Leanne Pan is portfolio manager of Prime Value Asset Management’s Equity Income Fund. The Melbourne-based firm oversees around $1.2 billion in assets.
Which stock in your fund is the most undervalued by the market?
Cedar Woods Properties is an interesting one. It’s based in Western Australia but has mixed projects of apartments, townhouses, houses and commercial buildings across four states. Yes, it is a cyclical story, it is in property development, it is small, with a market cap around $500 million – these may all be reasons to be cautious! But there are some good reasons to own the stock, and it does not have much broker coverage.
“Investment is a combination of art and science”: Prime Value’s Leanne Pan. Eamon Gallagher
CWP recently delivered a strong full-year result that exceeded expectations mainly because of strong sale prices. Currently, the company is in what we consider a sweet spot where demand for housing remains high, and the key drivers – population growth, strong enough economic conditions, low vacancies in rentals, and substantial housing shortages – persist.
Management is confident in providing an earnings growth guidance of 10 per cent due to high visibility of numbers for the 2025 financial year. This equates to a price to-earnings ratio of 10 times and a fully franked dividend yield of circa 4.5 per cent. Its balance sheet is strong with low gearing, enabling them to acquire sites for future development.
Where are the dividend traps that investors should be wary of?
We would argue that instead of just looking at dividend yield, it is better to take a total return approach combining both dividend and capital growth for investment. Dividend yield per se can be “manufactured” using financial engineering.
That said, investors should be wary of potential dividend traps from cyclical stocks, smaller companies and resources companies. They may pay a good dividend one year but then struggle to deliver after that. We often see smaller stocks fall in price a lot when they go ex-dividend, so this is another potential trap to watch because the shares may not rebound as you expect.
Which stock in the fund has the most near-term upside?
It is always difficult to predict short-term moves, as there are many factors that affect investment sentiments. “Mr Market” is not always rational.
As an equity income fund, our exposure to the technology sector is rather limited, but Telstra gives us some leverage in that space. All technology requires secure, reliable connectivity, which Telstra is well-placed to deliver. Mobile competition is becoming more rational; hence pricing power is restored, and subscriber growth continues in postpaid and prepaid services. There is potential for Telstra’s InfraCo to unlock its value in the long term. As its free cashflow improves, we could potentially have a higher dividend in the coming years.
Best piece of investment advice?
I like the Danish poet and philosopher Piet Hein’s description of the road to wisdom from his poem of the same name: ‘To err and err and err again – but less and less and less …” Hopefully, with experience we can embody this wisdom as investment managers.
Investment is a combination of art and science, with an intuitive human element and numbers. Good investment ideas are hard to come by, and it is important to give them time to work
There were several companies with excess franking credits that paid special dividends in the reporting season. Is there a company you own that might surprise in the near future?
One company is Super Retail Group, which owns a portfolio of well-known consumer brands including Supercheap Auto and Rebel with a strong omnichannel presence. It has clear principles in relation to dividends and capital management. There is a payout policy- typically a range based on underlying earnings, fully franked. Its balance sheet needs to maintain conservative credit metrics.
They have a good franking credit balance, and have declared special dividends in the past two financial years.
The early trading indication for FY25 has remained positive, as Club membership continues to gain traction and drive sales. They recently called out a higher capex requirement for its store development program, a new distribution centre, and other digital capabilities. The consumer outlook is uncertain, but we believe they are in a good position to continue their capital management initiative at year-end.
What’s your favourite restaurant and go-to order?
Banh-mi is a favourite of mine! Think warm crusty rolls with crispy pork, chilli and lots of salad. I recently had a great one from Minh Duc Bakery in Richmond, Melbourne.
Any podcasts or TV shows that you recommend?
I have recently come across an Aspen Institute interview with Bill Browder (a fund manager turned political activist) discussing his book Red Notice: A True Story of High Finance.
Murder, and one man’s fight for justice – rather fascinating yet sobering, especially in the current geopolitical environment.
Source: The Australian Financial Review