On the Couch with Jonathon Higgins (UCP): Neoclouds, Electrification and the ASX Opportunity

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Well, welcome to another episode of On the Couch and myself Henry Jennings from Marcus Today.
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And today I'm joined by the wonderful Jonathan Higgins from Unified Capital Partners down in Melbourne.
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And for those of you who aren't familiar with Jonathan, he has been a regular guest on the couch over the years and is very generous with his time and has some excellent recommendations, thoughts, and ideas.
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And is uh, I think one of the best analysts in the uh in the sector, certainly looking at technology and those sorts of stocks that are out there.
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So welcome, Jonathan.
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Really delighted to have you back on the show today.
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Thanks for having us on, Henry, and appreciate the support of all the listeners.
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And and uh we continue to try our best to try to make some people some money in what's been a pretty volatile market.
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It has, hasn't it?
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And uh just before we start, I must mention this is general advice only.
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So please do your own research.
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Contact your own financial advisor regarding any of the thoughts, ideas, or insights in this uh podcast.
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As you mentioned, Jonathan, just then, it has been a volatile market, hasn't it?
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It's bit it's been pretty hard to uh to trade uh, I guess, some of these uh these tech stocks.
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And when you look at our tech sector, what what's left of it, it has been somewhat decimated.
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Um what's what's been going on there that uh has been worrying you?
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Well, you really have to, I think, separate it into verticals that include offshore and and domestic.
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Um, you know, we it's probably reasonably well known that domestically we don't have a huge amount of access to technology companies.
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We've probably only got in the range of a couple of dozen that are of size and sort of scale in terms of their businesses.
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Um and then those technology companies are in the main, now there's outerlies to this, but in the in the main, doing um, you know, been having sort of a variety of AI-related sentiment issues, but also issues on earnings.
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You know, there's a lot of negative earnings momentum across the larger names in that sector, whether it be uh realestate.com.au on the back of perceptions around volumes and depth products, or you know, whether it whether it be uh Prometicus, which I think you know saw obviously some downgrades at the last result.
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I mean, so at a sector, the domestic um technology sector in software in particular, um, that's really been seeing a lot of negative earnings momentum.
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Um, negative earnings momentum, you know, should, you know, all things considered equal result in the share price moving downwards.
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Um, and then the AI trade has, which would, which we'll talk about today, the AI trade's also unwell on some of the multiples.
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So we're now seeing software and the ASX starting to trade towards the S ⁇ P 500 multiples.
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And so we're seeing software companies now starting to trade in line with the broader index, which is um, which is telling you that positioning is very low and that investors see the certainty on those earnings regardless of the outlook as having come down.
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And then if you overlay the international markets, we are seeing more positive signs in terms of software and some of the technology companies offshore.
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You know, we're seeing an earnings season where people are focusing on earnings, and if you're doing good earnings results, the stocks are starting to move.
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But broadly, as a rule of thumb, that software sector has been under pressure because people really see it as being at threat of of becoming AI roadkill and the like.
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And I think the other point, and we'll come to this in a moment, is that um some of the major structural tailwinds and the investment in the electrification thematic, the hardware, the shortage players, these types of companies offshore, these players are just sucking all the capital and they're sucking huge amounts of capital into things that look like they've got high return on invested capital at the moment.
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And as a result, it they're you know, some of these old some of these companies that were winning for 10 to 15 years just aren't seeing the investment dollars come like they used to.
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Uh it's it's interesting, isn't it?
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I mean, we've got a couple of um AI kind of stocks here that are that are fitting out um data centers, etc., the likes of Southern Cross Engineering and SKS, they're doing very well.
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Um, but what what's your take on the AI stocks at the moment?
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I guess, you know, let's focus on American ones.
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But uh what's your take on what's happening in the US in terms of the AI trade?
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Look, it's it's ultra exciting, is what's happening.
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And I think that, you know, when you're seeing such huge and exponential rates of adoption of the technology from everywhere, from users through to hyperscaler capex and the like, you you're just not seeing any data points that tell you that it's slowing down.
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And really to see, I think, the bubble or the air getting let out of that trade, you'd really want to see it, it really sort of starting to slow down.
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Our view is that if anything, it's accelerated.
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The demand for AI-related CapEx and everything associated with that, whether it be semiconductors, memory, the neo clouds, compute, hyperscalers, electricians, the demand is absolutely vertical in our view.
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And we expect that to remain the time um, we expect to remember that to remain for some time.
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Like, you know, to throw a few things out, you know, we're looking at um, you know, a trillion dollars in hyperscale, CapEx spending, it's up, you know, it's up exponentially year on year.
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You're seeing the rise of valuations in the likes of your anthropics, your SpaceXs, um, your OpenAIs continue to rise.
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Capital markets are also opening up, so they've got more and more capital.
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And even, you know, a good example would be, you know, if you look at, I think Alphabet, Google's parent company raised capital several weeks ago.
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That was the first time I think they've raised money in 21 years.
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That was anchored by Warren Buffett.
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So you're effectively seeing some very smart companies telling you that the returns are there.
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They're raising capital to go after it.
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They've got even value investors coming into those rounds, which in my view means it would be uh be the wrong thing to be jumping off that trade, you know, when we're circa, I think, six or twelve months into the euphoric part of that trade.
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Now, that doesn't mean it won't be bumpy, it won't be volatile.
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Um, but you know, effectively I think that you know there's there's still remains plenty of re-rating and plenty of winners to come offshore.
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Australia, it's a little bit harder to find, but they do exist, and there should be a greater menu of those to come as well, with some listings, I think happen.
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Um, but yeah, we we we're very constructive on it all.
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As a result, we probably sit more cautious towards other sectors that just aren't seeing the earnings growth.
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You know, we like to follow earnings momentum, we like structural earnings growth, um, those AI-related areas, electrification beneficiaries, the contractors, we all expect them to continue to see upward pressure.
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Whereas if you you know, if you're a low-growth retailer or something like that or related to Australian economic growth, then you're gonna have a pretty tough time of it in the next 12 months.
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Now, when we uh teed up this um this chat, I know you wanted to speak about neo clouds.
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Um what what the heck are neo clouds, Jonathan?
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What what are they?
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For those of us that are that are dumb in this respect, what is a neo cloud and uh how do we get exposure to the the upside here?
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Yeah, great question.
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So this is an emergent sector, and we should have more access and what we can we can sort of talk towards, and I'll talk some to some beneficiaries shortly, but but neo clouds are effectively a uh uh an OPEX-like model of delivering compute for AI.
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So that doesn't sound very simple, so I'm gonna try to dumb it down a bit more.
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At the moment, 95% of GPUs in the world being used for AI are coming from Nvidia.
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Those GPUs then likely end up in one of three places.
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The first would be a hyperscaler, think uh a data center campus that's either owned or run by Microsoft and AWS or Google, these types of businesses.
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Um the second place might be an enterprise, they might be doing some of their own workload to a lesser extent.
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And the third place is a place called NeoClouds or AI factories.
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So these are specialist companies that effectively take the risk, the implementation, and then the sale of these GPUs from Nvidia.
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They then sell these out to end consumers, end contract, end hyperscalers, end enterprises, governments, and the like, and they rent these GPUs out.
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And so it's a relatively emergent sector in terms of, you know, 18 months ago there wasn't a lot of interest in the in the sector, you know, debt was hard to find.
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But these guys are effectively providing an OPEX layer to access compute or GPU compute, and then renting that out to some of the best companies in the world, effectively.
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And that's what they do.
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Right.
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Um, so as far as Australia goes and the ASX, how how do we are there any uh players in this space?
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Is there any way we can uh we can get involved apart from obviously going to uh to US Neo clouds?
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Yeah, well, first I'll just speak about the US neo clouds just shortly.
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So the US probably has, I think, probably about a dozen neo clouds that you can access.
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So the more popular names you could look at would be like a core weave or anebius, these types of businesses, you know, they've gone through a capital markets journey of effectively de-risking themselves.
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And, you know, the scale of and size of the opportunity, I think I just want to highlight here.
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Anebius, for example, I think was a $2 billion market cap in September last year, and it's a it's a $50 billion plus market cap roll forward, obviously, within nine months.
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So the scale of the returns and the opportunities that investors have, it's well understood in the US.
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In Australia, we, as you probably would have heard from our electrotification coverage previously, we feel we're a year to two years behind what's happening in the US.
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The US has been going gangbusters at this trade everywhere from high voltage power lines to electricians through to then the data sale and the neo clouds.
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So the investors in the US understand it, and then the returns are there.
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In Australia, there's very few ways to get that.
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There's obviously the direct leverage with the data center players, the guys that own the buildings.
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So you've got like the likes of an XDC, you know, a Macquarie Telecom, and probably the you know, the one that's doing the best job at capturing sort of colo patient dolls at the moment would be a CDC, which has announced contracts equivalent to 40 or 50% of the Australian data center fleet in the last three months alone, and there's more to come in that space.
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So there's the physical real estate guys at the end of the day, as I said, that is physical real estate, and then you've got to get down into the next layers.
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So the neo clouds you could potentially get a little bit of access to here.
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So, you know, Fermis is well regarded.
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You can get that via some leverage into Marsfruit, which holds a stake in that business.
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I won't talk about that too much today, but Fermos is well known.
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It's one of three cloud partners here in Australia, Nvidia Cloud Partners.
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The second one's Sharon, Sharon AI, which we've picked up here at Unified, and I'd like to talk about more today because I think you'll have the option to look at it on the ASX.
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And then you're looking at other players like a Megaport.
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Megaport with their recent acquisition and capital raise has gone into um, you know, effectively the GPU rental market more as a NeoCloud.
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Now, they don't have the same sanctioning as what we've seen out of a Sharon AI or a Fermos or Reset data for context.
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Um, but they would provide plenty of leverage to this thematic.
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You can see obviously the investor appetite for their recent raise, and you'd expect potential catalysts to come.
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Sharon's the one we're really focusing, though, in Australia.
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Um, and so, you know, this is currently listed on the Nasdaq.
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It's been a strong performer on the NASDAQ.
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The reason why I hide this one is because we've picked up researchers, the first Australian broker to cover a Neo Cloud officially by Unified Capital Partners.
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Why have we gone early?
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Look, we really wanted to see the sector and really research the sector.
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We could just see the returns happening offshore.
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And it's been speculated that Sharon's likely to seek an ASX listing, and so that would be something that people should keep their eyes peeled.
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You know, Sharon itself now is is is close to a $3.5 billion US market cap.
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Um, you know, circa seven months ago, it was anywhere from $100 to $200 million.
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Um, they have recently announced the world first in becoming a partner with Nvidia to sell um to Nvidia via via an agreement where they enter the spot market for compute.
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And they've also got a range of other investors.
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So they've got strategic partnerships with Cisco, Nvidia, Oak Tree, Um, Lenovo, Bast Data.
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And it's also been recently announced that Situational Awareness, which is a very popular VC fund in the US, has also come onto the register for that business.
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So that would be, we always like to provide a potential up-and-comer that could, you know, potentially do multiples to the share price and really make waves in Australian capital markets when we come onto the podcast.
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And that would be one that we could see doing that in Australia.
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You'll you'll likely be able to, as an ASX investor, be able to have a look at that in the next few months.
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Um, or alternatively, it obviously trades on the Nasdaq, and we've got ongoing coverage on that exchange with that stock.
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Um, Jonathan, why would Sharon, uh, who is uh the name of an old girlfriend of mine, uh, why would Sharon want to list in Australia?
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I mean, it it seems to be, you know, it's a big Goliath if it came here.
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What what what's the attraction of the Australian market for it?
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I think this there's several things.
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I mean, as you say, it would be a Goliath when it comes to Australia.
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So it would be a big fish in a small pond when it comes to capital investment and dollars.
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And so being able to access Australian capital markets, I think would be very unique.
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It would also have benefits to indexation and other events.
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You know, in the US, it's probably the 500th largest company or 700th largest in Australia.
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It would, you know, go into the top 200 on those sort of metrics and and and and evidently be, you know, in the top quartile for growth and sort of outlook, I think, with some of those structural tailwinds.
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So I think would be first capital markets, but I think also, you know, in the US, what we're seeing is we're genuinely seeing an arms race of people building data centers and also doing neo clouds and investment in compute in the US.
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And in Australia, we really only have two options currently.
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We've got PermaSwitches Unlisten, we've got Sharon.
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They'll be selling to Australian customers, New Zealand customers, sovereign customers.
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So these are sovereign players.
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They've got, you know, they want to have a good percentage of their register here, they want to have the customers here, they want to be security clear here.
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These are all things that need to occur over time.
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And so I think it's only natural that we end up with three or four guys versus the 12 to 15 that we see in the US that's here.
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And so we, you know, hopefully they should be able to capture a large share of investment dollars as they as they leverage into this, they should be able to capture the strategic um angle that comes from being you know involved in co-location for neo clouds in Australia.
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And uh and look, the management teams, Australia and the you know, the deployment of all the compute that they're doing at the moment is in a variety of locations, including Next DC.
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So you can wander down and have a look at their facilities as they're being built.
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So I think as there's natural benefits rather than seeing just an offshore player coming to Australia with no Australian um lineage per se.
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I I have to say, and I don't know whether we've discussed this before.
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Um I I did a tour of the Next DC uh S3, I think it is, in our time, and which was uh very interesting to say the least.
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I I I was um yeah, I was blown away by the by the whole operation, just the redundancy they have to have in place in terms of the data centers for the critical infrastructure that they need, you know, diesel generators, uh, etc.
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It uh you can see where the money goes when they build these things.
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Um well yeah, you can just just to interrupt you on that point, it's in it's also important to understand the sky size and scale of the investment opportunity here.
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So when you look at those data centers, you know, they're they're billion-dollar data center deployments, you know, that's occurring.
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Um, when you're starting to talk Nvidia GPUs in the deployment, a megawatt of GPU compute is about $40 million US of CapEx, right?
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So, you know, what we saw uh Sharon, for example, has announced contracts in just the last three months.
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That's 100 megawatts in terms of what's what's available to be deployed.
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Next DC itself has about 350 to 400 megawatts of contracted utilization.
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So take the number, multiply it by 40.
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That's just the Nvidia compute and the infrastructure associated with it.
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It's nothing to do with the outside shell, the air conditioning, the generators, the gas turbines, the power lines, everything like that.
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So you investors need to, I think, be really across this and really be looking at you know who's going to win out of this.
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Because when you understand that that, you know, the vast majority of what goes into the data center isn't actually the data center, it's what's located in the data center.
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That's a very different um profile to say your typical building and leasing model where you know you'll fill out an office building and the like, and the entirety of the valuation of the building is in the building.
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This is very different.
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The building and the operation is important, but the billions and billions of dollars of chips, which equates to semiconductor memory, you know, semiconductor fabs, all these types of things, it's just multiple tired than that.
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And that's why we're seeing a very different investment thematicum and why the hardware shortage enabled players internationally, you know, the Korean semiconductor stocks, the memory players are all doing so well because the size and scale of that opportunity is just so much greater than a typical investment boom.
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Yeah, it it was quite um instructive for me to see how the whole data center thing works.
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And I I kind of equated it in the end when I wrote about it in the newsletter uh to uh to building a hotel and uh a hotel room, and the and the room's there, and you've got your air conditioning, you've got your power, you've got your internet, um, but the guest has to bring his own mini-bar, bed, um, has to do all the furnishings.
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It basically has to fit out the room, and that's uh very much more expensive, uh, especially when you're fitting it out with Nvidia chips, than uh the company itself, like XDC, uh just building the room for you.
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So it was kind of interesting to see in that respect.
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Absolutely.
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And and so people like Sharon Firmus, you know, like they're undergoing things in the capital markets now that are meaning that it's becoming more sustainable.
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So I'll give you an example.
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When we initiated on Sharon a few months ago, you know, we were probably viewing their ability to access debt as, you know, 10 to 12% per annum after the Nvidia contract that was announced two weeks ago and the financing, you know, we probably think that moves down towards six to seven percent.
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So you can imagine you're still buying the chips for the same price, but with the benefit of strategic partnerships, better customers, and more cash flows, you're able to drop your cost of capital, drop your debt, your IRRs start to really move forwards.
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And so I think this is what's really been underrated in the sector.
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Um, you know, the sustainability to the investment is continuing to rise.
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You do have to be watchful for when that investment starts to level off.
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But as you can see with companies like Sharon, if they've got capital, they'll have contracts, and you should expect that sector to remain, you know, very catalyst-rich would be our view.
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Um, interestingly, you mentioned earlier um megaport, which has had an astonishing run uh in the last uh month or so.
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It's you know it's gone from 12 bucks to $21, and I know brokers have got uh much higher targets, I guess, than even that.
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You are you um bullish on uh megaport?
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Yeah, so I will caveat and say we don't have official coverage on the company.
00:18:46.559 --> 00:18:56.960
Um look, we we we're of the view that um the shortage of compute means that there is going to be a real incentive price scheme occurring for a long period of time.
00:18:56.960 --> 00:19:05.200
What Megaport has announced is shorter deals um for compute, which they're able to do in conjunction with their networking and CPU business.
00:19:05.200 --> 00:19:15.519
And so now that they've got access to you know what's a reasonable amount of capital, you should see debt follow and you should see a similar pathway towards potential contract wins over the next couple of months.
00:19:15.519 --> 00:19:19.119
And so um there is no shortage, you know.
00:19:19.119 --> 00:19:27.200
One thing we we just leave, I think, the lessoness with today is that I there's no shortage of contract, contracts and compute available.
00:19:27.200 --> 00:19:37.359
So as long as the market continues to rate megaport on an EV to EBITR metric and seeing those contracts roll out, there's there's probably no shortage of potential wins that they could have.
00:19:37.359 --> 00:19:42.400
What I would caveat that caveat that with, however, is that they are taking a different model.
00:19:42.400 --> 00:19:47.359
Um, you know, it is shorter term, so we're looking more at pricing and the spot market and shorter-term contracts.
00:19:47.359 --> 00:20:01.119
And also, you know, they they do hold various distribution relationships, but they don't have the cloud partner certification, from what I can see of what the three in Australia do, which is Fermus, Sharon, and and Centuria.
00:20:01.119 --> 00:20:07.279
And so I think look to see how how they firm that up across the uh across the near term against some contract wins.
00:20:07.279 --> 00:20:15.599
So it's a roundabout way of saying um, you know, Megaport is truly one of the only ways to find some leverage to compute until Sharon IPOs.
00:20:15.599 --> 00:20:19.920
Um and so I suspect it continues to remain a strong performer.
00:20:20.319 --> 00:20:20.559
Right.
00:20:20.559 --> 00:20:22.079
Well, it certainly has, hasn't it?
00:20:22.079 --> 00:20:26.799
It's been absolute gangbusters since it raised that money and it just hasn't stopped going up.
00:20:26.799 --> 00:20:33.759
Um, what other stocks out there in the uh in the AI, tech space, etc., have uh caught your eye at the moment?
00:20:34.880 --> 00:20:36.640
Look, in Australia, it's it's hard.
00:20:36.640 --> 00:20:42.480
So we still remain second, we still remain of the view the second derivative electrification beneficiaries.
00:20:42.480 --> 00:20:49.039
So that's the data center players um that are building the data centers, anyone involved in high voltage power line work.
00:20:49.039 --> 00:20:50.960
We think gas becomes the next part.
00:20:50.960 --> 00:20:52.160
So look for gas players.
00:20:52.160 --> 00:20:53.039
It's hard to find them.
00:20:53.039 --> 00:20:55.200
We can come back on that in another con podcast.
00:20:55.200 --> 00:21:04.079
But the ones that probably stand out would be since we last came on the podcast, we like Mayfield Group NYG, which is a top three switchboard manufacturer out of Adelaide.
00:21:04.079 --> 00:21:08.640
Um, we think that business is a well-run business with a strong balance sheet.
00:21:08.640 --> 00:21:14.880
And if at any point they were to have any slower slowness in their order book, that it will just be swamped over time.
00:21:14.880 --> 00:21:20.160
So they're tendering on some well-known projects that's reasonably under the rate or I think that's a few hundred million dollars in market cap.
00:21:20.160 --> 00:21:24.799
Um, that would be one that stands out as being able to re-rate and still be discovered by the market.
00:21:24.799 --> 00:21:31.599
And the other one, um, which I think we have spoken about previously, which should be of interest, is um Tasmia.
00:21:31.599 --> 00:21:35.839
This is um now, full disclosure, we floated this company um several years ago.
00:21:35.839 --> 00:21:49.359
It's been a strong performer in the services space, but they made an acquisition of a group called Maxim Group, um, which has some leverage to s to one of the larger data center um operators in Australia in particular.
00:21:49.359 --> 00:21:55.839
Um and that business, I think, now becomes one of three of the electrical contractors in the DC space.
00:21:55.839 --> 00:22:02.799
So if you want to um have a look at a new stock that's growing really strongly, that Probably is at a big discount to the other electrical players.
00:22:02.799 --> 00:22:04.240
Um, have a look at Tasmia.
00:22:04.240 --> 00:22:12.000
If you want something a little bit smaller that's got a lot of leverage into the organic growth side of things, then have a look at Mayfield, would be the two that are really doing it there.
00:22:12.000 --> 00:22:14.720
So we we still think there's legs to go.
00:22:14.720 --> 00:22:19.680
We we would say we're we're a little bit cautious on valuations of several players in the space.
00:22:19.680 --> 00:22:20.960
That would be the only caveat.
00:22:20.960 --> 00:22:23.200
They've all had very strong runs, they've been good performers.
00:22:23.200 --> 00:22:24.799
We think the contracts come.
00:22:24.799 --> 00:22:26.799
Um, we think it's worth remaining there.
00:22:26.799 --> 00:22:32.799
But um, you know, we just know that it could be a little bit asymmetric, the risk if anything was to happen in any of these businesses.
00:22:33.039 --> 00:22:41.839
Yes, I mean eaia looking at the chart, it just you know, it's gone from five bucks to nine bucks in the in the in the blink of an eye in the last month or so.
00:22:41.839 --> 00:22:43.759
It's been extraordinary.
00:22:43.759 --> 00:22:47.279
Um, and and my g has done uh pretty similar.
00:22:47.279 --> 00:22:50.000
We should have done this podcast a month ago, Jonathan.
00:22:51.440 --> 00:22:52.720
Yeah, yeah.
00:22:52.720 --> 00:22:54.720
It's um it's it's always nice.
00:22:54.720 --> 00:22:56.640
It's obviously easy with hindsight.
00:22:56.640 --> 00:23:02.000
What I would say is that Tasmea is probably trading 20 times PE and the peers are trading 25 to 30.
00:23:02.000 --> 00:23:02.240
Right.
00:23:02.240 --> 00:23:08.880
And uh the maximum group business they bought, you know, did sort of several dozen million dollars in EBIT a couple of years ago.
00:23:08.880 --> 00:23:11.279
In the last financial year, they've just done 48.
00:23:11.279 --> 00:23:15.119
And so, you know, even for a big business, there's plenty of leverage there.
00:23:15.119 --> 00:23:21.039
And for Mayfield, Mayfield's net cash, you'll probably be likely, I think, to see an acquisition at some point and some big contract wins.
00:23:21.039 --> 00:23:25.920
And so, although they've done well, they're probably also de-risked in terms of where they go from here.
00:23:26.160 --> 00:23:27.839
Yeah, they certainly have done very well.
00:23:27.839 --> 00:23:32.720
Are there any any other stocks outside of those two that um take your fancy at the moment?
00:23:32.720 --> 00:23:35.200
We haven't spoken about zip uh for a while.
00:23:35.200 --> 00:23:38.160
That one's been kind of a bit quiet, actually.
00:23:38.160 --> 00:23:44.160
It used to be quite volatile, and it seems to be settling into a more quieter trading pattern.
00:23:44.160 --> 00:23:47.200
Um, is that um a sense that you're getting at the moment?
00:23:48.079 --> 00:23:50.319
Yeah, and I think it's probably in a good place.
00:23:50.319 --> 00:23:52.400
These are the expectations as well.
00:23:52.400 --> 00:24:00.880
You know, I think um, you know, zip's obviously been a strong performer over the last couple of years, but it's been a reasonably volatile ride on sometimes a 12-month view.
00:24:00.880 --> 00:24:10.720
And so, you know, it's we've seen effectively in the last six months, we've seen the sentiment um that turned vastly negative on the back of the Iranian war and the upticking inflation.
00:24:10.720 --> 00:24:17.200
And then we also saw bad debts rising, which the market got spooked about um, you know, in the second quarter.
00:24:17.200 --> 00:24:24.799
And so, yeah, the market, I think, has ended up in a position where they've got a reasonably low weight into the stock at the moment versus what we've seen previously.
00:24:24.799 --> 00:24:34.160
It's got their ability to re-rate up here, whereas, like, you know, perhaps nine months ago it was probably in trading in line with the peers, your affirms, your SESLs, these parts of businesses.
00:24:34.160 --> 00:24:46.640
But um, we think if you actually view the totality of what management's done over the last circuit three years, they've put the business into a very strong position to just be more sustainable, more, you know, deliver better growth.
00:24:46.640 --> 00:24:52.799
Although there was some experimentation on products which saw bad debts move around a bit this year, we think they'll be better for it.
00:24:52.799 --> 00:24:57.680
And they've got a longer growth runway with some of those new products, strategic partnerships in FY27.
00:24:57.680 --> 00:25:03.599
So we're although we sound like a broken record on this, um, we think the risk has slowed here.
00:25:03.599 --> 00:25:06.000
They've guided to bad debts lower this quarter.
00:25:06.000 --> 00:25:08.480
Um, we're very constructive on US dollar earners.
00:25:08.480 --> 00:25:12.559
We think the Aussie currency is probably likely to come under a little bit of pressure on interest rate differentials.
00:25:12.559 --> 00:25:17.200
So I think it's starting to move to a position where there should be some tailwinds for them in the US.
00:25:17.200 --> 00:25:23.119
We think expectations are in a good place, and it's trading, I think, 10 or 11 times cash earnings into next year.
00:25:23.119 --> 00:25:24.799
It appears to trading 15.
00:25:24.799 --> 00:25:30.880
And so, you know, any good news that might be done in August or at some point during the next couple of quarterly should be rewarded.
00:25:30.880 --> 00:25:36.319
So we're um we're high conviction on zip and and uh and see the management team is doing a good job.
00:25:36.319 --> 00:25:39.279
It's just taken the market a little while to work through it in the last six months.
00:25:39.599 --> 00:25:40.640
Yeah, it has, hasn't it?
00:25:40.640 --> 00:25:46.480
But uh yeah, but seeing those bad debts fall, that was certainly uh a big tick in the box, wasn't it?
00:25:46.480 --> 00:25:48.400
And they did did improve considerably.
00:25:48.400 --> 00:25:50.000
Still a big short position, mind you.
00:25:50.000 --> 00:25:52.960
So there's still obviously some unbelievers out there.
00:25:52.960 --> 00:25:59.839
Now, Jonathan, we're heading into the end of the financial year, a bit of tax loss setting around, no doubt.
00:26:00.000 --> 00:26:09.759
Um, what what are the sort of themes that you see emerging in the next uh six to twelve months that uh maybe the market maybe hasn't got its head around just yet?
00:26:09.759 --> 00:26:12.640
I mean, we're obviously AI and data centers, etc.
00:26:12.640 --> 00:26:19.200
But there are any themes out there you think, oh, yeah, this could be this could be the cabo verde of the stock market.
00:26:19.200 --> 00:26:24.400
This could be the big surprise package that uh that maybe uh we see in the market.
00:26:24.400 --> 00:26:26.240
Anything that strikes you?
00:26:27.200 --> 00:26:44.160
I think it's effectively that the Australian economy and the outlook at the moment look so bad, excluding resources and the investment associated with that in AI CapEx, that it's it's it's probably become so bad that you should start to become positive on it, would be our view.
00:26:44.160 --> 00:26:44.559
Yeah.
00:26:44.559 --> 00:26:49.119
Um and I say that, you know, obviously a little bit tongue-in-cheek.
00:26:49.119 --> 00:26:51.039
Never get too bearish on Australia.
00:26:51.039 --> 00:26:52.559
Like, you know, it's a great place to live.
00:26:52.559 --> 00:26:54.880
We're still experiencing high levels of net migration.
00:26:54.880 --> 00:27:00.799
But you know, we're coming off a weekend where we saw clearance rates um materially below where they were a year ago.
00:27:00.799 --> 00:27:09.200
You know, we're seeing obviously a real decline in consumer confidence associated with housing changes, high levels of inflation, the like.
00:27:09.200 --> 00:27:15.200
So at the moment, the market still has, I think, interest rate rises priced into our forward curve.
00:27:15.200 --> 00:27:19.039
I would say that that's likely to disappear pretty quickly.
00:27:19.039 --> 00:27:33.119
And so I think if investors could roll back to their copy book where they saw interest rates peak at where they currently have peaked, you know, several years ago, and we then saw the glide path as interest rates come off and the sectors that started to re-rate and improve from that point of view.
00:27:33.119 --> 00:27:46.640
I think investors should start to look at that copy book because we think that's likely to occur pretty quickly, perhaps not by the August results, which might show some, you know, some negative revisions and some real issues in parts of the cyclical economy.
00:27:46.640 --> 00:27:50.000
But um, we think things have materially changed.
00:27:50.000 --> 00:27:58.160
And as a result, I think it's real it's worth starting to think about what sectors can re-rate from here, and then starting to get some of your dry patter ready to accommodate them.
00:27:58.160 --> 00:28:00.799
So we've got five sectors we think can re-rate.
00:28:00.799 --> 00:28:04.799
Um, you know, that's the likes of retailers, probably the most popular at the moment.
00:28:04.799 --> 00:28:06.640
People looking to target retailers.
00:28:06.640 --> 00:28:12.480
Um, there's REITs, obviously interest rate sensitive um software, which we spoke a little bit about earlier.
00:28:12.480 --> 00:28:17.279
Um, you've got healthcare, um, and then altkys is probably the others.
00:28:17.279 --> 00:28:26.799
And so um I would just take like a more medium-term view and say that I think the dynamic, what we're gonna see is what we're seeing in December is gonna be a very different art look to what we're seeing in July.
00:28:26.799 --> 00:28:28.720
Um, and as a result, get ready.
00:28:28.720 --> 00:28:29.920
That would be my comment.
00:28:30.160 --> 00:28:30.720
Get ready.
00:28:30.720 --> 00:28:31.519
I like that.
00:28:31.519 --> 00:28:32.559
Get ready.
00:28:32.559 --> 00:28:34.640
Um interesting, isn't it?
00:28:34.640 --> 00:28:38.480
It's kind of weird because you know, I I drive a petrol car.
00:28:38.480 --> 00:28:45.359
Maybe that's um a bit of a luddite in me, but you know, the petrol price is actually lower than it was before the war began.
00:28:45.359 --> 00:28:59.599
And even if you put in the uh you know the the fuel excise, which is going to be halved um from what it is at the moment, that discount, yeah, we're still getting petrol at relatively good prices, and everyone's yapping about you know the cost of living.
00:28:59.599 --> 00:29:13.200
I all I see is lots of older Australians out enjoying the interest rate rises because they're the ones that have been, I guess, winners from all of this, which is um yeah, I guess there is always winners, there's always losers.
00:29:13.200 --> 00:29:14.400
But um, yeah, interesting.
00:29:14.960 --> 00:29:18.480
How do you feel about how do you feel about the value of your house at the moment?
00:29:18.960 --> 00:29:26.160
Um well the value of my house has probably gone down, which uh which I know, but it was it probably peaked during COVID.
00:29:26.160 --> 00:29:28.079
Um ridiculous.
00:29:28.079 --> 00:29:35.279
Uh I guess the the people that bought the house next to us, wow, did they pay a big price um during COVID?
00:29:35.279 --> 00:29:39.039
Um, as far as you know we're concerned, it's it's it's all relative, isn't it?
00:29:39.039 --> 00:29:44.079
If the value of our house goes down, then the value of the house that we buy next in theory goes down.
00:29:44.079 --> 00:29:51.920
Not that we're uh gonna be buying, it's only when you you cash out forever or your kids cash out that it becomes a massive issue.
00:29:51.920 --> 00:30:10.720
But you know, I I think we have to, as as older Australians, as as Australians that um have benefited from huge house price rises, I think we have to uh absorb a little bit of the the pain, if you like, and uh and at least give our young people a bit of a chance to uh to get on the ladder.
00:30:10.720 --> 00:30:16.880
So um I'm not too concerned, I must admit, but then we're not really looking to move anytime soon.
00:30:17.599 --> 00:30:18.079
Yeah.
00:30:18.079 --> 00:30:20.079
Look, I mean, I I would say the same.
00:30:20.079 --> 00:30:22.000
The reality is it's been good for a long time.
00:30:22.000 --> 00:30:30.400
Yeah, the the thing you do have to watch in Australia is that we have low levels of contrary to popular belief, we do have low levels of government debt compared with most Western economies.
00:30:30.400 --> 00:30:37.279
Like low our government debt compared with the US is a third of probably what theirs is to GDP or half or something like that.
00:30:37.279 --> 00:30:41.279
In Australia, that that debt sits on the private sector's balance sheet.
00:30:41.279 --> 00:30:45.839
And so, you know, at the end of the day, what's the old adage like don't fight the Fed?
00:30:45.839 --> 00:30:55.279
Well, no, I think effectively the the RBA is is probably more watchful of housing prices um than probably most of what they look at.
00:30:55.279 --> 00:31:14.400
And they wouldn't outrightly say that, but the reality is that if we're seeing a sustained environment where it's pretty negative on that stock of housing assets, but also um the debt associated there rather, I think that just comes back to our earlier comments, which is they can afford to be like that for a while, a short time, but not a long time, and then you probably see the support re-emerge.
00:31:14.400 --> 00:31:17.920
So um that'll provide opportunities in our view.
00:31:18.240 --> 00:31:28.880
Yeah, I I I you know I know that many um many people link the the house price to their overall feeling of well-being and optimism um about um their financial status.
00:31:28.880 --> 00:31:30.960
So it does have does have an impact.
00:31:30.960 --> 00:31:37.359
And you can probably, you know, we're seeing it in consumer confidence numbers, etc., um, and all the uh economic data.
00:31:37.359 --> 00:31:39.279
So it's it clearly is having an impact.
00:31:39.279 --> 00:31:48.240
But when you know when you're walking around, there's an awful lot of older people that seem to be um relatively smiley at the moment uh with uh higher interest rates.
00:31:48.240 --> 00:31:52.079
But anyway, um Jonathan, um you've been very generous with your time as always.
00:31:52.079 --> 00:31:53.759
Is there anything out there that worries you?
00:31:53.759 --> 00:32:01.440
Is there any sort of black black swan that's sailing around and you look at it and you go, Whoa, you know, we need to kind of keep an eye on this.
00:32:01.440 --> 00:32:05.119
It could it could change the the whole thing.
00:32:05.119 --> 00:32:10.559
Um is there anything out there that you think, yeah, I need to keep a watch on this?
00:32:11.440 --> 00:32:16.160
Well, the obvious one is that we need to continue to see the war rectify itself in the Middle East, you know.
00:32:16.160 --> 00:32:30.319
I think there's a throwaway comment, which there's plenty of them, of course, that came from Donald Trump over the weekend talking about how we've only got about four weeks left once we seen obviously the potential exhausting of um the strategic supplies and the like.
00:32:30.319 --> 00:32:34.400
So that's a part of the world where um it's very volatile.
00:32:34.400 --> 00:32:43.440
And so if there was a sustained outbreak in the conflict, which you know, irrespective of what people think politically, that would be something that we should be more watchful of.
00:32:43.440 --> 00:32:48.079
Um, but no, I think really the the thing probably to watch a bit of is like the US midterms.
00:32:48.079 --> 00:32:50.799
The midterms are coming up back into this calendar year.
00:32:50.799 --> 00:33:00.400
Um at the moment, we're seeing effectively um, you know, a reasonably unpopular president um from a polling point of view with Donald Trump.
00:33:00.400 --> 00:33:02.880
And, you know, they currently have some form of control.
00:33:02.880 --> 00:33:07.200
So we I think be watchful of what gets announced, when it gets announced.
00:33:07.200 --> 00:33:10.960
There's going to be some vote buying from both major political parties, I'd suspect.
00:33:10.960 --> 00:33:14.400
And that could cause the flow of investment dollars to go one way or the next.
00:33:14.400 --> 00:33:26.400
So yeah, I think if the Fed starts you know managing interest rates up in a sustained manner, which is related to inflation, the war, you know, there's there's just more broadly, I think, things to be looking at at the US from a macro point of view.
00:33:26.400 --> 00:33:33.119
Um, as to Australia, the obvious one is just how long they keep interest rates at what are effectively, you know, 20 to 30 year highs.
00:33:33.920 --> 00:33:35.519
It's interesting, isn't it, the midterms.
00:33:35.519 --> 00:33:50.319
I I you know I Donald Trump hasn't taken much interest in uh any of the uh any sides of the house at all and has kind of been on a a pathway to bypass most of the the politicians and just keep going.
00:33:50.319 --> 00:33:57.759
The only people that seem to have been able to uh to stop or pull back some of his uh his uh interesting decisions at times has been the court.
00:33:57.759 --> 00:34:02.480
So yeah, it's gonna be um it's gonna be fascinating to see, I guess.
00:34:02.480 --> 00:34:10.800
If if there's one stock that you had to if you had to look at and you go, you know what, this is my best pick at the moment.
00:34:10.800 --> 00:34:14.719
This is the one that's gonna, you know, from from whenever, from now.
00:34:14.719 --> 00:34:18.880
What is there a stock out there that you go this is this is a must buy?
00:34:20.000 --> 00:34:22.159
Is it boring to go with Sharon again?
00:34:22.400 --> 00:34:26.079
I don't know, she's my ex-girlfriend, so I can't it's hard to comment on that.
00:34:26.079 --> 00:34:27.840
Um in never in that.
00:34:28.159 --> 00:34:35.199
We think the uh we we we look for we we look for where the the earnings can really rise materially.
00:34:35.199 --> 00:34:41.360
And um, you know, we would just say that um you know Sharon with the team there with James, Nick, and co.
00:34:41.360 --> 00:34:45.360
Um, they've got the ability to win big contracts and re-rates substantially.
00:34:45.360 --> 00:34:47.679
So that would be one of our international companies.
00:34:47.679 --> 00:34:54.159
We've previously, I think mentioned other international companies, I think AMD was a pick on the podcast, yeah, which has done pretty pretty well amongst others.
00:34:54.159 --> 00:34:56.159
So I think that would be one.
00:34:56.159 --> 00:35:03.840
Um otherwise, aside from that, you know, we we remain, I think, broadly, you know, pretty invested in the electrification complex.
00:35:03.840 --> 00:35:10.400
So MYG would be the one on the smaller end of the spectrum that that we think investors have the potential to look at.
00:35:10.719 --> 00:35:11.039
Excellent.
00:35:11.039 --> 00:35:12.320
I will have a look at that one.
00:35:12.320 --> 00:35:21.039
I I got very excited about um Mass Group and um recommended that to our um newsletter members uh some time ago, and that's done very well.
00:35:21.039 --> 00:35:32.559
I I couldn't work out, you know, if the whole business is worth 1.7 billion and they were selling their building and construction business for 1.7 billion, uh the rest of it just seemed to be just I I don't get it sometimes.
00:35:32.559 --> 00:35:34.480
The market just seems weird sometimes.
00:35:34.480 --> 00:35:35.599
It just seems weird.
00:35:35.599 --> 00:35:36.639
Crazy stuff.
00:35:36.639 --> 00:35:37.920
Uh it's a good opportunity.
00:35:37.920 --> 00:35:45.760
Anyway, Jonathan, as always, thank you so much for your uh brilliant ideas and uh introducing us to Sharon.
00:35:45.760 --> 00:35:50.719
Um and um really enjoyed talking to you as always.
00:35:50.719 --> 00:35:55.199
And uh I know this is going to be a very popular podcast, so we'll get you back in a few months' time.
00:35:55.199 --> 00:36:00.480
And hopefully, hopefully we will uh we'll get Sharon to uh to listen on the ASX at some stage.
00:36:00.480 --> 00:36:01.840
That would be um that would be really good.
00:36:01.840 --> 00:36:08.639
That would give us a little bit more um optionality in terms of uh exposure to um to AI and tech stocks, that's for sure.
00:36:10.000 --> 00:36:13.519
Thanks very much for having me on, Henry, and thanks everyone for um for listening today.
00:36:13.920 --> 00:36:14.639
Always a pleasure.
00:36:14.639 --> 00:36:15.360
Thank you, Jonathan.
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Much appreciated as always.