Pengana tips this tiddler to grow into a ‘multibillion-dollar’ stock

Jeremy Bendeich is co-portfolio manager of the Pengana High Conviction Equities Fund. The Sydney-based firm oversees about $3.5 billion in assets,

What is a stock you like (that most) people haven’t heard of?

ASX-listed Brazilian Rare Earths has the potential to be the largest and richest rare earth reserve globally.

The rare earth sector is out of favour due to weak prices, as with many other commodities linked to China. However, we expect electric vehicles, wind turbines and robotics, which account for 25 per cent of the market, to grow rapidly, driving demand for lightweight motors enabled by rare earths.

China has also enacted policies to tighten supply and boost prices.

We expect its shares to rise during the year as the company releases drilling and reserve updates.

What’s your view on investing in this current environment?

Our portfolio is highly concentrated and is built from bottom-up stock research that applies during all economic conditions. Most of our stocks have value drivers which are uncorrelated with the cycle. For example, successful clinical trials, scaling new technologies, or successful exploration results.

Notwithstanding this, rising interest rates had a large negative impact on biotech and unprofitable companies in the two years prior to November 2023.

An environment where interest rates have plateaued and are likely to fall should be positive for the stocks we hold.

In addition, all of our companies have balance sheets and access to capital to fund themselves past significant valuation catalysts.

Which stock in your fund is the most undervalued by the market?

Dual-listed IperionX is the largest stock holding in our portfolio.

Nearly 80 per cent of the world’s titanium metal is produced in China, Russia, Kazakhstan and Ukraine. For supply chain security reasons, exacerbated by Russia’s invasion of Ukraine, the US government is keen to re-establish titanium production in the US.

While titanium cannot currently be recycled, IperionX’s process makes this possible, which allows it to draw on huge stocks of cheap scrap. Low-cost titanium
could potentially displace other metals such as stainless steel and aluminium, which are huge markets.

The company is testing their recently built production plant, and we expect first production in the last quarter of 2024 and then rapid scaling of output on customer
contract wins from 2025 onwards.

The company can generate many hundreds of millions [of dollars] of earnings with relatively low capex. We expect it to grow into a multibillion-dollar market cap in
the next three to five years, versus a current market cap of circa $600 million.

What did you make of the US reporting season? Name a stock in the portfolio that outperformed your expectations.

The US reporting season demonstrated strong ongoing revenue and earnings-per share growth for the “magnificent seven”, and they continue to be a crowded trade
as investors seek growth.

Cyclicals, on the other hand, are struggling from the impact of high interest rates and the rising cost of living. The market is not sure if the investment in artificial
intelligence will continue to deliver earnings surprises for affected companies.

We are invested in Coherent, which makes opto-electronic components and has outperformed expectations, but there are some good reasons why it may have further to run.

We invested because we expected demand would increase from AI, and the end markets for other applications would start to rebound from a cycle low.

The most interesting thing on their earnings call was that they mentioned pricing discipline, which suggests that margins can expand due to limited capacity in some of their product segments. This rebound is not fully reflected in earnings forecasts or the current multiple.

What influences your approach to investing?

I like to follow good management in good industries and stick to companies I can understand. Over the journey I have seen how important it is to roll the sleeves up and delve deep into research to improve understanding.

For example, we have spent a lot of time researching radio-pharmaceuticals and have had great success in companies including Telix Pharmaceuticals and Clarity Pharmaceuticals, both heavily focused on prostate cancer, and recently a new addition, OncoSil, a radiation therapy to treat pancreatic cancer.

What’s your favourite local bar or restaurant and your go-to order?

Uncut Deli in Bondi has some of the freshest seafood I have ever eaten.

My go-to meal involves sharing their prawn focaccia, fresh oysters, sashimi and a Greek salad.

Any podcasts you that you would recommend?

The Rest Is History is my favourite podcast. When I visited Europe with my family we listened to it between different historical sites.

View the original AFR Article HERE.