Income Report / Income Report; Mid-Cap opportunities….(ECX, CNU, IGL)

By Market Matters 23 May 18

Income Report; Mid-Cap opportunities….(ECX, CNU, IGL)

Market Matters Income Report 23rd May 2018

As Peter O’Connor said in a recent update (click to view), he was alert, but not yet alarmed. He was referring specifically to the resources stocks in his coverage however I think it’s actually a good way of describing our current view of the market. While we think that the market is dancing nearer the edge of a deeper correction, at this point we’re simply very alert, looking for signs that may indicate this almost unprecedented global bull market for stocks is coming to a close.

As it stands, some signs are emerging like increased underlying volatility in large cap stocks (2 weeks in a row where 7.5% of the ASX 200 has moved up or down more than 5%), some complacency being tested in previously ‘hot’ areas of the market however a number of the more generic signs of an imminent top – the buying of ‘cheap stocks’ that have not really participated in the market rally to date because of specific stock / sector related issues while that one final ‘blow off’ style top that typically pre-empts a larger correction is proving illusive.   

The buying of ‘cheap stocks’ that are yet to participate in the rally is a key point for the MM Income Portfolio. Clearly, the portfolio is specifically targeted toward relative valuation and yield – stocks that should do well in the late stages of a bull market, but more importantly, should have some insulation into a market drop. The income portfolio is reasonably new (less than 12 months old), has an obvious yield focus but is also designed to protect capital via weightings towards hybrids and fixed income.

The stability of performance in a portfolio like this and the consistency of income is a high priority. As it stands, the stocks in the Income Portfolio have an average PE of 12.7x  and a yield of 6.85%. This compares to the market which sits at 16.18x and a yield of 4.41% - so it’s cheaper, and higher yield but clearly a number of our holdings have specific headwinds (which broadly we think are priced in).   

Holding ‘cheaper stocks’ is one approach, while adding more exposure to mid-caps that are less influenced by the overall market is another way to reduce portfolio volatility. This will be an area of focus as the portfolio / market evolves over time.    

In terms of the MM Income Portfolio over the past week,  the portfolio was down (-0.66%), again largely a result of weakness in Telstra (TLS) which is becoming a real thorn in the side of recent performance. Overall,  the portfolio is up 4.92% since inception (5/7/17) versus it’s benchmark (RBA cash rate +4% - equates to 4.73%).  Cash sits  5.5%, which we remain comfortable with given our short term market view and exposure to more defensive hybrid securities, however we do remain keen to sell some equities into strength, and rotate into some lower ‘beta’ mid cap opportunities as they arise – some ideas below.   

Eclipx (ECX) – now on our radar

Eclipx is a $1bn vehicle leasing, fleet management business which also has a financial services division to support these operations. In addition to this core business, they have online car auctions (GraysOnline) and supply vehicles to not-at-fault drivers involved in an accident through their Right2Drive brand – both of these businesses were acquired in the last 18 months. The corporate fleet leasing in the main stay of earnings (about 60%) and is a mature operation growing at low single digits. The other parts provide the opportunity for earnings growth with the company recently re-affirming guidance for 10-12% earnings per share growth in the financial year to September 2018. As can be seen in the chart below, the stock has been weak in recent times, most likely due to the disappointing result from one of its competitors in February (SGF).

Australian Super has recently come on the register of ECX with a ~5% holding, and with the stock on a forward PE of 12.2x and an expected yield of around 5% fully franked plus a reasonable runway for earnings growth, this looks an attractive candidate for the MM Income Portfolio. 

The near term catalyst for the share price to start moving is more difficult to find. Simply, it could be evidence that the companies guidance is on track, given the market has more bearish assumptions built into forecasts. They have guided to a second half skew in earnings which is not ideal, however it fits with the seasonality of the business, particularly GraysOnline.

We are bullish ECX particularly if it can push up through recent highs above ~$3.60 which would target ~$4.25

Eclipx (ECX) Chart

Chorus (CNU) and IVE Group (IGL) – revisiting past calls

We wrote about Chorus (CNU) and IVE Group (IGL) back in early April (report available here). Chorus is an NZ based Telco that was spun out of New Zealand Telecom in 2011 – its duel listed on the ASX and in New Zealand with a combined capitalisation of ~$3bn (ASX listed cap of $1.6bn). We described IGL as an old school printing business utilising new technologies to dominate the market + it’s clearly cheap.

Chorus – In April the stock was $3.82, while today it’s trading at $3.73. We had originally targeted $3.40 as a buy – this remains on our radar and we may ‘pay up’ in time.    

Chorus (CNU) Chart

IVE Group – In April the stock was $2.18 in April while today it’s trading at $2.20. we had originally targeted a buy below $2.04 – this remains on our radar and we may ‘pay up’ in time

IVE Group (IGL) Chart

Conclusion (s)

We like CNU & IGL at lower levels but may ‘pay up’ for one or both of these  
ECX looks great technically on a break above $3.60 targeting $4.25

Have a great day!

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 23/05/2018. 11.00AM 

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