In this week’s video insight Roger discusses why calendar year 2023 could be a good year for investors. Disinflation has always been positive for stocks, particularly innovative growth stocks. And guess what? We’re in a disinflationary phase right now. Roger shares three transport companies that we currently have a positive view on including Transurban (ASX:TCL), Auckland International Airport (ASX:AIA) and Alliance Aviation Services (ASX:AQZ).
Hi, I’m Roger Montgomery from Montgomery Investment Management, and welcome to this week’s video insight. We’ve just hit May. So, I thought it might be worth reviewing our November and December forecast that 2023 could be a good year.
Well, so far it is. The NASDAQ is up almost 18 per cent. The S&P 500 is up just over 9 per cent. And both the ASX 100 and the ASX 200 have risen about 5.5 per cent, and that’s excluding dividends. And there doesn’t seem to be much that’s likely to upset the apple cart. Disinflation has always been positive for stocks, particularly innovative growth stocks. And guess what? We’re in a disinflationary phase right now. Sure, there’s fears that interest rates might stay high, that inflation might be persistent, that we might get a recession, but looking at the facts that are not looking at forecasts, it seems all is on track for a good year for 2023. And if the market does fall, for example, because the world does slip into a recession, well, you can be sure that interest rates might be cut or we might see quantitative easing resume at pace, both of which, of course, would be positive for equities.
Given that background, are there any stocks at the moment that are worth investigating? Remembering, of course, that you need to seek personal professional advice before engaging in any securities transactions, I thought it might be worth picking on a theme because there are three companies that have our interest at the moment that are in the transport sector. The first one is Transurban (ASX:TCL). It’s had a good run, but investors probably don’t quite understand the impact of the company hedging its significant debt at low interest rates last year, combined with revenue that is going to grow at a minimum of 4.25 per cent or consumer price index (CPI).
Now, because the way the revenue is structured and because of the structure of the company, those CPI increases, remember CPI rose above 7 per cent last year, won’t totally feed through for 18 months. So there’s potentially 12 to 18 months of revenue growth that needs to be factored into share prices that we don’t think are fully factored in just now. 68 per cent of the company’s revenue rises at CPI, and 27 per cent is fixed at 4.25 per cent increases. The combination of that very large amount of debt being hedged or the interest rates being fixed at low rates, and that rising revenue growth is going to be very positive for the company’s margins.
Another privileged asset owner is Auckland International Airport (ASX:AIA), the owner of the Auckland International Airport, and the owner of a portion of the Queenstown Airport in New Zealand. We think the combination of rising transport numbers or rising traveler numbers, along with the optionality embedded in the company’s property portfolio is not fully reflected in share prices at the moment.
And finally, Alliance Aviation Services (ASX:AQZ). This is a business that you might be surprised I’m even mentioning knowing that I don’t like airlines, but this is an airline that’s been able to generate very high rates of incremental return on capital of around 30 per cent. How do they do it? Well, they buy planes from airlines or the sector at large when it’s in distress or when those airlines are in distress. It manages to buy those planes very cheaply and wet lease them at a very high rate of return. Now, this is a business that has been underbid. Qantas bought 19.8 per cent of the company and made an offer to buy the whole company at $4.75, but of course, it was blocked most recently by the ACCC. Qantas would like to meet with the ACCC, but the ACCC isn’t budging until Alliance and Qantas decide what they’re going to do next. It’s probably not unreasonable to expect a challenge to the ACCC’s decision.
But let’s not get too caught up with the Qantas bid. Gary Rollo and Dominic Rose who run the Montgomery Small Companies Fund own it because of its status as a high quality growth company that they believe is worth significantly more than the current share price.
So there’s three stocks for you to go and investigate. Seek personal professional advice, remembering that our outlook for 2023 remains positive. I look forward to being in touch with you again soon. In the meantime, continue to follow us on Facebook and Twitter.
The Montgomery Funds own shares in Transurban, Auckland International and Alliance Aviation Services. This video was prepared 02 May 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.