Energy investing has its own social hierarchy. At the top sit the fashionable: solar developers with ambitious targets, battery makers with ambitious valuations and explorers with ambitious geologists. Somewhere near the bottom, rarely asked to give the conference keynote, sits the refiner. Refining is plumbing. It takes a black and often unpleasant liquid and turns it into the diesel, petrol and jet fuel the world still runs on, whatever the brochures say.ย
Plumbing becomes interesting when the pipes are under pressure, and this year they have been under a great deal of it. Flows through the Strait of Hormuz have been disrupted since the conflict with Iran began in late February, Russia continues to restrict diesel exports, and US refiners have been running flat out with almost nothing in reserve. In early September the average US diesel price hit a record US$5.85 a gallon, above the 2022 peak.ย
Valero stock has noticed. Valero Energy (NYSE: VLO), one of the world’s largest independent refiners, has roughly tripled from its 52 week low of about US$155 to trade around US$457. We have owned it from the early 100โs. The more useful question now is not how it got here, but whether the reasons it got here are temporary or structural. My answer is that more of them are structural than the market assumes, although not all of them.ย
Refiners earn the spread, not the oil priceย
Most investors look at a refiner and think about the price of crude. That is the first mistake. A refiner earns the gap between what it pays for crude and what it receives for the products it makes. Expensive crude is perfectly tolerable if diesel is more expensive still, which has been precisely the situation this year.ย
The second mistake is to treat all refiners as interchangeable. They are not. A simple refinery can process only light, sweet crude, the expensive kind, and turns a meaningful share of each barrel into low value residual fuel. A complex refinery, equipped with cokers, hydrocrackers and catalytic crackers, can take heavy, sour, sulphurous crude, which trades at a discount because relatively few plants can handle it, and turn it into high value diesel and jet fuel.ย
Valero sits firmly in the second camp. Its Port Arthur refinery in Texas, the largest in its system at 435,000 barrels a day, is described in the company’s own filings as processing heavy sour crude, and its Wilmington plant in California runs a blend of heavy and high sulphur grades. Across the system, Valero processed around 514,000 barrels a day of heavy sour crude in the second quarter. Discounted feedstock, run through equipment that most competitors lack, is a durable source of margin rather than a lucky quarter.ย
Venezuela comes back on the menuย
That capability has become considerably more valuable this year. Following the removal of Nicolas Maduro in January, Washington eased sanctions and issued general licences covering Venezuelan oil exports. Valero moved quickly. Reuters reported in February that the company planned to take up to 6.5 million barrels of Venezuelan crude in March alone, its largest intake since sanctions began in 2019, with the potential to overtake Chevron as the largest US refiner of Venezuelan barrels.ย
Venezuelan crude from the Orinoco belt is extra heavy, closer in consistency to tar than to the light crudes produced in the Permian. It is cheap precisely because it is awkward. Valero ran heavy Latin American crude for decades before sanctions shut the tap, and Port Arthur was expanded in 2023. When the supply returned, Valero did not need to build anything. It needed only to buy.ย
Management made a related point on its second quarter call, citing the outlook for heavy sour crude discounts as one reason the floor under refining margins may now sit higher than historical averages suggest.ย
Owning the plumbing to the plumbingย
The second advantage is geography. Valero operates 15 refineries in the US, Canada and the UK with combined throughput capacity of about 3.2 million barrels a day, and its Gulf Coast plants account for more than half of that throughput. That places them beside domestic crude supply, imported heavy crude and the export docks. On the second quarter call, management noted that an arbitrage had opened to ship jet fuel to Europe, a continent that has lost Russian supply and closed a number of its own refineries.ย
Just as important, Valero owns much of the infrastructure that serves those plants. Its annual report lists crude oil pipelines, product pipelines, terminals, storage tanks and marine docks, and states that these assets support its refining operations and export capabilities. In a world where supply chains are increasingly used as instruments of policy, a refiner that controls its own access to feedstock and to export markets is considerably harder to squeeze than one that relies on others to deliver its crude and collect its products.ย
The broader system is not getting any looser. US refining capacity has been drifting lower as older plants close, utilisation ran close to 98% in late August, and distillate inventories sat well below their five year average. Spare refining capacity is rather like a reliable electricity grid: its value becomes obvious only when it is not there.ย
A hedge against a return to Wokeworldย
Valero also runs two businesses that would surprise anyone who thinks of it purely as an oil company.ย
Diamond Green Diesel, its joint venture with Darling Ingredients, is one of the world’s largest renewable diesel producers, with around 1.2 billion gallons a year of capacity on the Gulf Coast. Valero also operates 12 ethanol plants in the US Mid-Continent with combined capacity of about 1.7 billion gallons a year.ย
These are policy businesses, dependent on fuel standards, renewable credits and tax incentives, and they have been volatile. In the second quarter they earned their keep: renewable diesel delivered US$717 million of operating income against a loss a year earlier, and ethanol contributed US$318 million. More importantly, they hedge the portfolio against a return to Wokeworld. Should the political pendulum swing back towards mandates and subsidies, Valero is one of the few refiners positioned to be paid on both sides of the argument.ย
The numbersย
The second quarter of 2026 showed what the business earns when conditions align. Net income was US$3.72 billion, or US$12.62 a share, against US$2.28 a year earlier. The refining margin averaged US$23.62 a barrel, almost double the prior year’s US$12.35, on throughput of about 2.95 million barrels a day.ย
Capital allocation has been sensible rather than heroic. Valero returned US$2.6 billion to shareholders in the quarter, 59% of adjusted operating cash flow, and pays a quarterly dividend of US$1.20. Net debt to capitalisation was 11%, and cash of US$7.9 billion sits well above management’s long term target of US$4 billion to 5 billion. As Ray Dalio and others have been pointing out, governments and AI builders are now competing hard for the world’s savings. A business that funds itself and still hands cash back is worth a premium in that environment, not a discount.ย
Valero stock valuation: cheap, or cheap for a reason?ย
At around US$457, Valero has a market capitalisation of roughly US$131 billion. Consensus earnings for 2026 are about US$51 a share, which puts the stock on roughly 9 times this year’s earnings. Estimates for 2027 are materially lower, at around US$42 to 43 a share, implying something closer to 11 times.ย
That gap tells you what the market believes. A single digit multiple for a business generating this much cash looks undemanding, but it is low precisely because investors assume they are looking at a peak. The sell side is divided in instructive ways. Wells Fargo and Citigroup both lifted their price targets to US$485 in the past few days, while the average analyst target, at around US$380, sits well below the current share price. Several brokers, including Jefferies, Bank of America and Mizuho, rate the stock a hold or neutral.ย
The bull case is that structurally tight refining capacity, persistent geopolitical disruption, rising compliance costs and a steady supply of discounted heavy crude justify a higher mid cycle margin than history implies. The bear case is that every refining boom in living memory has been followed by a bust. Both camps have history on their side, which is rather what makes it a market.ย
Risksย
Refining margins are cyclical and have historically mean reverted, sometimes brutally. Goldman Sachs expects Brent to fall to around US$85 a barrel by December and US$80 in 2027 as supply normalises. A settlement in the Gulf and a reopened Strait of Hormuz would ease the strain on product markets and, with it, Valero’s margins.ย
The share price has already moved a very long way, and the average analyst price target sits below it. Buying a cyclical business near the top of its cycle is the classic way to lose money in cyclical businesses. Consensus already expects earnings to fall next year.ย
Record fuel prices invite demand destruction, and they also invite politicians. Windfall taxes, export restrictions and public pressure on refiners are perennial temptations when diesel is at record highs.ย
The Venezuelan opportunity rests on US Treasury licences that can be withdrawn as quickly as they were granted, and on Venezuelan production actually rising. Valero’s own annual report flags uncertainty around events involving Venezuela as a risk to supply and margins.ย
Operational risk never disappears. Valero is repairing a diesel hydrotreater at Port Arthur at an estimated cost of US$250 million, much of which it expects insurance to cover. Refineries are complicated and dangerous places.ย
Finally, the hedge works in both directions. The renewable diesel and ethanol businesses depend on standards, credits and incentives that change with administrations, and management has flagged tariffs as a possible headwind.ย
Third quarter results are due on 22 October and will provide an early test of whether margins are holding.ย
TAMIM Takeawayย
Valero is neither a transition story nor a technology story. It is a plumbing story, and the plumbing is under strain. Its refineries are built to process discounted heavy crude that simpler competitors cannot, its Gulf Coast footprint and owned pipelines, terminals and docks give it dependable access to feedstock and export markets, and its renewable diesel and ethanol businesses hedge against a return to Wokeworld.ย
The market recognises that Valero is earning exceptional margins and is pricing them as temporary. For long term investors, the question is how much of today’s advantage is structural. The best opportunities in energy often sit not with whoever owns the most barrels, but with whoever can turn the awkward ones into something the world actually needs. After a run of this size, valuation discipline and a clear view of the cycle matter more than ever.ย
Disclaimer: Valero Energy (NYSE: VLO) is held in TAMIM portfolios as at the date of article publication. Holdings can change substantially at any time.ย
This week’s reading list is about crowding, and how seldom anyone actually decides to join a crowd. Wall Street’s largest firms have ended up at the same few tables funding the same buildout, not because they agree but because the career cost of being the one who stayed out is so much higher than the cost of being wrong alongside everyone else. J.P. Morgan has now put a number on where that leaves the rest of us, and it is not comfortable: AI related industries are roughly half of the S&P 500 by market capitalisation, which means a passive equity allocation is a concentrated position whether or not anyone chose one. Bond index investors have been accumulating the same exposure by the same accident. Insurers are retreating from the same postcodes at the same time, and the political reflex is to cap the price rather than read it. A household holding three years of expenses in cash has joined a crowd too, and is paying for the privilege. The counterpoint sits three thousand years back, in the moment a scarce metal was replaced by an abundant one and every power that had controlled the scarce version discovered what its advantage really rested on. The useful lesson for investors is that a crowded position rarely announces itself, because each step into it looked reasonable on its own. The best investors are not trying to be contrarian for its own sake. They are trying to notice which of their positions they actually chose.
๐ AI turns Wall Street into a herd: Liz Hoffman on the strangest feature of the AI financing boom, which is how little disagreement there is inside it. Nvidia’s US$500 billion consortium includes the four largest alternative asset managers and six of the top eight. Blackstone and Apollo are jointly funding Anthropic’s compute purchases, and nearly every large private equity firm outside that group is backing OpenAI’s competing version, with Goldman Sachs somehow in both. Brookfield’s Connor Teskey explains why rivals happily share a table: there is enough to go around. Hoffman reaches back to a 2008 postmortem for the phrase that describes the real incentive, “I’ll be gone, you’ll be gone”, and is candid that her own early 2024 call on contrarianism starting to pay has not aged well. A PwC estimate of more than US$30 trillion of global data centre spending through 2050 sits underneath all of it. (Semafor)
๐ AI-conscious asset allocation: Portfolio construction in a capital investment boom: Michael Cembalest and J.P. Morgan’s Strategic Investment Advisory Group with the most useful institutional paper we have read this year, and the one that turns the AI question from stock picking into asset allocation. Their central claim is that AI has become a cross asset risk factor inside portfolios that were never built with it in mind. AI related industries are about 50.6 per cent of S&P 500 market capitalisation, so passive US equity is a concentrated AI position by default, and the same factor then reappears in venture and growth equity, in private credit lending to data centres, in value add real estate and in investment grade bond indices. Apparent diversification is therefore partly an illusion. They map an AI intensity spectrum from most concentrated to most defensive, note that core real estate holds under 0.5 per cent data centre exposure in the NFI-ODCE index, and argue high quality fixed income remains the real protection against a shock to the AI narrative, while honestly flagging that inflation uncertainty could undermine that too. The line to keep is that allocators must consider both diversification within AI and diversification from AI. Note this links to the full PDF; the landing page shows only a summary. (J.P. Morgan Asset Management)
๐ AI Debt Issuance Taking Up More Room in Bond Indexes: Debbie Carlson on the same problem at the level a retiree can actually see on a statement. Alphabet, Amazon, Meta, Microsoft and Oracle together issued around US$35 billion of debt a year between 2020 and 2024, on Vanguard’s numbers. Industry estimates for AI related issuance in 2026, once chipmakers and utilities are included, run between US$300 billion and US$570 billion. Amazon is now the fifth largest issuer in the Bloomberg US Corporate Index at 1.4 per cent, after a US$53.8 billion dollar and euro sale, with Oracle eighth at 1.3 per cent following a US$30 billion bond and preferred deal. Nobody holding a global credit index fund decided to increase their exposure to the AI capital cycle. It happened because the issuers kept issuing and the index kept weighting. (Chief Investment Officer)
๐ How the insurance industry can help society adapt to climate change: David Gunn and Rob Bailey at Chatham House on why uninsurability is a policy failure rather than an insurer failure, and why that distinction is about to matter commercially. Their framing is the useful part: insurers are the messengers, and a rising premium is among the first honest signals that a risk has become intolerable. In California, political caps on premiums contributed to insurers withdrawing alongside the physical risk itself. They cite a UK Government Office for Science estimate of ยฃ3.5 trillion of cumulative global adaptation spending over the next decade, and warn that if blame lands on insurers the result will be tighter price controls and pressure to write cover at a loss. For Australian readers the application barely needs spelling out, across both residential property and the banks holding the mortgages against it. (Chatham House)
๐ Questions for the Chair: Claudia Sahm on the September meeting, where the Fed raised its policy rate a quarter point to 3.75 to 4 per cent on a unanimous vote, six weeks after only three of twelve voters had favoured a hike. The projections centre on one more rise in 2026 and do not reach 2 per cent inflation until 2029, with the median longer run neutral rate at 3.25 per cent, already below the funds rate before the increase. The dot plot implies a tightening cycle of 50 to 75 basis points against a median of 3 percentage points in past cycles. Her five open questions are the substance, and the sharpest is how Kevin Warsh will know when to stop, given he has filed no projections of his own and offers no forward guidance. She also notes the press conference ran about 30 minutes against roughly 50 for Powell’s last five, and that implied rates and the 10 year yield rose while it was happening. (Stay-At-Home Macro)
๐ Has AI impacted the labor market yet? Alex Imas and Jacob Schaal with the most even handed answer available to the question clients keep asking, and a model of how to weigh evidence that disagrees with itself. On one side, Brynjolfsson and colleagues found junior employment in high exposure roles down 13 per cent by July 2025, with their dashboard showing 19 per cent by June 2026, and a study of 6.7 million graduates found those in the most exposed majors 5 percentage points less likely to be employed on graduating. On the other, a Danish study finds null effects on earnings, hours and wages with confidence intervals ruling out anything above 2 per cent, Gallup finds only 1 per cent of laid off workers attribute their firing to AI, and around 90 per cent of executives report no significant effect. Google’s own data shows AI being used across 88 per cent of US employment but in only 21 per cent of tasks. Their conclusion is that aggregate stability and real stress in exposed subgroups can be true at the same time. (Ghosts of Electricity)
๐ The High Price of Feeling Safe: Vishal Khandelwal on a rule of thumb doing real damage, the advice to hold three years of living expenses in an emergency fund. He works the arithmetic, then makes the distinction that matters: preparation says something may go wrong and I should be able to handle it, while fear says I should arrange my whole life around that possibility. A young couple with two incomes and portable skills and a 55 year old sole earner with dependants and a large loan need genuinely different answers, and a single number serves neither. He borrows the Stoic practice of picturing the worst case deliberately in advance rather than carrying it around permanently. Written for an Indian audience, but the behaviour is universal, and it is one of the more common and least discussed drags on a self managed portfolio. (Safal Niveshak)
๐ Weapons of mass decentralization: Patrick Fitzsimmons on what happened when the cost of the critical input collapsed. Bronze required tin, and tin was scarce enough that Mari’s supply travelled more than 500 miles from Elam; the powers that could organise that trade fielded armies like the tens of thousands and 5,000 chariots that met at Kadesh in 1274 BC. Iron melts at 1,538ยฐC, which Bronze Age furnaces could not reach, but bloomery furnaces at 1,200 to 1,300ยฐC could work it without melting it, and iron is the fourth most abundant element in the crust. The measurable consequence is startling: across Assyria, Babylon and Athens, average reign lengths fell 29 per cent after iron was adopted, with Babylon getting almost twice as many kings. The closing line about drones accounting for up to 80 per cent of recent casualties in Ukraine is not subtle, and does not need to be. (Works in Progress)
๐ A good sceptic has more than doubt and less than certainty: Massimo Pigliucci on Cicero, who wrote the Academica in early 45 BCE at a villa near Naples, having just divorced after thirty years and lost his daughter, with Caesar newly dictator for life and two months from assassination. The idea worth taking away is Carneades’ pithanon, which Cicero rendered as probabile: not probability in the modern sense but graded confidence, running from an impression slightly more likely true than not, up through claims examined from several angles, with no step ever reaching certainty. It is a 2,000 year old description of exactly the habit of mind that investing requires and that crowds reliably destroy. Markets are never mentioned. We include it anyway. (Aeon)
Whenever the Reserve Bank lifts rates, the market tends to react to consumer stocks in a fairly predictable way. Commentary turns to “the consumer”, the retail names fall together, and a sector made up of dozens of very different businesses is repriced as though they all shared a single customer who had just been handed a larger mortgage repayment. The reflex is understandable, and on the first day it is usually right. The trouble comes over the following months, when results arrive and the businesses turn out to have very little in common.ย
The market is in one of those moments now. On 29 September the RBA lifted the cash rate by 25 basis points to 4.60%, its fourth increase this year and the highest setting since late 2011. The decision was unanimous. The Board noted that house prices had fallen in most capital cities and that new housing lending had declined, and made clear it was prepared to move again if inflation does not ease.ย
Rates up, spending down, sell retail. That is the obvious trade, and for a good part of the sector it may well prove correct. The problem lies in applying it evenly, because the businesses being sold together have very different exposure to what the RBA is doing.ย
Inflation has been stubborn, and households are adjustingย
The inflation data explains why the Board moved. The ABS reported annual CPI of 4.0% in the year to August, up from 3.5% in July, with fuel prices rising 14.8% in the month as global oil prices climbed and the last of the federal fuel excise relief was wound back. Petrol on its own would not have troubled the RBA greatly. The trimmed mean, its preferred measure of underlying inflation, is the bigger concern, having now held at 3.6% for three consecutive months.ย
Households are responding much as expected. ABS figures show total household spending was flat in August, and once fuel is excluded it fell 0.3%. Within that, discretionary spending fell 0.3% while spending on essentials rose 0.6%. Unemployment has edged up to 4.6%.ย
Read closely, the data does not describe a consumer who has stopped spending. It describes one who is moving money from things that can wait into things that cannot. Shifts of that kind tend to open a wide gap between the businesses on either side of them.ย
Who actually pays for a rate riseย
Part of the difficulty lies in the phrase “the consumer”. It suggests a single household with a single budget, and the rate cycle does not work that way. It works largely as a transfer from people who borrow to people who save.ย
Finder estimates that a borrower with a A$731,000 home loan on a typical variable rate will pay around A$113 a month more after this hike alone. Add the three earlier increases this year and mortgage holders have absorbed a meaningful cut to their spare cash. A retired couple with no mortgage and savings in term deposits, by contrast, is earning more interest than at any time in over a decade. Renters sit somewhere else again, squeezed through rents rather than repayments.ย
Seen this way, the more useful question for investors is not whether “the consumer” is weakening. It is which households a particular business sells to, and whether it sells mainly to Australian households at all.ย
Four things the sector label hidesย
Four questions go a long way towards separating consumer businesses in a rate cycle. The first is where the revenue is earned. A retailer selling almost entirely in Australia is fully exposed to the RBA. One that earns most of its revenue in Japan or the United States answers to different central banks, different housing markets and different shoppers, even if its head office is in Sydney and its ticker sits in the same index.ย
The second is the balance sheet. A company carrying debt is paying more for it this year, much like its customers. A company with net cash is being paid more on that cash, and has room to keep investing and gain market share while more stretched competitors pull back.ย
The third, which receives less attention than it deserves, is working capital. Some retailers must buy and pay for stock months before they sell it, so a slowdown ties up cash at precisely the wrong time. Others collect from customers before they pay suppliers, which means growth funds itself and a weaker patch can be managed without asking shareholders for more money.ย
The fourth is pricing power. A business with a brand customers value can usually protect its margin when volumes soften. A business that competes mainly on price tends to discount, and in a downturn discounting has a way of turning a sales problem into a profit problem.ย
None of this appears in an RBA statement or a CPI release. It appears in company results, usually some months after the share prices have already moved.
An example from this week’s newsletterย
Ron Shamgar’s article this week on The Koala Company (ASX: KOA) illustrates the point. Koala is usually described as an Australian online furniture retailer, and few purchases are easier to postpone than a new sofa. On the label alone, it is the sort of stock a hiking cycle would be expected to punish.ย
The numbers are more nuanced. In the first eight weeks of FY27, 60% of Koala’s revenue came from outside Australia. The company finished FY26 with no debt and A$71.2 million of net cash, and it runs a negative working capital model. Views on the valuation will differ, and Ron sets out the risks in full, but its exposure to the RBA is clearly much smaller than its sector classification suggests. It serves here as an example of how much a label can conceal; the investment case belongs in Ron’s article.ย
What the market expects from hereย
Before the September meeting, a Reuters poll found 26 of 31 economists expected the cash rate to remain at 4.60% at the end of December. ANZ was the main exception, forecasting a further increase to 4.85%. Most economists expect rates to stay on hold through the middle of 2027, after which forecasts diverge considerably.ย
Two dates matter in the near term. The September quarter CPI is released on 28 October, and the RBA meets on 3 November, Melbourne Cup Day, which seems a fitting occasion for a market fond of a punt. When the CPI lands, consumer stocks are likely to be traded as a group once again, sold together if the number is hot and bought together if it is soft. Over the next couple of years, though, the differences between individual businesses within the sector are likely to matter far more than the difference between one CPI outcome and another.ย
What history can and cannot tell usย
The last time the cash rate was this high, in late 2011, it proved to be close to a near term peak. That is an interesting parallel but not a reliable guide. The inflation mix is different, the economy is different, and the RBA now operates with a different board and a different set of priorities.ย
The more dependable lessons from history are behavioural. Investors tend to extrapolate whatever has just happened, selling cyclical exposure hardest when bad news is most visible and buying it back once the recovery is already evident in the data. That does not mean the low point has been reached for Australian consumer stocks, and with house prices falling and unemployment rising it may not have been. It does suggest that periods of widespread gloom are often a better time to examine well funded businesses than periods of widespread comfort.ย
A sensible approach for long term investorsย
None of this is an argument for taking a large position on the next move in the cash rate. Forecasting the RBA one meeting at a time is a game that very few people win consistently, and those who claim otherwise tend to have short memories.ย
A more productive exercise is to look beneath the sector label and work through those four questions business by business. Companies that answer them well, yet are still being sold because of the group they belong to, are where opportunity is most likely to form. Companies that answer them poorly may look cheap and still have further to fall, so a lower share price on its own says very little. It also makes sense to be cautious about treating the next CPI figure as a verdict on businesses whose earnings depend mainly on economies the RBA does not influence.ย
Where this argument could go wrongย
The risks to this view deserve to be stated plainly. Rates may not have peaked. A hot September quarter CPI would make a fifth hike a real possibility, and in a broad sell off the market rarely pauses to check which companies have net cash.ย
Offshore revenue offers no guarantee either. Overseas consumers face their own pressures, tariffs and trade rules can change quickly, and a stronger Australian dollar reduces foreign earnings when they are converted back.ย
Falling house prices also matter beyond the monthly repayment. Households that feel poorer tend to spend less even when their cash flow has not changed, and that wealth effect can weigh on demand for longer than most rate models assume. Finally, the market can continue pricing businesses by their label for some time, so a mispricing only rewards investors with the patience, and a sensible position size, to wait for it to close.ย
TAMIM Takeawayย
The RBA has raised the cash rate four times this year to 4.60%, underlying inflation remains at 3.6%, and households are shifting spending away from discretionary items towards essentials. The market’s natural response has been to treat every consumer facing company as equally exposed.ย
In practice the exposure varies enormously. Rate rises fall mainly on borrowers, and their effect on a business depends on where it earns its revenue, the strength of its balance sheet, how its working capital behaves and whether customers value its brand. For long term investors, the more useful work over the coming months is likely to be identifying where the market has priced a company by its sector label rather than its actual exposure, with a close eye on balance sheets, cash flow and valuation.ย
Disclaimer: The Koala Company Limited (ASX: KOA) is held in TAMIM portfolios as at the date of article publication. Holdings can change substantially at any time.ย
One of the enduring truths in small cap investing is that a good business can sit in plain sight for months simply because nobody has been paid to point at it. No broker roadshows, no index buying, no slides at the fund manager conferences. Just a company quietly doing what it said it would do.ย
The Koala Company (ASX: KOA) has spent most of its short life as a listed company in exactly that position.ย
Koala floated on 31 March 2026 at A$3.40 a share, raising A$68 million at a valuation of around A$305 million. It could hardly have picked a tougher moment. Consumer confidence was sitting near record lows, the RBA was lifting rates and the listed furniture and homewares names had been marked down hard. The shares enjoyed a brief pop on debut, then drifted below the issue price through May, June and July, trading close to A$3.00 for much of that period.ย
Then, on 26 August, Koala delivered its first full year result as a listed company. It came in ahead of the prospectus forecasts on revenue and earnings, it was debt free, and the new financial year had started stronger still. The share price has since moved meaningfully higher.ย
Even after that move, we think the market is still pricing Koala like a mattress retailer in a downturn. We think it is something quite different, and considerably better.ย
If Temple & Webster and Nick Scali had a babyย
The simplest way to describe Koala is this: if Temple & Webster (ASX: TPW) and Nick Scali (ASX: NCK) had a baby, it would look a lot like Koala.ย
From Temple & Webster it inherits speed and asset light execution. Koala is a digitally led, direct to consumer brand with only two showrooms in total. From Nick Scali it inherits curated product discipline, pricing power and a focus on margin. Koala designs all of its furniture in house rather than reselling white label product.ย
The result is a capital light global operator that becomes more efficient as each market matures, with an innovation engine that keeps lifting both product quality and unit economics.ย
A focused range is a feature, not a limitationย
Koala concentrates its demand into roughly 20 core products. That sounds like a constraint. In practice it is one of the most important parts of the model.ย
Fewer, higher volume products drive manufacturing efficiency, lower cost of goods and faster iteration. A Sydney based R&D team ships new generations of each product based on customer feedback, product data and engineering improvements. FY26 delivered the breakout Torquay and Tamarama modular sofas, next generation mattresses, the fourth generation Koala Sofa Bed and the second generation Wonder sofa bed. Each iteration lifted quality and improved margins at the same time.ย
Sitting furniture is where this gets interesting. Modular sofas and sofa beds carry higher average order values and higher margins, and modularity means one product can generate far more revenue than a smaller item ever could.ย
The second engine is brand. As brand equity builds in a market, customers trade up into higher value, higher margin products, and each marketing dollar goes further. Contribution margin expands without the business needing to lift its marketing spend at the same rate. Koala has spent a decade building that equity in Australia. It is now running the same playbook offshore.ย
The result was better than the share price had assumedย
FY26 was a clean result, and the numbers tell the story:ย
Revenue of A$332.3 million, up 20.1% (24.4% in constant currency)ย
Gross profit of A$216.9 million, up 25.7%, with gross margin up 2.9 percentage points to 65.3%ย
Contribution margin of A$88.0 million, or 26.5% of revenue, up 2.2 percentage pointsย
Operating costs up 8.5%, against revenue up 20%ย
Pro forma EBITDA of A$27.9 million, up 139.2%, ahead of the A$24.8 million prospectus forecastย
EBITDA margin of 8.4%, double the 4.2% of the prior yearย
Statutory net profit of A$24.6 millionย
Operating cash flow of A$28.6 millionย
The line I would focus on is operating costs growing at less than half the rate of revenue.ย
That is what operating leverage looks like in practice. Lean local teams sit on top of shared global capabilities in product, marketing, technology, finance and people. Revenue scales faster than the cost base, and each incremental dollar of sales drops through to earnings at a much higher margin.ย
Four markets, all heading the right wayย
Australia. Revenue of A$166.7 million and contribution margin of A$49.7 million, or 29.8%. This is the template market. A decade of brand building underpins strong marketing leverage and a premium product mix.ย
Japan. Revenue of A$89.4 million and contribution margin of A$25.6 million, or 28.6%. Plenty of Australian retailers have tried Japan and come home bruised. Koala has built a business there with margins almost level with its home market, and is now expanding from mattresses into sitting furniture with strong customer uptake.ย
United States. Revenue of A$74.9 million, up 67.6%, making it the fastest growing market in the group. Contribution margin was A$13.0 million, or 17.3%. The US is earlier stage, but Koala is positioned at the premium end, where its curated range supports higher price points. It navigated tariffs and volatility during the year while building adoption of its new sofa lines.ย
The gap between a 17.3% contribution margin in the US and almost 30% in Australia is, to my mind, the most interesting number in the result. It is the opportunity. If the US follows the path Australia and Japan have already travelled, the earnings uplift from margin alone is substantial, before counting any growth.ย
United Kingdom. Revenue of A$1.2 million in a partial year, with a small negative contribution of A$0.3 million reflecting a deliberately lean launch. Management says the UK turned contribution positive after the period.ย
Next on the list is Canada, targeted for the second half of FY27, with broader Europe under evaluation. The approach is the same each time: enter lean, build a culturally relevant brand, let mix and margin follow.ย
FY27 has started even strongerย
In the first eight weeks of FY27 to 23 August, group order revenue rose 27% year on year in constant currency, or 20% in reported Australian dollars. Every market was at or ahead of internal expectations, and international markets accounted for 60% of revenue in the period.ย
That last figure deserves a moment. Koala is routinely described as an Australian online furniture retailer. Most of its revenue is now earned offshore.ย
Management has chosen to emphasise execution over formal full year guidance this early in the year. That is sensible for a business still in its first year of listed reporting, and I would rather that than a number set to be beaten.ย
A balance sheet the market has not given credit forย
Koala is debt free with A$71.2 million of net cash. Net assets swung from negative A$9.9 million to positive A$38.1 million over the year.ย
Just as important is the shape of the balance sheet. Koala runs a negative working capital model, where payables and deferred revenue more than fund inventory. Combined with a light fixed and intangible asset base, the business can grow without consuming its own cash. Growth funds itself.ย
Management has flagged a flexible capital management stance and a pathway to dividends. We think a dividend policy is likely to be announced at the AGM or with the February result. If no dividend is paid, we expect Koala to finish FY27 with around A$100 million of net cash.ย
So why has the market been slow to notice?ย
The answer has very little to do with the business.ย
Koala is a recent IPO. It has limited broker coverage, limited institutional ownership and limited awareness in the broader market. At listing, the large majority of shares were held by founders and early investors under voluntary escrow, which leaves a thin free float and makes the stock hard for larger funds to buy in size.ย
It has also been lumped in with domestic discretionary retail during a rate hiking cycle. That is understandable. It is also, increasingly, the wrong comparison for a business earning 60% of its revenue outside Australia.ย
This is a familiar small cap pattern. The fundamentals arrive first and the audience arrives later. The rerating usually happens somewhere in between.ย
Founder led, with real alignmentย
Koala was founded in Byron Bay in 2015 by Dany Milham and Mitch Taylor with a single mattress product. Milham returned as CEO in 2024 and held around 20.7% of the company at listing, with Taylor holding around 16.3%. Perennial Partners, an investor since 2020, held around 22.7%.ย
That is the kind of alignment we like to see. The people running the business have far more riding on the share price than on their salaries.ย
Valuation: a 30% grower on 13 times earningsย
Koala is trading on around 13 times forward earnings, while growing earnings at more than 30% a year, with net cash representing a meaningful share of its market value.ย
In our experience, that combination does not persist for long once a company builds a track record as a listed business. Our valuation is A$8.00 a share.ย
The catalysts are clear enough:ย
A formal dividend policy at the AGM or the February resultย
The 1H FY27 result in February 2027, the first half year comparison as a listed companyย
Further US contribution margin expansionย
The Canadian launch in the second half of FY27ย
Broker initiations and growing institutional awareness as the free float widensย
The risksย
No investment case is complete without an honest look at what could go wrong, and Koala has several.ย
The Australian consumer. On 29 September the RBA lifted the cash rate to 4.60%, its fourth increase of 2026 and the highest level since 2011, and kept the door open to further hikes. ABS data showed discretionary spending fell 0.3% in August. Australia still generated around half of FY26 revenue, and furniture is one of the easiest purchases for a stretched household to defer.ย
US execution and tariffs. The US is the growth engine, but it is also the lowest margin market and the most exposed to tariffs and trade policy. Contribution margin convergence with Australia is the opportunity, not a certainty.ย
Currency. The gap between 27% constant currency growth and 20% reported growth in the FY27 trading update shows that currency is already a headwind. With most revenue now earned offshore, movements in the yen and US dollar will increasingly affect reported results.ย
Product concentration and supply chain. A focused range of around 20 core products is efficient, but a misstep on a key product hurts more. Koala relies on offshore manufacturing partners and accelerated its supplier diversification program in FY26, which tells you management sees the risk too.ย
Marketing efficiency. Direct to consumer brands live and die by customer acquisition costs. If digital advertising costs rise sharply or brand momentum fades, the operating leverage that drove FY26 can work in reverse.ย
Competition. Koala competes with Ecosa and Sleeping Duck in mattresses, with Temple & Webster online and with IKEA at the value end of home furnishings, as well as local players in each offshore market.ย
New market expansion. The UK, Canada and potentially Europe all consume capital and management attention. The history of Australian retailers expanding offshore is not a kind one. Koala’s record in Japan and the US is encouraging, but each market is a fresh test.ย
Liquidity, escrow and selling by insiders. Existing shareholders, including co-founder Mitch Taylor, sold A$48.1 million of stock into the IPO. Escrowed shares are scheduled to be released in tranches around the FY26, FY27 and FY28 results, and Perennial’s large holding will at some point need an exit. Supply of stock may weigh on the share price at times, and the thin free float can amplify moves in both directions.ย
Short track record and limited independent research. Koala has reported only one full year result as a listed company. Research coverage is thin, and the lead managers on the IPO were Barrenjoey and Morgans. We are not aware of published bearish broker views on the stock at the time of writing, which is itself a reflection of how little coverage it has. Our A$8.00 valuation is our own and depends on Koala sustaining strong earnings growth.ย
TAMIM Takeawayย
Koala listed into one of the worst retail backdrops in years, slipped below its issue price and was largely ignored. Its first result as a listed company then beat the prospectus, showed real operating leverage, and confirmed a debt free balance sheet with A$71.2 million of net cash and a working capital model that funds its own growth.ย
The market still appears to view Koala as a domestic mattress retailer exposed to rising rates. In reality, it is a founder led, capital light global brand that now earns most of its revenue offshore, is profitable in every established market, and still has a large margin opportunity in the US.ย
KOA ticks all the boxes Tamim looks for in a company. It is founder led with significant shareholder alignment. It has a strong brand and has executed successfully in multiple countries. It has a cashed up balance sheet, strong growth and profitability, and in our view it is significantly undervalued with clear catalysts ahead.ย
The lesson for long term investors is a familiar one in small caps. When a newly listed company delivers on its promises and the market has not yet assembled the audience to notice, the gap between price and value can be wide. The job is to judge whether the business is genuinely as good as the result suggests, size the position for the risks, and give the market time to catch up.ย
Disclaimer:The Koala Company (ASX: KOA) is held in TAMIM portfolios as at the date of article publication. Holdings can change substantially at any time.
This week’s reading list is about the difference between a law of nature and a decision that has been left alone long enough to look like one. Global imbalances are debated at G7 and G20 level as though they were weather, when they are simply every country’s domestic saving and investment choices added together. The Strait of Hormuz is treated as a fact of geography, when what actually binds is the absence of an agreement specific enough to be verified. Europe’s ban on paying interest on electronic money turns out to have no economic foundation at all, only a rule nobody has revisited. Mosquito-borne disease in the United States is now a regulatory choice rather than a technical limit, the technology having sat in limbo for fifteen years. Companies scale before they build a business model because the people funding them are rewarded when they do, not because business requires it. And the one item on this list that genuinely is a law of nature, the distribution of how often companies actually compound at 20 per cent for a decade, is the thing investors most reliably treat as optional. The useful lesson is that it is worth asking, of anything that looks permanent, who decided this and when. The best investors are not only forecasting outcomes. They are working out which constraints are real and which ones are simply unexamined.
๐ Imbalances are a feature of the global financial system, not a bug: David Ronicle at Chatham House on why this year’s revival of the global imbalances debate, a flagship G7 report and a G20 finance ministers’ summit that could not agree a communiquรฉ, is aimed at the wrong target. The numbers are certainly arresting. America’s net liability to the world reached about 70 per cent of GDP in 2025, a level last seen just before 2008. His argument is that imbalances are not a global phenomenon at all, just the sum of domestic saving and investment decisions, and that they function as a discipline rather than a disease, because foreign capital is mobile and will leave when policy is bad. He is also good on why the US position is more robust than it looks: American liabilities are in dollars while its assets are in foreign currency, so a rebalancing away from the US weakens the dollar and raises the value of those assets. The sharp line is that the imbalances are an early warning signal about domestic choices, and that treating them as a foreign problem is a way of avoiding the reforms each country already knows it needs. (Chatham House)
๐ Escaping the Hormuz trap: What should an agreement to reopen the Strait look like? Published on 30 September, which makes it the freshest thing on the list and the most directly relevant to anyone holding energy exposure. The argument is that reopening the Strait is not a matter of declarations but of designing a process detailed enough, reciprocal enough and verifiable enough that it actually holds, which is a far higher bar than the headlines around any ceasefire will suggest. Worth reading alongside the companion piece from 25 September on the pipelines and transport corridors that Iraq, Syria and Lebanon are now planning to route around the chokepoint, because that is the version of this story that persists long after the shooting stops. For investors, the useful distinction is between a crude price that responds to news and a regional logistics map that is being permanently redrawn. (Chatham House)
๐ Europe should stop banning interest on digital money: Ulrich Bindseil at Bruegel making a technical argument with larger consequences than its title suggests. The European Union prohibits paying interest on e-money and on stablecoins, and the digital euro is being designed the same way. His case is that non-remuneration functions as a distortionary tax, that it lacks any real economic justification, that it falls hardest on less wealthy households who hold more of their money in these forms, and that it is increasingly being circumvented anyway. Given how much capital is now moving into stablecoins and tokenised cash, the question of who is permitted to pay interest on digital balances is quietly one of the more consequential open questions in payments, and almost nobody outside the field is watching it. (Bruegel)
๐ The Scaling and Profitability Trade off: Venture Capital’s Weakest Link: Aswath Damodaran on why so many large private companies arrive at public markets without a business model, and why that is a design feature of the system rather than an accident. The data he assembles is the part worth keeping. More than 80 per cent of companies going public in the 1980s were profitable; less than a quarter of those listing in the past decade have been. Median age at listing has risen by about eleven years over the last fifteen, revenues at the median listing have tripled or quadrupled in real terms, and median market capitalisation at listing has exceeded a billion dollars over the last six years. His explanation is incentives: venture capitalists price companies rather than value them, are judged on entry price versus exit price rather than on the quality of the business built, and in the 2023 to 2026 period took 80 per cent of their returns from the top 1 per cent of investments. When the payoff is that concentrated, chasing scale is rational for the funder even when it is value destructive for the business. (Musings on Markets)
๐ Overpaying for Greatness: A Base-Rate Check: Vishal Khandelwal with the most useful piece on the list, opening with the Navi Mumbai airport, proposed in 1997 and finally opened on Christmas Day 2025, roughly seven years after the foundation stone and six after the first official deadline. The investing application is Michael Mauboussin’s base rate work. Across the thousand largest global companies by market value from 1950 to 2014, only about 4 in 100 grew sales at 20 per cent or more a year over the following decade. The median was 4.7 per cent. Nearly one in five finished the decade with lower real sales, and about half of listed companies do not survive ten years at all, so even that is a survivor’s table. Size matters enormously: 18 in 100 managed it from a base under US$325 million of sales, and none at all from US$50 billion. The arithmetic at the end is where it bites. Pay 70 times earnings, get your 20 per cent compounding for a full decade, accept a de-rating to 30 times, and you earn about 10 per cent a year. At 15 per cent growth you earn under 6 per cent, and at 12 per cent you earn about 3 per cent, having owned a wonderful company the entire time. (Safal Niveshak)
๐ Mosquitoes are a choice: Maya Rosen on the fact that the technology to eliminate several mosquito-borne diseases already exists and has spent roughly fifteen years in regulatory limbo. The specific approach she focuses on, seeding wild mosquito populations with Wolbachia bacteria so that they become resistant to viruses like dengue and pass that resistance on, involves no genetic modification at all, which is what makes the regulatory delay so hard to defend. The broader argument is the one that travels: biotech capability has advanced enormously while the rules governing deployment have not moved, so the binding constraint on a whole category of outcomes is now administrative rather than scientific. Anyone trying to work out where value accrues in life sciences should be thinking about approval pathways at least as hard as about the science. (Works in Progress)
๐ Why Alberta doesn’t have rats: Deena Mousa on a genuinely odd fact. Rats have colonised very nearly every place on earth where humans live, and one Canadian province is an exception, not by luck or geography but because of a sustained and deliberate programme. A good closing note for a week about decisions that get mistaken for destiny, and a reminder that the occasional unglamorous administrative effort does in fact work. No portfolio application whatsoever. We include it anyway. (Works in Progress)
