By Gus McCubbing
From car dealers, to education providers and pizza makers, investors see plenty of opportunity to pick up stakes in good companies for low prices.
Four years ago, IDP Education shares were on their way to nearly $40. Now, the ASX-listed student placement and language testing business trades for less than $5, after enduring a long post-pandemic sell off and getting caught in a global clampdown on international student enrolments as governments in Australia, Canada and the United Kingdom set tough limits.
Despite the steep share price decline, IDP remains one of the most heavily shorted stocks on the market. But not everyone is so pessimistic.
Forager Funds chief investment officer Steve Johnson, buoyed by the Albanese government’s move to allow an extra 25,000 students into the country next year, says it’s time to buy into the “heavily beaten up stock”.
Johnson’s fund has already had a good year, returning 35.5 per cent in the year to August and beating the ASX Small Ordinaries Index by 23.8 per cent.
“This is a wave that will eventually pass,” Johnson said, when the view was put to him that large numbers of international students may push prices and rents up for locals.
Johnson has also recently added a small holding in OFX Group.
The ASX-listed foreign exchange and payments group has rallied by more than 10 per cent since sinking about 30 per cent in a single day in May and dipping well below the $1 mark for the first time since it listed in October 2013. That was after the release of results that missed on nearly every key metric.
“OFX and IDP are both small for us, but they’re heavily beaten up small caps that we think might have some ability to recover,” Johnson said. “There’s plenty of former darlings in the small cap space that are getting interesting. It’s a prospective environment given how expensive things are at the larger end.”
IDP, which will deliver its annual earnings on August 28, was named by Morningstar as one of the best small cap ideas for August and given a fair value estimate of $17, implying underlying growth of nearly 75 per cent.
Morningstar analyst Shane Ponraj said the market had a “short-sighted” view of the stock, driven by declining volumes and regulatory uncertainty. “We agree that the short-term outlook is soft … but we expect the firm to continue taking market share as the industry prefers quality operators like IDP,” he said. “We see compelling long-term value given foreign-student caps are temporary, and in response to temporary cyclical concerns.”
Other beaten down ASX stocks tipped to bounce back by Morningstar include telecommunications company Spark NZ, which last week sold a 75 per cent stake in its 11 data centres to Pacific Equity Partners for $532 million in cash, and Domino’s Pizza. The latter dropped nearly 16 per cent in a single day in July following news its chief executive Mark van Dyck was stepping down, having been in the role for less than a year.
Morningstar estimates that Spark NZ shares are worth $3.20, suggesting growth of 40 per cent if they reach that level, and ascribed a $46-per-share estimate to Domino’s Pizza, implying the stock can more than double.
Another fallen stock favoured by Morningstar is Bapcor, the owner of some of the country’s best known car parts retailers. Its share price plummeted in July after the company warned investors it faced weaker than expected earnings, revealed big write-offs and announced the exit of three directors. Having peaked at $8.35 in July 2021, the shares are now available for less than $4.
Atlas Funds Management chief investment officer Hugh Dive likes the stock, calling it a “prime candidate for a rebound” if it can properly explain its leadership changes and report stronger results in its upcoming annual results. Morningstar has a fair value estimate on Bapcor of $6.
Morningstar equity analyst Angus Hewitt said that although the company faced ongoing challenges, including a slowdown in discretionary spending and the rapidly increasing popularity of electric vehicles, he believed the auto parts sector could recover.
Wilson Asset Management investment analyst Sam Koch likes a different automotive business, Peter Warren, which has come off 40 per cent since September 2022. He tipped the second-largest car dealership group on the ASX would follow the rapid rally of its larger rival, Eagers Automotive, after the latter’s share price doubled in the past year as interest rates fell.
“The auto dealer cycle has decisively turned,” Koch said. “Three interest rate cuts this year have already lowered inventory holding costs and ignited consumer demand, with any further cuts set to accelerate these gains.”
Ten Cap founder and lead portfolio manager Jun Bei Liu’s two picks from the ASX bargain bin are glass bottles and cans maker Orora, and Ampol. The latter, one of the country’s largest petrol and diesel businesses, agreed on Thursday to acquire EG Group’s Australian service station portfolio.
Liu said the $1.1 billion purchase, which triggered a share price bump on Friday, would add scale and margin uplift potential. “It’s a buy,” she said.
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