MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Katana Asset Management portfolio manager Romano Sala Tenna.
When we were last spoke to Katana in February, RST identified four ASX stocks of middling size and variety.
That was on February 9, in a rather wonderful piece which the Dear Reader can find here, entitled thusly:
Since then two of them – West African Resources (ASX:WAF) and Integrated Research (ASX:IRI) – have more than doubled in value.
Here they are, side by side for the year to date:
Via Google
The other two stocks were Pepper Money (ASX:PPM) and Praemium (ASX:PPS) .
Via Google
Both have appreciated respectably since February, albeit they have both also retraced from recent highs.
That said, compared to the benchmark, they all look pretty good.
“We have been taking some profits on IRI and WAF, but see strong upside in both PPM and PPS from these levels,” RST says.
And this month, he reckons there’s another two additional ASX stocks worth considering.
“The first is a low risk, large cap company that offers a disproportionally high level of upside. The second is a potential five-bagger but with a commensurately high risk profile.”
Two more Katanas for the pool room
Whitehaven Coal (ASX:WHC)
WHC is the cheapest stock in the ASX 100, RST says, trading at an 80% discount to the average PER of 20.6x.
“There currently exists a rare opportunity to buy an ASX 100 company that screens attractive on value, offers high growth, and has potential to pay well above market dividends in the coming years.
“In October last year WHC emerged as the successful bidder for BHP’s Daunia and Blackwater coal assets (BMA Assets). On announcement of the deal their share price rose near 20%, but the move since fizzled out with the current price now below what it was pre the announcement.
“We believe the market’s overlooked how transformational this transaction is and expect a material re-rating once investors see the magnitude of cashflow generated from the combined operation. With the inclusion of these assets, sales are set to instantly double from ~14mt in FY24 to ~27mt pa.
“They’re also planning further growth at Maules Creek and the newly acquired assets to increase group sales to over 31mt pa by FY26.
“That’s an astonishing 122% increase in production over a very short timeframe.”
Romano also believes the acquisition enhances WHC’s sales mix.
Post completion, the proportion of higher value metallurgical coal sales will move from 15% to approximately 50%.
He adds that a key factor the market’s probably been overlooking is that WHC’s not had any share dilution, unlike many of its peers.
“Production has doubled and revenue has close to tripled, without any dilutive equity raise. This has therefore generated a large increase in earnings per share (EPS).
“The forward multiples for WHC represents exceptional value when compared to the ASX materials average of 12.1x. WHC’s PE of 4.1x represents a 66% discount to the sector, or 77% discount on current spot prices.
“As with every company, there are risks, the main one being potential weakness in the thermal and met coal markets. However, with little new supply coming online and relatively resilient demand, we think coal prices will be well supported.”
Karoon Energy (ASX:KAR)
KAR has grown into a $1.5bn oil producer through the transformational acquisitions of Bauna in Brazil and Who Dat in the Gulf of Mexico, RST told Stockhead.
“Whilst WHC put on a masterclass in how to make an acquisition (using cash and vendor finance), KAR were not as clever or fortunate. For both acquisitions, they undertook dilutive capital raises – the 2nd (at $2.05 per share) far exceeding the size that investors were expecting.
“But every cloud has a silver lining, and it is this caution with management that presents the current opportunity. On consensus earnings forecasts, KAR is trading on a notably depressed PER of just 3.7x this financial year and 4.1x next.
“However what is even more pertinent is the anticipated free cashflow that the two projects are likely to generate. On our internal model, we generate industry high cash yields.
“If we put aside deferred consideration to Petrobas and newly added appraisal capex at Who Dat, we forecast free cash flow yields in excess of 30% per annum over the next three years.”
“Allowing for these one-offs and growth capex, our model generates free cashflow of 14%, 26% and 20% respectively over the coming three years,” Romano says.
In total, RST calculates that the company could generate 60% of it’s market capitalisation in free cash flow in the coming three years.
And therein lies both the issue and the opportunity.
“If management’s pre-occupation is on building an empire, then shareholders will see less of this cashflow than they should.”
And there are some slightly alarming indicators in this direction, he says, including the structure of Remuneration KPIs, which are based on absolute numbers and not earnings per share.
“The latter being considerably more aligned with shareholders.
“However, if management can strike the right balance between growth and rewarding long suffering shareholders, then the sustainable divine yields could easily approach very high single digits or low double digits.
“At present, there are a number of institutional investors calling on KAR’s management to do precisely this.
“We are supportive of their efforts and are cautiously hopeful that KAR’s management will respond appropriately,” Romano says. “And we believe that the stock will significantly rerate should we see a pivot towards dividends and capital management.”
Romano Sala Tenna is Portfolio Manager at Katana Asset Management.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.
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