Allan Gray blasts Lendlease, finds value in Orora

What to do when the markets look historically expensive? Allan Gray is finding value in package makers such as Orora and telling Lendlease management to shape up.

Data produced by Allan Gray showed valuations for nearly all sectors except for utilities, energy and materials are significantly above historical forward price/earnings ratios.

It’s a delicate balance trying not to seem gloomy when you want to encourage investing, and yet you see clear signs the market is too expensive.

And so it appeared for the Allan Gray and Orbis annual investment forum, where 100 or so morbid candles backlit Allan Gray chief investment officer Simon Mawhinney as he took umbrage at the mismanagement of Lendlease, talked up the promise of packaging company Orora and shared data on the how high above the normal shares are currently trading.

“I’m a bit worried about where we are in the market’s price cycle today,” Mr Mawhinney said on the sidelines of the forum.

“The market is more expensive than it’s been on average over the last 25 years and then there is some fragility in the actual earnings themselves. The actual multiple that you pay for the actual earnings next year could be quite high.”

Data produced by Allan Gray showed valuations for nearly all sectors except for utilities, energy and materials are significantly above historical forward price/earnings ratios, based on weekly weighted average sector valuations since 2000.

The information technology sector ranked the most expensive, with a median forward P/E ratio of around 120 times, though Mr Mawhinney pointed out this sector was more difficult to get a long term average on in Australia.

The healthcare sector was the next most expensive, at around 36.4 times, followed by communication services, around 27.4 times.

Mr Mawhinney described some industries as “eye-wateringly expensive across several valuation metrics,” and warned “the price you pay for shares is paramount” to future returns.

Allan Gray is overweight in the three sectors that are trading at a discount to historic valuations, being utilities at 14.4 times, energy at 11.5 times and materials at 11.9 times.

The fund manager did not shy away from recent bad bets. AMP, which Allan Gray has previously pulled at as being one to buy, fell into the bad bet category.

More current is Lendlease, the troubled property developer that is under pressure to exit its under performing global operations.

Lendlease on Wednesday confirmed that chairman Michael Ullmer would step down at the company’s annual general meeting in November after activist shareholders called for the company to wind back its global footprint.

Allan Gray chief investment officer Simon Mawhinney.

Mr Mawhinney said he has met with embattled property ahead of its investor meeting next week, to advise on “what rational people should do.”

“They are too arrogant by half and they’re trying to take over the world; they’ve expanded into geographies in which they have no competitive advantage,” said Mr Mawhinney.

“They’ve allocated $4bn of shareholder capital to those geographies and collectively made zero for shareholders.”

Mr Mawhinney said Lendlease chief executive Tony Lombardo needed to “move fast” to “exit those geographies, come back home and give us our $4bn (otherwise) get someone else to do your job.”

But it wasn’t all black clouds.

The chief investment officer picked ASX-listed Orora, comparing the packaging company to a company that uses its boxes, pizza-maker Dominos.

The two companies have similar market capitalisations but Dominos does it with annual revenue of $2.5bn whereas Orora pulls in $5.5bn.

Domino’s is almost three times as expensive as Orora, trading at 31 times compared with Orora’s 12-13 times earnings.

“That’s all fine if you’re one of those companies growing your earnings very fast … but Domino’s hasn’t grown its earnings in the last seven years, whereas Orora has slightly grown over the last seven years despite having sold big parts of their business. There is a big dislocation between what the market is happy to pay for a company like Domino’s versus Orora and that’s the reason we are in Orora and not in Domino’s.”

While the Australian market looks expensive on Allan Gray analysis, global investor Orbis flagged concerns about the concentration of global equities.

Orbis investment specialist Eric Marais said investors were “blindly following the world index at a time when it is highly concentrated in huge companies.”

Mr Marais said the so-called magnificent seven – being Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla – account for 17 per cent of the world index; 31 per cent of the world index is in tech stocks, and that 64 per cent are US domiciled companies.

“The question investors should be asking is, how are these huge stocks going to continue to meet the growth expectations that are now baked-in to share prices?”, said Mr Marais.

The Orbis fund manager said he saw value in two global sectors: Korean banks, and the US health insurance sector.

Of the latter, Mr Marais said uncertainty around the US election was depressing share prices in the health insurance sector.

As for Korean banks, he pointed to the fact that the four majors all trade at five times earnings or less, whereas the Australian banks trade at between 21 and 13 times earnings.