US Virus Outbreak/Surge

The US Covid-19 outbreak has, in the last few weeks, accelerated again and seen record new case numbers reported in the last few days. On Saturday alone, over 40,000 new cases were reported. This takes the total (official) cases since this started to 2.5m. The recent surges are being experienced primarily in the southern states of California, Arizona, Nevada, Florida and Texas.

Several of these states are now pulling back on their reopening plans, in some cases reinstating shutdowns for bars and other venues. Although we don’t see lockdowns being reinstated in full, it is our job to look for opportunities and we do think this trend is a positive for both Pushpay Holdings (PPH.ASX) and Marley Spoon (MMM.ASX).

PPH is a payment company enabling mobile app donations to the faith giving sector in the US. The business services over 10,000 churches and has seen a marked increase in take up as church goers stay home but still wish to connect and support their local community church. A recent profit upgrade by PPH reaffirms this trend with $74m EBITDA guidance for FY21. We expect the company to continue to grow, benefiting from this structural shift, and exceed $110m in EBITDA within two years. Given this, we think the stock could be worth in excess of $10.00.

Marley Spoon (MMM) is an online meal kit subscription business enabling consumers to order fresh ingredients according to easy to make recipes and portions to cook at home. We already saw the company benefit immensely during the lockdown period as people stayed at home and took up their services. Since then there were some concerns that growth could taper off as restrictions eased. The recent local outbreaks and the company having good exposure to the surging US market plays neatly into their outlook for at least this year. We expect a strong and profitable quarterly update in the next couple of weeks. MMM is currently trading at about half the revenue multiple of their larger peer, Hellofresh.

Wirecard’s Collapse Creates an Opportunity

Last week one of the world’s largest payment companies and a DAX top 30 German listed stock, Wirecard, was found to be trading fraudulently. Their CEO was arrested, and the business was placed into administration. The news rocked the fintech industry across Europe and the US.

Over the weekend the UK financial regulator has suspended the accounts of many of Wirecard’s digital banking customers (Pockit, Curve, Anna Money, among others) in order to protect customer funds. This has seen these providers scrambling to look for alternative and credible issuers to manage their customer programs. We believe EML Payments (EML.ASX), through its acquisition of PFS, could benefit immensely from this monumental customer churn event. Our estimates and analysis indicate an opportunity of up to $50m of revenue for EML is up for grabs in the next few months. Watch this space, execution will be key. We value EML at over $4.00.

Too Profitable? There’s a Downside

Lastly, this week Jumbo Interactive (JIN.ASX) updated the market on a renegotiated lottery ticket reseller agreement with Tabcorp (TAH.ASX). The agreement, due to expire in 2023, will now be extended to 2030 for a one-off fee of $15m. Unfortunately, the new agreement incorporates a new service fee that will phase in gradually from FY21 to FY24 and will see JIN pay an additional 4.65% of its lottery ticket sales back to TAH. We estimate this to represent a revenue hit of $28m by 2023, all lost profit for JIN.

For JIN holders this agreement is bittersweet news. It secured longevity but gives away significant margin. We wrote about JIN previously and took our position at around $9.00 about three months ago as we saw online lotteries to be a pure beneficiary from the unfolding Covid-19 situation. The stock then appreciated to $14.00 and we sold down the vast majority of our holding as our valuation of $13.00+ was exceeded. The recent update indicates that the trend toward online lotteries continues to accelerate. But, with JIN being too good at doing so and earning close to 60% EBITDA margins, it was probably never sustainable selling a product that is licensed to someone else.

Over time we expect the charity lottery business here and overseas to diversify sales away from Tabcorp. With the shift to online lotto sales only growing, we still see profits growing but at a lower rate, as the phased in service fee kicks in over time. We will continue to monitor JIN and potentially look for an opportunity to re-enter the stock as investor sentiment and enthusiasm inevitably dampens.