Writing in its September 2018 performance report, the Firetrail Australian High Conviction Fund has named three ASX 200 shares to buy.
The Fund returned minus 0.39 per cent for the month ending 30 September 2018, outperforming the ASX 200 accumulation index by 0.88 per cent, benefiting from defensive positions in a falling share market including Telstra (ASX:TLS) shares and Tabcorp (ASX:TAH) shares.
Woodside Petroleum (ASX:WPL) shares were one of the largest contributors to fund performance. The fund is positive on the company, and positive on the outlook for the oil price.
Woodside is Australia’s largest oil and gas producer, and the fund’s investment thesis is built on the material value of two assets that today produce nothing for Woodside shareholders, namely Scarborough (discovered 1979) and Browse (discovered 1970 – 2000).
The fund thinks these assets are set to be commercialised over the next eight years. With the North West Shelf LNG project facing production declines, Firetrail says the low-cost infrastructure already in place would otherwise be missing out on returns.
“The economic rationale is compelling… As the market gains confidence in the value in Scarborough and Browse, we believe Woodside is well placed to perform well for investors,” says the fund.
Sims Metal Management (ASX:SGM) shares have been a poor performer over the past quarter on the back of big picture concerns around slower Turkish economic growth, US-Turkey tariff wars and Chinese environmental crackdowns.
Compounding the woes for the scrap metal recycling company was a recent earnings downgrade on the back of poor performance in their non-operated joint venture, Sims Adams Recycling (SAR).
Firetrail says the rest of the business is performing well, saying even on the downgraded earnings, first quarter earnings are expected to be 35 per cent higher than the prior year.
“With greater than 10 per cent of the Sims Metal Management market capitalisation in cash, a 13x PE ratio and organic and inorganic growth options, Sims continues to represent excellent value despite recent setbacks,” says the fund.
During the month the fund said it took a position in Link Administrations Holdings Ltd (ASX:LNK).
While facing some headwinds in the funds administration division, including changes that will lead to less superannuation accounts in the market, Firetrail believes the worst-case scenario is unlikely to come to pass.
The fund says that while the market is correctly focusing on the negatives in funds administration, it believes the European business will represent more than 40 per cent of earnings by 2020.
“We believe Link is set up to generate strong earnings growth for many years to come. In a market where many growth stocks are trading at material premiums to their history, Link is trading close to a market multiple in FY19 and presents a terrific investment opportunity,” says Firetrail.
