Presented by Ron Shamgar, Head of Australian Equities at TAMIM Asset Management
Disc: ASX: CVW is held in TAMIM Portfolios as at 25 June 2024. All investing entails risk – please read disclaimer on our website for more details – www.tamim.com.au.
Welcome to this week’s TAMIM reading list, where we explore the dynamic intersections of business, technology, law, and science. Dive into the lifecycle of companies with insights from “At the Money,” followed by a deep dive into the dark side of AI with an exposé on the “Deepfake Elon Musk” scam. Next, we unravel the monopolistic strategies that have shaped giants like Walmart and Amazon. Shifting gears, we look at how hotels might be colluding to inflate room rates and consider the legal turmoil surrounding Trump’s immunity case. Environmental concerns are front and center with articles on climate tipping points and carbon laundering in Africa. We round out the list with a glimpse into the elite world of Paradise Cove, the enigmatic potential explosion of Betelgeuse, and the spiritual journey of Olympian Sydney McLaughlin. Each article provides a unique lens on the forces shaping our world today.
🎙️ At the Money: Learning Lifecycles of Companies
📚 How ‘Deepfake Elon Musk’ Became the Internet’s Biggest Scammer
📚 The one weird monopoly trick that gave us Walmart and Amazon and killed Main Street
📚 How hotels are colluding to jack up room rates, according to two lawsuits
📚 How Close Are the Planet’s Climate Tipping Points?
📚 Laundering Carbon and the New Scramble for Africa
📚 The Reintroduction of Kamala Harris
📚 Inside ‘Billionaires’ Bluff’: Why Paradise Cove Keeps Drawing the Superrich
Earnings season is well and truly underway with a number of companies in the TAMIM portfolio reporting last week.
Two stand out and high conviction holdings that reported were Bravura Solutions Limited (ASX: BVS) and Viva Leisure (ASX: VVA). Coincidently we recently covered updates prior to earnings on both in Shamgar’s small cap summary.
Bravura Solutions Limited released their full year results last week with continued signs of the business turning its fortunes around.
We wrote back in November last year that we believed this could be a turnaround story but it has even caught us by surprise at the pace of change. Arguably this is one of the quickest turnarounds we have seen.
Bravura Solutions reported an impressive return to profitability following significant transformation efforts.
The company achieved gross revenue of $250.4 million, marginally surpassing FY23, with operating earnings reaching $25.8 million eclipsing the prior period by $26.1 million. The growth was driven by a substantial reduction in operating expenses, which fell 10% to $231 million. The strategic cost-cutting measures included a reduction in headcount and reorganisation of occupancy requirements. As a result, Bravura posted an adjusted net profit after tax of $8.8 million, marking a $31.9 million improvement from the previous year.
Bravura’s FY24 performance reflects the success of its recent restructuring, which has restored the company to a positive cash operating earnings.
The company is in a strong net cash position with $90 million as of June 30 2024, with a net cash inflow of $14.2 million and an additional $56 million of cash payment due in FY25 we discuss further below. Despite the success, Bravura has opted not to declare a dividend in FY24 but with a view to paying dividends in FY25.
Looking ahead, Bravura aims to further strengthen its financial position by targeting cash operating earnings of $28 million to $32 million in FY25.
Earlier in the month the company announced a proposed return of capital as part of its capital management strategy. The return of up to $75.3 million has been further enhanced by an additional $20 million on-market buyback of up to 10% of the company. The strategy will be funded by existing cash reserves and proceeds from its recent agreement with Fidelity International.
The company has entered into an agreement with Fidelity International, granting them a perpetual, non-exclusive licence to use and develop the Sonata software platform.
The deal includes a £29 million payment ($56 million AUD), with £24 million due upon software delivery in August 2024 and the balance in early 2025. While Bravura retains intellectual property rights, the move is designed to streamline Bravura’s operations. We believe that while it may have a minor revenue impact in FY26, there will be minimal effect on profitability.
While Bravura’s transformation continues, the company is moving into its next phase of sustainable growth with some large potential new logo wins being tendered and prospect of further work in the U.K. market with existing clients. In addition Continued cost reduction initiatives and a focus on maintaining a strong balance sheet remain at the forefront of the company’s future plans.
Viva Leisure delivered an impressive set of financials for FY2024, marked by a 15.9% increase in revenue to $163.6 million, driven by organic growth.
Operating earnings rose by 21.0% to $35.4 million, with enhanced margins and improving operational efficiency. Viva Leisure was cashed up with $22.3 million on hand as of June 30, with significant free cash flow reinvested in acquisitions, greenfield sites, refurbishments, and technology platforms.
Membership growth was a key highlight, with a 10% increase in owned locations to 200,067 members, despite the removal of over 15,000 low-yielding Fitness Passport members.
The company completed 27 site upgrades, achieving a return on investment of over 75%. Viva executed strategic acquisitions, including four Plus Fitness sites and seven independent locations. Furthermore, following the end of financial year the company expanded its footprint by acquiring assets from three Gold’s Gym locations and Surge Enterprises Pty Ltd, adding five more locations in Western Australia.
Looking ahead, Viva Leisure is well-positioned for continued growth, supported by its newly secured Commonwealth Bank facilities, which increase its funding capacity to $165 million. The new facility is designed to increase the free cashflow substantially enabling to grow without the need to raise equity. Q4 exit run rate is currently $39.2 million Ebitda with incremental benefits to flow on from Viva pay and the recent WA acquisitions we estimate starting base of $44 million Ebitda for FY25 before any further growth or M&A.
The company plans a smaller strategic refurbishment program in FY2025, building on the success of FY2024, while also focusing on expanding its digital signage and vending machine networks, and launching its online supplement business, Supp Society.
Viva Leisure CEO and Managing Director Harry Konstantinou said:
“We are thrilled with the outstanding results achieved this financial year, which reflect the strength and resilience of our business model. The significant growth in revenue, EBITDA, and membership underscores our commitment to operational excellence and strategic expansion.
Our focus on organic growth, coupled with prudent investments in our people, technology, and facilities, has positioned us strongly for continued success. These results are a testament to the hard work and dedication of our entire team, and we look forward to building on this momentum as we continue to deliver value to our members and shareholders.”
We certainly know a takeover opportunity when we see one.
We believe Viva Leisure is beginning to look like an appealing acquisition. We feel the company could be a prime takeover target due to its industry-leading position, founder-led management and growing profitability. The valuation is cheap, trading at 4 times enterprise value to operating earnings.
These factors often attract strategic interest, making it a compelling candidate for acquisition or market re-rating.
GQG Partners (ASX: GQG) experienced a significant 46.5% increase in average FUM during the first half of 2024, reaching US$139.5 billion. This growth was fueled by positive net flows and strong investment performance, reflecting the trust clients place in GQG’s consistent long-term returns.
Management attributes the positive net flows of US$11.1 billion during the half to the firm’s strong client relationships and the consistency of its investment strategy. Looking ahead, GQG anticipates continued positive flows throughout 2024, supported by a robust pipeline of client demand across multiple geographies and channels.
The fund manager’s competitive fee structure has also played a role in its success, with the majority of its revenue coming from asset-based fees. Performance fees accounted for just 5.4% of total revenues in the first half of 2024, underscoring the stability of its income stream. With improving margins year over year, GQG reported a 54.9% increase in net operating income to US$273.2 million.
However, despite the strong performance, the growth was slightly below analyst expectations, falling short of the 65% growth forecast. This shortfall and an unexpected higher cost base may explain the recent pull back in GQG’s share price. Nonetheless, the company continues to demonstrate solid financial health, as evidenced by the increase in its quarterly dividend to 3.35 US cents per share, bringing the total dividend for the half-year to 5.66 US cents per share, a 46.3% year-on-year increase.
GQG trades on 12.5x PE multiple and a 7% dividend yield. We believe these metrics are too cheap to ignore for what is a high quality, high growth and founder led business.
We continue to focus on industry leading companies with aligned board and management teams that have shown a clear strategy to grow their respective businesses for the long term rather than focusing on short term goals. We believe this type of mentality leads to higher shareholder returns over time and in many cases to takeover offers at significant premiums.
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Disclaimer: Bravura Solutions Limited (ASX: BVS), Viva Leisure (ASX: VVA) and GQG Partners (ASX: GQG) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
In the world of investing, the difference between success and mediocrity often boils down to how deeply one thinks about opportunities and risks. Howard Marks, co-founder of Oaktree Capital Management, is renowned for his deep insights into market behavior, and one of his most influential contributions to the field is the concept of “second-level thinking.” This idea, explored extensively in his memo “First Level Thinking vs. Second Level Thinking” and his book The Most Important Thing: Uncommon Sense for the Thoughtful Investor, offers a framework for investors seeking to transcend conventional wisdom and achieve superior results.
At its core, second-level thinking is about going beyond the surface. Marks defines first-level thinking as simplistic, conventional, and reactive. It’s the kind of thinking that leads to conclusions like “This company is doing well; let’s buy its stock,” or “The economy is in trouble; sell your shares.” First-level thinkers tend to focus on the obvious and make decisions based on straightforward observations that are often already reflected in market prices.
Second-level thinking, on the other hand, is more complex, contrarian, and analytical. It requires asking deeper questions, such as:
Marks summarises this by saying, “First-level thinking says, ‘It’s a good company; let’s buy the stock.’ Second-level thinking says, ‘It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.'”
This kind of thinking doesn’t just accept the obvious conclusion but instead digs deeper to uncover insights that aren’t immediately apparent. It’s about understanding the nuances of market behavior, investor psychology, and the hidden risks and opportunities that first-level thinkers often miss.
Second-level thinking often requires investors to be contrarian in their thought process. Marks frequently points out that to achieve above-average results, one must be willing to think differently from the crowd. Markets are generally efficient, meaning that the consensus view is typically already reflected in prices. To outperform, an investor needs to identify situations where the consensus is wrong and act on that insight.
However, being contrarian doesn’t simply mean doing the opposite of everyone else. It’s not enough to be different; you must be different and right. Marks emphasises that successful second-level thinking requires both contrarianism and accuracy. This means having the insight to see things others don’t and the conviction to act on those insights even when they go against the grain.
Marks writes, “To achieve superior investment results, you have to hold non-consensus views regarding value, and they have to be accurate. That’s not easy.” Indeed, this is the essence of second-level thinking: seeing opportunities where others see none, and risks where others see only reward.
To illustrate second-level thinking, consider a scenario where a company reports strong earnings growth. First-level thinkers might rush to buy the stock, driving up the price. However, a second-level thinker might dig deeper and ask questions like:
By asking these questions, the second-level thinker might conclude that the stock is overvalued and decide to sell or avoid buying, even as others are piling in. This deeper analysis helps avoid overpaying for a company just because it has shown recent success.
Another example could involve a market downturn. While first-level thinkers might react to bad news by selling in a panic, a second-level thinker might look for opportunities that arise from the market’s overreaction. They might ask:
By thinking in this way, the second-level thinker is more likely to buy when others are fearful, capturing value that might not be immediately apparent.
Marks’ work suggests that developing second-level thinking is less about intelligence and more about mindset. It requires a willingness to be skeptical of the obvious, to dig deeper into data and narratives, and to think independently of the crowd. It also demands patience and discipline, as the conclusions reached through second-level thinking often take time to be validated by the market.
Investors looking to cultivate second-level thinking can start by questioning everything. Instead of accepting a company’s success at face value, consider the reasons behind it, the sustainability of its business model, and the assumptions baked into its stock price. In times of market euphoria or panic, ask whether the market has become too optimistic or too pessimistic, and consider the potential for mean reversion.
Marks also stresses the importance of understanding the psychology of other investors. Since markets are driven as much by emotions as by fundamentals, second-level thinkers need to consider how sentiment might shift and what impact that could have on prices. Understanding behavioral finance and the common biases that affect decision-making can give second-level thinkers an edge.
Howard Marks’ concept of second-level thinking is a powerful tool for investors seeking to outperform the market. By looking beyond the obvious, questioning consensus views, and thinking more deeply about the implications of events and decisions, investors can gain a significant edge.
Second-level thinking isn’t about being smarter than everyone else—it’s about thinking differently, more critically, and more independently. It’s about understanding that markets are complex and driven by a myriad of factors, many of which are psychological and behavioral. By cultivating second-level thinking, investors can navigate this complexity with greater confidence and clarity, positioning themselves for long-term success in the ever-unpredictable world of investing.
For those striving to elevate their investment game, the Tamim takeaway is clear: don’t settle for the obvious. Challenge assumptions, think deeper, and strive to see what others don’t. It’s in these often-overlooked spaces that the true opportunities—and the real rewards.
In an era marked by escalating geopolitical tensions and rapid technological advancements, certain companies have gained prominence due to their strategic importance and innovative capabilities.
The ongoing conflicts in regions like Eastern Europe and the Middle East have underscored the need for advanced defence technologies, driving interest in companies that serve military and intelligence sectors. Simultaneously, the rise of artificial intelligence (AI) has captured the imagination of investors and technologists alike, as AI promises to revolutionise industries.
Palantir Technologies (NASDAQ: PLTR) stands at the intersection of these two powerful trends.
With its roots in providing critical data integration solutions to U.S. intelligence agencies, Palantir has expanded its reach to become a significant player in the commercial sector, particularly through its innovative AI-driven platforms. The company’s ability to blend cutting-edge AI technology with military-grade data processing capabilities has made it a standout in the market.
As geopolitical dynamics continue to evolve and AI advances further into mainstream applications, Palantir’s position as a leader in both arenas makes it a compelling subject for closer examination.
Founded in 2003, Palantir Technologies began its journey by developing software solutions for the U.S. intelligence community, primarily to support counterterrorism efforts.
Over the years, the company has expanded its expertise to cater to a diverse array of commercial enterprises, offering solutions to complex data challenges that parallel those faced by government entities. Palantir has developed four principal software platforms—Gotham, Foundry, Apollo, and the Artificial Intelligence Platform (AIP). Gotham and Foundry enable organisations to integrate vast amounts of information into cohesive data assets, driving more informed decision-making. Gotham has been instrumental for global defence agencies and disaster relief organisations, while Foundry is increasingly becoming a central operating system for entire industries.
Apollo, introduced commercially in 2021, ensures the continuous operation of critical systems by managing software delivery, security updates, and platform configurations across any environment.
The company’s latest innovation, AIP, launched in 2023, integrates generative AI models and large language models with its existing platforms to operationalise AI within enterprise data environments. This innovation positions Palantir as a leader in enabling organisations to harness the power of AI while adhering to strict legal, ethical, and security standards. As Palantir continues to expand its market reach, it remains committed to forming long-term partnerships that transform how institutions leverage data in pursuit of their strategic goals.
Palantir has captured the attention of retail investors, largely due to its unique blend of military and AI associations.
Initially, Palantir’s reputation was built on its deep connections with the U.S. military and intelligence agencies. The company’s software has played a pivotal role in critical military operations, reportedly aiding in locating Osama bin Laden. This strong military association provided the stock with a certain allure, particularly among investors interested in defence and security sectors.
In recent years, Palantir has successfully rebranded itself as a leader in AI, thanks to its AIP.
This shift has attracted a new wave of investors who see the company as a key player in the AI revolution. This transformation has fueled a significant rise in Palantir’s stock price, with the company seeing a remarkable 350%+ increase in its share price since 2023.
However, Palantir’s journey has not been without its challenges.
The stock was swept up in the meme stock frenzy of early 2021, with its price soaring to a peak of $45 per share, driven by retail investors on platforms like Reddit. This momentum was short-lived, as the broader tech sector faced a sharp sell-off. Palantir’s stock plummeted by 87%, hitting a low of $5.80 in January 2023. Despite this dramatic decline, the recent resurgence of AI-driven optimism has led to a strong recovery.
The question now is whether this AI-fueled momentum can be sustained, or if it represents another speculative phase in the stock’s volatile history.
Palantir Technologies has joined forces with Microsoft (NASDAQ: MSFT) to deploy its AI products on Microsoft’s cloud platforms for US government agencies, AI products on Microsoft’s cloud platforms for US government agencies, including the Department of Defense.
Palantir will roll out its ‘Gotham’ software, which is designed to pinpoint targets on battlefields, on Microsoft’s Azure Government and Azure Government Secret clouds.
This makes Palantir the first to introduce Microsoft Azure OpenAI Service to classified settings, giving users access to AI language models like GPT-4. Palantir’s AIP aids in testing, debugging, and evaluating AI scenarios, enhancing its defence and intelligence applications. Yet, these uses require government authorisation.
This collaboration highlights Palantir’s strong bond with the US government, with over 40% of its revenue last quarter coming from government contracts.
For markets: AI ventures take centre stage.
This major collaboration strengthens both companies’ positions in the growing market for defence-focused AI solutions. Palantir and Microsoft establishing themselves as key players in classified AI services could attract significant investments and drive market momentum.
Investors should watch for increased interest in firms innovating at the intersection of technology and government.
The bigger picture: Defence meets the future of AI.
This partnership signifies a broader trend of governmental adoption of advanced AI technologies.
Integrating AI into national defence strategies highlights the evolving landscape of military and intelligence operations. The move also shows the increasing reliance on private sector partnerships to enhance national security capabilities, setting a precedent for future collaborations in AI and technology sectors.
Palantir sits inside a compelling thematic, intertwining the worlds of military-grade data analytics and cutting-edge AI.
With deep-rooted ties to U.S. intelligence and defence agencies, Palantir has established itself as a key player in national security, while its recent ventures into AI have positioned it at the forefront of technological innovation. The company’s ability to seamlessly integrate AI into its existing platforms has not only attracted a strong following but also positioned it as a leader in the AI revolution. As geopolitical tensions rise and the demand for advanced defence technologies grows, Palantir’s strategic importance continues to increase.
This unique blend of AI and military applications makes Palantir a company to watch.
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Disclaimer: Microsoft (NASDAQ: MSFT) is currently held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
