Buy Hold Sell: CGT changes be damned, we're hunting ASX growth stocks

[MUSIC] Hello and welcome to LiveWise byholdSEL. My name is Chris Conway. CGT changes be damned, Aussie investors will still be on the hunt for great growth stocks. Oftentimes those stocks are born from the small cap space, so today I'm joined by Oscar Oberg from Wilson Asset Management and Alex Chevrolet from Forager Funds Management. They are each going to share three stocks that they think have big potential. That's right, ladies and gentlemen. It's going to be wall to wall buyers in today's episode. Before we get to the stocks, however, Oscar, I just wanted to ask you first, are when small cap sentiment is a little bit soft like it is today, what are the signals that tell you that a company still has the ingredients to be a long term winner? Yeah, I think a little bit soft might be one of the great understatements. I think it's the fourth bear market we've had in small caps in six years. So it's a very tough market at the moment, but what we've seen, tough environments and the economy is tough, is generally the strongest companies with the strongest management team. And these are generally family companies, generally do quite well and never waste an opportunity. So stocks like Nick Scali and supply networks have done very well in these periods in taking market share. For us at Wilson Asset Management, we've got a very strict investment process. We're focusing on earnings growth. We're focusing on the quality of management, and we're looking at the strength of the company in their chosen field of expertise. But we need a catalyst. And we're very consistent on that. And we're constantly questioning management around those catalysts. And when those catalysts start to fade, that for us is often a cell signal. And I think to finish off, I think one of the most important things when we speak to management and the boards through periods like this is to really have faith on your balance sheet and not to silly things. And we've seen so many examples over the years. There might be companies that were looking to acquire a company in a different market and fast forward. It's a tougher market. And they still go through that acquisition and put the balance sheet under pressure. So the things we're looking for. But ultimately, if the company still fits our investment process, we look through periods of uncertainty like this and invest for the longer term. Some good points there, Oscar. Alex, a similar sort of question for you, but when investors are far more selective on growth as they are now, what characteristics are really non-negotiable for you? But we're quite valuation-focused investors. So I wouldn't say there's not a whole heap of things that are completely non-negotiable, but we do try to price for those things. One of the things that really helps in that process is to have a good amount of recurring revenue in a growth business. Because of course, if you are trying to run around and try to replace revenue from the last year that you've lost, well, I have a little bit more difficult. If what you can do is rely on the priorities, revenue, and work to build that over time, that is going to be a much steadier path to growth. And of course, with that comes a fair amount of operating leverage, which we like to see as well in that free cash coming straight down. The other one, of course, and Oscar hit on it there is just the management side of things. We want these people running the business, of course. We want them cognizant about the capital decisions that they make. We also want them cognizant on what sort of decisions they're making around interacting with investors and putting their best foot forward as well. Alex, let's take it from theory to practice. What's your first peak in terms of a growth stock that you like at the moment? So premium is the first peak here. Premium is an investment platform used by advisors. This business has been overshadowed by its two larger cousins in the listed space, Hub and NetWolf. It's been overshadowed for years, in fact, with those two businesses. And it trades at one third of a multiple of those two larger businesses. It has had a more checkered history. But we think there are some very positive characteristics there. They've continued to win quite a lot of clients and attracted quite a lot of new farm from existing clients, new farm from new clients as well. So that avenue is quite healthy. Then they have done something reasonably remarkable in the small cap world. They have reduced the tech spend into next year by about $9 million that we have seen disclosed so far. That $9 million is very meaningful to the profitability of this reasonably small business. And those savings have already taken place. And so we should see that flow through into the next financial year. On top of that, there's an acquisition made a couple of years ago. That acquisition should also start to contribute into this coming year as well. So lots of positives there for the business. And lots of reasons why we think it can re-rate closer to the valuations of some of the larger peers. So Prime Minister, for you first up, Alex Oscar, what have you got for us? Yeah, stock is our Regis Healthcare, Tickia is R-E-G, and it's Australia's largest H-Care operator. The company's done very, very well. It's as I think people are well aware. There's a shortage of H-Care beds across the country. And the government has been very supportive around funding for the sector coming out of the Royal Commission. The company's performed well this year. It's actually upgraded earnings two weeks ago, but the share price is down 15%, which is a product of the market that we're in. But what we think the market misses on this stock is, the company has no debt. It has around $200 million of cash on the balance sheet. But it has cash in for around $400 million coming in from RADs. And so in fact, we've got a $600 million war-chairs that it can use for acquisitions, which has the largest player in the country when all its competitors are indebted, and it gives it an advantage for acquisitions. And you've got one of the best long-term stories around the aging population in the country. So keep pick for us. And while the share price is for, the business continues to do well and we keep buying shares. Two strong picks straight out of the blocks. Alex, I'll swing back to you. What's your second pick? So the second one is Nanasonic. This business is really of a world standard and dominates in the US for high-level disinfection. In this case, for now, of ultrasound probes. Now, these probes are something that you really as a hospital need to focus on getting right. Infection is a real risk for this for hospitals. And with the amount of market share that they have, which is over 50% in the US, 75% of their revenue is now coming from recurring revenue sources. So in this case, every time someone disinfects an ultrasound probe, there is an amount that we paid to nanosotics for the particular liquid that is used to disinfect that probe. That alongside building an ecosystem, in this case, maintaining the machines, other and silery products around those machines, really driven the recurring revenue higher and should continue to do so. You're starting point here at decent margins on that business and with those high incremental margins, consumables are about an 80% or above gross margin, we should really see that trophone only, which is that core business margin, continue to climb over time. Then independently, they have spent the last six years and $150 million developing a similar device for the disinfection of endoscopes. It's a lot of time, it's a lot of money, but it seems like it's finally coming to fruition. So we should see the first revenues from that over the next little while. And it should hopefully cement for investors that there is five plus years here of growth still to come on this business. - Nanosynics for pick two, for you, Alex, Oscar, I'll swing back to you. - It's probably the worst market to call technology company, but I will and it's Megaport, MP1 is the ticker. And I think the Australian market's been crying out for an artificial intelligence beneficiary apart from BHP. So we think Megaport is certainly that and it comes from the acquisition of latitude that was made at the end of last year. And for context, there's an offshore player called Digital Ocean that's trading on an enterprise value to EBITDA valuation of over 20 times. Megaport bought the latitude business for eight times. So we think in time, this would be regardless one of the great acquisitions. But effectively or simplistically, what does latitude do? It provides computing power. And as you know, there's a shortage of memory that we're seeing globally. And so we're seeing customers looking to lock in long-term contracts. And we've just seen two meaningful contracts that Megaport's announced. And we think this is the start of many. The traditional Megaport business, the connectivity business will continue to do well and grow double digits. So putting that all together, we think that the stock can strongly rewrite from here and can be hopefully Australia's artificial intelligence beneficiary. There you go, two stocks relying on their technology. Alex, I'll swing back to you for your third and final pick for this episode. Right, so the third one for me is high pages. Group. So this business is much smaller than the other ones we've talked about today. It's about $100 million market cap. It is effectively a platform where trade-es can come to seek jobs. And if you are wanting to post a job, gardening, plumbing, whatever, you can go on there. And you can receive bids from multiple trade-es. It's a very good platform for joining that sort of interest because trade-es want that extra revenue. It's a very valuable source for them. And as a result of that, high pages has been able to gradually increase the price that it charges to those trade-es. Now we're at a stage where the businesses try to build an ecosystem around the trade-es that they already have. So that last acquisition was of an insurance business that they can then use. They can then use their existing set of trade-es and distribute that insurance to them. The revenue growth here is also coming. It's a pretty healthy operation. with some pretty healthy operating leverage. So the business actually has a target now, 40 to 50% of incremental revenue should be flowing through to pre-tax free cash flow. Those are very strong numbers. You're already starting from some pretty healthy cash generation. So over time, we should really see that cash generation improve and add to the already pretty large pile of cash on the balance sheet, which is about $30 million. Alex, I may or may not have used high pages myself, given on useless at home. So it's an interesting one. Oscar, I'll swing back to you. Last pick for this episode. Yeah, the company's called IPD Group, or IPG, it's a ticker, and it's a distributor of electrical equipment. And it's largely the ABB brand, which is the second largest electrical products business globally. This business listed back in 2021. It did very well for a number of years that rolled up a number of distributors across the country and diversified geographically. And like often acquisition strategies needed time to digest that. And we think it's through that period now. And it was trading it around just over 20 times earnings back then. And today it's trading it, I think, around 16, 17 times when we look forward. But the real kicker that owned the business is it's got a significant data center exposure. It's around 20% of the business is growing very strongly. And the outlook for data centers and data factories, as we all know, is very, very strong. So within there's a great organic growth profile there. Again, it's a founder-led company. Boundsheets, very strong, close to net cash. So we do think that they'll potentially acquire as well in a creative fashion. So we think the business is a good chance of seeing that share price re-rate over time. There you have it. Ladies and gentlemen, six stocks. For your watch list, I know I'll be adding a few of those to mine as well. If you enjoyed this episode, make sure to give it a like and don't forget to follow our YouTube channel. We're adding lots of great content every single week. [APPLAUSE]