Expert Investor: Julia Lee – Mastermind #8

HOSTS Alec Renehan & Bryce Leske|25 May, 2020

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

In today’s mastermind episode we are joined by Julia Lee, CIO of Burman Invest, to each pitch a stock or investment idea. In this episode:

  • Bryce discusses ASX-listed funeral stock InvoCare (ASX: IVC)
  • Julia discusses ASX-listed data centre manager NextDC (ASX: NXT)
  • Alec discusses NYSE-listed home builder Taylor Morrison Home Corp (NYSE: TMHC)

Remember, nothing in this podcast is specific buy, hold or sell advice. This episode is intended to feature discussions of stocks on our watchlists, but has not been prepared with your personal financial circumstances in mind. Before making any investment do your own research, read the PDS and consider speaking to a licenced financial advisor.


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Bryce: [00:00:57] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in 45 minutes or less. We break down the world of investing from

Bryce: [00:00:57] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going? [00:01:11][14.5]

Alec: [00:01:12] I'm very good Bryce. I am back under my blanket once again and you know, I'm ready for, I think, what is fast becoming, if not already become our favourite episode of the month. [00:01:22][10.4]

Bryce: [00:01:23] Yes, favourite episode. And that is our Master Mind episode, where we are joined by Chief Investment Officer of Bermann Invest, Julia Lee. Julia, thanks for joining us. [00:01:33][9.7]

Julia: [00:01:33] Great to be here, Ren. I think you have to explain the blanket for anyone in this room [00:01:38][5.0]

Alec: [00:01:39] that is very, very cold and I need a blanket, no fur for the sake of audio quality. Apparently it helps to be under a blanket or in a cupboard when you're podcasting from home. And I don't have a Covid that I can fit into. So I've decided to record under a blanket while we're all self isolating at our respective houses. [00:02:07][27.5]

Julia: [00:02:07] That is dedication. [00:02:08][0.4]

Bryce: [00:02:09] It is dedication. And whilst you're suffering with a blanket Ren, I am lucky enough to have two beautiful acoustic soundboards in front of me sent to us by a listener who felt sorry for you under the blanket. [00:02:21][11.9]

Alec: [00:02:22] And somehow you're holding the sound [00:02:23][1.5]

Bryce: [00:02:24] or words with the other two safely wrapped up in cardboard, ready to be dropped down to your house, which is about 17 metres from mine. But we haven't got around to that yet, so we will do that at some stage this week. But anyway, if you have just joined the show, welcome to Equity Mates. In the journey of investing, today's episode is all about taking a couple of stock picks. Will each throw a stock pitch at each other and really get an insight into how Julia thinks and goes about her investing process and about some ideas around and understand different ways in which we think about the company. So by all means, this is not a buy hold. Also recommendation. Julia has plenty of years of experience in the markets with a focus on Australian equities. So we try to keep that focus, although I think today Ren is throwing out a stock that's from the States. So that'll be interesting. [00:03:16][52.7]

Alec: [00:03:17] Yeah, I never signed on, didn't sign up for that. [00:03:19][2.1]

Bryce: [00:03:22] So before we get started, Ren, I think you wanted to give a shout out to Julia for one of the last pics that we did. And then we'll get stuck in, [00:03:28][6.1]

Alec: [00:03:28] as we always say, Bryce. And we're definitely not experts. And that is probably abundantly clear by now. But Julia is definitely an expert and she has proven it again with her latest stock picks. So about a month ago, a month and a half ago, Julia pitched Elders' ASX to Elby. And in the month and a half since she pitched it on the show, it's up a bit over 40 percent. Wow. So well done. [00:03:55][26.7]

Julia: [00:03:56] Okay, this is one of those stocks that's coming out of the drought and really doing well. So cattle prices doing well. And Eltis came out with its half year results today and that were pretty solid. [00:04:08][12.0]

Alec: [00:04:08] Yeah, up about 10, 10 percent today alone. [00:04:11][2.5]

Bryce: [00:04:11] Wow. Without going into too much detail, is it still a pick for you, Julia? [00:04:16][4.9]

Julia: [00:04:17] Yeah, well, they said that the dividend would be steady compared to last year, but the second half dividend, that if conditions remain the same, that you could see a rise there. So that really tells you a lot about the underlying business, that things are getting better and in particular, cattle prices have been doing really well. So what we're finding is that farmers are becoming a lot more confident because it's been raining in this food for the cows to eat. So they've been restocking their herds. And that's been great news for cattle. And of course, we're eating steaks at home. So also the consumption of beef. So watching that China relationship very closely and the tensions there as well, because China's largest export market. [00:05:03][45.6]

Bryce: [00:05:04] Mm, nice. Well, let's [00:05:05][1.7]

Alec: [00:05:06] get straight up Bryce well before we do, to give some credit to us, but not as much. Cut it. We're both up from that last peak. I'm I'm up about 20 percent and we're up in the teens. So, you know, it's been a good month for the markets in general. I guess [00:05:19][13.2]

Bryce: [00:05:19] my worry was [00:05:21][1.9]

Alec: [00:05:22] rising tide truly does lift all boats. [00:05:24][2.0]

Bryce: [00:05:25] Watch this space soon to come to the market. Is the mastermind ETF or index. [00:05:30][5.0]

Alec: [00:05:30] So you go long, long and short, though. [00:05:35][4.7]

Bryce: [00:05:37] Anyway, let's get stuck into this week. I'll kick off, then we'll throw to Julia for her pick and then finish it off with you Ren with your international stocks. So how's that sound? Sounds good. So unlike many, many previous picks where I've had a focus on. The retail industry I've decided to branch out of my circle of competence so anything could happen here, so bear with me and my thinking around this was what are some industries that, despite the disruption of Covid, will continue to see consistent sources of revenue and tobacco gambling, not both industries that I'm not interested in Ren as you would know, you're [00:06:17][39.3]

Alec: [00:06:17] supporter, an investor. [00:06:18][1.2]

Bryce: [00:06:20] And so I decided to have a look into the funeral services industry because unfortunately, people obviously do keep dying. And the result of that is funerals and cemeteries and crematorium services. And those sorts of places obviously need to still provide services to the families of those that have died. So I had to look in funeral services and came across invoker. IVC is that ASX ticker. So Invoker, the largest provider of funeral and crematorium services in Australia, New Zealand, and they have some services over in Singapore as well. They're very well known throughout Australia and have a whole bunch of brands underneath their brand, which gives them pretty significant market share. So market cap of one and a half billion revenue of just shy of half a billion currently trading at about eleven point, down from a high of sixteen, forty or thereabouts. And to give you insight into their market share, they have about two hundred and ninety locations across Australia. [00:07:21][61.9]

Julia: [00:07:23] This is like a horror movie. This is more of it I have to disclose. I also need the care in the fight. [00:07:28][5.4]

Bryce: [00:07:31] I thought you were just about to say everything I said is just not true yet. So full disclosure, Julia does own this in her fund, which makes me even more nervous about this pitch because you've probably done about a thousand times more research than on what I've put in. So looking forward to seeing if we do a line on this. [00:07:48][17.7]

Julia: [00:07:50] I can't wait. [00:07:50][0.4]

Bryce: [00:07:51] So the main reason that I like Invoker is I think they've got a pretty strong moat. And they're also, as I said at the start, their source of revenue is pretty consistent. And obviously this source of revenue comes from the death rate and the death rate, according to the Australian Bureau of Statistics, is projected to grow progressively at around 2.8 to three percent over the next few years, sort of up until around 2030. So that gives invoker a reasonably consistent revenue stream. And then when you combine the fact that there is a market later and have about thirty five per cent of market share, they can then start leveraging that scale in terms of operating costs and advertising and marketing as well as their brands to really build on that increase in deaths. And that's where you're going to start seeing. Well, that's why until now we've had pretty consistent revenue growth. What are your thoughts so far? [00:08:52][61.8]

Julia: [00:08:53] When I look at it, you know, all the things you mentioned, people will always die. They say, you know, nothing's certain in life except death and taxes, I think is to say so. The death rate, usually it's quite a stable cash flow for Mackay except for this year. And that's because covid-19, you know, you haven't been allowed to have more than 10 people at funerals. So funerals have become these celebrations where people spend a lot of money. I mean, you would care at some point was even looking at getting a liquor licence. Oh, funerals. And then suddenly you weren't allowed to have these large gatherings. Enormous revenue obviously has been impacted. Not only that, but we're washing hands and with social distancing. So people who would have usually have died of the flu this year or something else, you're probably actually going to get a lower death rate this year compared to other years because of social distancing and also washing hands and getting the flu injection and things like that. So that's the bad news. The good news is that, you know, if you're due to die, you're probably going to die. So the death rate does tend to be mean reverting, which means if you get a lower death rate this year, then usually next year or the year after you get a higher death rate to make up for it. So it does tend to be quite stable. So this is one of those sort of EKI companies and morbid companies. But on the flip side, it's an essential service and it's also a stable cash flow because death and taxes [00:10:24][90.6]

Bryce: [00:10:25] are always going to happen. So Ren, did you have a comment? Before I move on [00:10:28][3.1]

Alec: [00:10:28] now, I'm interested to hear the rest of your explanation and then we'll get stuck into some questions. [00:10:33][4.4]

Bryce: [00:10:34] It goes without saying that covid will have an impact on their ability to offer the full range of services. And obviously, as a result, the growth plans for 2020 have had to go on hold. However, they have gone to market recently and done a capital raise of two hundred and fifty. Million or thereabouts, which they are going to be putting towards what they call protect and grow, which was a growth strategy that they're going to put in place over the next sort of year or so, where they stop building out and optimising their brand and network and investing in people and culture, as well as starting to now think about how that innovatively, I guess, leverage that scale and provide services in ways that previously you wouldn't necessarily have your funeral. So they're now looking at things like how they can do funerals online and virtually and all these sorts of things. So the three main pillars of obviously deaths, their market share, what they call funeral case average, the number of obviously funerals they do, and then the operating margin. And whilst I think now they're taking a bit of a hit and to Julie's point, deaths at the moment are probably not in line with where they have historically been. I believe that they'll be able to leverage their operating margin, embark on a bit of a cost cutting exercise at the moment and deploy some of the capital that they've raised to go out and acquire more funeral homes and services to increase their market share so that when things do start to turn around and deaths do start to revert to the mean, they're going to be in a pretty strong position. And as Julia mentioned, it's a pretty good cash flow business. So, yeah, I think now it's kind of down and out for a bit, not necessarily knocked out, but a good opportunity to get it at a price that it is at the moment. So Ren, what are your thoughts? [00:12:21][107.8]

Alec: [00:12:22] Yeah, it's interesting. I guess my question with a company like this is obviously they've got some big brands. White Lady Funerals is well known. But what's your competitive advantage in the funeral space like? What do you think these guys are better than any of the other players in this space? [00:12:37][15.4]

Bryce: [00:12:38] It's a good question. I think from reading through one of the old annual reports and they spend relative to their competition an enormous amount on advertising. And there was some research done that showed the impact of, I guess, quality advertising on people choosing these brands. And I couldn't really tell you why it is. [00:13:01][22.5]

Alec: [00:13:01] Let me ask you this question. When's the last time you've seen an ad for a funeral home? [00:13:05][3.5]

Bryce: [00:13:05] And I I'm getting them on Instagram all the time. [00:13:07][1.5]

Alec: [00:13:09] Well, it's surreal that smoking and drinking, [00:13:12][2.6]

Bryce: [00:13:13] but I'm sure I'm not sure I'm not being targeted for funeral services. To your point, it's probably more that their scale allows them to offer services across a broader range. So they have that premium offering as well as an offering that probably targets those that don't want to spend a whole bunch on it. And with scale, obviously, comes your ability to do these at a much cheaper cost than than your average competitor who's running solo with to know services or locations around Australia. That would probably be my comment to that. Do you have any insight on that, Julia? [00:13:47][34.0]

Julia: [00:13:47] I haven't seen any advertisements about funerals, but I have seen advertisements about prepaid funerals. And that's another side to this business. There's actually a funds management side to this business where people prepay for their funeral because they don't want their loved ones to be lumped with the cost of those funerals after they die. And that money basically goes into a pool and is invested. So there's a funds management aspect to prepay funerals as well. [00:14:18][31.0]

Bryce: [00:14:19] So anything more from you, Ren regarding Invoker? [00:14:22][2.5]

Alec: [00:14:23] No, no. Hopefully I won't need the services for a long time, but it's an interesting company to watch. [00:14:28][5.3]

Bryce: [00:14:29] One final note that I found interesting is they try and I guess increase their revenue stream. They've just launched a cremation service for pets, which I think they're hoping they can start growing. It was running at a loss, but I thought that was an interesting tax from them as people spend more and more money on pets. I can certainly say this part of their business being of interest to some pet owners. So watch that space. [00:14:53][24.4]

Julia: [00:14:54] There you go. The other way thing is that, you know, if you're not looking to be cremated and you're looking to be buried, you need a larger land size. The land is very scarce in Sydney and capital cities. So my mum's a bit more. But as well as she's gone and bought her funeral plot because land prices are going up and, you know, in 40 years time, that plot is going to be worth so much more. So that's one property always goes up. Even if it's a funeral for my wife. [00:15:28][34.5]

Alec: [00:15:30] Maybe we need to start a fund that buys up funeral plots in Sydney and Melbourne and then just hold them. [00:15:35][5.1]

Bryce: [00:15:36] Not bad. All right. Well, let's move on. We'll try to Julian now to to hear your pitch. [00:15:42][6.3]

Julia: [00:15:43] So my mum this time around is covid-19 related. You know, a lot of us are working from home and we've seen a ramp up. In the need for network storage and infrastructure when it comes to technology. So next, Stacey is my pick and choose the stock code and the question I've been asking myself is, is a demand surge from covid-19 temporary or is it permanent demand that's going to be recurring revenue, which is what you want to see when it comes to stability and companies? I like next D.C. and I think that the covid-19 situation and working from home, what it's done is accelerated trends that were already in place. So, for example, bricks to clicks the move to online shopping that's been accelerated and then the need for data and technology that's also been accelerated for companies. And I think that's a permanent thing rather than just, I guess, panic buying that's going to quickly disappear. So I like next DC. We've heard from companies similar to next DC, I guess, in that sort of technology space super loop, which has digital fibres, have said that they've been seeing extremely strong business in terms of fibre, connectivity and also cyber security sales. So they've seen high digital demand through covid-19 and traffic over its global network is up 30 percent in the past few weeks. Supergroups, another one sort of in that area. It's a smaller company and I focus on ASX 200 companies. So next DC is my peak there. [00:17:22][98.9]

Bryce: [00:17:23] So speaking of rapid growth, it's been on an absolute run. And you see this stock pick on sort of the watch list of companies that will survive and thrive after Covid. So certainly been on our radar in the radar of many of our listeners. So I'm sure they'd be interested to hear what you say. But it's trading at an incredibly high here. I'm just interested to know how you sort of think about that. And a stock like this is this just to get on and ride it while it's while it's running and then reassess? How are you thinking about this in terms of a short term or long term play? [00:17:57][34.5]

Julia: [00:17:58] The reason I became interested in next was while I was actually looking at another company over in the US and reading about and Beta, which is a gaming chip company. And I was reading a survey which said that during the working from home that gamers were spending two and a half times more playing games and they would normally and Nevada also has data centres and that's being driven by things like I as well as the Internet of Things and recommendation engine. So I kind of took the strong numbers we were seeing in the US and thought, well, how can I apply it to what's happening here in Australia? So the question I asked myself was, will we use more technology or less in the future? So will we need more of next week's services or less? And my view is that we will need more. We're going to see ICE and we're going to see Internet of Things 5G and technology is really going to dominate. So I think that next year is actually in the infancy of its journey as a company rather than at the mature stage. And the great thing about the infancy and a growth story is you usually see higher rates of growth and a much more mature company. So they look at things like network storage infrastructure in the tech space. So things that are important, a space power cooling is a huge cost. And at the moment they have eight data centres around Australia, too, which are being built and one that they're planning as well. The thing I don't like about next DC is that you have to build the data centres before the demand is there. The last thing you want as a data centre is to go dark, which means that you've run out of capacity. So what happens is you have a huge capital cost up front and a huge risk, and then you need to feel those data centres. So it's a bit of a hard business model, but structurally they have this tailwind coming through, which I think they can ride, at least for the next decade. [00:20:02][123.8]

Alec: [00:21:24] You said it's an interesting company and I agree with you. The long term tailwinds are definitely there for a business like this. It didn't turn a profit last year. It turned a profit the two years before that. Do you know why it lost money last year? And does it worry you at all? [00:21:42][17.5]

Julia: [00:21:42] I think when you have a look at next, Stacey, there were problems and there were concerns around its Melbourne data centre. I think the second data centre in Melbourne. And part of those concerns have now dissipated. They've seen to hyperscale contracts coming through in Melbourne over the next two months. And that's another reason why I've turned positive on the stock. There were question marks on the viability of its Melbourne centre and now we're starting to see these hyperscale contracts come through. It looks like we could see more there. And I think that bodes well for next. See, I guess the risks in terms of profitability would come down to being able to secure new sites, the capital costs which are involved. And also power is a huge cost in trying to cool down the data centres. So when you see power prices spiking up, that's a huge negative for next DC. At the moment, Palis pretty cheap, but that's definitely something to watch with next DC. [00:22:41][58.2]

Alec: [00:22:42] We should see lower power prices in the coming years as all these renewables projects eventually come online. So hopefully that's good for next day. So I hope so. One other question that I have. I'm not 100 percent across how the data centre industry works, but I assume that given the dominance that Amazon Web services and Google cloud business have in the industry, are they selling a lot of their capacity to those big tech companies? [00:23:08][26.0]

Julia: [00:23:08] Yes, the big companies, I guess, called the ones that are that require hyperscale contracts. And I think Facebook defined what it meant to be hyperscale in the data space by basically spelling out its needs so that data centres could compete or build for the capacity of the likes of Facebook. So I guess you are looking at these mega technology companies, which still require data centres, network storage, and that outsources. So you are seeing these hypochondriacs coming through. And, you know, a lot of it at the moment is just that movement to cloud instead of physically holding things on our computers. And to me, that's only going to continue, if not accelerate, which means that the biggest challenge, I think, for next, Stacey, would be if we saw competition coming through. [00:23:59][50.9]

Alec: [00:24:00] That was going to be my follow up question. Do you worry that if these big players that require so much data storage, I guess, and sell it on like Amazon Web Services sells it to so many customers, it gives them a lot of power in the market. And I guess there are so many data centres out there. Do you worry that they become too reliant on a few big customers and it creates a risk if they don't keep winning those contracts? [00:24:23][23.3]

Julia: [00:24:24] Yeah, I mean, it's amazing that Amazon Web Services probably a customer of next DC, but I guess there has been a view that perhaps we could see Amazon moving into this space. But, you know, that view has been around for, you know, at least the last four or five years and it's never eventuated. There's always been an idea that we could see some big giants over in the US coming to Australia and Wall next. DC does have competition in this space. We just haven't seen like a huge US player coming through. I guess its closest competitor, I would say, would be Equinix in this space. Look, next, Stacie's been doing pretty well and outside of Sydney and Melbourne, I think next DC has more capacity than Equinix. The other thing that I like about next PC is that sometimes data centres, they reach capacity and they get quite mature. And what you would think was that costs would either the revenue that you get from those data centres would fall over time or that would fluctuate. But actually what we found with the more mature at capacity centres is that data costs have been rising over time. So you're still generating greater revenue from those more mature data centres as well. Sort of the original the way they aname their data centres is basically if it's Sydney, it's in this. If it's Melbourne, it's to em. If it's Perth, it's a. And then the number so you have S1 as to Astreus for that one has this and one and two Perth P one, and I think this one in Brisbane being one. Hmm. [00:26:03][98.7]

Alec: [00:26:03] There you go. Interesting. [00:26:04][0.6]

Bryce: [00:26:05] Yeah. Well, I'm sure, as I said, a lot of our audience would be very interested in what you had to say about Next Taisei, because it's certainly on a lot of their watch lists, Julia. So good to hear your thoughts. Shall we move to Ren pitch? Yeah, let's do it. Nice. [00:26:20][14.7]

Alec: [00:26:20] Far away. So the stock I'm talking about is Haisla Morrison home, Kaup New York Stock Exchange ticker. TMH say it's a strange pick given the current economic climate and I'll get into it. But I guess the reason that I chose it is we've said on the show a few times that there's no points for originality in investing. All that matters is that you take a good idea and you invest in it and you make money. Doesn't matter if you came up with the idea yourself or you stole it off someone else. And I guess I wanted to use an example of that for this episode. So Howard Marks is a big investor in the US, famous for the memos that he writes on the markets. And he runs a fund, Oaktree Capital Management. And every quarter all the big hedge funds and money managers in the US have to file a 13 F, which basically says, you know, what they bought and what they sold in the quarter and what their biggest holdings are. And so Oaktree released their thirteen f a few days ago. I was looking at what they were buying and I thought I use one of those. It was an interesting pick to my mind. I was surprised that they bought so much of it. So Oaktree bought it was a new position for them in the first quarter of twenty twenty and they bought four point eight million shares, so about fifty million dollars worth of this home builder. So the company is now America's fifth largest home builder. And as the name suggests, they build homes. They a lot of the time they buy land and then build the homes and then a the rent the homes or sell the homes to customers. They're based in eight states in the US. So even though they're the fifth largest in the country, they don't have a massive geographic footprint. They're only in eight states. And I guess if we start with why, it was surprising to me the housing market is so correlated to the broader economy and obviously with coronavirus, with the economic shutdown, with job losses and bankruptcies that are likely to come as we play out 2020, it was surprising to me that Australia was taking such a big position in this company. So, yeah, so I decided to look into it a bit for that reason. Do you guys have any comments or questions at this point, or do you want me to just keep going on with the spiel? [00:28:41][141.0]

Bryce: [00:28:42] I'm sure you will answer some of mine in the spill. But Julia, do you have anything? [00:28:45][3.0]

Julia: [00:28:45] Oh, no, I'm curious because obviously Home-building is highly dependent on jobs and the US job numbers have been horrible over the last few weeks. [00:28:55][10.1]

Alec: [00:28:56] Yeah. Yeah, terrible. So I guess there's two reasons why it's an interesting topic. So the first is a macro reason around the US housing market, and then the second is the price at which you can get it. So if we start broad and we start macara, the US housing market has been seriously under building for the last 10 years and there's a lot of pent up demand that we were starting to see come through in the last few years. So to put some numbers around it, in December twenty nineteen, the US homebuilding market hit a thirteen year high, so it reached the levels that was out in December 2006. And basically the 2010s was a lost decade, I guess you could call it, for the US homebuilding market. They seriously under built. The long term average is that the US needs to build 56 homes per one hundred residents and for about a decade we were under that only in twenty, eighteen and twenty nineteen did we get back above that long term average. And a lot of that was because of the damage that the 2008 housing market collapse did to the housing market and the and the broader economy. So Pré Covid, I guess there was a lot of strength in the housing market as it was recovering. And what you saw in the US was house prices and rent all rising because there was like a fundamental mismatch between supply and demand. And so, you know, adjusted for Covid that sort of under building problem and the mismatch between supply and demand is still there. Now, obviously, there's a massive asterisks next to that because of Covid. But I guess the point is, if we do get a relatively quick recovery or a V shaped recovery or whatever it's going to be, there aren't too big a job losses that supply and demand mismatch will still be there. So there will be some, I guess, structural tailwinds to help the industry. But if we get more specific, the price is trading at seems to have a raised. The level of margin of safety built into it, so the price, it's trading at fourteen point seventy three, it has a market cap of one point nine billion, which means it's trading at a price to earnings ratio of nine price to sales ratio of point three. It did revenue four point eight dollars billion last year. And it's been growing that at 12 percent a year over the past five years and two hundred and fifty five million dollars in profit, which it's been growing. Twenty nine percent on average for the last five years. So looking at those growth rates, which will obviously be impacted by coronavirus, but essentially that the price that it's trading at now, if you did a reverse DCF and you looked at the sort of the growth rates assumed based on, you know, your standard discount rate and all that, it's basically implying no growth to justify its current share price. Or if I just did a quick discount cash flow calculation, five years earnings growth of half of what it was for the last five years, 10 percent discount rate inflation after that. And it gave me a fair value of thirty three dollars, which is a fairly large margin of safety for the stock. So it also has a fair bit of cash on its balance sheet compared to its short term debt obligations. And so this one was interesting for May one because Howard Marks bought it and he's a lot smarter than I am because there seems to be some macro tailwinds in the housing market with a big asterisks because of Covid three, it seems to be trading at a relatively safe valuation. And then I guess the fourth reason that I haven't really touched on is from what I can tell and with some pretty limited research, it does seem to be like one of the better home builders in America. It's one of the most trusted home builder, five years in a row at one builder of the in twenty twenty. And it seems like it potentially has an opportunity to continue growing by being the best in its field rather than, you know, the biggest or anything like that. So, yeah, that's the pitch, I guess. Feel free to tear it apart. [00:33:01][244.3]

Julia: [00:33:01] So you best discounted cash flow model on the last five years in an average growth rate, but all the jobs that have been created over the last 10 years or even more than that. So the comparison to the next five years, should you apply a discount to that because of where we're finding ourselves? [00:33:19][18.2]

Alec: [00:33:20] Yeah. So the growth rate I put in was half of its growth rate for the last five years. [00:33:25][5.0]

Julia: [00:33:26] What if it's a negative growth rate? [00:33:27][1.4]

Alec: [00:33:28] I think the point around the reverse discount cash flow is that there's no growth implied in the stock on its current price. And I think if the price now is assuming no growth, then the risk to reward may be there if the economy does recover faster than expected. [00:33:43][15.7]

Julia: [00:33:44] So you're banking on recovery. So you obviously want to see that a quick recovery come through. [00:33:49][5.4]

Alec: [00:33:50] Yeah, yeah. And I think, you know, if it has the ability to survive in the short term and get through this period, it was running pretty well before then and you would hope to see it pick up where we left off afterwards. It also has a backlog of inventory that it will recognise as sales in the coming quarters. So, look, this one could go very wrong for me. Don't don't get me wrong, I'm very aware it's not a safe bet, but I thought it was an interesting one, given Howard Marks was taking the plunge with a [00:34:17][27.2]

Julia: [00:34:18] high risk, high potential return, high potential loss, but definitely a brave one. I mean, just come out with Howard Marks and Oaktree Capital. Yes. They don't know when he bought it. Let's get an idea that this stock has basically fluctuated between six and 16 dollars over the past couple of months. So you could have bought a six Dollars and happy to sell at fifteen. So you just have to take those big moves with, I guess, a grain of salt because you don't know how long he's planning to hold off. He's been a major shareholder in the past, I think of this company. [00:34:53][35.6]

Alec: [00:34:54] Yeah, he he was involved in the private equity buyout in twenty fourteen, I think. But yeah. Yeah, you're right. You know what quarter they bought it in. But a quarter is a long time in markets. [00:35:05][10.5]

Julia: [00:35:05] Yeah. I'd be happy to buy it at six bucks. Sixteen dollars. The question is, are you happy to hold up fifteen. Sixteen dollars [00:35:14][8.6]

Bryce: [00:35:15] question. And I like it just given, you know it's a good example of perhaps a value by and against many metrics and different calculators as well. It kind of indicates that it is. And you mentioned that there's a pretty decent margin of safety with the parameters that you put into the DCF. I guess hypothetically, if you did buy into it and you mentioned that it would be looking for a pretty quick turnaround, I guess, in economic conditions, what would you be looking for to, I guess, reverse your thesis on this over the next sort of 12 months and then realise that perhaps it's not the. That you thought it would be [00:35:51][35.8]

Alec: [00:35:51] I think the key thing would be what is happening in the macro picture. So there's eight states that are based in the big ones, places like Arizona, Colorado and California. So you would be looking at those particular states and looking at what's happening in the job market, what's happening with the state's economic growth there and what's happening with the population growth is probably the key one because the population growth drives demand for housing. So I think this is to Julia's point earlier, this is a very dependent on the macro environment and it could turn very quickly. I think the company fundamentals will come into play, but probably over the longer term and potentially with a lot of pain in the meantime, if it really is such a good company. But yeah, in the short term, it will all be macro driven. I like it. But hey, Trump wants to open up the economy so [00:36:45][53.9]

Bryce: [00:36:47] it's not at the detriment to the rest of the population. So all good. [00:36:51][3.9]

Julia: [00:36:52] I like that you said he's got a cash buffer and you talked about the valuation and the margin of safety. I'm not such a big fan that you brought up that you like it because Howard Marks and Oaktree Capital bought into it because even the professionals, you know, don't always get it right. Rowe and Warren Buffett bought into Insurance Australia group and he's still a shareholder. Berkshire Hathaway owns Insurance Australia group. But it's a question of, I think, sometimes timing. So I think you pull back in twenty sixteen or twenty fifteen and basically insurance group Australia share prices back at the same level as back then. So, you know, it depends on what time frame you're looking at. If you're looking at Insurance Australia group over the last well one year, then the shares have sort of fallen from eight dollars to five dollars for looking at it over the period that Warren Buffet's owned it. It's flat and he still owns it. And maybe it'll go to 15 points. And he's a complete genius. But I don't know. I have no idea. Good point. This reminds me back to a company called One.Tel on the Australian market, and it was owned by James Packer and Lachlan Murdoch. And a lot of people bought into it. I remember even at my work at the time saying that, you know, you've got billionaires investing in this company can't go wrong. And of course, he went belly up. [00:38:19][86.8]

Alec: [00:38:19] Yeah, well, it was the it was the billionaires that eventually killed it, wasn't it? There was a whole case about it and everything. [00:38:25][5.4]

Julia: [00:38:25] Yeah. And even 10 at one point, it had the most amount of billionaires on its share register of any Australian company gone. [00:38:33][8.3]

Alec: [00:38:34] Maybe we go completely contrarian and just short what billionaires are investing in. [00:38:38][4.0]

Bryce: [00:38:39] Hold on. [00:38:39][0.2]

Julia: [00:38:41] I like your Fekri. I like that you like contrarian and going out on a limb and you know, in 12 months time will probably be high five. [00:38:50][9.4]

Alec: [00:38:52] Yeah. Let's call this a. [00:38:53][0.9]

Bryce: [00:38:57] Yeah. We will add it to the mastermind index and see how we go, but we'll leave it there. Julia, thank you so much for your time, as always, joining us on the podcast. If anyone is new to the show and they want to get a bit more information about what you do or perhaps follow some of the work that you're doing, what's the best place to do so? [00:39:14][17.2]

Julia: [00:39:14] Yes, please visit my website. Burman, invest the you are a man. Invest dotcom today. You or I am on Twitter and Facebook as well. [00:39:22][7.9]

Bryce: [00:39:23] Not so. I do recommend following Julia on Twitter. Some great stuff comes out each day, so jump on there and give her a follow. But as always, fun to do the pitch and we look forward to chatting with you next month. [00:39:35][11.9]

Julia: [00:39:35] Look forward to it. Thanks, guys. You can come out from under the blanket. Yes. [00:39:40][4.7]

Speaker 4: [00:39:42] Thanks for listening to Equity Mates investing podcast production of Equity Mates Media. Please remember that everything you hear in Equity Mates investment podcast is general advice. Only the content has been prepared without knowing the personal objectives, specific financial circumstances or goals. The host of Equity Mates investment podcast may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial professional. [00:39:42][0.0]

[2167.9]

beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going? [00:01:11][14.5]

Alec: [00:01:12] I'm very good Bryce. I am back under my blanket once again and you know, I'm ready for, I think, what is fast becoming, if not already become our favourite episode of the month. [00:01:22][10.4]

Bryce: [00:01:23] Yes, favourite episode. And that is our Master Mind episode, where we are joined by Chief Investment Officer of Bermann Invest, Julia Lee. Julia, thanks for joining us. [00:01:33][9.7]

Julia: [00:01:33] Great to be here, Ren. I think you have to explain the blanket for anyone in this room [00:01:38][5.0]

Alec: [00:01:39] that is very, very cold and I need a blanket, no fur for the sake of audio quality. Apparently it helps to be under a blanket or in a cupboard when you're podcasting from home. And I don't have a Covid that I can fit into. So I've decided to record under a blanket while we're all self isolating at our respective houses. [00:02:07][27.5]

Julia: [00:02:07] That is dedication. [00:02:08][0.4]

Bryce: [00:02:09] It is dedication. And whilst you're suffering with a blanket Ren, I am lucky enough to have two beautiful acoustic soundboards in front of me sent to us by a listener who felt sorry for you under the blanket. [00:02:21][11.9]

Alec: [00:02:22] And somehow you're holding the sound [00:02:23][1.5]

Bryce: [00:02:24] or words with the other two safely wrapped up in cardboard, ready to be dropped down to your house, which is about 17 metres from mine. But we haven't got around to that yet, so we will do that at some stage this week. But anyway, if you have just joined the show, welcome to Equity Mates. In the journey of investing, today's episode is all about taking a couple of stock picks. Will each throw a stock pitch at each other and really get an insight into how Julia thinks and goes about her investing process and about some ideas around and understand different ways in which we think about the company. So by all means, this is not a buy hold. Also recommendation. Julia has plenty of years of experience in the markets with a focus on Australian equities. So we try to keep that focus, although I think today Ren is throwing out a stock that's from the States. So that'll be interesting. [00:03:16][52.7]

Alec: [00:03:17] Yeah, I never signed on, didn't sign up for that. [00:03:19][2.1]

Bryce: [00:03:22] So before we get started, Ren, I think you wanted to give a shout out to Julia for one of the last pics that we did. And then we'll get stuck in, [00:03:28][6.1]

Alec: [00:03:28] as we always say, Bryce. And we're definitely not experts. And that is probably abundantly clear by now. But Julia is definitely an expert and she has proven it again with her latest stock picks. So about a month ago, a month and a half ago, Julia pitched Elders' ASX to Elby. And in the month and a half since she pitched it on the show, it's up a bit over 40 percent. Wow. So well done. [00:03:55][26.7]

Julia: [00:03:56] Okay, this is one of those stocks that's coming out of the drought and really doing well. So cattle prices doing well. And Eltis came out with its half year results today and that were pretty solid. [00:04:08][12.0]

Alec: [00:04:08] Yeah, up about 10, 10 percent today alone. [00:04:11][2.5]

Bryce: [00:04:11] Wow. Without going into too much detail, is it still a pick for you, Julia? [00:04:16][4.9]

Julia: [00:04:17] Yeah, well, they said that the dividend would be steady compared to last year, but the second half dividend, that if conditions remain the same, that you could see a rise there. So that really tells you a lot about the underlying business, that things are getting better and in particular, cattle prices have been doing really well. So what we're finding is that farmers are becoming a lot more confident because it's been raining in this food for the cows to eat. So they've been restocking their herds. And that's been great news for cattle. And of course, we're eating steaks at home. So also the consumption of beef. So watching that China relationship very closely and the tensions there as well, because China's largest export market. [00:05:03][45.6]

Bryce: [00:05:04] Mm, nice. Well, let's [00:05:05][1.7]

Alec: [00:05:06] get straight up Bryce well before we do, to give some credit to us, but not as much. Cut it. We're both up from that last peak. I'm I'm up about 20 percent and we're up in the teens. So, you know, it's been a good month for the markets in general. I guess [00:05:19][13.2]

Bryce: [00:05:19] my worry was [00:05:21][1.9]

Alec: [00:05:22] rising tide truly does lift all boats. [00:05:24][2.0]

Bryce: [00:05:25] Watch this space soon to come to the market. Is the mastermind ETF or index. [00:05:30][5.0]

Alec: [00:05:30] So you go long, long and short, though. [00:05:35][4.7]

Bryce: [00:05:37] Anyway, let's get stuck into this week. I'll kick off, then we'll throw to Julia for her pick and then finish it off with you Ren with your international stocks. So how's that sound? Sounds good. So unlike many, many previous picks where I've had a focus on. The retail industry I've decided to branch out of my circle of competence so anything could happen here, so bear with me and my thinking around this was what are some industries that, despite the disruption of Covid, will continue to see consistent sources of revenue and tobacco gambling, not both industries that I'm not interested in Ren as you would know, you're [00:06:17][39.3]

Alec: [00:06:17] supporter, an investor. [00:06:18][1.2]

Bryce: [00:06:20] And so I decided to have a look into the funeral services industry because unfortunately, people obviously do keep dying. And the result of that is funerals and cemeteries and crematorium services. And those sorts of places obviously need to still provide services to the families of those that have died. So I had to look in funeral services and came across invoker. IVC is that ASX ticker. So Invoker, the largest provider of funeral and crematorium services in Australia, New Zealand, and they have some services over in Singapore as well. They're very well known throughout Australia and have a whole bunch of brands underneath their brand, which gives them pretty significant market share. So market cap of one and a half billion revenue of just shy of half a billion currently trading at about eleven point, down from a high of sixteen, forty or thereabouts. And to give you insight into their market share, they have about two hundred and ninety locations across Australia. [00:07:21][61.9]

Julia: [00:07:23] This is like a horror movie. This is more of it I have to disclose. I also need the care in the fight. [00:07:28][5.4]

Bryce: [00:07:31] I thought you were just about to say everything I said is just not true yet. So full disclosure, Julia does own this in her fund, which makes me even more nervous about this pitch because you've probably done about a thousand times more research than on what I've put in. So looking forward to seeing if we do a line on this. [00:07:48][17.7]

Julia: [00:07:50] I can't wait. [00:07:50][0.4]

Bryce: [00:07:51] So the main reason that I like Invoker is I think they've got a pretty strong moat. And they're also, as I said at the start, their source of revenue is pretty consistent. And obviously this source of revenue comes from the death rate and the death rate, according to the Australian Bureau of Statistics, is projected to grow progressively at around 2.8 to three percent over the next few years, sort of up until around 2030. So that gives invoker a reasonably consistent revenue stream. And then when you combine the fact that there is a market later and have about thirty five per cent of market share, they can then start leveraging that scale in terms of operating costs and advertising and marketing as well as their brands to really build on that increase in deaths. And that's where you're going to start seeing. Well, that's why until now we've had pretty consistent revenue growth. What are your thoughts so far? [00:08:52][61.8]

Julia: [00:08:53] When I look at it, you know, all the things you mentioned, people will always die. They say, you know, nothing's certain in life except death and taxes, I think is to say so. The death rate, usually it's quite a stable cash flow for Mackay except for this year. And that's because covid-19, you know, you haven't been allowed to have more than 10 people at funerals. So funerals have become these celebrations where people spend a lot of money. I mean, you would care at some point was even looking at getting a liquor licence. Oh, funerals. And then suddenly you weren't allowed to have these large gatherings. Enormous revenue obviously has been impacted. Not only that, but we're washing hands and with social distancing. So people who would have usually have died of the flu this year or something else, you're probably actually going to get a lower death rate this year compared to other years because of social distancing and also washing hands and getting the flu injection and things like that. So that's the bad news. The good news is that, you know, if you're due to die, you're probably going to die. So the death rate does tend to be mean reverting, which means if you get a lower death rate this year, then usually next year or the year after you get a higher death rate to make up for it. So it does tend to be quite stable. So this is one of those sort of EKI companies and morbid companies. But on the flip side, it's an essential service and it's also a stable cash flow because death and taxes [00:10:24][90.6]

Bryce: [00:10:25] are always going to happen. So Ren, did you have a comment? Before I move on [00:10:28][3.1]

Alec: [00:10:28] now, I'm interested to hear the rest of your explanation and then we'll get stuck into some questions. [00:10:33][4.4]

Bryce: [00:10:34] It goes without saying that covid will have an impact on their ability to offer the full range of services. And obviously, as a result, the growth plans for 2020 have had to go on hold. However, they have gone to market recently and done a capital raise of two hundred and fifty. Million or thereabouts, which they are going to be putting towards what they call protect and grow, which was a growth strategy that they're going to put in place over the next sort of year or so, where they stop building out and optimising their brand and network and investing in people and culture, as well as starting to now think about how that innovatively, I guess, leverage that scale and provide services in ways that previously you wouldn't necessarily have your funeral. So they're now looking at things like how they can do funerals online and virtually and all these sorts of things. So the three main pillars of obviously deaths, their market share, what they call funeral case average, the number of obviously funerals they do, and then the operating margin. And whilst I think now they're taking a bit of a hit and to Julie's point, deaths at the moment are probably not in line with where they have historically been. I believe that they'll be able to leverage their operating margin, embark on a bit of a cost cutting exercise at the moment and deploy some of the capital that they've raised to go out and acquire more funeral homes and services to increase their market share so that when things do start to turn around and deaths do start to revert to the mean, they're going to be in a pretty strong position. And as Julia mentioned, it's a pretty good cash flow business. So, yeah, I think now it's kind of down and out for a bit, not necessarily knocked out, but a good opportunity to get it at a price that it is at the moment. So Ren, what are your thoughts? [00:12:21][107.8]

Alec: [00:12:22] Yeah, it's interesting. I guess my question with a company like this is obviously they've got some big brands. White Lady Funerals is well known. But what's your competitive advantage in the funeral space like? What do you think these guys are better than any of the other players in this space? [00:12:37][15.4]

Bryce: [00:12:38] It's a good question. I think from reading through one of the old annual reports and they spend relative to their competition an enormous amount on advertising. And there was some research done that showed the impact of, I guess, quality advertising on people choosing these brands. And I couldn't really tell you why it is. [00:13:01][22.5]

Alec: [00:13:01] Let me ask you this question. When's the last time you've seen an ad for a funeral home? [00:13:05][3.5]

Bryce: [00:13:05] And I I'm getting them on Instagram all the time. [00:13:07][1.5]

Alec: [00:13:09] Well, it's surreal that smoking and drinking, [00:13:12][2.6]

Bryce: [00:13:13] but I'm sure I'm not sure I'm not being targeted for funeral services. To your point, it's probably more that their scale allows them to offer services across a broader range. So they have that premium offering as well as an offering that probably targets those that don't want to spend a whole bunch on it. And with scale, obviously, comes your ability to do these at a much cheaper cost than than your average competitor who's running solo with to know services or locations around Australia. That would probably be my comment to that. Do you have any insight on that, Julia? [00:13:47][34.0]

Julia: [00:13:47] I haven't seen any advertisements about funerals, but I have seen advertisements about prepaid funerals. And that's another side to this business. There's actually a funds management side to this business where people prepay for their funeral because they don't want their loved ones to be lumped with the cost of those funerals after they die. And that money basically goes into a pool and is invested. So there's a funds management aspect to prepay funerals as well. [00:14:18][31.0]

Bryce: [00:14:19] So anything more from you, Ren regarding Invoker? [00:14:22][2.5]

Alec: [00:14:23] No, no. Hopefully I won't need the services for a long time, but it's an interesting company to watch. [00:14:28][5.3]

Bryce: [00:14:29] One final note that I found interesting is they try and I guess increase their revenue stream. They've just launched a cremation service for pets, which I think they're hoping they can start growing. It was running at a loss, but I thought that was an interesting tax from them as people spend more and more money on pets. I can certainly say this part of their business being of interest to some pet owners. So watch that space. [00:14:53][24.4]

Julia: [00:14:54] There you go. The other way thing is that, you know, if you're not looking to be cremated and you're looking to be buried, you need a larger land size. The land is very scarce in Sydney and capital cities. So my mum's a bit more. But as well as she's gone and bought her funeral plot because land prices are going up and, you know, in 40 years time, that plot is going to be worth so much more. So that's one property always goes up. Even if it's a funeral for my wife. [00:15:28][34.5]

Alec: [00:15:30] Maybe we need to start a fund that buys up funeral plots in Sydney and Melbourne and then just hold them. [00:15:35][5.1]

Bryce: [00:15:36] Not bad. All right. Well, let's move on. We'll try to Julian now to to hear your pitch. [00:15:42][6.3]

Julia: [00:15:43] So my mum this time around is covid-19 related. You know, a lot of us are working from home and we've seen a ramp up. In the need for network storage and infrastructure when it comes to technology. So next, Stacey is my pick and choose the stock code and the question I've been asking myself is, is a demand surge from covid-19 temporary or is it permanent demand that's going to be recurring revenue, which is what you want to see when it comes to stability and companies? I like next D.C. and I think that the covid-19 situation and working from home, what it's done is accelerated trends that were already in place. So, for example, bricks to clicks the move to online shopping that's been accelerated and then the need for data and technology that's also been accelerated for companies. And I think that's a permanent thing rather than just, I guess, panic buying that's going to quickly disappear. So I like next DC. We've heard from companies similar to next DC, I guess, in that sort of technology space super loop, which has digital fibres, have said that they've been seeing extremely strong business in terms of fibre, connectivity and also cyber security sales. So they've seen high digital demand through covid-19 and traffic over its global network is up 30 percent in the past few weeks. Supergroups, another one sort of in that area. It's a smaller company and I focus on ASX 200 companies. So next DC is my peak there. [00:17:22][98.9]

Bryce: [00:17:23] So speaking of rapid growth, it's been on an absolute run. And you see this stock pick on sort of the watch list of companies that will survive and thrive after Covid. So certainly been on our radar in the radar of many of our listeners. So I'm sure they'd be interested to hear what you say. But it's trading at an incredibly high here. I'm just interested to know how you sort of think about that. And a stock like this is this just to get on and ride it while it's while it's running and then reassess? How are you thinking about this in terms of a short term or long term play? [00:17:57][34.5]

Julia: [00:17:58] The reason I became interested in next was while I was actually looking at another company over in the US and reading about and Beta, which is a gaming chip company. And I was reading a survey which said that during the working from home that gamers were spending two and a half times more playing games and they would normally and Nevada also has data centres and that's being driven by things like I as well as the Internet of Things and recommendation engine. So I kind of took the strong numbers we were seeing in the US and thought, well, how can I apply it to what's happening here in Australia? So the question I asked myself was, will we use more technology or less in the future? So will we need more of next week's services or less? And my view is that we will need more. We're going to see ICE and we're going to see Internet of Things 5G and technology is really going to dominate. So I think that next year is actually in the infancy of its journey as a company rather than at the mature stage. And the great thing about the infancy and a growth story is you usually see higher rates of growth and a much more mature company. So they look at things like network storage infrastructure in the tech space. So things that are important, a space power cooling is a huge cost. And at the moment they have eight data centres around Australia, too, which are being built and one that they're planning as well. The thing I don't like about next DC is that you have to build the data centres before the demand is there. The last thing you want as a data centre is to go dark, which means that you've run out of capacity. So what happens is you have a huge capital cost up front and a huge risk, and then you need to feel those data centres. So it's a bit of a hard business model, but structurally they have this tailwind coming through, which I think they can ride, at least for the next decade. [00:20:02][123.8]

Alec: [00:21:24] You said it's an interesting company and I agree with you. The long term tailwinds are definitely there for a business like this. It didn't turn a profit last year. It turned a profit the two years before that. Do you know why it lost money last year? And does it worry you at all? [00:21:42][17.5]

Julia: [00:21:42] I think when you have a look at next, Stacey, there were problems and there were concerns around its Melbourne data centre. I think the second data centre in Melbourne. And part of those concerns have now dissipated. They've seen to hyperscale contracts coming through in Melbourne over the next two months. And that's another reason why I've turned positive on the stock. There were question marks on the viability of its Melbourne centre and now we're starting to see these hyperscale contracts come through. It looks like we could see more there. And I think that bodes well for next. See, I guess the risks in terms of profitability would come down to being able to secure new sites, the capital costs which are involved. And also power is a huge cost in trying to cool down the data centres. So when you see power prices spiking up, that's a huge negative for next DC. At the moment, Palis pretty cheap, but that's definitely something to watch with next DC. [00:22:41][58.2]

Alec: [00:22:42] We should see lower power prices in the coming years as all these renewables projects eventually come online. So hopefully that's good for next day. So I hope so. One other question that I have. I'm not 100 percent across how the data centre industry works, but I assume that given the dominance that Amazon Web services and Google cloud business have in the industry, are they selling a lot of their capacity to those big tech companies? [00:23:08][26.0]

Julia: [00:23:08] Yes, the big companies, I guess, called the ones that are that require hyperscale contracts. And I think Facebook defined what it meant to be hyperscale in the data space by basically spelling out its needs so that data centres could compete or build for the capacity of the likes of Facebook. So I guess you are looking at these mega technology companies, which still require data centres, network storage, and that outsources. So you are seeing these hypochondriacs coming through. And, you know, a lot of it at the moment is just that movement to cloud instead of physically holding things on our computers. And to me, that's only going to continue, if not accelerate, which means that the biggest challenge, I think, for next, Stacey, would be if we saw competition coming through. [00:23:59][50.9]

Alec: [00:24:00] That was going to be my follow up question. Do you worry that if these big players that require so much data storage, I guess, and sell it on like Amazon Web Services sells it to so many customers, it gives them a lot of power in the market. And I guess there are so many data centres out there. Do you worry that they become too reliant on a few big customers and it creates a risk if they don't keep winning those contracts? [00:24:23][23.3]

Julia: [00:24:24] Yeah, I mean, it's amazing that Amazon Web Services probably a customer of next DC, but I guess there has been a view that perhaps we could see Amazon moving into this space. But, you know, that view has been around for, you know, at least the last four or five years and it's never eventuated. There's always been an idea that we could see some big giants over in the US coming to Australia and Wall next. DC does have competition in this space. We just haven't seen like a huge US player coming through. I guess its closest competitor, I would say, would be Equinix in this space. Look, next, Stacie's been doing pretty well and outside of Sydney and Melbourne, I think next DC has more capacity than Equinix. The other thing that I like about next PC is that sometimes data centres, they reach capacity and they get quite mature. And what you would think was that costs would either the revenue that you get from those data centres would fall over time or that would fluctuate. But actually what we found with the more mature at capacity centres is that data costs have been rising over time. So you're still generating greater revenue from those more mature data centres as well. Sort of the original the way they aname their data centres is basically if it's Sydney, it's in this. If it's Melbourne, it's to em. If it's Perth, it's a. And then the number so you have S1 as to Astreus for that one has this and one and two Perth P one, and I think this one in Brisbane being one. Hmm. [00:26:03][98.7]

Alec: [00:26:03] There you go. Interesting. [00:26:04][0.6]

Bryce: [00:26:05] Yeah. Well, I'm sure, as I said, a lot of our audience would be very interested in what you had to say about Next Taisei, because it's certainly on a lot of their watch lists, Julia. So good to hear your thoughts. Shall we move to Ren pitch? Yeah, let's do it. Nice. [00:26:20][14.7]

Alec: [00:26:20] Far away. So the stock I'm talking about is Haisla Morrison home, Kaup New York Stock Exchange ticker. TMH say it's a strange pick given the current economic climate and I'll get into it. But I guess the reason that I chose it is we've said on the show a few times that there's no points for originality in investing. All that matters is that you take a good idea and you invest in it and you make money. Doesn't matter if you came up with the idea yourself or you stole it off someone else. And I guess I wanted to use an example of that for this episode. So Howard Marks is a big investor in the US, famous for the memos that he writes on the markets. And he runs a fund, Oaktree Capital Management. And every quarter all the big hedge funds and money managers in the US have to file a 13 F, which basically says, you know, what they bought and what they sold in the quarter and what their biggest holdings are. And so Oaktree released their thirteen f a few days ago. I was looking at what they were buying and I thought I use one of those. It was an interesting pick to my mind. I was surprised that they bought so much of it. So Oaktree bought it was a new position for them in the first quarter of twenty twenty and they bought four point eight million shares, so about fifty million dollars worth of this home builder. So the company is now America's fifth largest home builder. And as the name suggests, they build homes. They a lot of the time they buy land and then build the homes and then a the rent the homes or sell the homes to customers. They're based in eight states in the US. So even though they're the fifth largest in the country, they don't have a massive geographic footprint. They're only in eight states. And I guess if we start with why, it was surprising to me the housing market is so correlated to the broader economy and obviously with coronavirus, with the economic shutdown, with job losses and bankruptcies that are likely to come as we play out 2020, it was surprising to me that Australia was taking such a big position in this company. So, yeah, so I decided to look into it a bit for that reason. Do you guys have any comments or questions at this point, or do you want me to just keep going on with the spiel? [00:28:41][141.0]

Bryce: [00:28:42] I'm sure you will answer some of mine in the spill. But Julia, do you have anything? [00:28:45][3.0]

Julia: [00:28:45] Oh, no, I'm curious because obviously Home-building is highly dependent on jobs and the US job numbers have been horrible over the last few weeks. [00:28:55][10.1]

Alec: [00:28:56] Yeah. Yeah, terrible. So I guess there's two reasons why it's an interesting topic. So the first is a macro reason around the US housing market, and then the second is the price at which you can get it. So if we start broad and we start macara, the US housing market has been seriously under building for the last 10 years and there's a lot of pent up demand that we were starting to see come through in the last few years. So to put some numbers around it, in December twenty nineteen, the US homebuilding market hit a thirteen year high, so it reached the levels that was out in December 2006. And basically the 2010s was a lost decade, I guess you could call it, for the US homebuilding market. They seriously under built. The long term average is that the US needs to build 56 homes per one hundred residents and for about a decade we were under that only in twenty, eighteen and twenty nineteen did we get back above that long term average. And a lot of that was because of the damage that the 2008 housing market collapse did to the housing market and the and the broader economy. So Pré Covid, I guess there was a lot of strength in the housing market as it was recovering. And what you saw in the US was house prices and rent all rising because there was like a fundamental mismatch between supply and demand. And so, you know, adjusted for Covid that sort of under building problem and the mismatch between supply and demand is still there. Now, obviously, there's a massive asterisks next to that because of Covid. But I guess the point is, if we do get a relatively quick recovery or a V shaped recovery or whatever it's going to be, there aren't too big a job losses that supply and demand mismatch will still be there. So there will be some, I guess, structural tailwinds to help the industry. But if we get more specific, the price is trading at seems to have a raised. The level of margin of safety built into it, so the price, it's trading at fourteen point seventy three, it has a market cap of one point nine billion, which means it's trading at a price to earnings ratio of nine price to sales ratio of point three. It did revenue four point eight dollars billion last year. And it's been growing that at 12 percent a year over the past five years and two hundred and fifty five million dollars in profit, which it's been growing. Twenty nine percent on average for the last five years. So looking at those growth rates, which will obviously be impacted by coronavirus, but essentially that the price that it's trading at now, if you did a reverse DCF and you looked at the sort of the growth rates assumed based on, you know, your standard discount rate and all that, it's basically implying no growth to justify its current share price. Or if I just did a quick discount cash flow calculation, five years earnings growth of half of what it was for the last five years, 10 percent discount rate inflation after that. And it gave me a fair value of thirty three dollars, which is a fairly large margin of safety for the stock. So it also has a fair bit of cash on its balance sheet compared to its short term debt obligations. And so this one was interesting for May one because Howard Marks bought it and he's a lot smarter than I am because there seems to be some macro tailwinds in the housing market with a big asterisks because of Covid three, it seems to be trading at a relatively safe valuation. And then I guess the fourth reason that I haven't really touched on is from what I can tell and with some pretty limited research, it does seem to be like one of the better home builders in America. It's one of the most trusted home builder, five years in a row at one builder of the in twenty twenty. And it seems like it potentially has an opportunity to continue growing by being the best in its field rather than, you know, the biggest or anything like that. So, yeah, that's the pitch, I guess. Feel free to tear it apart. [00:33:01][244.3]

Julia: [00:33:01] So you best discounted cash flow model on the last five years in an average growth rate, but all the jobs that have been created over the last 10 years or even more than that. So the comparison to the next five years, should you apply a discount to that because of where we're finding ourselves? [00:33:19][18.2]

Alec: [00:33:20] Yeah. So the growth rate I put in was half of its growth rate for the last five years. [00:33:25][5.0]

Julia: [00:33:26] What if it's a negative growth rate? [00:33:27][1.4]

Alec: [00:33:28] I think the point around the reverse discount cash flow is that there's no growth implied in the stock on its current price. And I think if the price now is assuming no growth, then the risk to reward may be there if the economy does recover faster than expected. [00:33:43][15.7]

Julia: [00:33:44] So you're banking on recovery. So you obviously want to see that a quick recovery come through. [00:33:49][5.4]

Alec: [00:33:50] Yeah, yeah. And I think, you know, if it has the ability to survive in the short term and get through this period, it was running pretty well before then and you would hope to see it pick up where we left off afterwards. It also has a backlog of inventory that it will recognise as sales in the coming quarters. So, look, this one could go very wrong for me. Don't don't get me wrong, I'm very aware it's not a safe bet, but I thought it was an interesting one, given Howard Marks was taking the plunge with a [00:34:17][27.2]

Julia: [00:34:18] high risk, high potential return, high potential loss, but definitely a brave one. I mean, just come out with Howard Marks and Oaktree Capital. Yes. They don't know when he bought it. Let's get an idea that this stock has basically fluctuated between six and 16 dollars over the past couple of months. So you could have bought a six Dollars and happy to sell at fifteen. So you just have to take those big moves with, I guess, a grain of salt because you don't know how long he's planning to hold off. He's been a major shareholder in the past, I think of this company. [00:34:53][35.6]

Alec: [00:34:54] Yeah, he he was involved in the private equity buyout in twenty fourteen, I think. But yeah. Yeah, you're right. You know what quarter they bought it in. But a quarter is a long time in markets. [00:35:05][10.5]

Julia: [00:35:05] Yeah. I'd be happy to buy it at six bucks. Sixteen dollars. The question is, are you happy to hold up fifteen. Sixteen dollars [00:35:14][8.6]

Bryce: [00:35:15] question. And I like it just given, you know it's a good example of perhaps a value by and against many metrics and different calculators as well. It kind of indicates that it is. And you mentioned that there's a pretty decent margin of safety with the parameters that you put into the DCF. I guess hypothetically, if you did buy into it and you mentioned that it would be looking for a pretty quick turnaround, I guess, in economic conditions, what would you be looking for to, I guess, reverse your thesis on this over the next sort of 12 months and then realise that perhaps it's not the. That you thought it would be [00:35:51][35.8]

Alec: [00:35:51] I think the key thing would be what is happening in the macro picture. So there's eight states that are based in the big ones, places like Arizona, Colorado and California. So you would be looking at those particular states and looking at what's happening in the job market, what's happening with the state's economic growth there and what's happening with the population growth is probably the key one because the population growth drives demand for housing. So I think this is to Julia's point earlier, this is a very dependent on the macro environment and it could turn very quickly. I think the company fundamentals will come into play, but probably over the longer term and potentially with a lot of pain in the meantime, if it really is such a good company. But yeah, in the short term, it will all be macro driven. I like it. But hey, Trump wants to open up the economy so [00:36:45][53.9]

Bryce: [00:36:47] it's not at the detriment to the rest of the population. So all good. [00:36:51][3.9]

Julia: [00:36:52] I like that you said he's got a cash buffer and you talked about the valuation and the margin of safety. I'm not such a big fan that you brought up that you like it because Howard Marks and Oaktree Capital bought into it because even the professionals, you know, don't always get it right. Rowe and Warren Buffett bought into Insurance Australia group and he's still a shareholder. Berkshire Hathaway owns Insurance Australia group. But it's a question of, I think, sometimes timing. So I think you pull back in twenty sixteen or twenty fifteen and basically insurance group Australia share prices back at the same level as back then. So, you know, it depends on what time frame you're looking at. If you're looking at Insurance Australia group over the last well one year, then the shares have sort of fallen from eight dollars to five dollars for looking at it over the period that Warren Buffet's owned it. It's flat and he still owns it. And maybe it'll go to 15 points. And he's a complete genius. But I don't know. I have no idea. Good point. This reminds me back to a company called One.Tel on the Australian market, and it was owned by James Packer and Lachlan Murdoch. And a lot of people bought into it. I remember even at my work at the time saying that, you know, you've got billionaires investing in this company can't go wrong. And of course, he went belly up. [00:38:19][86.8]

Alec: [00:38:19] Yeah, well, it was the it was the billionaires that eventually killed it, wasn't it? There was a whole case about it and everything. [00:38:25][5.4]

Julia: [00:38:25] Yeah. And even 10 at one point, it had the most amount of billionaires on its share register of any Australian company gone. [00:38:33][8.3]

Alec: [00:38:34] Maybe we go completely contrarian and just short what billionaires are investing in. [00:38:38][4.0]

Bryce: [00:38:39] Hold on. [00:38:39][0.2]

Julia: [00:38:41] I like your Fekri. I like that you like contrarian and going out on a limb and you know, in 12 months time will probably be high five. [00:38:50][9.4]

Alec: [00:38:52] Yeah. Let's call this a. [00:38:53][0.9]

Bryce: [00:38:57] Yeah. We will add it to the mastermind index and see how we go, but we'll leave it there. Julia, thank you so much for your time, as always, joining us on the podcast. If anyone is new to the show and they want to get a bit more information about what you do or perhaps follow some of the work that you're doing, what's the best place to do so? [00:39:14][17.2]

Julia: [00:39:14] Yes, please visit my website. Burman, invest the you are a man. Invest dotcom today. You or I am on Twitter and Facebook as well. [00:39:22][7.9]

Bryce: [00:39:23] Not so. I do recommend following Julia on Twitter. Some great stuff comes out each day, so jump on there and give her a follow. But as always, fun to do the pitch and we look forward to chatting with you next month. [00:39:35][11.9]

Julia: [00:39:35] Look forward to it. Thanks, guys. You can come out from under the blanket. Yes. [00:39:40][4.7]

Speaker 4: [00:39:42] Thanks for listening to Equity Mates investing podcast production of Equity Mates Media. Please remember that everything you hear in Equity Mates investment podcast is general advice. Only the content has been prepared without knowing the personal objectives, specific financial circumstances or goals. The host of Equity Mates investment podcast may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial professional. [00:39:42][0.0]

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