Fairview Equity Partners
Disruption is something we hear about every day. As small cap investors, there’s not one industry that’s not been or won’t be impacted by technological and social change.
There are three markets in particular that are going through significant change at the moment: power, telecommunications and retail. The key is being on the right side of change, and as stock pickers we ask the question, how can we make money from this change? Here are three short examples.
We’re surrounded by electricity infrastructure. Some is new, like the growing number of solar and wind generators. But the majority are legacy networks that are complex and becoming more and more unreliable. This complexity means a reduction in stability. Blackouts and resultant business disruption will have a huge political cost to state governments as they will be held responsible by voters. And with a long hot summer approaching, blackouts will require urgent political action and these higher margin projects will be fast tracked past the usual bureaucracy.
The companies who are innovating and helping to solve the coming electricity supply problem tend to be found in the small caps space and these are companies we’re interested in. RCR Tomlinson Limited is one great example of a business that has exposure to solar project construction. The group has recently delivered two large projects and we’ve been buying their stock since 2016. Downer EDI Limited is another business we own that has strong rail and solar prospects.
We’re starting to hear that the NBN could already be outdated and hence be superseded by the faster 5G network. Being able to download a movie in a couple of seconds is what consumers expect these days. So how can we benefit from this? Do we give up on the NBN completely and look elsewhere? No, because the political will is there and it’s going to be built or the government of the day will be highly embarrassed. So we want to hold in our portfolio the companies who are building the NBN network and will then roll straight into building the coming 5G network.
The problem (or opportunity) with 5G is that it has very short wave length and the signal degrades rapidly. This means you need more towers and they need to be closer together, compared with the current 4G and 3G networks. There are big 5G network builds on the immediate horizon – up to four of them in Australia. For us, Service Stream Limited is an excellent way to invest in this technology revolution. Service Stream provides construction and maintenance services to telcos.
The retail market is one of the most talked about in terms of disruption, and we can see the impact digital is having on our high streets and in our shopping centres every day. The market is waiting in anticipation to see the Amazon effect. Combine this with rising interest rates and higher energy bills, it’s fair to say the golden age of high retail margins is over.
With 8% of the S&P/ASX Small Ordinaries Index being retail focussed, from our perceptive we believe the best way to take advantage of this type of disruption is to avoid it. We’re underweight the retail sector but have a good size holding in Kogan.com Limited, an online sales engine which has been one of the best of the retailers in its stock price performance over the past six months.
While it’s important to be aware of mega trends and market disruption, we are stock picking investors and our goal is to find good, well-managed companies at the right valuations.
To find out more about Fairview and how to invest, go to nabam.com.au/fairview or speak to your financial adviser.
This publication is provided by Antares Capital Partners Limited (ABN 85 066 081 114, AFSL 234483) (ACP) a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (‘NAB Group’). Any references to “we” include members of the NAB Group. An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.
This information may constitute general advice. It has been prepared without taking account your objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.
Securities mentioned in this article may no longer be in Fairview’s portfolio.
Any projection or other forward looking statement (‘Projection’) in this document is provided for information purposes only. No representation is made as to the accuracy of any such Projection or that it will be met. Actual events may vary materially.
Any opinions expressed in publication constitute our judgement at the time of issue and are subject to change. Neither ACP nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy, not accept any responsibility for errors or omissions in this publication.
Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. Any projection or other forward looking statement in this publication is provided for information purposes only. No representation is made as to the accuracy of any such projection or that it will be met. Actual events may vary materially.
This information is directed to and prepared for Australian residents only.
ACP may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.