Key points: 

  • QBE Insurance seen as undervalued with a P/E ratio of less than 9x 2023 earnings.
  • Woodside a top pick due to its strong balance sheet, strong dividend and low production costs.
  • Costa identified as having a great growth portfolio.

Transcript:

Dr Philipp Hofflin: We like QBE Insurance (QBE), and we like that stock mostly, again, because of the price. It's on a very low multiple. It's on less than 9x 2023 earnings. Behind that there is a dynamic that we invest in this stock for the global premium rate cycle. There is such a thing as a global premium rate cycle. We get periods where premium rates soften for extended periods and then due to large cap costs or claims rising too much, you get what's called a hard market and premium rates rise very rapidly. The last time we had this was following World Trade Center in the early 2000s. And the cycle turned in 2018-2019 and prices have risen very significantly. The nature of insurance accounting means that that flows only through the P&L with a lag. And we're only really starting to see that in the P&L in '22, and we'll see more in '23. In addition to that, we now have rises in interest rates and inflation. And when it comes to interest rates, insurance companies are beneficiaries of this because you'd be aware that an insurance company makes its money really, if you will, from the free float of money that it holds because people prepay their insurance, and the claims are paid later. But QBE holds something like US$27 billion of free float and they invest this. So, given the valuations, we remain very happy with that stock.

Next, I should probably mention Woodside Petroleum (WDS). We had a very large energy position going into '22. A lot of the stocks have gone up a long way and some we have sold down very heavily because the prices have been so strong. We still like Woodside. Today, you can buy this stock at a price lower still than just before COVID in February 2020, despite the fact that the prices they are getting are very, very high. I mentioned earlier, the Asian gas price is at the equivalent of over $200 a barrel oil. It's a company that underwent that merger with BHP Petroleum last year, and that was fully equity funded. So, it has a fortress balance sheet. It has very little debt compared to its cash flows. It pays you something like a 9% dividend yield at the moment. And it's a company that has a breakeven cash cost of production of about $12 barrel of oil equivalent, and the price for their sell is $200. So, it's a low-cost producer. They do have some growth projects. So, some of that balance sheet will be deployed. But you'd be aware that in Asia gas is a growth market. China alone wants to increase gas in its energy mix by 80% this decade. They're doubling their import terminals on the East Coast through 2025. We think it's a stable, pretty safe stock. One for the bottom drawer, if you will. There are some risks because we may get that U.S. recession and now, China has to go through its COVID outbreak and that might be quite bumpy, but they will eventually return to the world's energy market and there are about 2 million to 3 million barrels a day that are not being used because China is in lockdown. Eventually that demand will return. So, the stock has gone up a fair bit, but we still like it.

And then, just one that's perhaps a bit more volatile, a smaller stock, Costa (CGC). You know this is the company that sells you blueberries and the like, raspberries and then various fresh fruits around the world. It's had a bit of a rough time and profit warnings because with this it comes you take agricultural risk. Things are too wet or too dry or too cold or whatever, you're going to get a bad season and sometimes it can be even worse when you get a really good season, then prices are low. So, you do have an agricultural risk in that company. But it has a great growth portfolio. They've invested very heavily in Morocco to export berries to the European market very early in their season. And in mainland Europe, berry consumption is still much lower than it is in Australia and the U.K. So, there's probably some catch-up. Berries are very healthy. They're high-quality health food. And they have investments in China, and China, again, as Chinese people, particularly the urban middle class on the East Coast become wealthier, their berry consumption is rising at double-digit every year, and is probably going to do this for a fairly long time yet. And they have invested quite heavily in production in China. So, it is not just an agricultural stock, but it has an international growth portfolio, if you will. On about 13x. Has some debt, but it's quite manageable compared to the size of the company. So, somewhat more volatile, but perhaps a high risk, high return type of investment.