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See The Forest For The Trees

A newsletter with investment views, observations & ideas.
May 4, 2021
by Rob Zdravevski

The anti-ESG investment theme

I wanted to share one of my major investing themes which surrounds the popular movement and directive of Environmental, Social, and Corporate Governance (ESG), although it's not as you’d expect.

It’s more so the antithesis of ESG's intent & effect.

The investing theme is targeting prosaic, industrial businesses.

We also call these companies, cyclicals. 😊 

And so my thinking goes......

Due to growing ESG standards and metrics, 

the ability to increase industrial production and supply is being capped or stifled,

because getting approvals for new industrial projects will be difficult,

while countries are also acting on CO2e reduction goals by either closing capacity or not allowing new projects to progress,

and a the absence of broader capital expenditure over the past 5-10 years has left industry with a dearth of capacity,

which suggests that existing, installed industrial capacity becomes more valuable, 

this will prove lucrative for companies already owning such ‘strategic' assets, be it an alumina refinery, a chemical plant, a LNG plant or a uranium mine.

Simply, it will be quite difficult to get new projects in these type of industries built, replaced or replicated. Let alone the rising costs of doing so.

The companies which already own and operate these (already depreciated) assets should see their pricing power return and their margins expand, not to mention an improving 'return on assets'.

And when you see margins expand from 4% to 6% in a company trading on a P/E Ratio of 11, that's a much more impressive 'pop' than a technology stock whose margins are rising from 26% to 28%.

Don't hesitate to call should you wish to discuss this further.

Until next time,

Warm Regards, Rob

Rob Zdravevski
Managing Director

Mayfield Green Pty Ltd trading as Karri Asset Advisors is a holder of Australian Financial Services License No. 406083

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