Twelve pro bono stock picks from Australia’s top fund managers

Stock pick 2: Ridley Corporation (ASX: RIC)

Ridley operates two business segments. It provides bulk stock feed to the rural sector in the key categories of dairy, chicken and pork and its other business segment recycles abattoir offtake for ingredients in pet foods and biofuel as well as producing ingredients for aquaculture.

In a recent Ridley investor presentation slide, there was a capital allocation slide that stated a commitment to reinvest cashflows prioritising high return on funds employed whilst maintaining a strong balance sheet and distributing 50 per cent of profits back to shareholders. This would be done to maximise shareholder value with a target of delivering 15per cent returns per annum back to shareholders. Of course saying it is one thing, delivering it is another.

In the financial year 2022 just gone RIC smashed these targets by delivering 70 per cent earnings per share growth, improved a post-tax return on funds employed from 6.8 per cent to 10.9 per cent, paid out 56 per cent of profits in dividends and the balance sheet debt is now almost fully paid off giving the board the confidence to announce a share buyback. Far more importantly, the outlook suggests continued growth both organically and with the identification of significant capital reinvestment opportunities that will deliver returns well exceeding what RIC has achieved to date.

So RIC represents a proposition where they are exceeding shareholder value goals, have a 3-5 year outlook where this is likely to continue and a valuation where even though the market is starting to recognise the progress made, trades on 16x PE and 8.4x EBITDA. With ASX inclusion likely in the next 12 months there is a catalyst for a further positive re-rating in the stock.