Category: Stock Market

The Telstra Group Ltd (ASX: TLS) share price could be great value at the current level.

That’s the view of analysts at Goldman Sachs, which remain very positive on the telco giant.

What is Goldman saying about Telstra?

Goldman Sachs notes that the Australian telco sector returned to positive top-line growth during the first half of FY 2023 following an extended period of declining revenue. Pleasingly, the broker expects this to continue thanks to mobile. It commented:

We remain bullish on near-term mobile revenues following 1H23 results and mgmt. meetings, underpinned by ongoing price rises, roaming and accelerating subscriber growth (albeit prepaid skewed). […] Industry feedback suggests that mobile rationality is set to continue, with the only potential risk (in our view) to further pricing increases, if TLS/Optus postpaid sub growth was to decline for an extended period.

And while the sector is expected to face inflationary pressures, the broker believes that Telstra is well-placed to manage the situation. It commented:

We expect the sector to continue facing inflationary pressures, impacted by mandated wage increases (TPG +4.5% CY23E growth incl. super, TLS +2.5%) alongside higher energy and equipment (opex/capex) costs.

To mitigate these headwinds, operators have a range of cost out programs in place. These include (1) Telstra’s $500mn net cost out program across FY22-25, with aspirations for a small reduction in FY23 opex. Although this is now more challenging vs. when the target was set in Sept-21, we believe that it is consistent with global peer programs (VZ/BT/VOD) with media reports recently suggesting TLS is looking to accelerate this program.

Where is the Telstra share price heading?

According to the note, Goldman has reiterated its buy rating and $4.60 price target on the telco giant’s shares.

Based on the current Telstra share price of $4.16, this implies potential upside of just over 10.5% for investors over the next 12 months.

And with Goldman expecting a 17 cents per share dividend in FY 2023, which equates to a 4.1% yield, the total potential return stretches to almost 15%.

The post Why Goldman Sachs is bullish on the Telstra share price appeared first on The Motley Fool Australia.

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More reading

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• Forget term deposits and buy these ASX 200 dividend shares: analysts
• These ETFs could be top options for buy and hold investors
• Here are the 3 most heavily traded ASX 200 shares on Friday
• Here are the 3 most heavily traded ASX 200 shares on Thursday

Motley Fool contributor James Mickleboro 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 positions in and has recommended Telstra Group. 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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A former boss of Tesla Inc (NASDAQ: TSLA)’s Australian operations has been sentenced to 2.5 years of imprisonment for insider trading.

The Sydney district court handed down the sentence to Kurt Schlosser, who used to be Tesla Australia’s country director.

While holding that position, he was told of a confidential, in-principle agreement that Tesla’s US head office had struck with Piedmont Lithium Inc (ASX: PLL) to supply lithium to the car maker.

The court heard from the Australian Securities and Investments Commission that Schlosser bought 86,478 shares in Piedmont Lithium in two transactions before that deal was announced to the public.

“[He] also communicated that inside information to a friend in circumstances where it was likely that person would also acquire Piedmont Lithium Ltd shares,” ASIC stated. 

“Mr Schlosser, shortly after the announcement was made public, sold the shares for a realised profit of $28,883.53.”

‘Insider trading undermines investor confidence’

Back in November, Schlosser pleaded guilty to one count of trading while in possession of inside information and one count of communicating inside information to an associate.

ASIC deputy chair Sarah Court warned that her organisation would act against any behaviour that “damages the integrity of Australia’s financial markets”. 

“Insider trading undermines investor confidence and gives individuals an unfair advantage,” she said.

“This criminal outcome demonstrates the serious consequences for trading when in possession of inside information.”

In addition to the sentence, Schlosser is disqualified from managing corporations for five years.

The court also ordered him to give up the $28,883.53 profit he made from the illegal trades.

Schlosser was released from custody immediately upon recognizance.

The post Ex-Tesla Australia boss sentenced 2.5 years for insider trading ASX lithium shares appeared first on The Motley Fool Australia.

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• Piedmont Lithium shares: 150% upside or big short opportunity?
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• Piedmont Lithium share price sinks following short attack response
• Tesla-induced sell-off of ASX rare earths shares like Lynas overblown: experts

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 positions in and has recommended Tesla. 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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The New Hope Corporation Limited (ASX: NHC) share price is up 6.2% in late morning trade on Tuesday.

Shares in the S&P/ASX 200 Index (ASX: XJO) coal stock closed yesterday trading for $4.90. Shares are currently trading for $5.21 apiece.

ASX 200 investors are bidding up New Hope shares following the release of the coal miner’s half-year results this morning for the six months ending 31 January.

And some results they were.

What’s spurring ASX 200 investor interest today?

The New Hope share price is rocketing after the miner reported a remarkable 103% increase in net profit after tax (NPAT) compared to the prior corresponding half year. NPAT for the six months came in at $669 million.

The massive profit boost was driven by a 54% year on year surge in revenue, which came in at $1.58 billion.

Income investors may also be snapping up shares today after the company declared fully franked, interim dividends of 40 cents per share (inclusive of a 10 cps special dividend). At the current New Hope share price that works out to an instant yield of 7.7% from the interim dividend alone.

Well, not quite instant.

New Hope stock trades ex-dividend on 17 April. Investors holding shares at market close on that day can expect the outsized dividend payout to hit their bank accounts on 3 May.

What’s next for the New Hope share price?

Looking ahead to what could impact the New Hope share price over the coming months, the miner said global thermal coal demand was outstripping supply, pointing to Southeast Asia as an expected growth market.

It noted that “All major coal suppliers face considerable constraints, placing increased value on already permitted, low cost operations.” 

The company added that the New South Wales government has granted its Bengalla Exploration Licence, which “should provide further long-term growth opportunity”.

What kind of growth?

New Hope said it has the “ability to almost double current production levels over the next three years through organic growth”.

New Hope share price snapshot

Though still down in calendar year 2023, the New Hope share price remains up an impressive 76% over the past 12 months.

The post New Hope share price rockets 6% as half-year profits double appeared first on The Motley Fool Australia.

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More reading

• Guess which ASX 200 coal share just posted a 100% profit jump
• Top brokers name 3 ASX shares to buy today
• Analysts warn of future earnings downgrades for ASX 200 coal shares
• 3 ASX 200 coal shares to buy for big gains and huge yields: Morgans
• Is the party well and truly over for ASX 200 coal shares?

Motley Fool contributor Bernd Struben 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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The Incitec Pivot Ltd (ASX: IPL) share price is having a strong session.

In morning trade, the ASX 200 industrial chemicals company’s shares were up almost 7% to $3.33.

The Incitec Pivot share price has since pulled back a touch but remains up over 3% currently.

Why is this ASX 200 share charging higher?

Investors have been buying the company’s shares on Tuesday in response to the release of an announcement after the market close yesterday.

According to the release, the company has reached an agreement with CF Industries for the sale of its ammonia manufacturing facility located in Waggaman, United States.

The two parties have agreed a deal with a total value of US$1.675 billion (A$2.50 billion). This includes a 25-year ammonia supply agreement with CF Industries for up to 200,000 short tonnes of ammonia per annum to support Incitec Pivot’s Dyno Nobel Americas (DNA) explosives business.

Management also highlights that the supply agreement secures ammonia at producer cost for the DNA business. The value allocated to the ammonia supply agreement is approximately US$425 million (A$634 million) which will be offset from the cash proceeds of the sale agreement for Waggaman.

All in all, after tax and the ammonia offtake agreement, the company expects to bank US$837 million (A$1,249 million) in net cash proceeds. These proceeds are intended to be allocated in line with the company’s previously disclosed capital allocation framework.

Though, the deal remains subject to US anti-trust regulatory clearance and the completion of other customary closing conditions.

Why is it selling Waggaman?

Management advised that it decided to sell the Waggaman operation in response to a strategic review.

Incitec Pivot’s managing director and CEO, Jeanne Johns, added:

Our announcement today represents a pivotal step in the execution of our strategy to enhance the focus of our businesses on the high value technical and service needs of our explosives customers. We are also delighted to be partnering with CF Industries, a world class producer of ammonia with an excellent manufacturing and safety track record. We are looking forward to this journey as we seek to deliver long-term sustainable value creation for our shareholders and stakeholders.

The post This ASX 200 share is charging higher on $2.5bn asset sale news appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Tuesday

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Fortescue Metals Group Limited (ASX: FMG) boss Andrew ‘Twiggy’ Forrest is out for nickel, posting a bid for All Ordinaries Index (ASX: XAO) miner Mincor Resources NL (ASX: MCR).

The Aussie billionaire’s privately-owned Wyloo Metals made a $760 million offer for the battery metals stock this morning.

The offer, if accepted, could see shareholders receiving $1.40 for each of their securities – a 35% premium on the Micor share price’s previous close. Though, the market appears to think the rich lister could go higher.

Stock in the ASX All Ords takeover target is surging 40.87% to trade at $1.465 apiece at the time of writing.

Let’s take a closer look at the offer on the table from the Fortescue icon.

Twiggy tables $760m bid for ASX All Ords nickel miner

Fortescue’s Twiggy Forrest has put forward an on-market takeover offer to buy all shares in ASX All Ords nickel producer Mincor.

The billionaire already boasts a 19.99% stake in the battery metals stock.

That stake was worth around $111 million when the Mincor share price closed Monday’s session at $1.04. At that price, the company boasted a market capitalisation of around $557 million according to the ASX.

Though, the $1.40 all-cash bid still represents a bargain compared to the stock’s recent highs. The Mincor share price peaked at $2.84 in April 2022.

Not to mention, the ASX All Ords company offered new shares for $1.39 apiece under a recent $55 million placement.

On announcing the bid, Wyloo Metals commented:

Wyloo believes that the offer represents attractive value to Mincor shareholders, particularly given the current risks and uncertainties associated with remaining a Mincor shareholder in the face of prevailing economic and equity market risks.

Wyloo considers these risks may be weighing on Mincor’s valuation, as demonstrated by the 49% decline in its share price over the last 12 months.

The offer period in which Mincor shareholders can accept the Fortescue boss’ offer will open on 5 April. It will close on 8 May unless it’s extended.

Twiggy first bought into the ASX All Ords nickel share in 2019, snapping up a 6% stake.

The post Guess which ASX All Ords mining share Fortescue’s Twiggy Forrest is eyeing off for $760m appeared first on The Motley Fool Australia.

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More reading

• Is the Fortescue share price a buy at $21?
• How to generate $10,000 of passive income from Fortescue shares
• Is it time to buy ASX 200 iron ore shares right now?
• Fortescue share price marching higher as green hydrogen plans heat up
• Are Fortescue shares back on the menu amid job cuts?

Motley Fool contributor Brooke Cooper 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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Although the tech sector has been a pocket of strength on the Australian share market this year, it is still down materially over the last 12 months.

This means there could be some huge bargains out there for patient investors.

Goldman Sachs agrees with this view and has picked out a number of ASX tech shares that it believes investors should be buying before it’s too late.

The first two are Life360 Inc (ASX: 360) and Xero Limited (ASX: XRO), which it believes will benefit from a shift to profitable growth. This is due to the fact that “profitable tech continues to trade at a large premium to non-profitable.”

Goldman has a buy rating and $7.85 price target on Life360’s shares and a conviction buy rating and $116.00 price target on Xero’s shares.

What else is Goldman saying about ASX tech shares?

The broker also reiterates its bullish view on profitable ASX tech shares Data#3 Ltd (ASX: DTL), Macquarie Telecom Group Ltd (ASX: MAQ), and REA Group Ltd (ASX: REA).

It has price targets of $9.20, $73.30, and $158.00, respectively, on their shares.

Goldman summarises:

We believe investors will reward companies that demonstrate (1) resilient top-line momentum and/or pathways to revenue upgrades; (2) tight cost management or cost-out programs; and (3) reasonable valuations in light of the elevated rate environment. We refer to our updated Tech Resilience Screen as a framework to identify companies with strong balance sheets, high recurring revenue, defensive end markets, mission critical products and shorter time-to-value.

As such we reiterate our top picks and delineate our Buy calls into more “offensive” names that trade at low valuations and are moving to free cash flow profitability (Xero (on CL)/Life360) and “defensive” profitable names with resilient end-markets and visibility to consensus upgrades (REA (on CL), Data#3 and Macquarie Telecom).

The post Goldman Sachs names 5 of the best ASX tech shares to buy now appeared first on The Motley Fool Australia.

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More reading

• Leading brokers name 3 ASX shares to buy today
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• 7 ASX shares flying under the radar to buy now: Goldman Sachs

Motley Fool contributor James Mickleboro has positions in Life360 and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Life360 and Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool Australia has recommended REA Group. 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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The fund manager Contact Asset Management has outlined two S&P/ASX 200 Index (ASX: XJO) shares that could be great value investments and could outperform.

With its Contact Australian Ex-50 Fund, it aims to find businesses that can deliver a mix of growth and income by looking at businesses that are quality Australian companies outside of the S&P/ASX 50 Index (ASX: XFL).

The strategy seeks to invest in founder-led businesses and tomorrow’s leaders within the universe of mid and small-cap ASX shares.

The fund manager said that reporting season is an interesting time for stock pickers like Contact Asset Management. It saw consistent themes from company results in February: tight labour supply, rising interest expense, a cautious consumer and ongoing inflation.

Smartgroup Corporation Ltd (ASX: SIQ)

This ASX 200 share offers salary packaging, fleet management and a range of other services to organisations across Australia. It’s committed to delivering an “exceptional experience”.

Contact pointed out that over the prior two years, Smartgroup’s operating conditions were challenging, but the latest report showed that operating momentum is “improving”.

The fund manager said that novated leasing leads have been “buoyant”, while supply chain pressures on vehicle availability are “only just beginning to abate.”

As the environment normalises, the fund manager is expecting the ASX 200 share’s sales to improve as orders are converted. Costs are also expected to drop, as redundant service expenses are removed at a faster-than-expected pace.

Contact said that growth in electric vehicles is an “unappreciated” additional boost to activity, as well as benefits from the recent investments in digital platforms.

The fund manager believes that Smartgroup has a “strong” balance sheet with near zero debt forecast.

Contact pointed out that the better-than-expected dividend highlights management’s confidence in the outlook.

In the fund manager’s opinion, a forward-looking price/earnings (P/E) ratio of between 11 to 12 suggests “excellent value.”

Flight Centre Travel Group Ltd (ASX: FLT)

Flight Centre is one of the largest ASX travel shares. It offers both leisure and business travel for travellers.

Contact revealed that it added Flight Centre shares to the portfolio recently.

It pointed out that the corporate business is seeing emerging strong momentum, which now accounts for “over 50% of earnings.”

The fund manager also noted that leisure is also recovering, yet “still has upside with Australian arrivals at around 70% of pre-COVID levels.”

Contact also thinks that the resumption of Chinese tourism “will help drive growth.”

On top of that, the fund manager said that the ASX 200 share’s balance sheet is in a “sound position” after the recent capital raising.

Contact said that it expects the founder-led business to return to dividend payments in the next financial year.

The post 2 ASX 200 shares to buy for ‘excellent value’: fund manager appeared first on The Motley Fool Australia.

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More reading

• Here are the 10 most shorted ASX shares this week
• Why has the Flight Centre share price tumbled 11% in a week?
• Why is the Flight Centre share price lagging the ASX 200 on Monday?
• Here are the 10 most shorted ASX shares this week
• When will Flight Centre shares resume paying dividends?

Motley Fool contributor Tristan Harrison 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 positions in and has recommended Smartgroup. The Motley Fool Australia has recommended Flight Centre Travel Group. 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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Fund manager Wilson Asset Management (WAM) has identified two top small-cap ASX shares in one of the portfolios it manages that could be investment ideas.

WAM operates several listed investment companies (LICs). Some, such as WAM Leaders Ltd (ASX: WLE) and WAM Capital Limited (ASX: WAM), focus on larger companies.

There’s also one called WAM Microcap Limited (ASX: WMI) which focuses on small-cap ASX shares with a market capitalisation of under $300 million at the time of acquisition.

WAM says WAM Microcap targets “the most exciting undervalued growth opportunities in the Australian microcap market”.

These are the two small-cap ASX shares the fund manager outlined in its recent monthly update.

MMA Offshore Ltd (ASX: MRM)

WAM described MMA Offshore as a global provider of marine vessels and services to the offshore energy sectors, government, defence and maritime industries.

Last month, the company reported its result which showed a 16.6% increase in its revenue to $160 million and a 124.5% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) year over year.

The fund manager explained that the positive result was driven by “improved market conditions as well as its non-core asset sales program and cash flow generation which meant MMA Offshore finished the half with one of the strongest balance sheets in its industry.”

WAM also said that the small-cap ASX share has additional flexibility with its capital management initiatives. The investment team explained:

We believe the recovery within the oil and gas industries presents a unique opportunity to MMA Offshore to maximise profit returns moving forward.

Ridley Corporation Ltd (ASX: RIC)

The fund manager describes Ridley Corporation as Australia’s leading provider of animal nutrition solutions.

Ridley Corporation was another business that reported its result last month, which the WAM investment team called “solid”. Ridley achieved revenue growth of 25.4% to $637.9 million, and EBITDA went up by 12.8% to $44.1 million. The result also included “strong” cash flow conversion.

WAM was impressed by the result considering there was the impact of weather on its operations. The investment team said that the result demonstrated “the resiliency of the company’s diversified business model.”

The fund manager explained:

We remain optimistic on the company’s outlook, with earnings growth supported by internal improvement initiatives that will deliver earnings ahead of industry growth rates, and an under-geared balance sheet providing them with optionality to continue capital management initiatives and engage in earnings accretive acquisitions.

The post 2 exciting small cap ASX shares to buy for market-beating growth: expert appeared first on The Motley Fool Australia.

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More reading

• These 2 ASX shares just doubled. But there’s more to come: experts
• Why Block, Liontown, MMA, and Norwest Energy shares are charging higher today
• ‘Happy buyers’: Expert’s 2 ASX shares to grab after boom reporting season

Motley Fool contributor Tristan Harrison has positions in Wam Microcap. 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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Mining stocks absolutely carried the S&P/ASX 200 Index (ASX: XJO) last year.

And even though western economies are struggling, China’s post-COVID resurgence has many experts betting that there will be renewed thirst for raw materials.

Fairmont Equities managing director Michael Gable this week picked out two ASX shares in the resources sector that would make handsome buys at the moment:

Now is the buying opportunity for metals producer

The South32 Ltd (ASX: S32) share price has fallen almost 15% since 3 March.

“In our view, this can be considered a buying opportunity for this diversified mining company trading at a discount,” Gable told The Bull.

He’s not the only one thinking along those lines. According to CMC Markets, ten out of 19 analysts are currently rating South32 as a strong buy.

The analysts at Citi were certainly pleased with what they saw over reporting season.

“1H FY23 profit of US$560 million was better than expected,” reported The Motley Fool’s James Mickleboro.

“Importantly, FY23 production and cost guidance was maintained. FY24 production guidance points to modestly higher output in FY24.”

In rating South32 as a buy, the Citi team predicted that it has plenty of upside to come.

“We believe S32 has not yet run to full valuation levels trading on FY24E EV/EBITDA of 4x vs peers at >5x.”

Gable points to the upside in commodity prices forecast for the rest of this year.

“Low inventories in base metals should lead to a spike in prices,” he said.

“We expect increasing demand for base metals in later 2023.”

Gold will conquer the world

Gold is considered a safe haven asset for troubled times, and that’s no different in 2023 for Gable.

“We’ve been positive on gold stocks for the past few months, and still believe Newcrest Mining Ltd (ASX: NCM) is a buy at current levels.”

Newcrest shares have rocketed in sync with gold prices, with the stock gaining more than 62% since late September.

Gable likes the momentum.

“The share price has been trending higher since September 2022 and we expect it to continue moving forward,” he said.

“Any fall in the US dollar will be positive for gold prices.”

Another catalyst could come in the form of an acquisition.

“Potential exists for a new takeover bid after Newcrest rejected an offer from Newmont Corporation (NYSE: NEM) in February.”

The team at Firetrail is also a fan, last month nominating Newcrest shares as a stock to hold for the next decade.

They believe that the US dollar will lose its status as the world’s reserve currency, thus pushing gold into prominence.

“Gold was the world’s reserve currency for 5,000 years. It was only usurped by the US dollar 40 years ago following the breakdown of the gold standard,” Firetrail analysts said in a memo to clients.

“A greater role in world finance will put upward pressure on the gold price to the benefit [of] low cost, long life gold miners such as Newcrest Mining.”

The post ‘Increasing demand’: Expert picks 2 ASX 200 mining shares to buy (not BHP) appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• Where I would go hunting for defensive ASX 200 shares with upside
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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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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, Capital H Management portfolio manager Harley Grosser tells us the two hottest small-cap ASX shares to buy right now.

Investment style

The Motley Fool: How would you describe your fund to a potential client?

Harley Grosser: Our team manages the Capital H Inception Fund, which is a value-focused, bottom-up stock picker specialising in small and microcap ASX-listed stocks. 

What we try to do is find situations where the upside is large and the downside’s relatively small. It tends to be in the smaller companies where you can find those, so that’s where we focus. 

The final one is we only buy businesses that we think we understand and at prices that we think are well below what we think they’re worth.

MF: The last 12 months for small caps haven’t been great. Where do you think the market is now and where do you think it’s heading?

HG: My honest answer on where the market’s going is that I don’t know, and we don’t spend much time trying to figure that out. 

As you mentioned, it has been a difficult market for small caps. So what we do know is there’s a whole lot more value in Aussie small caps now than there was 12 months ago. We’ve been pretty much buying some stocks every day for the last six months or so. We spend our time just sifting through everything and trying to find one or two good ideas a year, really. 

Over the really long term, markets will move higher but in the short term, they can do anything. So we just try to block out the noise and focus on finding good opportunities.

MF: Would it be fair to say you buy stocks with a reasonable investment horizon?

HG: Yeah, we want to be invested in the business as long as the company’s executing and the valuation stays reasonable. So the longer that is, the better. When we’re buying a stock, we’re buying it on what we think is [its] earnings in 12 or 18 months, not what it’s earning today or yesterday. 

We’re happy to take advantage of the short-term ups and downs, but we try to take a long-term focus on the actual investment.

Hottest ASX shares

MF: What are the two best stock buys right now?

HG: One is Environmental Group Ltd (ASX: EGL), which we’ve been in for a while. It’s a provider of integrated waste management and environmental solutions. 

They’ve had a really good 12 months at an operational level but as you mentioned, most small-cap stocks are down. So they’ve upgraded a few times over the last year through FY22, and we think there’s good prospects of earnings momentum continuing into FY24, given their deal pipeline. 

It’s a really well-run business. It’s run by someone who the market knows well, and it’s in the right space with billions of dollars going to be spent on waste and environmental solutions in coming years, regardless of inflation, or recession risk, or base collapsing. It’s a little bit recession-proof there. 

What we think will get the market excited in the new term is their opportunity in PFAS [chemical pollutants], which looks like it’s starting to come together. So I think it’s probably just one that investors should keep an eye on because we think it’s close to an inflection point, potentially.

MF: These small caps, they can go down a fair magnitude, but when the market picks up again, they go up significantly compared to the larger stocks, don’t they?

HG: For sure. And when they do go up, they go up very quickly, and often on relatively low volume. So it’s hard to buy them when they’re moving. You’ve got to take a view, get set, and hope your work proves you’re correct. 

We’re not trying to be too smart and trade each year around the edges. We just held the position, and if the stock goes nuts, we’ll of course manage the position and sell what we need to, but it’s a long-term hold for us. And the management’s executing, so we can’t really fault them.

MF: Great, and your other ASX share to buy?

HG: Final one is Sequoia Financial Group Ltd (ASX: SEQ). They’re a financial services group. They’ve just announced they’ve agreed to sell 80% of one of their businesses for $40 million of cash. 

The stock’s trading on a silly valuation of three times EV [enterprise value] to EBIT [earnings before interest and tax]. The catch there is that the market doesn’t yet fully believe the sale will complete, at least based on what the share price is. 

But the buyer is coming out saying publicly that they’ve got the funding, so we just got to wait and see.

We think it’s an investment with relatively little downside. If the deal doesn’t complete, we don’t lose much. If it does complete, then it looks really, really cheap. We’ll probably make a good return. 

The first key date there would be the 20th of March for investors to watch. Pencil that date in because that’s when the first payment of about $10 million comes in. And we think as each payment comes in, there’s three payments totalling $40 million, then the stock will re-rate. 

It’s not without risk there. The deal might not complete, but we think it’s a reasonable chance it does and the stock looks cheap on that basis.

MF: That’s a pretty huge transaction for a company with a current market cap of only $72 million.

HG: Oh, massive. I mean if it does complete, they’ve got $45 million of cash, they’ll still be doing say $8,  $9 million of operating EBITDA a year. 

I think the market was shocked, in a good way, by what price they got for Morrison’s. But because the structure of the deal is cash payments over a relatively long time, the market’s not going to price it in until the cash’s actually in the account, which is fair enough.

The post This $70 million ASX company just pulled off a $40 million deal: fundie appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has positions in Environmental Group. 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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