is increasingly adept at passing on rate increases to preserve net interest margin."

A structural growth stock, according to Sala Tenna, is "the holy grail of investing".

"It is easy to see why. If we consider a stock growing at 5% per annum, then after 10 years it has grown profits by 1.6 and presumably its share price by about the same amount," he said.

"However, if a company is able to grow its profit by 20% per annum consistently, then through the effect of compounding its profit will grow 6.2x, and so too will its share price (all things being equal)."

He added that true structural growth narratives are extremely rare, and they often trade at a PE ratio that's 10 or 15 times higher than the market.

"A basket of structural growth stocks that we track is currently trading on an average PE ratio of 34 versus the S&P/ASX 200 Index (ASX: XJO) 's PE ratio of 16.3."

This makes Pepper, with a PE ratio of 5, outstanding value at the moment.

The Pepper Money share price has plunged more than 22% this year so far, closing Monday at $1.69.

The post This rare ASX share is growth, quality AND value: expert appeared first on The Motley Fool Australia.

The Pepper Money Ltd (ASX: PPM) share price is in the green today following the release of the company's results for the first half of 2021.

Right now, the Pepper Money share price is $2.78, 6.92% higher than yesterday's close.

Pepper Money share price jumps on 46% profit increase

Here's how the loan provider performed over the first half of 2021:

• Statutory net profit after tax of $56 million – up 41.1% on that of the first half of 2020
• Ended the period with $16 billion of assets under management
• Lending assets under management up by 5.2% to $14.3 billion
• Record originations of $3.7 billion

Pepper Money's first few months on the ASX were profitable.

The company reported net profit after tax, adjusting for initial public offering (IPO)-related costs, of $66.1 million. That represents a 57.3% increase on that of the first half of 2020.

The number of new mortgage values on its books increased by 33.9% to $2.8 billion over the half-year ended 30 June 2021.

Pepper Money's asset quality remained strong. It reported its loss rates, excluding COVID-19 overlays, improved 9 basis points to 0.28% of lending assets under management over the first half.  

Additionally, its net interest margin improved 3 basis points to 2.59%. Pepper Money stated this reflected the increased scale of its asset finance business and ongoing improvements in its cost of funds.

Over the first 6 months of 2021, Pepper Money's mortgage losses fell by 4 basis points to 0.01% of assets under management, excluding COVID-19 management overlays. Pepper Money states this shows the quality of its asset portfolio.

Additionally, its mortgage and asset finance arrears of more than 90 days reached pre-COVID-19 levels over the half-year.

Finally, over the half, Pepper Money finalised 2 residential mortgage-backed securities transactions. Together, they raised more than $1.5 billion of securitisation. Pepper Money also secured $700 million in warehouse capacity for prime mortgages.

What happened in the first half for Pepper Money?

We asked Pepper Money's CEO Mario Rehayem about the last 6 months for the company and its share price.

IPO

Perhaps the most exciting news from Pepper Money over the 6 months ended 30 June 2021, was its debut on the ASX. Pepper Money's IPO occurred on May 25, 2021.

Speaking on the company's first few months on the public exchange, Rehayem said:

[Being a listed company] has been business as usual. We're very focused on delivering our business strategy and pushing the boundaries on automation digital, and tools to supply the marketplace. Obviously, we came out of the gates and the share price isn't as reflected from day one, but to be honest, that's not in our control and our number one focus is to deliver on our business strategy.

At the time of writing, the Pepper Money share price has fallen 3.8% from its prospectus' offering price of $2.89. Right now, shares in the company are trading for $2.78 apiece, 6.92% higher than their previous close.

Positive growth

While the share price hasn't moved in the way Pepper Money's initial investors might have hoped, it's been a positive 6 months for the company. Rehayem outlined numerous achievements the loan provider has surpassed recently:

We've had quite a number of milestones. It has been a very celebratory 6 months. We celebrated our 21st anniversary, we listed on the ASX, we've settled more loans than we've ever done in our 21-year history. We've helped 10,500 self-employed customers in the first half to obtain a loan – which is a record 27,000 customers in total.

It's just been milestone after milestone. It's definitely been a great 6 months and we look forward to continuing these milestones in the second half.

Let downs

While Pepper Money hasn't reported any major drawbacks, it hasn't all been smooth sailing. Rehayem commented:

From a macro perspective, obviously, the lockdowns, that's definitely been a low for us. But outside of that, our prepayments have been slightly higher than what we originally forecasted. The reasons for that are fairly obvious: it's a very competitive market [with] record low interest rates, cash-back offers and incentive offers by a lot of the major banks, especially with the TFF [term funding facility] that they have offering very low fixed rates. So, we saw movements of people either paying down their loans with us, or looking to refinance a way to get record low interest rates elsewhere.

Because we are a business that is focused on looking after our customers, we have now shifted ahead with a huge focus on ensuring this scene is a learning experience for us and we're looking to address the retention of our customers.

What did management say?

Commenting on Pepper Money's IPO, and its share price's downwards slide, Rehayem wasn't concerned. He said:

We always knew coming out of the gates from the listing could be a little bit turbulent because of the macro environment, but we have a very solid business strategy. We have a 20-year proven track record through the cycle.

The foundation of this business is extremely strong, we've had 10 years of double-digit growth in the business… The business is extremely well managed, it has many levers and it's diverse and flexible in the way it generates its revenue. The core segments that we play in have a huge corridor of growth, specifically the non-conforming segment of the market. Our technology is superior to our peers', and we've invested very heavily into technology that'll give us the scalability and efficiency that we need to continue growing for many years to come.

What's next for Pepper Money?

Here's what might drive the Pepper Money share price in FY22:

According to Rehayem, Pepper Money is set to continue its momentum, particularly as the Australian and New Zealand property markets are booming.

Additionally, the company's investment into technology is making its business more efficient and negating much of the impact COVID-19 lockdowns may have otherwise had. Rehayem also highlighted some of the technological initiatives the company is working towards:

[Going forward] we're focusing on the continual rollout of new products that will be distributed across our very extensive distribution footprint, across all of our asset classes both here in Australia and in New Zealand. We also have a number of initiatives that are coming out that will be focused on automation and digitisation. [These will] allow us to continue to scale up and keep a lid on our expenses.

As long as the market continues how it is, Pepper Money expects to bring in $120.7 million over 2021. It's also looking to hand out its first ASX dividend in the second quarter of calendar year 2022.

The post Pepper Money (ASX:PPM) share price jumps 7% on 'milestone after milestone' appeared first on The Motley Fool Australia.

Small-cap ASX shares have treated investors very well in the past year.

Yes, the big boys of the S&P/ASX 200 Index (ASX: XJO) gained more than 23% over the last 12 months. But the little guys have actually outperformed them, with the S&P/ASX Small Ordinaries (ASX: XSO) returning almost 26%.

Eley Griffiths Group managing director Ben Griffiths reckons small-cap ASX shares are in "the midst of a bull-drive".

"Reassuring to see 66% of small cap names are trading above their 100-day moving average," he posted on Livewire.

"Witness the solid outperformance small caps have had over large caps this past 12 months."

Griffiths' team is "confidently" betting that the Small Ordinaries will hit 4,177, which is a 23% premium to now.

And he picked out 5 small-cap ASX shares that might lead the charge.

Real estate and finance

Griffiths' team likes Pepper Money Ltd (ASX: PPM) because they see it as "more entrepreneurial and opportunistic than other operators" in the lending sector.

"For example, in the mortgage broking channel, where customer service and approval times are critical, Pepper's investment in technology, particularly in its distribution capability, has positioned it well for further market share gains."

The company listed on the ASX in late May after an initial public offer priced at $2.89 per share. The stock closed Tuesday at $2.40.

"The company was priced on a [price-to-earnings ratio] P/E of 10.5x," said Griffiths.

"Whilst its debut has been soft, we are optimistic about the company's future, particularly as credit growth in Australia continues to recover post The Royal Commission."

Related to this is another recent ASX debutant, PEXA Group Ltd (ASX: PXA).

The real estate transaction settlements system holds a practical monopoly in Australia currently.

"As various state governments have embraced [or] mandated digitisation over the last few years, electronic settlement now makes up over 70% of all transactions, of which Pexa has a circa 95% share."

While wary of IPOs, Griffiths' team managed to follow Pexa's fortunes since 2018 via 42%-owner Link Administration Holdings Ltd (ASX: LNK).

"The business has excelled over that time frame, growing from ~$40 million revenue then to in excess of $200 million today."

Gamblers going from TAB to this ASX share

Bluebet Holdings Ltd (ASX: BBT) is taking advantage of the recent trend away from traditional provider TAB to online bookmakers.

"Bluebet has been well-positioned to pick up market share, particularly from regional customers looking for alternative wagering product[s] with a quality mobile and in-app experience," said Griffiths.

"Mobile-first with innovative wagering products, Bluebet has grown to over 90,000 registered customers, with significant growth in betting turnover (>$340mil)."

And of course, like every other online Australian bookmaker, it's having a go at the recently deregulated US market.

'Significant scale' for this small cap

Chemicals company DGL Group Ltd (ASX: DGL) also listed on the ASX in late May after raising $100 million through the IPO.

It's no startup though — it floated with a 20-year history behind it.

"Specialist licenses and significant scale positions DGL as the leader in chemical manufacturing and logistics across the Tasman, with the top 20 customers having on average over 9 years of tenure," said Griffiths.

"With sound financials, management alignment and large end markets, DGL is a quality industrial addition to the portfolio."

DGL shares are up almost 39% since its listing.

This small-cap ASX share is 'over-trading'

Agricultural services provider Elders Ltd (ASX: ELD) was sold off after a "strong interim result" in May, according to Griffiths.

"We believe Elders is presently 'over-trading', notwithstanding a continuing flow of self-help initiatives via acquisition integrations and 8-point plan wins," he said. 

"The group is well leveraged to livestock prices and is presently booking outsized earnings largely from record cattle prices (via voracious re-stocker demand)."

Despite the sell-off the last few weeks, Elders shares are still up more than 15% for the year.

The post 5 small-cap ASX shares on their way up appeared first on The Motley Fool Australia.

The Pepper Money Ltd (ASX: PPM) share price has struggled to give the kick its investors might be looking for after a flat debut on the ASX.

Its shares opened at $2.61 on Tuesday, its first day of listing and below its initial public offering price of $2.89. Its shares have failed to push higher on Wednesday, sliding 3.26% to $2.53 at the time of writing.

What does Pepper Money do?

Pepper Money is a little bit different to your atypical big four bank. The company isn't licensed to accept deposits, but offers a broad range of loan and credit products.

Within the highly competitive lending landscape, Pepper Money targets underserved customer segments such as non-conforming borrowers that are unable to satisfy the criteria of the Major Australia Banks. Its prospectus highlights that the non-conforming market represents approximately 12% of the existing Australian residential home loan market as at December 2020.

The company currently offers three broad categories of products. This includes mortgages predominantly for residential home loans, asset finances primarily for used cars and, loan servicing for residential mortgages and personal loans.

The prospectus revealed that Pepper Money had a market share of ~0.5% of the $2,160 billion Australian and New Zealand mortgage market, and a market share of ~5.1% of the $52 billion Australian motor vehicle and equipment finance market.

The company has a solid track recovery of growth with a respective compound annual growth rate (CAGR) for asset under management, total operating income and net profit after tax of 10%, 35% and 82% respectively, between CY2018 and CY2020.

In CY2020, the company delivered a net interest income of $352.2 million with net profit from continuing operations sitting at $106.3 million. The prospectus forecasts a flat CY21 net interest income of $356.3 million and a 13.5% increase in net profits to $120.7 million.

The Pepper Money share price falls flat

Despite Pepper Money's unique take on growing its business and solid track record, its shares have struggled to make headway in its first two days on the ASX.

The Pepper Money share price isn't the only recent finance IPO to fall flat, with Latitude Financial Services Group Ltd (ASX: LFS) also sliding from $2.70 on its first day of listing on 20 April to $2.41 at the time of writing.

The post The Pepper Money (ASX:PPM) share price sinks below listing price appeared first on The Motley Fool Australia.