Two companies benefiting from the reopening trade
In this week’s video insight David interviews portfolio manager of the Montgomery Small Companies Fund Dominic Rose to discuss how the rapid vaccination rates have provided a catalyst for the reopening trade. With this in mind the Montgomery Small Companies Fund has broadened their reopening exposures to include a number of domestic opportunities, including Accent Group and oOh!media.
Transcript
David Buckland:
Hello ladies and gentlemen, my name’s David Buckland, CEO at Montgomery Investment Management, and this is the sixth edition of interviews I’m having with the team from the Montgomery Small Companies Fund. Today I’m delighted to be accompanied by Dominic Rose. For context, the Montgomery Small Companies Fund kicked off on the 20th of September 2019. And in the 25 odd months to the end of October 2021, the Fund has put on 63 per cent, outperforming the benchmark by a whole 36 per cent over that 25 odd month period, which happens to be an annualised 14 per cent after all expenses.
David Buckland:
Today, Dominic is going to focus on the domestic reopening trade. And for those that don’t keep tabs on it, Australia has now administered 36 million vaccinations as at a couple of days ago, and by the end of this month, they’ll be well into the 40 odd million vaccination mark. We’re seeing really big openings from places like the ACT, Victoria, New South Wales. And it looks to me like we’re going to end up about 95 per cent double vexed in the next bunch of weeks, which will challenge possibly only Portugal on a global basis.
David Buckland:
Without further ado, Dominic is going to really focus on the domestic reopening trade with an emphasis on two stocks, Accent Group (ASX:AX1) and oOh!media (ASX:OML). Dominic, over to you.
Dominic Rose:
Thanks Bucko. Perhaps I’ll start with some scene setting. So rapid vaccination rates across the developed world have provided a major catalyst for the reopening trade. We initially started buying reopening names with exposures to the US, UK and Europe, where vaccination rates were far greater. Examples of these global businesses are retailers like Labisia and City Chic, and travel stocks such as Corporate Travel and Webjet.
Dominic Rose:
Domestically, the pictures have been different due to recent lockdowns and Australia being far behind many other developed nations in its vaccination program. However, this has changed with New South Wales and Victoria rapidly catching up and naturally looking likely to end up with some of the highest vaccination rates globally, potentially in the mid 90 per cent order, which is really impressive. And of course, this has pulled forward the end of lockdowns, and just in time for the key December quarter trading period, which includes Black Friday, Cyber Monday, Christmas, and the Boxing Day sales.
Dominic Rose:
So with this dynamic in mind, we broaden our reopening exposures with the portfolio to include a number of domestic plays and the two stocks we’ll talk about today Accent Group and oOh!media. We think Accent Group represents an attractive play on domestic reopening in the near term. While looking further out, the company is rolling out stores, which supports a solid earnings growth profile over the medium term.
Dominic Rose:
So Accent is a domestic retailer with a market cap of about $1.4 billion. The company has a strong stable of international footwear brands, which are very much fashion and youth oriented. Clearly the lockdowns had a significant impact on the business because while the company does have an online presence, demand really comes from customers looking to stand out when they’re out and about. So the stock sold off quite heavily. It lost about a third of its value during the recent lockdowns. Its investors worried about the impact of lost sales and the need for aggressive discounting to keep the inventory position clean.
Dominic Rose:
We saw that as an opportunity and we built a position taking the view that yes, the first quarter was going to be tough, but pent-up demand should be strong as we come out of lockdowns into the key December quarter trading period. And with a high inventory position that actually could become an asset for the company when we consider the global supply disruptions and logistical challenges facing the industry.
Dominic Rose:
We also like the fact that management decided to retain key staff to support the reopening of the business, and also to restart the store rollout program. At the FY21 result, management confirmed its on track to reach about 700 stores in FY22 with at least 65 new stores expected to open during the period. And this strategy is really different to what we saw from the team last year, where the company was shedding staff to slash costs, pausing all growth investments given the outlook was so uncertain.
Dominic Rose:
Another attraction for Accent is that there is strong upside potential for some of the recent acquisitions, namely Glue Store and Stylerunner. Glue was a good youth apparel brand about 10 to 15 years ago. However, under investment meant lost market share to competitors like General Pants and Universal. We rate Accent’s management team very highly and expect them to revitalize the Glue brand and expand the footprint. They plan to grow the store network from 22 stores today to 60 by December 2023 with a major drive towards vertical brands, which should benefit margins. Stylerunner sells activewear and has been growing very strongly. There’s about four stores today. Accent’s looking to grow that network by 20 by into FY22 and 60 plus within the next three years.
Dominic Rose:
So in summary, we saw a quality growth company heavily sold off on what we saw were very short term issues and with an improving outlook with lots of upside potential from the store rollout. Valuation still looks good here to us in our view, trading on about 15 times FY20 PE with a 5 per cent yield. Now we think that’s too cheap given that it’s got a 10 per cent earnings growth profile we think over the medium term.
Dominic Rose:
So oOh!media. oOh!media is another attractive reopening investment in our view. The company has about a billion dollar market cap today. It has the largest footprint of out of home advertising assets in Australia and New Zealand, which reach almost 80 per cent of the population through around 37,000 digital and static sites. These sites range from roadside billboards, retail shopping centers, offices, bus stops, train stop and airports.
Dominic Rose:
The pandemic really hammered the out of home sector far worse than any other forms of media. Audiences significantly declined due to lockdowns or mobility restrictions, and so advertisers pulled their outdoor campaigns, redirected their budgets towards viewers stuck at home in front of the television.
Dominic Rose:
Before the most recent lockdowns in the eastern states, OML saw a strong recovery in its roadside billboard sites, which were trading quite quickly back above pre-pandemic levels. We’ve been quite active in the stock. We lightened up when we went into the most recent lockdowns, however, we’ve increased our positions more recently on share price weakness as our confidence has grown that the company would be well positioned as we come out of the lockdowns, and importantly, just in time for the December quarter, which is also seasonally strongest for advertising.
Dominic Rose:
The Australian economy looks to be in a strong position. Unemployment levels are low, we’ve got a buoyant housing market and this tends to support healthy advertising budgets. We also like out of home assets because they’re not facing structural challenges as old media formats like television and newspapers, and they provide an attractive reach to advertisers. The sectors also have been taking share based on growing digitalisation of the asset pool, which benefits the advertisers in terms of the analytical capabilities.
Dominic Rose:
The company also has some corporate appeal we think. Since the media law has changed a few years ago, we really haven’t seen the wave of sector consolidation that was anticipated, but we think the rationale for consolidation in that industry still makes sense. And out of home assets, they’re trading cheaper than they have historically, and so OML could really be a target for a bigger media player looking for growth and diversification. So we expect a solid recovery as we come out of the lockdown and the medium term structural growth drivers should resume.
Dominic Rose:
The market has OML’s earnings recovering to pre-pandemic levels by about calendar year 2023. We think that looks pretty conservative and the balance sheet is in the best shape the company’s had since listing. The stock is trading on eight times recovered EBITDA, which looks pretty cheap given historical levels. So two stocks for you today that we think are pretty good domestic reopeners.
David Buckland:
Dominic, an excellent summary on AX1 and OML and the Australian reopening trade. Ladies and gentlemen, I hope you enjoyed the sixth edition of my interviews with Gary Rollo and Dominic Rose on the Montgomery Small Companies Fund. Thanks very much for your attention and please continue to follow us on Facebook and Twitter.
You can watch David’s previous interview here: Three themes driving the Montgomery Small Companies Fund’s Performance
The Montgomery Small Companies Fund owns shares in Accent Group and oOh!media. This video was prepared 08 November 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
