The number one building repair and restoration insurance business in Australia ticks a lot of the buzzwords that fund managers like to promote: founder-led, strong organic growth, sector-leading margins, international expansion into a big market, structural tailwinds and a strong balance sheet. All these things are true, yet the stock is down 6% YTD in a rising market and now sits nearly 40% below its all-time high, trading at the lowest PE it’s been on in nearly 5 years (25x). This was (and still is) a well-loved stock, and rightly so. The CEO owns almost 50m shares/17.8% of the company, with the top 5 shareholders including The Capital Group (the major seller of FMG on Monday), Soul Patts, Milton and QVG Capital, which equates to a strong share register.
However, the re-rate from the $9.23 high back in mid-2022 has been a result of slowing growth, largely due to lower catastrophes and the stock cycling off an incredible period that saw the share price 5x from 2019. This happens in share markets, where overexuberance gets met with sharp realities – and we now have a quality company back at a level where we think the risk to reward stacks up.
We describe our investment strategy as top-down meets bottom-up, and this stock highlights our process well. At a macro level, we believe the backdrop for the business will improve as interest rates fall, meeting ongoing structural tailwinds of more climate-led catastrophises, rising building costs promoting restorations over new builds, and higher-density living. From a bottom-up perspective, JLG has expanded nicely in North America, which now accounts for ~20% of its revenue, and as their penetration increases in that market – which takes time – the growth in earnings should again re-accelerate.
- Our caution previously has been around valuation, which time and the share price have corrected. While it’s not cheap, we think there is a good chance that earnings will grow strongly over the next three years.
MM is bullish and now long JLG in the Emerging Companies Portfolio
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