EQT operates in a favourable industry that has consolidated over the years to just two sizeable players, each of which has its specific focus. This has created a rational market with highly sticky and recurring revenue streams.
We view the current earnings base as masking the business’ true earnings power, with its recent acquisition of Australian Executor Trustee likely to deliver synergies beyond current targets. The announced exit of its loss-making UK and Ireland business will improve group profits by over 10 per cent.
Despite all this, the stock trades on a financial year 2025 price-to-earnings ratio of 15 times with earnings per share growth of 15 per cent a year FY23 to FY26.
What piece of advice has helped inform the way you invest?
Letting your winners run and cutting your losers is one key lesson I have learnt over the years. While valuation is a crucial factor in determining portfolio construction, being overly rigid on valuation and constantly trimming your winners by definition results in a portfolio with a smaller weighting to winners, and a higher weighting to market performers or losers. US investor Peter Lynch referred to this as cutting your flowers and watering your weeds.
Stocks that consistently perform well have a knack of continuing to perform strongly, whether that be due to strong management, the business model, the industry structure, or finding ways to generate high incremental returns on capital. These stocks tend to outperform market expectations time and time again, which over many years can compound into a share price that may not have been feasible at the time of the original investment.
What is your take on the market at the moment when it comes to investing in small caps?
The past two years have seen small caps underperform large caps by around 20 per cent and so there is an understandable expectation in the industry that this will revert over time, resulting in small cap outperformance. This phenomenon is not unique to Australia with US small caps also materially underperforming large caps.
Given we are not macro investors, however, we tend not to take an aggressive stance on the top-down trends and instead focus on bottom-up stock picking, ensuring that each stock in the fund has, in our view, the likelihood of delivering us a more than 10 per cent per year return over time.
Which stock in your fund is the most undervalued by the market?
It may sound strange given News Corp rose 38 per cent in 2023, but we continue to see it as materially undervalued. It has changed its spots significantly over the years, in large part due to the extraordinary growth trajectory of Realestate.com.au (which it owns 61 per cent of), a well-executed acquisition strategy in Dow Jones, and the structural decline of the traditional News Media business (which now generates less than 10 per cent of group earnings).
To highlight the value on offer, we estimate that Realestate.com.au generates 26 per cent of the company’s economic share of earnings before interest and tax, yet based on the REA share price, it accounts for 67 per cent of News Corp’s market capitalisation. If we exclude REA from the equation, the rest of NWS businesses (Dow Jones, Move, Harper Collins, Foxtel and News Media) currently trade at an aggregate 66 per cent valuation discount to their respective peer groups.
What’s your favourite local bar or restaurant and your go-to order?
It may reflect my home town bias, but the Railway Club Hotel in Port Melbourne is my favourite. I can’t go past the eye fillet with sides of mashed potato and roasted carrots.