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Speaker 1: Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer.

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Speaker 1: Today it's all about MidCap stocks, companies that many of

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Speaker 1: us know but often don't get the same attention as

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Speaker 1: their large cap is. I want to find out what

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Speaker 1: to look for, how to spot the opportunities in this

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Speaker 1: section of the market. Remember, the information in this episode

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Speaker 1: is general in nature. It doesn't take into account your

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Speaker 1: own circumstances. Jack Briggs is portfolio manager of the Elliston

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Speaker 1: Mid Cap Opportunities Fund, which is working with Soda Or Capital,

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Speaker 1: a great supporter of this podcast, he joins me in

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Speaker 1: the studio. Jack, Welcome, if you're in Greed, thanks for

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Speaker 1: having me today, Sean, So give us a quick overview

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Speaker 1: of mid caps. What are they? How do you think

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Speaker 1: about investing in them? What's your process?

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Speaker 2: Kind of a one A one yeah, great.

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Speaker 1: So.

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Speaker 2: The way that we define midcaps at Elliston Capital is

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Speaker 2: a market coupalization of between a billion dollars Australian and

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Speaker 2: twenty billion dollars Australia. And if you look at the indexes,

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Speaker 2: that roughly aligns to the AX fifty, starting at the

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Speaker 2: top all the way down to the AX three hundred,

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Speaker 2: so around two hundred and fifty stocks in that universe,

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Speaker 2: and we also invest in New Zealand's of corresponding size.

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Speaker 2: So the Aliston MidCap Opportunities Fund is our vehicle to

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Speaker 2: invest in that space and target those businesses, and so

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Speaker 2: we own thirty five of those stocks across the fund.

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Speaker 2: It's a long only, bottom up fundamental process.

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Speaker 1: So let's just break that down. Long only basically, you're

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Speaker 1: in it for the long term. You're not trying to

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Speaker 1: trade every day.

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Speaker 2: Long only in the sense that we're not taking short

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Speaker 2: positions in stocks, so we're benefiting from share prices appreciating

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Speaker 2: rather than dropping.

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Speaker 1: Yes, okay.

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Speaker 2: And then stylistically, we look for the best opportunities wherever

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Speaker 2: they may be, so we're not getting stuck into value

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Speaker 2: versus growth. We're doing a bit of both. We're looking

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Speaker 2: for the best risk rewards wherever they may be at present.

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Speaker 1: Okay, So you must have premitives though about how you

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Speaker 1: think about it's two hundred and fifty stocks, you've picked

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Speaker 1: thirty five, what are those thirty five broadly got in common?

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Speaker 2: So the way that we think share prices end up

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Speaker 2: being mispriced is when the market doesn't appreciate the future

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Speaker 2: earnings potential of that business. So how we get to

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Speaker 2: that conclusion is we go and do the deep, bottom

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Speaker 2: up fundamental work. We spend a lot of our time traveling.

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Speaker 2: We spend a lot of our time out and about

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Speaker 2: meeting the companies. We want to meet not just their executives,

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Speaker 2: but also numerous other sort of employees across the business.

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Speaker 2: Within those companies, we want to meet their competitors. We

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Speaker 2: want to meet their suppliers, their customers, if there's a

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Speaker 2: regulator or a consultant involved in the industry, want to

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Speaker 2: hear their perspective, and we blend all of that together

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Speaker 2: to forecast future cash flows for those businesses. And we're

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Speaker 2: looking for situations where we think the market has underappreciated

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Speaker 2: the earnings potential of that business. We've done all our

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Speaker 2: deep fundamental work. We think the current valuation isn't implying

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Speaker 2: the same thing, and we think the market will come

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Speaker 2: to agree with us over time and the share price

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Speaker 2: will appreciate and will benefit.

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Speaker 1: We'll get to some stocks in a moment. But are

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Speaker 1: there certain attributes that you must have? I suppose management

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Speaker 1: is one. You know founders or strong management. Are there

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Speaker 1: other things that all these companies have. Once you've done this.

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Speaker 2: Work, Yeah, it's a great point, Sean. Managements are a

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Speaker 2: really key one. So part of our fundamental work, we'd

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Speaker 2: have a number of pillars that we evaluate a company

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Speaker 2: on management. Bang. One one of the things we look

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Speaker 2: at for management is how they set the strategy. So

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Speaker 2: a strategy is a business has a series of resources

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Speaker 2: and capabilities, and then there's a market opportunity which is

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Speaker 2: external to the business, and your strategy is trying to

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Speaker 2: use your resources and capabilities to produce the highest return

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Speaker 2: on your increment invested capital as you exploit that market opportunity.

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Speaker 2: And generally we find when businesses are producing incremental returns

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Speaker 2: on invested capital, that's a pretty good hunting ground for

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Speaker 2: miss priced stocks where we might make an outsized return.

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Speaker 1: How much of this is financial, So you might invest

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Speaker 1: in a minor, You might invest in a financials as

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Speaker 1: it a bank or something like that. You might invest

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Speaker 1: in a retailer. You probably invest in all of those things.

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Speaker 1: You can get your return on invested capital through the

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Speaker 1: balance sheet. How much of it, though, is about understanding

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Speaker 1: the business kind of visiting a retailer, realizing you know

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Speaker 1: how many people on the floor. They're that type of thing.

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Speaker 2: Yeah, I think our best investments and on average we

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Speaker 2: try to look for this in every single investment, but

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Speaker 2: our best investments are definitely the ones where we have

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Speaker 2: some underappreciated aspect of our analysis that's based on robust

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Speaker 2: data that we can validate and we can know is

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Speaker 2: true to a high degree of certainty. We then reflect

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Speaker 2: that in our forecast for the future cash flows and

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Speaker 2: we come up with, as I was talking about, a

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Speaker 2: differentiative view on that business's earnings power. So to answer

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Speaker 2: the question, it's always better when you can turn it

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Speaker 2: into a quantitative assessment, and that's not always possible, and

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Speaker 2: often you're operating with degrees of uncertainty. And that's what

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Speaker 2: makes the job a little bit of art and a

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Speaker 2: little bit of science. And you know, that's what keeps me,

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Speaker 2: you know, engaged every day and waking up and running

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Speaker 2: into work to do that work and to really sort

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Speaker 2: of solve those work.

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Speaker 1: You got a two year old that's stratting you up

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Speaker 1: at night. That's what made you hesitate when you were

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Speaker 1: saying that. But yeah, that's right, it works my safe place,

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Speaker 1: very true. Jack, Stay with me, we'll be back in

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Speaker 1: a minute. My guest this morning is Jack Briggs from

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Speaker 1: Elliston MidCap Opportunities Fund. We're ahead of the break. We

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Speaker 1: spoke about the process. Let's talk about some stocks. So

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Speaker 1: of those thirty five, can you give us a few

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Speaker 1: that you like. So let's start with you choose. Yeah.

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Speaker 2: Great. So one of the ones for today Regis Healthcare

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Speaker 2: ticker RAG. So they own sixty nine and operate age

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Speaker 2: care facilities around Australia around seven and a half thousand

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Speaker 2: beds capacity, and so we like Regis Healthcare because it's

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Speaker 2: got a structural tailwind. Obviously, the baby boomers are aging,

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Speaker 2: they're moving into that demographic that requires age care. The

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Speaker 2: Department of Health forecasts we need ten thousand beds per

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Speaker 2: annum of new capacity being built to house all of

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Speaker 2: those that require care. But at the moment, in the

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Speaker 2: last four years, we've only built one and a half

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Speaker 2: thousand beds perannum. So there's a massive supply and demand

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Speaker 2: imbalance and that's scene occupancy almost at breaking point. Now.

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Speaker 2: The reason for that gap, in our view is the

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Speaker 2: returns aren't high enough to justify building new facilities as

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Speaker 2: much better uses of capital, and so the government needs

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Speaker 2: to fix that by coming in and it's a heavily

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Speaker 2: legislative center. These age care providers can't just go and

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Speaker 2: charge more. It's the government decides all of that. They

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Speaker 2: need to improve the economics, either with more copay or

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Speaker 2: with more incentives from the government themselves, and we think

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Speaker 2: that that's the only answer for this issue. You can't

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Speaker 2: have them in public hospital that costs four times as much.

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Speaker 2: There's not really an alternative. They need a high level

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Speaker 2: of care. The government needs to make it better for operators,

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Speaker 2: and we think that benefits both Regis as existing portfolio

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Speaker 2: of assets, expanding their returns and also allows them to

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Speaker 2: build new assets at returns that are attractive to us

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Speaker 2: as investors as well.

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Speaker 1: How do you know as Regis? I was just looking

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Speaker 1: at the share price as you were talking to me,

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Speaker 1: and it ran up in twenty two to twenty three.

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Speaker 1: I mean it was good kind of may during this

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Speaker 1: year's come off a little bit. How do you know

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Speaker 1: when the share price is the right time to jump

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Speaker 1: in and out? Presumably you're long only you holding this anyway,

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Speaker 1: but for a new investor, how do you know when

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Speaker 1: to jump into Regis?

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Speaker 2: I think when we look at our process. It all

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Speaker 2: just comes back to we've done the work to understand

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Speaker 2: the business as best we can. We've spoken to industry consultants,

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Speaker 2: to the other players in the industry. We've looked for

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Speaker 2: alternative points of view, we've tested why we might be wrong,

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Speaker 2: and we've brought all of that back to our financial

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Speaker 2: forecasts and we've said, Okay, we think that there's an

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Speaker 2: underappreciated earnings potential here, and we've turned that into evaluation.

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Speaker 2: We think Regis could trade to twelve to fourteen dollars

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Speaker 2: per share on a two to three year of view,

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Speaker 2: and so at prices below that, we're happy to accumulate

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Speaker 2: shares unless something changes and we get proven to be wrong,

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Speaker 2: which happens from time to time, we re evaluated at

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Speaker 2: that point in time. So I think if I can

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Speaker 2: emphasize one thing, it's that deep fundamental work. It's getting

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Speaker 2: busy going and seeing companies understanding that businesses understanding why

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Speaker 2: you might be wrong. That we seek to really differentiate

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Speaker 2: ourselves and our analysis.

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Speaker 1: Okay, so reagis twild fourteen bucks, it's about sven and

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Speaker 1: a half. Now, what about a way from Regis? Give

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Speaker 1: us the second one?

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Speaker 2: Yeah, so going in a pretty different direction. Seek so

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Speaker 2: ticker sk so many of us will be familiar with

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Speaker 2: the brand. Obviously the leading sort of online job ad

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Speaker 2: marketplace both in Australia but also in New Zealand and

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Speaker 2: throughout Southeast Asia. Seeks the classic story of a really

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Speaker 2: high quality company with a really embedded moat being the

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Speaker 2: leading player in a heavily branded marketplace industry. Difficult to

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Speaker 2: disrupt that moat. But it's had some short term issues

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Speaker 2: that have seen the share price quite weak over the

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Speaker 2: last two to three years. So the first bang, macroeconomic

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Speaker 2: setting has been wrong for them. So unemployment rising is

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Speaker 2: negative for the number of ads placed on Seek. It's

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Speaker 2: been negatively correlated historically. And then secondly, Seek embarked about

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Speaker 2: three years ago and what they called the Unification program,

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Speaker 2: which is seeking to align the tech stack of all

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Speaker 2: those different geographies. They're all operating on a different tech way.

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Speaker 2: Too hard trying to innovate when you had to do

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Speaker 2: it six times, they just want to just collapse altogether.

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Speaker 2: That cost a lot of money, as you'd probably guess.

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Speaker 2: And we think they're past those two issues now. We

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Speaker 2: think the rate of increase in unemployment and decline in

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Speaker 2: add volumes is starting to accelerate. With having rate cuts,

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Speaker 2: we think that becomes potentially a tailwind where unemployment starts

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Speaker 2: to drop, you get more AD volumes in the next

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Speaker 2: six to twelve months. And then secondly on the technology side,

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Speaker 2: Seeks through that program, costs and capex have dropped materially

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Speaker 2: and now we're starting to see the benefit. On the

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Speaker 2: revenue side. We've seen product innovation really jump and topically,

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Speaker 2: it's probably one of the most tangible AI stories in

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Speaker 2: the near term that we found. Seek have had an

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Speaker 2: AI team for a number of years, well before chat

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Speaker 2: GPT became into everybody's lexicon, and we think that there's

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Speaker 2: big opportunity to increase the matching of those candidates and

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Speaker 2: the jobs together. And there's a lot of upside in

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Speaker 2: being able to charge more if you can create more

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Speaker 2: successful outcomes for hires.

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Speaker 1: What it may mean, I'm not supporting Seek or taking

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Speaker 1: away from it. Last week and Greep put up and

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Speaker 1: ad for business journalist and it rate the ad it

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Speaker 1: kind of I mean, it was such a seamless process

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Speaker 1: just to.

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Speaker 2: Get out there.

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Speaker 1: We paid our nine hundred bucks or whatever it costless,

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Speaker 1: and you know, We had enormous follow through from that,

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Speaker 1: but it was all I generated and so as a

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Speaker 1: user it was incredibly easy. Okay, so we've done regis seek,

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Speaker 1: a third one, a third and final one.

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Speaker 2: I think if I look at the portfolio today, maybe

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Speaker 2: trying to go in a slightly different direction. We like

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Speaker 2: Ozzie Broadband a lot, so obviously, again a household name,

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Speaker 2: many of us would be customers. They have the Ozzie

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Speaker 2: Broadband brand for consumer, and then they have some business

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Speaker 2: and wholesale telecommunications platforms as well. We think are the

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Speaker 2: structural growth of basically everybody who's not Telstra and TPG

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Speaker 2: is here to stay with better service outcomes and better

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Speaker 2: price being offered to consumers and what is a commodity

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Speaker 2: service in terms of the actual quality of the network

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Speaker 2: and Ozzie's been taking market share quite strongly for some

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Speaker 2: time with I think the rationality in the market is

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Speaker 2: being underappreciated. Obviously, as a commodity product you often see

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Speaker 2: price competition and that can be bad for returns. We

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Speaker 2: think the players are exhibiting quite high price rationality and

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Speaker 2: that should see margins and returns expand in the short term.

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Speaker 2: And we think the market's underappreciating that balance sheets in

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Speaker 2: great shape. We think the valuation is quite cheap at

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Speaker 2: around seven and a half times EBA DAH for f

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Speaker 2: y twenty six, and we think that has room to

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Speaker 2: expand based on where some of the peers are trading

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Speaker 2: and the growth profile of the business.

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Speaker 1: Jack, thank you for talking to Fear and Greed. Thank

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Speaker 1: you very much, Sean as Jack Briggs, portfolio manager of

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Speaker 1: the Elliston MidCap Opportunities Fund which is working with Sale

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Speaker 1: or Capital, a great supporter of this podcast. Remember information

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Speaker 1: in this podcast is general in nature and you should

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Speaker 1: always get professional advice and make sure a product is

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Speaker 1: right for you before proceeding. This is the Fear and

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Speaker 1: Greed Business Interview. Join us every morning for the full

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Speaker 1: episode of Fear and Greed business news you can use.

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Speaker 1: I'm chanaelmar Enjoy you to day.

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Speaker 2: You know