Livewire | Buy Hold Sell: Winners and losers in the growth game
*Recording date: 14/8/2019
There’s a popular narrative in the market that companies attacking global markets have been a great place to make returns. For example, Nearmap, A2 Milk and Vista Group have delivered an average return of ~50% over the past year, despite some recent weakness.
Ritzy multiples are part of the game, which makes for a bumpy ride when expansions plans hit the inevitable hiccups. Freedom Foods and Costa Group have fallen 58% and 26% respectively in 12 months after falling short of expectations. Of course, a short-term blip can also be a great entry point, if you believe the growth story remains intact.
Livewire ask Rachel Cole from NAOS Asset Management and Josh Clark from QVG Capital if the growth winners will keep delivering and if the laggards can turn things around.
James Marlay: Welcome to Buy Hold Sell. My name's James Marlay, and today we're talking about growth stocks. Aussie stocks looking to crack it big in the offshore markets. Joining me to talk about growth stocks today, I've got Josh Clark from QVG and Rachel Cole from NAOS. Rachel, welcome to the show. First cab off the rank, A2 Milk. It's been a longterm success story. Buy, hold or sell?
Rachel Cole: Sure has. I think I'm going to go a bit counter consensus here and put it on a sell. We think that it's had a very good run. They have very strong brand equity in their products, but we think at this current valuation, the risk's not being priced in relating to the China regulatory risk, relating to their sales channels. And particularly now, with the political environment being a little bit more unstable, so we'll stay clear of that for us.
James Marlay: Okay, Josh, there's definitely a few murky things happening in the big market in China. Buy, hold or sell on A2?
Josh Clark: Yeah, I think A2's a buy for us. You're right, Rachel. It's has had an incredible run. You look at the the cashflow generation of that business and it's been incredible. I mean, if there's anything that we like more than cash flow, it's growing free cashflow, and the business when it reports, is going to have more cashflow on its balance sheet than the entire market cap when it listed on the ASX initially. Yeah, again, the story is entirely about growing market share in China. I think this week they signed a deal with jd.com, an online retailer in China, which is going to be really supportive of their direct marketing to the Chinese consumer and continued to grow that market share. So yeah, absolutely A2 is a buy for us.
James Marlay: Okay. Staying in that organics space, fruit and veg, taking Aussie fruit offshore. Costa Group had a little bit of a hiccup earlier in the year. Capital rising. Buy, hold or sell?
Josh Clark: Costa's a sell. In my opinion, and definitely at least for now, it's a commodity producer and and so in that kind of a business, you've got to accept the commodity price that you're selling. We've had some industry feedback recently that demands a bit weaker in some of their categories, which means that should flow through to price and ultimately revenue.
Then you've also got some input costs to be a little bit concerned about specifically in the mushroom category, and also the tomatoes category. So you're potentially getting squeezed from both sides there and with a leveraged balance sheet there's a bit of risk to equity going into the result. So Costa's a sell.
James Marlay: Rachel, Costa group, cyclical exposed to the elements. Your view, buy, hold or sell?
Rachel Cole: I tend to agree with Josh, and put it on a sell. It's exactly what he said. It's a business that faces commodity risk with pricing, and we think recently they've had some headwinds that they faced in their produce category, particularly mushrooms, as Josh mentioned. So that bodes not very well for the near term. But for us, I think if you look through that, the business has a lot of growth levers. We just think that potentially there's a lower point you can buy it at before then.
James Marlay: Freedom Foods. We're all into health and nutrition these days. This is one that's that's listed on the ASX, looking to go offshore. A bunch of different platforms. They're looking to leverage. Buy, hold or sell?
Rachel Cole: It's a buy for us. We like the business. We think that, they've been investing for quite a long time now in capital and that'll start to pay off looking forward over the next few years, especially with the increasing production of a particular high value product called lactoferrin. So that should drive higher return on capital over time. And you look on the register, we've got, one of Australia's most successful dairy farming families buying stock in the raise at higher levels than where we are now. So we think it represents good value here.
James Marlay: Okay, great. Josh, are you into your lactoferrin? Buy, hold or sell?
Josh Clark: I'm not a big consumer of lactoferrin. But I would be a buyer of Freedom Foods. I mean, the key thesis is very similar. It's raised a lot of capital in the past. I think the market's lost patience with the earnings constantly being on the horizon, and they haven't quite got there just yet. But the last thing you want to do is lose patience after all the capital's gone in, and you're close to this earnings growth trajectory that they've got right in front of them now. So, free cash flow should improve a lot for the business, and that's the key thinking behind the buying Freedom Foods.
James Marlay: Nearmap. It's been an absolute darling. Stunning 12 months, that's delivered on a number of fronts. Looking offshore. Buy, hold or sell with Nearmap?
Josh Clark: Look, I think Nearmap's a hold purely on valuation grounds. So you're right, it's been an incredible story. What they've done in the U.S. over the last two years has been really impressive. And the business looks completely different to what it looked like five years ago. In July, they gave an earnings update where incremental revenue growth in in dollars in the U.S. there was actually a slight acceleration. So that's really positive. But the market reaction is telling you something, that a business that's now trading on 12 times sales really needs more than a meet to expectations. It really needs a beat to go up. So I think for the moment Nearmap's a hold.
James Marlay: Buy, hold or sell on Nearmap, Rachel.
Rachel Cole: We think it's a sell for the same reasons, really. Valuation has just gone to the extremes, and we think that it is assuming that an extremely high level of growth occurs over a long term, actually. And we don't think that's realistic, particularly when we kind of look at the business and think that the competitive advantage is not that clear to us, and there could well be some risk of disruptive technologies on the horizon. So it's not one for us. It's a sell.
James Marlay: Last off for today. Vista Group. A new one to me, but mission critical software in the cinemas business. Buy, hold or sell?
Rachel Cole: That's right. I think it's buy. We think it's a very high quality business, and it's been proven to grow very well over quite some time now. A very proven management team. And we think there'll be able to continue to grow, particularly with their Movio business, and also in their core product in the Vista cinema product. So yeah, we think that's got loads of growth to go, so that's a buy.
James Marlay: You're into your movies, Josh. Buy hold or sell on Vista?
Josh Clark: I'll watch a movie from time to time. In terms of Vista, I'd be a hold on Vista. Very similar to the thinking around Nearmap. I agree in terms of the quality of the business, high quality sticky revenue streams that they're growing out of their cinema customers. Globally dominant. But I think when you're getting over the 22 times EBIT level for the growth, you really need Movio to kick in. And for Movio to kick in, I think you need to win that AMC deal in the U.S. And that's probably a bit easier said than done. So Vista's a hold.
James Marlay: Well, there's plenty of growth when you go offshore. The one key thing to have a look out for is that valuation. That's the sticking point for our team today.
Important Information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529 and is provided for general information purposes only and must not be construed as investment advice. It does not take into account the investment objectives, financial situation or needs of any particular investor. Before making an investment decision, investors should consider obtaining professional investment advice that is tailored to their specific circumstances.
We acknowledge the Traditional Owners of Country throughout Australia and recognise their continuing connection to lands, waters and communities. We pay our respect to Aboriginal and Torres Strait Islander cultures; and to Elders past and present.