Talking Money To Us | Philip Pepe

Candice: [00:00:11] Hello and welcome to talk money to me, this is your need to know financial podcast, we would argue one of the best podcasts going around town at the moment. Thanks for joining us. I'm Candice Bourke. 

Felicity: [00:00:20] And I'm Felicity Thomas. Now today marks our final show analyst three-part series. And to wrap us up, we're joined by Philip Pepe now. Philip is a senior analyst covering the industrial sector from Shaw & Partners research team. Welcome, Philip. It's really nice to be chatting to you and have you on our show. 

Philip Pepe: [00:00:38] It's lovely to be here, especially after hearing my my co analyst go first. It's yeah, it's it's good to be on board. 

Felicity: [00:00:44] That's it. There's a little bit of competition here who is going to get the most downloads. Now, aside from covering the ASX industrial sector, Philip also covers the small to mid-cap companies across a number of different sectors, which we're actually going to be hearing about in this episode. Now he's worked in the investment industry for over 25 years in roles that include investment consulting, funds management and stockbroking. He's also lectured for various educational bodies, including the Financial Services Institute of Australasia and the Institute of Actuaries of Australia. Now, Phillips qualifications include a Bachelor of Commerce with honours, a graduate deployment, applied finance and investment chartered financial analyst and a fellow of the Institute of Actuaries of Australia. Wow, that is a huge wrap that you've got. 

Philip Pepe: [00:01:29] I've read a lot of books. 

Candice: [00:01:30] Yeah, we can't wait to hear your insights now. All right, guys. You know the drill before we get into today's conversation. As a reminder, although we are registered financial advisers at Srom and partners, Felicity and Philip is obviously in our research team. Please note that this podcast and the content discussed does not constitute as financial personal advice, nor is it a financial product. Okay, so let's jump into today's conversation. As we mentioned in your intro there, Philip, you're the lucky last analyst in our series here, so no pressure. But let's start off the conversation with giving our listeners some more context. Can you explain to us the brief rundown of the ASX sectors? You do cover what's been going on in the last couple of weeks? That's, you know, particular interest. 

Philip Pepe: [00:02:13] I'm a generalist. I like being a generalist, couldn't think of anything more boring than turning up every day and just covering the one sector that doesn't change from year to year. So there are some themes that are constant across all the sectors I cover. I mean, they include retail, health care, financial services, agriculture, property, mining services, engineering, tech, etc. So there are some constant themes within that, and there is different ways the sectors are responding to current conditions. So everyone's discussing the value of the Australian dollar, the new normal, whatever that means, cost pressures, a lot of wage inflation coming through at the moment. So some of those themes are permanent and some of those themes are temporary. And as animals, we're all trying to work out what's happening on underlying basis and what's perhaps temporary and one off in nature.

Candice: [00:03:01] Any stocks in particular that you've followed over the years or recently picked up that has come out as a bit of a surprise, you know, in the last couple of weeks of information or indeed the reporting season, 

Philip Pepe: [00:03:13] the two that have been most surprising to the market given the share price reaction to some of the retail stocks, to some of the consumer discretionary stocks and some of the agriculture stocks. And if I was to grossly summarise each of them, the reporting season we just had in February was for results ending December 20 21. So we covered the September lockdown in parts of Australia. People in some cases or analysts in some cases underestimated what that actually meant for companies like companies may have reported at the regimes that conditions were challenging because of the ongoing lockdowns. Well, what did that mean? We found out in numbers what they meant in February. In some cases, they were more negative than the market had expected. In other cases, staff costs went up. You know, we saw the unemployment. Yes, I'll do that. The unemployment rate's around four percent at the moment. Not everybody knows that, apparently, but you know, unemployment rate low means wages cost high or going up, and the sector has seen costs rises. And it's amazing the number of companies that reported staff costs rises or I.T. cost rises. Each one was a surprise, even though their peers had reported cost increases a few days earlier in the ad space, it's quite the opposite. Conditions are strong, and it was almost like one company after the other reporting strong conditions. And yet the market doesn't realise that Jesus is strong for one or two. Maybe they're strong for three or four. And yet every time there's an earnings upgrade in the new company that stock rallies, but the market seems to have missed it. Now there's a lot goes on in February to it's one of the busiest times of the year. It's only 28 days, so the same number of companies reporting in three days less than you get in August. And I guess, you know, some of it's obvious in hindsight, but not obvious when the results come out.

Felicity: [00:04:58] You know, how has. Agriculture sector really change in the last kind of two years due to Covid, you know, do you think the sector over the last five years even has changed since you've been covering it? 

Philip Pepe: [00:05:10] Yeah, the one thing I like about agriculture, it's it's a good diversifier now. You don't buy stocks or thinks there's just some diversification. But the story I tell people is, you know, whether the share markets up or down, whatever happens to bitcoin, whatever happens to global tensions, whoever wins the footy, we all go home. We eat a steak, eat some tofu weight, other grains, bread, milk and we have we have agriculture. So its earnings tend to be quite resilient. The things exogenous shocks that faces a more weather related. So it's ten. It's ten to a powered on despite share market volatility, just despite Covid. But the biggest challenge it's faced, like everybody faces, is in the supply chain. You know, a lot of a lot of tourists would come to pick fruit, come on a working holiday, pick some fruit out in the regions they haven't come. So the getting staff costs have gone up because now the locals seem to not want to go to Bendigo for a summer and pick some fruit, whereas the backpackers used to love to do that. They've gone. Wages, costs have gone up. Logistics I met with a trucking company this morning, moving freight around from the farms to the supermarkets. There's a supply shortage in supply of truck drivers and trucks, so moving it around is costing a lot more, with people being sick or unable to work because of COVID and quarantine rules. The cost of moving the agriculture around has gone up. Now, ultimately, we'll see that in food inflation. In terms of the volumes, the volumes have been good because of a bumper winter and a bumper summer crop and strong commodity prices. It's just moving it around has become more complex because of COVID, so we'll start to see what we've already seen some food price inflation come through. 

Candice: [00:06:48] Philip, what are you factoring in to your pricing models with these businesses in the AG sector in the next, I guess, 12 to 24 months? Is it? Is it massive numbers? 

Philip Pepe: [00:06:57] Yeah, that's an interesting one. So I look at a handful of agricultural commodities or agricultural data points. So the single biggest drive is the size of the winter crop, mainly wheat. The size of the summer crop. Then obviously the wheat in the barley price. Livestock prices are topical at the moment particular cattle and sheep, and then you've got wool and other other other lesser commodities. They tend to be going up now. They're going up for a number of reasons. I we've had great rainfall after a year or two of drought where we saw volumes fall. We've had some great rainfall and we continue to have great rainfall. So volumes are going up. So that's a tick because of what's happening in the other side of the world. Again, supply of commodity prices, we're seeing wheat and barley futures prices go up. So that might be short term in nature. But at the moment, we've got perfect conditions in terms of strong volumes and strong prices. You have to assume they mean revert at some stage. I mean the stronger for longer camp. But you know, these aren't permanent conditions. Hopefully in terms of livestock prices. With the drought, we had an increase in what's called turn off. You can look at what that means. So we lost, we lost a lot of herd. Now farmers are rebuilding, growing the herd, which had great rainfall. So there's there's grass on the paddocks, there's less cattle offered for supply so that prices have gone up again. That will mean it's not like planting a tree. It takes years for for the herd to get back to where it was and for prices to come down. So although when you model something in a spreadsheet, you do mean revert to a normal for want of a better phrase rate of return. But at the moment, I can't see it happening. You know, you said you've had three three agriculture companies that I follow put up strong trading updates in February and March of April that we've got at least another 12 months of strong conditions in the ag sector, which means more food inflation. It will mean revert, but not not this calendar year, according to what I can see 

Felicity: [00:09:00] from your perspective is climate change. Again, huge concern in this sector then? Is that something that you know, really does potentially impact agriculture? 

Philip Pepe: [00:09:10] It certainly has. I mean, some of the stocks have looked at the growth fish, for example, warm water warming of the water impacts right of growth. Climate change can impact things just changing rainfall levels. At the moment, we've had very good rainfall. Once you don't want is irregular weather patterns. We're lucky at the moment we've had early and heavy rainfall that there's moisture in the soil. It kind of needs to rain from April. And the the old adage is, if it rains from Anzac Day onwards, we'll have a good crop. So at the moment we're getting it early. But if you start disrupting rainfall patterns, yeah, it will affect. It will affect crops and livestock and all that kind of thing that happens slowly, very slowly. But it certainly is happening and farmers farmers are learning to adjust to that with the way they. Need to. 

Felicity: [00:10:00] Now I'm going to throw you a little bit of a curveball. OK, so one of our listeners actually wanted to get your thoughts on one of these other companies that isn't under your coverage. SRH very select harvests. Can you give us any thoughts or your opinion on this business? 

Philip Pepe: [00:10:16] Yeah, I've looked at it briefly in the past and I did overlook it, which was a mistake. But I'll tell you why I did it and I'm grow and I in my career, I've tended to ever avoid single commodity plays, whether it's an agriculture play or resources play. I've always preferred the diversified. So the issue I have with commodities is the price is set globally, but the volume is set locally. So if you're growing in Australia and you get a bumper crop, that's great. But if you get a bumper crop globally, then the prices are falling. So I have never followed that too closely because it is a single commodity play. And if the conditions are in your favour, that's great. If the world stops eating almonds or there's a poor crop in Australia, you get wiped out. It's me like investing in resources and not only picking one commodity coal, copper, gold if it works in your favour. Happy days, if it doesn't. Guess what? It's it's the downside. So I'm saying it's a well-run businesses that done very well. But personally, I've never bid on just one one horse, one commodity. So I've never, never Covid, of course, have preferred something more diversified where eggs, just like any other business, you never have all cylinders firing. I'd rather have five out of six than just bet on the one. 

Candice: [00:11:29] Tell us the process of, you know, your checklist, right? You're going out hunting to find the next compelling business that you want to cover and go the journey with. You don't like to go single kind of single commodity, as you just explained. So is there any other kind of checks and balances that you do to find that compelling business? 

Philip Pepe: [00:11:47] Yeah, absolutely. I always start with an analysis of the industry. If you want a good industry, you want good management and you want a cheap stock. And then the day, if you find good management in a bad industry, often the bad industry wins. So you start with a good industry. So what's a good industry? Ideally a growth industry, not a mature industry. High barriers to entry. High returns on capital. I don't like companies who are constantly bleeding money. I prefer to see companies making profits and growing. Those profits prefer high returns on capital to low, because that gives you some margin for error. If you do get a Covid or such a shop, they can still make money that just make less. How hard is it to get into the industry is a capital intensive? Is the behaviour rational, or are they competing in price? So for me, first and foremost, finding good industry, secondly is management. You know, management's got to have a track record, ideally runs the business well, have skin in the game, especially with small and mid-cap. You know what's in it for them? I always look at the key performance indicators their KPIs and ask, Are they aligned with shareholders? Because you've heard the you've heard the phrase, you know, show me the shame of the incentives, I'll show you the behaviour. So what does management need to do to get paid to earn a bonus, to earn their shares or whatever, whatever, whatever their remuneration is? And then it's ideally going to be cheap valuations important and don't like to own expensive stocks just because they're good. We're investing in shares, not companies. So, you know, we're not taking them over. So you're building a share portfolio. You know, I've seen people overpay for quality stocks because they want to own a quality stock. But then it didn't live up to the high expectations and it underperforming the portfolio. So it's valuation is the third, but it is part of it. 

Candice: [00:13:31] So being a value investor, when you do go out and find these businesses, when it starts to rally, Philip, does that sort of force you to go alright, I have to take profits or do you move to sell? Like on the other side, you know, how does that work? 

Philip Pepe: [00:13:44] It depends on what rallies, if if it rallies, because your thesis is playing out and the market is catching up to your earnings forecasts, then yet you take profits, you rebalance safety. Expected return falls from pick a number 30 per cent to 15 percent. You take some profits because you wouldn't. Yeah, if a stock outperforms your position, builds in the portfolio and your expected return. Also, so portfolio theory tells you you sell something. If it's outperforming because there's been an upgrade, then you might even buy some more. Yeah, it depends. But all things being equal, if if I have, if my price target hasn't changed, then the expected return falls. Then you take some profits because you might get the other scenario where it actually falls for no reason and you buy some more. So if you haven't sold, haven't taken any profits might be harder to buy, buy a few more when it when it falls for no reason. 

Candice: [00:14:36] So with all that in in the back of our minds, give us an example of a company you've recently added to your coverage and why it it hit all those checklist for you. 

Philip Pepe: [00:14:45] One added About three weeks or so ago was Elders Limited Stock Code Aldi. 

Felicity: [00:14:51] I know you're going to say that one.

Philip Pepe: [00:14:53] Well, you know who we've been talking about. It's been a great, you know, it's. Australian agriculture. It's a good industry, we produce a lot of agricultural commodities out here. It's one of our top top exports have produce, a lot of weight, lot of wool, barley, beef, et cetera. So we've got some good product that the world wants to buy. We've had a couple of years of very strong seasons summer and winter crop, some of the commodity prices, soft commodities have been quite strong and because of what's happening in the other side of the world, you know, people want security of supply, and countries like Australia are very stable and you can place your orders every year and get yourself in and get your products over in a boat when you need to. And you haven't got some of the issues that we have in the other side of the world. So, you know, with things like Covid and potentially interest rate rises and people trying to work out where a particular company's earnings are going, you know, what is the new normal? We will go home tonight. We will have some dinner. There'll be some sort of agricultural product on the table that that is pretty much guaranteed in this country. We live it. So the industry I have a positive view on elders has now been run by Mark Ellison, managing director for about seven, seven and a half years ago. Now, when I met him, he was running 6TB chemicals outside of Wesfarmers and Wesfarmers, and elders are very much return on capital focussed. So the elders, board and management talks return on capital. I've been on site visits out in country South Australia, talking to people in overalls, holding pitchforks, telling me about balancing act between capital and, you know, it's a cultures right throughout the organisation say in order to get more capital from head office, they need to give the return on capital argument, which is fantastic. So for me, it's a well-run business where management gets remunerated for delivering returns to shareholders five to 10 per cent a bit growth with a minimum of 15 per cent return on capital and then kind of getting over 20. Fantastic. And I was just so I joined Sean. I was looking at what stocks to read and on, and I saw two of their peers. It was New Farm and GrainCorp within four weeks of each other, put out a very strong trading updates and elders didn't move. In fact, it. Well, he's now had two companies sign conditions of great volumes are great, is shaping up like a good winter, and elders who supply some of the same customers had it moved. So I thought, this is this is silly. Elders should be higher. So reinitiated on elders and good luck or bad luck, depending on your point of view. A week later, elders put out a trading update and they said, Hey, guess what? Conditions are good? We're having a strong year and they put out 20 to 30 percent a bit guidance, even growth guidance for FY22. It wasn't rocket science. It's just reading what the competitors are saying and realising the conditions are strong. Market had missed it or were focussed elsewhere, and Elvis has rallied strongly since since when he showed,

Felicity: [00:17:50] I guess, sticking with the elders theme. How often do you speak to management and you know what's involved from your end to continue to follow and report on the business? 

Philip Pepe: [00:17:59] I try to speak to them as often as I need to without pestering them, but not not just them. So if you are, it's important to talk to management. How often if I've got a heart condition, call on something, it's very rare. Two weeks go by and I haven't given them an update or ask them for an update or put a potential investor in front of them or something. But I also do a lot of channel checking, so I talk to the competitors. I talk to their suppliers, their customers, you know, unlisted people. You know, I apply what's called the mosaic theory. Talk to a whole bunch of different, unrelated or semi related companies and get a picture of what's happening. So an example spent a few days in Melbourne last week seeing some companies and companies in different sectors to a person. I will say we are seeing rising costs of staff actually in the IT space. And you know, again, to a person, all the anecdotes were like 10 to 20 per cent growth in staff costs. If you can get them, in some cases you couldn't get them. So by talking to a whole bunch of unrelated companies, you can't work out well. Guess what? The staff costs are going up a bit. Look at my models and work out who's got a high proportion of I.T. staff on their books because those costs are going up, not down.

Candice: [00:19:13] And on the channel checking side of things in the day you're doing there, I guess what's your insights into the vegan agricultural sector? You know, is it growing rapid pace? Is there a lot of interest or pushback from from the sector? 

Philip Pepe: [00:19:26] What you say is a lot of pushback. It is growing. It is a movement. It's a vegan natural. There are some themes that are just constant and they're going to keep growing. And although myself, I might not be a user of the product, you can't deny there is a movement towards plant based on the best products. And when you say mainstream fast food chains going down that space, yeah, absolutely. I do a bit of research into protein and health and protein by soy based sources of protein can be almost as good as meat based sources. A protein, so there's no real reason to have meat if you choose not to have meat and as it becomes more and more mainstream, I think it'll continue to grow. So again, demand for soy good for Australian farmers. Something else to grow. Diversify their portfolios. Instead of relying on wheat, barley and beef. More soy, more others can only help them. 

Candice: [00:20:18] Good for the bottom line at the end of the day, right? Diversify. 

Philip Pepe: [00:20:20] Absolutely hands because companies like elders who supply them with more different inputs like to supply them with the better for elders, 

Felicity: [00:20:28] cellular aquaculture, you know, and lab-grown meat. You know, what are your thoughts on that? 

Philip Pepe: [00:20:35] My general view and a sample of one is that people like wild caught the fish. It tastes better. It's just the way it's always been done. We will evolve. We do, we do grow cows and chickens, et cetera, on farms. I went and saw this company, which is listed, I won't name them, but they did. Let's call a swimming pool grown particular type of fish. It just didn't taste the same, really, as a market for it. I ate more bread than I did the fish, but it's a way to get scale. Not all things are better with scale. I think we'll get there with time. But at the moment you look at what's happening in other other forms of livestock. People prefer free-range Bryce. We can, whether it's cruel or not, people prefer free range. With some aquaculture, we're going in the other way. So again, I'm not the target market. I'm sure one day we'll get the formula right, but I haven't come across anything at the moment that's maybe say a lot of that from now on. 

Felicity: [00:21:31] I mean, I guess it's not mainstream enough. I mean, kind of interests me in the sense that perhaps I can have something that tastes like fish, but it was never actually a live animal or something that tastes like beef. It was never actually a live cow. That's where I find it quite interesting because I would definitely be vegetarian or vegan, you know, if I had to kill my own food 

Philip Pepe: [00:21:51] like, I guess. 

Felicity: [00:21:52] Yeah, yeah, basically.

Candice: [00:21:55] So just pivoting a bit now before we started the pod. Philip, we were talking about, right? And you go on the journey with that particular business. So talk us through the process of adding a business, loving it, then selling it for whatever reason and then adding it back again, you know, is there a sort of system to that for me? 

Philip Pepe: [00:22:15] I think longer term, I'll typically sell out of something. If it gets completely overvalued, the market can sometimes fall in love with the stock. I'll give you an example it's quality company in IDP education that I Covid early on like. It was around three bucks or so who initiated stocks done really well. I think it's 30 bucks or so as of today. So if you grow it the whole time, you would have made a lot of money in the company. Yeah, no brainer. Well, for his shareholders paid 40 bucks. I changed jobs. I wasn't covering it. But you know, it's just a lot of people to really 40 bucks like, what are you buying at 40 bucks? Sometimes as a company gets bigger, it attracts more attention, gets a big weighting in the index, the index buyers buy in and you've got to sit and ask yourself, Is this the best use of my limited capital in my portfolio? And you don't necessarily need to sell something. It's a little bit expensive, but if it's, let's say hypothetically, twice your price target as well, you know, maybe you can recycle into something that that's a bit cheaper, maybe still is good quality, but be cheap, and it's fallen back from 40 bucks to 30 bucks. So nothing wrong with the business. It's just that is a great business. It's just people piled into it because it was bigger, more liquid that felt the need to own it. But you're buying shares, you're not buying the business. So, you know, think of it as an investment. Not I'm not a company. You're running to 

Felicity: [00:23:41] basically don't fall in love with a stock is your point there. 

Philip Pepe: [00:23:47] It's easier said than done. It's easy to say don't fall in love with the stock and don't be, especially 

Candice: [00:23:53] when you're making money,

Philip Pepe: [00:23:54] you're making money. But it's it's I find the reverse happens more so when people won't sell a mistake, not lost money. And there's something in human nature. People will let beat themselves up less if they sell. If I take profits on something too early and it keeps running as opposed to something drops, you hang onto it in the hope that it gets back to your entry point. So you can you can exit. I find the downside is when people forget to sell or don't sell too soon. Human nature? I guess so.

Felicity: [00:24:25] In a moment, we're going to be hearing Philip's thoughts on the strong industrial sector, as well as other sectors under his coverage as he's a generalist. Now we're also going to hear why he's a bull on that company, so actually stick around to hear some more interesting stock picks. But before we do, we're going to take a quick break and hear from our sponsors. 

Candice: [00:24:45] So we've covered a lot on the businesses that you are liking at the moment in the ag sector. But Philip, let's switch tactics now. Let's go to more, I guess consumer discretionary and maybe touch on health care. So one that you cover is in the beauty space BW. Talk to us about that business and why you like it. 

Philip Pepe: [00:25:03] Sure. So BW X is a natural skincare beauty brand that owns brands like Skin and our natural mineral fusion nourish lush flora and fauna. And it recently bought a business called Go To, which is run by Zoe Foster Blake, which some, some some may have heard of very, very popular blame prime. I like the business from the beginning for a number of reasons I natural categories growing. You know, we were talking earlier about perfume made preferring growth sectors. What we found during Covid of the recent years is that beauty is non-discretionary. People didn't stop spending on beauty products because I was staying at home. They changed what they were spending on more in-home consumption, you know, hand creams, moisturisers, less makeup products. But now we're all moving back into office and the makeup in the face or facial care starts growing again. The is definitely non-discretionary. Probably growing about four to five per cent per annum within the naturals category is growing at a faster rate, perhaps five to six percent. So all things being equal, a bit like the vegan discussion earlier, if there's a natural product that's as good or better than the chemical based product, more people, most of which are women, but some men would prefer the natural option. So it's a no brainer that this sector will grow, and VW is in the position that it owns three top selling brands in two countries and is number one in Australian pharmacies and in Australian retailers. Angela Naturals is number one in its category in the US and mineral fusion. More of a makeup brand is number one in this category in the US, so when you are the number one selling natural brand into a market. Anyone else wanting to grow in the space will usually start with the number one. So let's take Australia. For example, the skincare category was dominated, still remains dominated by the pharmacy chains, you know, the Chemist Warehouse, the Priceline's, etc.. When Coles wanted to enter the category, they started with skin, their first skin, one of their first skincare brands. Their dominant natural skincare brand is second. Similarly, Chemist Warehouse is leading off with skin. There's a bit of skin, but two mega retailers have started with the number one selling natural skincare brand, and they will be their top two top three customers this financial year on a run rate basis. So it's a growth sector that's not going anywhere is here to say, 

Candice: [00:27:30] and the margins are pretty good, right? As well in that particular space. 

Philip Pepe: [00:27:34] Margins are good. They they manufacture their own brands, so you can is manufactured in-house. They're building a new facility or expanding their facility in Victoria to bring more of the manufacturing in-house. But the margins on skincare, depending on whether it's outsourced or in-store, will vary from, say, 30 percent to 70 per cent because they've got economies of scale to mass market products, and they're the values in the brand. 

Candice: [00:27:58] Speaking of mass market, we all need health care. I know you also cover a couple of businesses in that sector. What are you liking in that space? 

Philip Pepe: [00:28:05] Yes, I like seeing my health care. It can say it's there are pharmaceuticals wholesaler, so there are five thousand five hundred pharmacies in Australia that have a choice of about three wholesalers. Sigma API, which is now owned by Wesfarmers and or Symbion, which is owned by Amos, so a choice of three, is linked to ageing population. It's linked to preventative medicine. You know, every year we spend, I think about 15 billion plus spent on prescription medicines every year in Australia, and that's only $15 billion. 

Candice: [00:28:41] Sorry to interrupt you to slowing this thing 

Philip Pepe: [00:28:43] and on on prescriptions 20 bill roughly in pharmacies every year. It's an important and growing sector. Sigma is one of three wholesalers. They've had a decade of two halves. I describe it in my research first five years where everything went right last five years, where a few things have gone wrong. They've got a new managing director who started about two months ago. Very, very good track record at a company called the Clicks Group in South Africa. I think it's been about 28 years there. It's a bigger version of Sigma, so he's joined enjoyed in February to help turn Sigma's fortunes around. And so far he presents very well and he will give us a strategy update around September this year. And again, I think it's underappreciated. Stock has had a bit of a a rough 12 months, but it's in a good sector, it's in a stable sector and I think earnings will rebound strongly over the next two to three years. 

Felicity: [00:29:40] That's a really interesting point. So basically, Sigma is one of your stocks, which is. Recently sold off. Is this potentially a buying opportunity? I know we've actually seen a lot of health care has been sold off. I mean, CSL isn't doing too great either. Perhaps it's the environment we've been in the last couple of months, but would be keen to hear your thoughts on that.

Philip Pepe: [00:29:58] Yeah, it's I think a lot of the health care stocks Ren. As as the pandemic brought out, people were trying to pick the beneficiaries of the pandemic. Sigma's has been both the beneficiary and victim of the pandemic. You know, they're selling a lot of assets at the moment, so that's been a positive. But when we're all in lockdown last winter, we weren't getting sick, we weren't travelling, we weren't going to work. So there was no cold and flu season last year, so they missed out some sales there. They also implemented an sap system and surprise surprise is quite complex and taking a little longer than expected. So they've lost sales. So Sigma never really rallied because of that. Who's going to benefit from the pandemic? Net net, I'd say it's neutral. We all went out and bought more hand sanitisers when it first started and then people didn't get sick over winter and then we brought some more rats. So I call it a neutral terms of what it's meant for them against a case of what does the new normal mean at the moment, people aren't travelling. A lot of our diseases come from imports. Tourists coming and spreading the love we have. We haven't seen that. People are still working from home some days a week, so we might not get a and that's probably a good thing. We're not get a terrible flu season, but most people go into the pharmacy and getting a jab for one reason or another. They'll pick up a lot of preventative medicine while they're there, so we will get back to some level of normality. But Sigma's definitely underwriting at the moment, and the potential is a lot greater than the result that they just delivered. 

Felicity: [00:31:32] What is the price target on Sigma at the moment and what is the code? 

Philip Pepe: [00:31:37] So the code is so vague and my price target is 60 cents per share. And what I find extra interesting about this space at the moment, you know, fund managers may have been selling the sector in the last couple of years, but we saw recently Wesfarmers decide to make a big investment in the space, and they took out an Australian Pharmaceutical Industries API. So the corporates are saying, Well, these stocks, perhaps that's cyclical lows and are starting to invest, and you can bet Wesfarmers will behave rationally and look to improve the industry, which may or may not make Sigma a target for somebody else. But certainly Sigma at its current share price around whatever is 45 cents or so 60 per cent price target, I think I think it should be trading a lot higher. 

Felicity: [00:32:24] Note that one down on your order pad, guys. Now, besides Sigma have any other key positions being sold off lately that you think could be a good buying opportunity for our listeners? Yeah. 

Philip Pepe: [00:32:35] Look, there's a couple more that I've let off with. One is a company called Serve Corp Ltd. Is they? They provide flexible workspace, so service offices not, you know, if not, five year lease is more six to 12 months leases. For me, that's a case of what is the new norm. I think working from home in a lot of companies is the new norm, and a lot of the mega mega companies are now reducing their fixed office footprint and perhaps relying more on service offices to house their staff when they're in the office. And that's great for a company like Surf Club who offers flexible workspace solutions, including virtual. You know, we can be sitting at home with a virtual office in Chifley Tower and come in for a meeting when we need to, but we're sitting at home with a Chifley Tower address, so I think demand for that will increase. It's sold off during the pandemic because everyone fled the offices, including service offices, because we're all forced to work from home. Globally, the conditions are recovering, so surf clubs private suffering from 90 per cent of its shareholders being in Australia, but 90 per cent of its earnings being offshore as we all get back to work in the cities. People are realising that it's, of course, marvellous perhaps the new norm going forward. I've got a $6 price target on that, so I think it's it should be a lot higher once they can deliver that show that things are getting back to normal and not delivering the the strong cash flow that they normally deliver. 

Candice: [00:34:01] And I guess listening to all of these companies and the reasons you like them, you keep coming back to that key point. It's about the long term. So what's a short term? I guess concern for investors in their portfolio is rising interest rates and inflation. We're hearing double digits in the US and we're hearing more like seven, eight per cent here in Australia eventually in the next couple of months. Plus, we have an election around the corner, which markets hate. So what's your thoughts on rising interest rates? And you've touched on labour and other things increasing into the business models across the different sectors you cover? Is there a particular sector that stands out the most? It's going to be hit, in your opinion by rising interest rates. 

Philip Pepe: [00:34:39] My valuation technique is discounted cash flow DCF. So do present values of. Future cash flows. Generally speaking, the higher the interest rates are, higher the discount rate, the lower the valuation. So some of the pullbacks you're seeing is because interest rates long term say Australian bonds have gone from one per cent to three per cent in the last 12 months. That can be a material impact to your valuation. If if it's you dealing with what's called a long duration stock, its earnings are more into the future compared to something else. In my modelling, I never followed interest rates all the way down because I didn't believe they were going to stay at one per cent. I still have used three percent throughout this whole time, so they're back to what I've been assuming at this whole time. That probably meant that I didn't pick the peak, but I don't try and pick the peak. But I'm now not downgrading as the rest of the market is. So what you're seeing at the moment is probably techs probably been hit the most because they are by long duration. I mean, their cash flows are more longer dated, they're further out. And the further out the cash flows are, the more sensitive to the valuation is to a rise in interest rates. So that's why you've seen that tech sell off. Some of that will be earnings related, but the extent that that is valuation related, that doesn't come back unless interest rates come back. Then there's a secondary effect. Rising interest rates means rising costs of capital. It becomes more expensive for some companies to reinvest. Some projects might be unprofitable at the margins, so they don't do it. So there might be some forecasts out there that, you know, might not happen because it's it's very destructive for the companies to pursue that. So I try to be more conservative in my forecasts. So the five stocks are written on it Shaw and partners. I think there's minimal risk and unless the interest rates go to 10 percent, then I think then we're all in a bit of trouble

Felicity: [00:36:25] Yikes. Thank you so much for that. You've given us some really, really valuable insights, and I think our listeners are going to honestly find that so interesting on how you actually value a company and you know what you're really looking for. So we've heard about quite a few of the businesses that you do cover, but what would be your number one pick? This is what everyone's been waiting for. 

Philip Pepe: [00:36:47] I don't like no one thinks because it depends on what else people own in their portfolios. If I can give you two for two very different reasons, if that's okay, go for it. 

Felicity: [00:36:56] Even better, take it 

Philip Pepe: [00:36:57] one two four one to five for different reasons. First one is elders. I think people, my peers are underestimating how strong the ag sector is at the moment, and I mean the stronger for longer category. I did some very rough analysis for my colleagues yesterday looking at market expectations, what the company aspires to deliver because people like to mean revert. The market is forecasting a decline in earnings in FY twenty three because of a mean reversion in whatever AG cycle they're looking at. I've got forecast growth and if I'm right, there's big upgrades to come in the market. So we've got twenty three and I think I think eldest is worth owning over the longer term. But certainly there's a positive surprise coming. I think in the next 12 months if they can continue to deliver. The second one is is BW X limited because of the comet impacts in their 30 June result and the February results stock's been sold off, stock has more than halved. It was went from a high of five sixty five last year to about two today. I've got a $4 DCF on IT companies having a strategy they may where I think they'll be. That will be showcasing the new facilities down in Victoria. I think it'll be well-received. I don't think the natural category is dead and I think their brains work. How that impacted my channel checking suggest that they were genuinely impacted by COVID in the September quarter. We will one day get back to normal and hopefully it's sooner rather than later. And I think I think this stock should be a lot higher because skincare beauty care is non-discretionary and natural will continue to outgrow the market, certainly in my working life time, in my opinion. 

Candice: [00:38:37] So there you go, guys. Hot off the press, Aldi for elders and BW Ex, he is really keen on those businesses for the for the reasons you just outlined the big key message that I'm really taking away from today's chat with you, Phillip is stick to the long haul. No, the management, no, the expectations. Don't be afraid if you do know the business is gone a couple of short term rough months ahead, but the the projection long term is looking good, particularly with elders. You're Mr Positive when everyone else is Mr Negative on FII 23 earnings. So I'm going to be definitely watching that of interest and a good way to wrap up today's chat. We ask all of our special guests who sit down with us, particularly. This is a good one for you because you're in the agriculture sector. What's your preference? Coffee, tea or tequila? 

Philip Pepe: [00:39:25] Hahahaha. Coffee, definitely coffee. Every year I'd give up alcohol once a year and I've never given up coffee in my life, so definitely coffee. 

Felicity: [00:39:35] Well, thank you so much for taking the time to chat with us today. We really appreciate it, and I'm sure our listeners are also going to absolutely love this episode. 

Philip Pepe: [00:39:44] Thanks. It was fun,