Ask A Fund Manager: NAOS Asset Management’s Robert Miller reveals a software company busy turning around recent bad fortunes.
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Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part two of our interview with NAOS Asset Management portfolio manager Robert Miller, he presents 3 ASX shares that currently have beautiful prospects.
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The Motley Fool: What are the 2 most attractive ASX shares right now?
Robert Miller: First one I’ll talk about is Eureka Group Holdings Ltd (ASX: EGH). They are a provider of independent seniors living. So it’s not aged care.
If you think about people that are of senior age and they want to live in the community still, this is a way to live in a rental community that certainly doesn’t have any aged care factor involved in it. It’s simply a rental agreement.
The vast majority, 95%-ish, of Eureka’s revenue actually comes from government pension funds — in terms of rental assistance.
Eureka’s got a portfolio of about 2,500 units across 40 villages that they own and manage. Strong management team and board. The key here is the aging population tailwind is very significant — only going to be a bigger factor for the economy over time.
But also equally the flip side of that is as you get more people moving into retirement age, there are less people in the age of their working career, as in producing income for the economy. So therefore you get that natural switch between people that are generating income to… the government needing to provide more stimulus and whatnot over time.
Add to that housing affordability, which is a topic, and certainly one that you’re seeing less home ownership percentages over time. That plays into Eureka’s long-term [benefit] in terms of the tailwinds that they operate in.
It’s a very large market and we see them as providing a social infrastructure good that [has] a significant demand.
What I would also say is I think Eureka’s done a good job to date, under the current management and board, of acquiring businesses. There are significant M&A opportunities within this space. But as well as that, they’ve got a lot of assets where they might have some vacant land, or are able to purchase vacant land as well, and develop that internally.
You possibly could classify it as a boring business, but we believe that’s one that’s got very strong tailwinds, very stable revenue profile, and a business that can incrementally grow over time, and generate hopefully very strong free cash flow returns.
The Motley Fool: And the other one?
Robert Miller: Another one that is a little bit different, it’s probably classified as a turnaround story at this moment, is a business called Gentrack Group Ltd (ASX: GTK), which is an enterprise software business that provides billing and customer support software to utility providers.
So this business has been around for a few years… It went from $6 to 80 cents. Since that time, a new board [and] new management team have come on into this business. And it’s a new strategy under the current management team who’ve been there for approximately 12 months now.
The reason for mentioning it today is they’ve put out an outline of a 3-year strategy at the end of their investor day in June. They’re not starting from scratch on this turnaround. So they’ve got a very sticky product, and we believe by not starting from scratch, you’re able to reinvest in technology and transition the business to becoming a cloud-first business with your existing customers first, before you have to go out and win new customers.
Despite the long-term tailwinds around energy businesses and utilities looking for a lower cost to serve and also more complexity around a transition to a green energy world, … there are short-term headwinds for this business.
Quite a few of the [management team] have come out of a business called Amdocs Limited (NASDAQ: DOX), which is a US-listed business that does a lot of utility and customer billing software. I think roughly it’s like a US$10 billion NASDAQ business. … There’s a lot of pedigree out of that business.
So it’s a big market. And I think if they’re successful in turning around this business with their existing customer base and then grow it from there, and they want to be best of breed at what they do, the earnings profile could be significant in terms of the upside there.
They’ve got another small division, which is an airport software division. So the utilities division I’ve touched on, is by far the majority. But they do have an airport software business as well, which is providing some mission-critical software into some of the largest airports in the world, including Sydney Airport Holdings Pty Ltd (ASX: SYD), and JFK, around say things like passenger tracking.
Yes, this is at a cyclical low, but they’ve got some tier-one airport customers. We think there’s quite a bit of inherent value in this airport software as well. Hopefully, it can be realised in time.
The Motley Fool: If the market closed tomorrow for 5 years, which stock would you want to hold?
Robert Miller: A key principle of ours is long-term investing. So we almost always think about, when investing, for periods of 5-plus years. So this is perfect, and I could probably answer this with a few across the portfolio.
In saying that, I certainly will pick something within our investment universe. Objective Corporation Limited (ASX: OCL) — I don’t know how familiar you are with that one, but it’s an enterprise software business again. This one’s for regulated industries, such as local councils, state councils, federal [government], whatnot. What they provide is software that has tools for governance, content and workflow processes.
The business was founded by Tony Walls, who founded it over 30 years ago now. He’s still the CEO and the major shareholder. He still owns over 65% of the shares on issue. They haven’t raised capital since back in 2000.
Clearly, digital transformation is something that all industries are experiencing, but I think probably government and regulated industries have a long way to go on this and probably aren’t as nimble as other sectors. So we think there’s a long runway for this tailwind to benefit Objective Corp.
Their software [contributes as] core platforms within their customer base. So their churn rate is very low. A low level of churn is an extremely valuable asset in an enterprise software business.
They expense all their R&D. And that’s been the case since listing, and they’ve invested close to $200 million in their software over that time, all expensed. And they invest a very healthy portion of sales at over 20%. So they are continually reinvesting in the product and the software offering to make it a benefit for their customers, which in turn drives growth, which they in turn reinvest back in the businesses, and it becomes a bit of a perpetual cycle like that.
The other thing to note is they’ve taken the migration to the cloud successfully. … Objective are the majority of the way through that. I suppose once you’ve got a high-quality software cloud offering, you get compounding over time.
Management has been excellent allocators of capital over a long period of time. And we see no reason why this won’t continue. So very much if the market closed tomorrow … happy to hold this for that period of time.
The Motley Fool: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
Robert Miller: Yeah, there’s plenty. Where do I start? Wrong timing, wrong price, missed opportunities — I’d be lying if I said we hadn’t had all of those things occur to us. I think regrets and mistakes are part and parcel of being an investor, unfortunately.
What I would say is being able to learn from your mistakes and also potentially learning from the mistakes of others before they’ve happened to you, is another key factor.
I would say the one that can hurt the most are missed opportunities in terms of our experiences. I won’t name names, but I feel like over the years, you’ve probably missed a few businesses that have been run by excellent founders.
So when you miss one that’s in your circle of competence that compounds for many, many years, and you can generate 5, 10 times returns, missing them are the ones that probably hurt the most.
The Motley Fool: You don’t want to name an obvious clanger?
Robert Miller: No, I really don’t, because some of them we’ve invested in later on.
But it’s just identifying excellent founders and whatnot early on enough so you get that compounding nature of returns for shareholders. I would say that we probably learnt a lot from some of these, and you’re never going to get a business that looks exactly the same, run by a founder who looks exactly the same.
But using our knowledge and experiences, we’ve been able to invest in quite a few businesses since then, that are run by what we believe to be excellent founders and allocators of capital.
And hopefully in the future, we can identify them early. But obviously you’re never going to get them all right.
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Motley Fool contributor Tony Yoo owns shares of Sydney Airport Holdings Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Objective Corporation Limited. 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 Bruce Jackson.