These 2 ASX shares just doubled. But there’s more to come: experts

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Ask A Fund Manager

The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Discovery Fund portfolio manager Chris Bainbridge and Mark Devcich tell us how the planets are aligning for two ASX shares.

Hottest ASX shares

The Motley Fool: What are the two best stock buys right now?

Chris Bainbridge: You mentioned that markets have been difficult overall. That was our experience of reporting season, but we like to think there’s always a bull market somewhere and you just have to find it.

One of those is the offshore service vessel market, as a case in point. So, one stock which we believe is a great buy right now is MMA Offshore Ltd (ASX: MRM). MMA provides offshore service vessels to oil, gas, and wind producers.

There’s been an increase in the number of offshore oil and gas projects, combined with a shortage of the offshore service vessels, [that] has driven up utilisation and day rates for the offshore service vessel operators. MMA had a really strong first half. EBITDA of $32.1 million and management team is very conservative, but NTA [net tangible assets] was upgraded to $1.15 and we still believe that’s conservative. 

Looking ahead, you’re in an environment with a cyclical stock, where if demand is high and supply is constrained, day rates probably need to go up another 50% to justify anyone building a new vessel. And when they build a new vessel, there’s a three-year wait time on that vessel. 

So it’s a really great environment at the moment to be [an] offshore service vessel provider and that’s where MMA is.

Final point, MMA traded up to around two times the NTA. Management has said that they’re targeting 15% return on capital. If that was achieved, based on the potential replacement value of these vessels, they should be achieving $100 million dollars a year just on the vessels alone, and they also provide subsea and project logistic services on top of that. So plenty of upside [to] earnings coming out there.

MF: It’s so funny how it’s all turned, isn’t it? Thirteen or 14 months ago, this type of business would have been so out of fashion, but I see that the MMA share price has doubled in the past year.

CB: Yeah, well, they [were] at 30 cents, which feels not too long ago, and at $1.20 today. 

But they’re in a great position where they have a lot of tax losses, they don’t really pay too much tax, there’s only modest capex requirements, so they’re already generating plenty of cash… and potentially in a place and an environment that demands quality, that is a fantastic way to grow that.

MF: Excellent. What’s your other best buy that you see at the moment?

Mark Devcich: Yeah, the other one is Duratec Ltd (ASX: DUR), which [is] a maintenance and remediation contractor. 

They reported a strong first-half result of $16.2 million EBITDA. However, the first half could have actually been a lot better — there was margin contraction due to some delays with projects, particularly in the northwest. They’ve also taken a conservative view on project margins as well with their new acquisition of Wilson’s Pipe Fabrication. They did that acquisition last year and only got a partial contribution from it in the first half.

However, when you look to the second half, the guidance is $32 to $35 million. If you just double the first half, you’re at the bottom end of the range. That will grow organically into the second half and then also if you include the contribution from Wilson’s, which is expected to be just under $4 million for the full year on a 12-month basis, that should add a couple of million dollars to the second-half result.

So you’re already getting a result that’s towards the top end of the guidance range for FY2023, and if they achieve anything like the organic growth rates they did in the first half, we feel there’s potential to exceed that again. 

It’s a founder-led business. Our flagship fund is the Founders’ Fund where we like investing alongside founders. And because it’s heavily skewed to the maintenance and remediation work, far more predictable. They’ve got lots of formal contracts with smaller tickets of work, so that they’re less likely to run into contract issues.

It’s been a strong investment for us that we listed, basically, since the inception of the fund back in late September.

MF: I see that’s another stock that’s more than doubled in the past year — but you guys feel like there’s more to come.

MD: Yeah, the valuation model is still very low and there’s just so much work out there for these guys that they’re being constrained, really, around labour. So they could take on more work if they had the labour availability. 

The other thing that I didn’t mention was that they do get good insights into projects by doing ECI work, which is the industry acronym for early contract involvement. They get on these sites, do the engineering work, scope out the project design, and then they’re in a good position to win the actual contracting work on the back of that. That gives them potentially up to a 25 times uplift from their initial engineering work to actually executing on the contracting work. So they’re in a good position to see more revenue from getting involved with the project very early on at an engineering and design level.

The post These 2 ASX shares just doubled. But there’s more to come: experts appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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