Newly listed Judo Bank offers the most direct leverage on rising rates. Its funding costs are anchored by the RBA’s fixed-rate term funding facility, while its interest income automatically increases with rate hikes. This will provide a significant boost to the bank’s margins, in addition to the bank’s strong growth in lending.
As a bonus, since Judo operates in the small and medium enterprise (SME) sector rather than the highly competitive mortgage sector, its rate hike is less likely to face competition.
IPOs you’re in, or like the look of?
Recently, the vast majority of IPOs and subsequent fundraisings have been in the smaller resource sector. For many, the raises were opportunistic to take advantage of current commodity prices, with funds raised intended to cover anticipated inflation in capital expenditure costs. We didn’t find them particularly compelling.
Is it time to take profits on resource stocks that have benefited from the strength in commodity prices?
Decarbonization will provide a very long-term tailwind to demand for many mining products, but it will not be a linear path. We favor companies that offer some diversification, such as Independence Group, which is exposed to nickel, lithium and a little copper.
For early-stage pure-play companies operating in the hottest sectors such as lithium, a series of profit-taking wouldn’t go wrong, especially as Western Australia-based operations risk a double whammy. from weakening commodity prices and rising COVID-related costs.
Are you concerned about concentration risk following BHP’s rebalancing?
We like BHP’s positioning in commodities, its proactive approach to securing the social license to operate and its strong cash flow – but there’s no denying that the stock will be influenced by perceptions of China’s economic outlook and by fluctuations in commodity prices.
Fortunately, the Australian market is home to a number of other global winners such as CSL, Macquarie Group and Goodman Group, so with careful diversification you can benefit from the upside while mitigating the downside.
Which stock do you think the market is really undervaluing?
Unlike most junior mining stocks, there isn’t much excitement in Nickel Mines’ stock price. The company’s output will roughly triple over the next few years, making it one of the few resource companies that doesn’t need commodity prices to do the heavy lifting of profit growth. The shares were sold in March on worries about their joint venture partner, Tsingshan, worries about rising input costs and worries about the outlook for stainless steel demand in China.
Stocks are on single-digit price-to-earnings over the next few years – it’s not single-digit price-to-sales ratio what tech companies come to – it’s single-digit multiples of earnings real covered in cash!
The last quarter of the company showed an excellent result both on production and margins; few more quarterly like this, the risk discount in equities will be squeezed out.
What is the stock that you would like to own but cannot for some reason?
My fund is indexed to the S&P/ASX 200, so only Australian stocks are on the menu for me. Looking further afield, in the current environment, it’s hard to find a stock better positioned than Cheniere Energy Inc.
The company operates LNG “trains” that package US shale gas for export to other markets – hello Europe! – and it has a juicy 60% market share of that market. Like Nickel Mines, Cheniere enjoys an advantage related to volume growth rather than raw material prices.
Any TV shows or podcasts you enjoy or have recently enjoyed?
I’m a huge fan of the “Capitalisn’t” podcast published by my alma mater, the University of Chicago. I admit I watched “The Candidate” a bit on Netflix – a catchy satire on modern America starring the very talented Ben Platt. “Morning Wars” and “Dickinson” on Apple TV+ provided excellent treadmills.
Nine is the publisher of The Australian Financial Review.