Marcus Bogdan: AGM Season

Marcus Bogdan, Portfolio Manager of the Switzer Dividend Growth Fund (Quoted Managed Fund) recently spoke to Peter Switzer on Switzer TV to discuss AGM season, recent quarter reports, and some stocks that have caught Marcus’ attention.

Watch the full interview here:

Video Transcript

Peter Switzer (PS): Joining me now is Marcus Bogdan of Blackmore Capital, he’s also the fund manager of the Switzer Dividend Growth Fund. We’re going to look at some developments in recent times. Marcus, thanks for joining us.

Marcus Bogdan (MB): Thanks Peter, good to be here.

PS: We’re looking at the earnings and you say the momentum is actually a bit mixed, something on the positive side, some encouraging updates for green shoots. But let’s go through the companies where you think things are looking only up.

MB: Well, we are definitely seeing a bifurcation in the market, but importantly, on the industrial company size, companies really facing into the economy. The recent announcements for their AGM or their first quarters have been encouraging. Companies like Cleanaway, which is the largest waste management company in Australia, very sensitive to volumes from small businesses, from industrial users, they are starting to see some green shoots and starting to see a recovery as New South Wales and now Victoria reopens. So that’s a very good litmus test for the underlying economy in terms of volumes.

Secondly, QUBE at their AGM indicated that they were expecting to see a strong recovery in earnings compared to what they previously said at their full-year result of solids. They’ve gone from solid to strong. Now QUBE are the largest logistics company, vertically integrated company in Australia. They’re seeing volumes not only from imports, but exports, but volumes around the country improving. All of those things are encouraging and suggest that we should see a nice V-shaped recovery in the economy as we come out of lockdowns and then in the early part of next year, we’ve got the federal election we should see some further fiscal stimulus as well.

PS: Now what about a company like Goodman Group, industrial real estate has done very, very well. I read only today that the outlook still remains pretty strong for these sorts of businesses, what do you think of Goodman Group?

MB: We like them as not only are they in the right space in industrial property and those trends look like they’re going to increase even further, but they are also a global leader in industrial warehousing. They’re benefiting from what you’re seeing with Amazon and online and inventory levels. They upgraded their earnings from 10%, which they said at the full-year result in August to their AGM where they’re seeing plus 15% growth for this year. The other thing we do like about them is that they are obviously executing very well, they’re in the right part of the market, and they’ve got a very, very strong balance sheet and a very strong history of execution.

PS: Another area you quite like is healthcare. And I say, I’m really happy that we kept talking up CSL when it was about $246 and now it’s up near 300 a side, that’s really good to see that it’s rebounded, a great company that was probably not advantaged by the lockdowns and the Coronavirus. Looks like you like CSL, Healius and Australian Clinical Labs. Let’s talk a little about Australian Clinical Labs, because a lot of people wouldn’t know much about them.

MB: Sure. Just to reiterate what we’ve got in the portfolio in the healthcare sector, we’ve got CSL, which is Healius, Integral Diagnostics, Ramsey Healthcare and Medibank. We’re positive across the spectrum for healthcare providers. What we’re seeing in diagnostics and pathology, which is Healius and Australian Clinical Labs, is a recovery in their base business. To distil that into its simplest form, they’ve obviously benefited from pathology testing, for PCR testing for COVID, those trends continue, and we expect that testing environment will be with us for the foreseeable future. Maybe not at the levels that we’re seeing today, but certainly elevated going forward. But importantly, people are now going back for general medicine for their general health care check-ups and we’re starting to see the recovery in elective surgery as well. Both of those outcomes require pathology testing, blood testing and we’re starting to see evidence of that recover.

PS: Let’s go to another sector that you seem to like and that’s media, and particularly you like News Corp. Tell us why.

MB: News Corp has always traded at a big discount to the sum of the parts that valuation and it’s idiosyncratic to that dynasty. However, in Dow Jones, which is obviously the owner of Wall Street Journal, they’ve seen a huge uptake there in subscriptions and that model pricing power there, they’ve moved into compliance, they’ve made some very good acquisitions there. The momentum in Dow Jones is particularly encouraging, but where they’re seeing the strongest growth is their investments in digital real estate. They’ve got a 60% ownership in REI so obviously the volume is in housing there. But what we’re also seeing is in the US is they’ve got the second largest digital property provider there in a company called Realtor.com. They’ve significantly turned that business around, so that has also been encouraging. Then businesses like Harper Collins have been very consistent earners for them, and then potentially they’ve got a joint venture investment with Foxtel, which has been problematic but now that is starting to turn around. That could well come to the market in terms of an IPO in the future. So the valuation, big discount, recovery in earnings, and very good execution is the thesis around.

PS: There was a time when we were younger, when you always saw News Corp as a very dominant player in this market. But it just seemed as a business too hard to fully understand, but the way you’ve broken it up, it seems as though it’s a more transparent organization than before, is that a fair call?

MB: I think you’re absolutely right. I mean, it’s had a bedevilled history, but I think in recent years, they’ve simplified their model. They have been far more strategic in how they’ve been allocating capital and they’ve moved into the right parts of the economy. Subscription media, digital real estate, they’ve been very good drivers of earnings for us.

PS: Okay, so there’s the sectors you like, couple of businesses to have, I guess, sent out our concerns is the banking sector and also resources. Lately we’ve seen CBA and Westpac not really excite the market and CBA actually lost 8% on Wednesday. So, tell us what you’re seeing in those results.

MB: Well, if we take a step back and look at the earnings season for FY 2021, it was driven by the banking and the materials growth in earnings. It’s a very different picture of what we’re starting to see in 2022, where we’re seeing from the resources sector, downgrades there in earnings. Now with both Westpac and CBA reporting, both have been disappointing results. I think the more profound result was certainly CBA because that was unexpected. The underlying loan growth that we’re seeing from mortgages has been very, very strong. CBA has been leading the market, it’s been growing above system in mortgages and business loans and in deposit growth. But at the same time, what we’re seeing is it’s been an incredibly competitive environment. We’re starting to see pressure there on the margin and then the underlying margin fell by around seven basis points, which was unexpected. CBA’s result for the first quarter was around 4% below market expectations. It had a more pronounced response yesterday, down around 8% and I think that there was just a question there of surprise and maybe questioning the large premium that they tried relative to the other three banks.

Our thesis around the banks is, is that on the plus side, is that credit quality still remains very, very sound. Banks balance sheets are still incredibly strong, unquestionably strong based on what the regulator wants. And so that’s important that we should still see further buybacks and some far and further growth in dividends. But a far more moderate outlook for earnings growth. We’re going to do a much deeper dive into looking at the banking sector and CBA and Westpac, and to see whether that is just a one off in terms of the pressure that they were seeing there in the margins or whether it is a more structural, competitive environment. I think the one encouraging element around the margin is, is that now we’ve started to see that on the fixed rate loans that they’re starting to increase the prices there. Hopefully there will be some moderation in the margin pressure going forward.

PS: The summary I feel is this. You’re doing a bit of a watch to see if you want to reduce your exposure to the banks. But it could mean that in your research, you can say, this is actually a buying opportunity that I think over the course of 2022, they might retrace their losses because the economy could be very, very strong, interest rates could start rising and that would be an advantage to banks.

MB: Absolutely. There’s definitely pluses and minuses there. Obviously in the income fund, we’re absolutely focused on the dividends and the growth of the dividends there. I think as a headline number, we still expect to see growth in the dividends, which is important. They will be fully franked and there will be some buybacks there, but it’s the growth rate, it’s the earnings growth rate where I think that there’s been a level of sort of heightened scrutiny.

PS: Okay, let’s go to the resources now. I’m interested in your view on this Marcus, because I wrote a piece for Switzer Report earlier this week where I said, well, if you want to take a longer-term view, where might has been in a year’s time, my argument was, it will probably be higher. I looked at a lot of the analysts and they all kind of agree with me. We know there’s a China slow down now, which is impacting on oil prices, but what’s your view on where these companies might be in a year’s time?

MB: Well, we still like BHP. We were always wary of iron ore prices above $200 they’re now around $90. And so they’re much closer to their long-term average of around seven $70. And that’s what the treasury have gotten their models as well. I think we’ve had the big shock in the resources sector which we’re just starting to see in the banking sector. I also think the resources sector is much further through this. If we look at the underlying businesses of BHP, very strong returns on capital, very high levels of free cashflow generation, very, very strong balance sheets, which leads to still very attractive dividends and a far more favourable valuation. So, I think that from a medium to longer term perspective, I think your thesis is absolutely underpinned.

PS: So therefore, people who might not have any BHP, this could be a good entry point at this point in time?

MB: Well, they’ve come back, you know 30% over the last quarter. They’re back sort of year loss. If you believe in the underlying company those times where you see that big contraction in the price is a much better place to enter.

PS: Warren Buffett said, be fit greedy when other people are fearful.

MB: Yeah, the psychology of the market’s incredibly important.

PS: Okay. Let’s just go before we wrap up. For people who are trying to work out what is a sound investment strategy to pick a stock, just in a nutshell, what do you do to make sure a stock is a stock that you want to buy?

MB: There’s a couple of flags that we really focus on and when we’re looking at companies, history is very important. Earnings, history, and the returns that those companies have generated. So overall we want companies that have earnings resilience through investment cycles. So we were attracted to higher quality earnings, higher quality companies. If you look at the portfolio, those core names are there, whether it’s Wesfarmers, Woolworths or CSL. Just very strong history of returns and earnings growth and industry leaders. That’s the first element that we look at.

The second element is balance sheet strength, because we do go through economic cycles, we do have shocks in the economic cycle. Each decade that I’ve certainly worked in, we have had those shocks that have come. If companies have got strong balance sheets, they’re able to withstand those shocks and actually increase the strength of their franchise because they can invest counter cyclically. They’re the two, it’s earnings quality and balance sheet strength are the sorts of things that we look at. We are attracted to industry leaders and in industries that are actually growing.

PS: I must admit historically, when I developed the core of my portfolio, it was always based on the kind of strategies that you talked about. Quality companies, particularly when the market is really scared and they’re dumping everything, it can be a fantastic time to buy quality companies for the long-term, isn’t it?

MB: Absolutely. that’s why you want to have the dexterity to be able to do that. Going back to that Warren buffet quote there of taking advantage of when things are much cheaper.

PS: Yeah. Thanks for joining us in the program.

MB: Terrific, thanks Peter.

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