AFIC when appropriate looks for opportunities to further strengthen its portfolio to ensure it continues to deliver superior returns to shareholders over the long term.
Portfolio Manager David Grace provides a closer look at some of the companies recently added to the AFIC portfolio and those where additions were made to existing holdings.
Recent market fluctuations have reduced previously very high valuations for some companies, making them more attractive for long-term investment. We have taken advantage of lower share prices to invest in several companies where we see good long-term value, including retailer JB Hi-Fi and property developer Mirvac. We have also increased our stakes in toll road developer Transurban and New Zealand airport operator Auckland Airport.
JB Hi-Fi and Mirvac are currently exposed to a challenging consumer environment, with investor sentiment concerned about the impact of potential future interest rate rises. We believe JB Hi-Fi and Mirvac are very high-quality companies that are attractive, long-term investments. Both companies are extremely well managed and well capitalised with strong balance sheets. We’ve evaluated them for some time and waited for their respective share prices to provide an attractive entry price.
We’ve increased our holdings in Transurban and Auckland Airport, seeing disruption brought on by the COVID-19 pandemic as temporary. Both companies have highly strategic assets that should produce good returns over the long term.
JB Hi-Fi will likely retain its strong position
As the market leader in consumer electronics in Australia, slowing consumer sentiment from higher interest rates has weighed upon the share price in recent months. However, the company has a long history of strong management which is a key factor in our assessment of companies.
We believe there’s opportunity for JB Hi-Fi to generate meaningful growth over the long term, as its products remain essential for many consumers. Particularly as the replacement cycle for many of its products continues even in a more difficult environment.
Mirvac has a portfolio of high-quality assets
Mirvac’s management team has executed well on its strategy to exit lower quality assets and recycle capital into development of high-quality real estate across residential, office, industrial and retail.
During this transition, the company maintained a strong balance sheet which is able to fund future development opportunities.
While rising interest rates may pressure real estate capital values, Mirvac’s currently trading at more than 20% below net tangible asset (NTA) backing. We consider this an attractive price given the high-quality portfolio where tenant rental demand has historically proven most resilient.
Transurban and Auckland Airport have highly strategic assets
We added to positions in Transurban and Auckland Airport when they were being sold off amid fears of COVID-related disruption. Recent declines in the valuations of both companies have provided opportunity to increase our holdings, as we believe both are in a strong position to create value over our long-term investment horizon.
Both companies have highly strategic assets that are hard to replace, providing a platform for meaningful earnings growth over the long term. Transurban has a significant pipeline of brownfield development projects while Auckland Airport has a meaningful land bank for future development.
Conclusion
JB Hi-Fi, Mirvac, Transurban and Auckland Airport possess attributes that AFIC desires in its investments – high-quality strategic assets, run by capable management teams, with strong balance sheets able to fund future growth prospects.
Importantly, once we get beyond COVID disruption, we believe these companies will deliver a steady flow of income over the long term.
