This week’s reading and viewing list covers Apple Intelligence is Right On Time, Inflation & Interest Rates More Likely To Rise Than Fall In Coming Years with Jim Grant and Stock Market Concentration: How Much Is Too Much?
One of the most highly anticipated initial public offerings (IPOs) is set to hit the ASX with fast-growing Mexican quick service restaurant (QSR) chain Guzman Y Gomez set to list on the 20th of June.
IPOs on the ASX have had a mixed track record, with some companies experiencing meteoric success while others have struggled to live up to expectations. Notable IPO successes in years gone by include Domino’s Pizza Enterprises Ltd (ASX: DMP), which has delivered exceptional returns (despite recent troubles) since listing in 2005, and Afterpay Ltd (now Block, NYSE:SQ), whose disruptive buy-now-pay-later model propelled its share price to dizzying heights before being acquired.
However, for every success story, there are cautionary tales of companies that failed to capitalise on their public debut, such as Dick Smith Holdings, which collapsed into administration just two years after its IPO.
Companies often pursue an IPO to raise capital for expansion, acquisitions, or debt reduction, while also providing an exit opportunity for founders and early-stage investors to cash in on their investments. The decision to go public is a significant milestone, as it subjects the company to increased scrutiny, regulatory requirements, and the demands of public shareholders. When evaluating an IPO, investors must carefully analyse the company’s financials, growth prospects, competitive landscape, and management team, as well as the valuation and pricing of the offering.
The hype surrounding high-profile IPOs can sometimes lead to inflated valuations, making it crucial for investors to maintain a disciplined approach and avoid getting caught up in the frenzy.
So, should you think about GYG?
A Mexican-inspired QSR with a current network of 210 restaurants across Australia, Singapore, Japan and the US, GYG prides itself on the use of fresh, high-quality ingredients and offers a “100% Clean” menu with no added preservatives, colours, artificial flavours, or unacceptable additives.
The company operates a diverse range of restaurant formats including drive-thrus, strips, food courts, and university campuses. While taking its lead from other popular Mexican QSRs like Chipotle (NYSE: CMG) in the US, GYG attempts to differentiate itself with a stronger emphasis on using fresh ingredients and its diverse range of restaurant formats and ordering channels catering to different consumer preferences.
GYG looks to recreate a vibrant, fun restaurant design inspired by Mexican and urban street culture.
GYG’s offer price is $22.00 per share, valuing the company at an eye-watering $2.2 billion.
The proceeds will primarily fund the expansion of GYG’s Australian restaurant network from the current 185 stores to a targeted 1,000 stores over the next two decades. As a comparison, McDonalds (NYSE: MCD) had 1,043 stores in Australia as of April 2024.
The company had announced it was floating 10.9% of the business raising proceeds of $242.5 million. It has since increased that to $335.1 million with TDM Growth Partners reducing its stake from 29.7% to 26.2% following an additional sell-down of $92.6 million. The supplementary sale by TDM Growth Partners brought on by interest from Capital Research Global Investors, a major global investor in QSR chains committing to subscribing for shares at the offer price.
As part of the float, key backers TDM Growth Partners and Barrenjoey Capital will partially cash out, with co-founder Steven Marks retaining a 9.9% stake valued at $192 million.
GYG is projecting some impressive revenue growth, bringing with it a lofty valuation.
The company’s Pro Forma revenue forecast is $339.7 million for FY2024, with it estimated to grow to $428.2 million in FY2025. Operating earnings are projected to increase from $29.3 million in FY2023 to $59.9 million in FY2025. The IPO values GYG at an enterprise value to operating earnings multiple of 32.5 times, significantly higher than Domino’s Pizza at around 18 times and Collins Foods Limited (ASX: CFK) at just over 14 times.
This rich valuation has raised concerns, especially when compared to the global fast-casual Mexican chain Chipotle, which trades at a multiple of 45 times despite its stronger growth and brand recognition.
However, a controversy has emerged around GYG’s treatment of lease liabilities in its valuation. Critics argue that by excluding $210 million in lease costs from its operating earnings calculation, GYG can present a much higher estimate of 2025 operating earnings in an attempt to justify a richer valuation multiple. Properly accounting for leases could result in GYG being valued significantly higher on an earnings before interest and tax (EBIT) or a price to earnings ratio.
This has raised questions about the accuracy of GYG’s valuation in the IPO prospectus, which many be considered misleading.
While GYG’s growth ambitions are impressive, investors would be wise to approach this IPO with caution.
The rich valuation in comparison to other QSR players raises questions about whether the hype surrounding the offering is justified. The controversy around GYG’s treatment of lease liabilities, which could significantly understate its true leverage if properly accounted for, adds further uncertainty. History has shown that many high-profile IPOs struggle to live up to their lofty expectations once the initial excitement fades. Rather than getting caught up in the frenzy, prudent investors may be better served by waiting on the sidelines to see how GYG’s growth story unfolds as a public company. Only then can the true merits of the business be evaluated without the distortions of IPO pricing and promotions.
A cautious “wait-and-see” approach could pay dividends for those seeking to invest in GYG for the long haul.
Turnaround stories on the ASX are a rare breed, and within the technology sector, they are among the rarest of all. Investors often shy away from tech companies burdened with high cash burn, lack of profits, frequent capital raises, product deviations, and management changes—typically a recipe for disaster. However, every so often, an unlikely contender begins to defy the odds, emerging from the depths with renewed promise and potential.
Such is the case with Catapult Group International Limited (ASX:CAT). This small-cap technology company, originally founded to enhance athlete performance through innovative wearable technology, has faced its share of challenges. Yet, in 2024, Catapult is proving to be a shining light, ticking all the right boxes and quickly climbing out of its previous struggles.
Catapult’s journey from an Australian startup to a global leader in sports technology is a testament to resilience and strategic pivoting. Now, with a focus on profitability and sustained growth, Catapult is capturing the attention of savvy investors looking for a hidden gem in the tech sector.
Catapult creates technology to help athletes and teams perform to their true potential. Founded in Melbourne in 2006, Catapult emerged from a partnership between the Australian Institute of Sport (AIS) and the Cooperative Research Centres (CRC) to enhance the performance of Australian athletes ahead of the Sydney Olympics. Initially focusing on wearable technologies to address fundamental questions in sports performance, Catapult has grown from a little local startup to a global leader in sports technology, offering solutions across the entire performance ecosystem, from wearable tracking to athlete management and video analysis.
Catapult operates primarily in the sports analytics industry, focusing on collecting and analysing athlete performance data. The company’s foundational technology, developed through a five-year collaboration between the Commonwealth Cooperative Research Centre for Microtechnology and the AIS, integrates inertial sensors with GPS to track athletes. This innovative platform has paved the way for sophisticated tools that measure and enhance athlete performance. Today, Catapult’s operations are divided into three main segments:
The company’s commitment to making performance technology accessible to athletes at all levels is evident in products like PLAYR, an athlete tracking device designed for the consumer market. This device allows amateur soccer players to monitor their performance like professional athletes. Catapult’s client base includes some of the world’s largest teams and organisations, reflecting its influence and reach in the sports technology market.
The global sports technology market is a rapidly growing sector, valued at US$21.9 billion in 2022 and projected to reach US$41.8 billion by 2027, with an impressive compounded annual growth rate (CAGR) of 13.8%. This expansive market provides a substantial playing field for companies like Catapult to thrive and expand.
Catapult’s extensive global footprint is a testament to its influence in sports performance technology. With over 500 staff across 28 locations worldwide, Catapult works with more than 3,650 elite teams in over 100 countries. This broad network underscores the company’s capability to drive significant advancements in sports performance on a global scale.
A notable aspect of Catapult’s strength lies in its leadership and insider commitment. Key insiders hold approximately 18% of the company’s 261 million ordinary shares, demonstrating substantial ownership and confidence in the company’s future prospects. Additionally, nearly 26 million unquoted securities, including long-term and short-term incentives and various options, reflect the leadership’s vested interest in the company’s success.
It hasn’t been a smooth ride for long-term shareholders of Catapult. The company initially rode the wave of post-COVID investment in promising growth stocks in 2020, only to see its share price decline sharply over 2022-233 due to disappointing results, capital raises for acquisitions, and a management change to steer the company in a new direction. Additionally during this period, Catapult shifted its focus towards the consumer/prosumer market, resulting in significant cash burn.
However, recent financial results indicate a promising turnaround. The market reaction has been optimistic about Catapult’s outlook following the company’s latest annual results. Some of the key highlights include:
Revenue growth was driven by new customers and increased ACV per team, boosted by the company’s new video solutions. Catapult’s core SaaS metrics showed ACV retention improving to 96.5%, up 30 basis points year-on-year. Customer lifetime duration increased by 15.9% to seven years, and the number of pro team customers rose by 9.4% to 3,317 teams.
CEO Will Lopes highlighted this as a historic year for Catapult, with solid growth in free cash flow and profit margins. The company’s SaaS strategy has been pivotal, delivering substantial ACV growth driven by new customer signings and increased cross-selling with new video solutions.
The company achieved its free cash flow targets, generating US$4.6 million, a US$26 million improvement year-over-year, after paying down US$4.7 million of debt during the latest quarter.
Catapult’s FY24 financial results reveal a company that has not only stabilised but is also well-positioned for future growth. The achievement of positive free cash flow is a significant milestone, demonstrating the effectiveness of the strategies implemented by the new management team. The market responded positively, with Catapult’s share price rising about 10% upon receipt of these results, capping off a twelve-month period in which the share price has increased by more than 80%.
For FY25, Catapult’s management aims to sustain strong ACV growth and high retention rates while balancing growth and profitability. Management has emphasised the importance of adhering to the Rule of 40 to ensure cost margins align with long-term targets.
The Rule of 40, a key valuation metric for SaaS companies, suggests that the combined revenue growth rate and profit margin should exceed 40%. With a 43% rate, Catapult is performing well and shows strong potential for continued success.
“Our objective for FY25 is to deliver on our strategic priorities with a focus on profitable growth,” said Lopes. “We anticipate that this focus on profitable growth will also lead to higher free cash flow as our business scales.”
These metrics will serve as important indicators of Catapult’s progress towards sustained profitability and the development of a world-class SaaS business.
Catapult is a rare turnaround story on the ASX, particularly within the technology sector. Despite past challenges, the company has shown remarkable resilience and strategic agility, transforming itself into a promising player in the global sports technology market. With improved financial results, effective leadership, and a robust growth strategy, Catapult is well-positioned for continued success. As the sports technology market expands, Catapult’s innovative solutions and strategic focus make it a compelling investment opportunity for those looking to capitalise on the growing demand for performance-enhancing technology in sports.
The appeal of global addressable markets and sheer size of growth has drawn many ASX listed companies into di-worse-ification overseas.
Australian companies have faced significant challenges in their attempts to expand globally, including underestimating local market differences, intense competition from established players, and a lack of brand recognition and robust e-commerce strategies. Despite their domestic success, many Australian firms have struggled to adapt their business models and offerings to the unique preferences and competitive landscapes of foreign markets, leading to strategic missteps, financial losses, and writedowns that have hindered their international ambitions.
NAB’s (ASX: NAB) expansion into the UK market through the acquisition of Clydesdale Bank faced significant challenges, including underestimating local market conditions, financial losses, and intense competition.
Wesfarmers (ASX: WES) struggled to expand Bunnings into the UK market due to underestimating local consumer preferences, intense competition from established players, and a lack of e-commerce strategy. This despite dominating the Australian home improvement market.
Lendlease Group (ASX:LLC) is the latest in a string of companies pulling away from the international market.
Lendlease has announced a strategic shift aimed at simplifying its organisational structure, optimising costs, and focusing on its core strengths.
Following activist investor pressure, Chief Executive Tony Lombardo has put a plan in place to shift the company’s focus from expensive international construction projects to its core Australian market. This strategic realignment, which includes shedding thousands of jobs, will result in up to $1.48 billion in impairments associated with unprofitable overseas ventures. Lombardo’s vision is to simplify and refocus Lendlease, emphasising its strengths and potential in the Australian market.
The strategy aims to recycle approximately $4.5 billion in capital, with $2.8 billion targeted by June 2025. This initiative has been well received by key shareholders and investment funds who have previously criticised the company over its capital allocation. Key measures of the change include achieving $125 million in annual pre-tax savings, releasing approximately $3.42 per security of net tangible assets, reducing gearing to 5%-15% by FY26, and initiating a $500 million buy-back.
The company aims to lower its risk profile, improve earnings, and prioritise debt reduction and capital returns through a disciplined capital allocation framework.
Despite impairments and charges expected between $1.150-$1.475 billion pre-tax in FY24, Lendlease has maintained its FY24 guidance of a 7% return on Group equity, equating to approximately $450 million in operating earnings after tax, with modestly above midpoint gearing in the 10-20% target range. This strategic refocus aims to deliver sustainable value, leveraging Lendlease’s integrated capabilities and project pipeline in Australia and its investment platform’s growth potential internationally.
Lendlease’s long time international foray has led to expensive distractions and sub-optimal returns on investment which could be considered di-worse-ification.
Diworseification is a term coined by the renowned investor Peter Lynch. It refers to a situation where a company diversifies into new businesses or markets in such a way that it actually detracts from the company’s overall value and performance. Essentially, rather than enhancing the company’s core business, these diversifications dilute management focus, drain resources, and often result in underperformance.
The ASX is littered with examples of companies who have looked to new investment and tarnished the quality of their overall business.
AMP Limited (ASX: AMP) has had a history of problematic acquisitions. One notable example is its acquisition of AXA Asia Pacific Holdings’ Australian and New Zealand businesses in 2011. This acquisition was intended to strengthen AMP’s market position, but it faced numerous challenges. The integration of AXA’s operations proved to be more complex and costly than anticipated. This led to significant disruptions and inefficiencies within AMP. The acquisition did not align well with AMP’s core business strategies, leading to difficulties in realising expected synergies. Furthermore, it did not deliver the expected financial benefits and, over time, contributed to AMP’s struggles with profitability and shareholder value.
Law firm Slater & Gordon made a highly ambitious and ultimately disastrous acquisition of Quindell’s Professional Services Division (PSD) in the UK in 2015.
The acquisition was marred by inadequate due diligence. Quindell’s accounts were later found to be problematic, and the financial health of the acquired business was far worse than initially thought. To finance the acquisition, Slater & Gordon took on significant debt. When the expected revenues and cost synergies failed to materialise, this debt burden became unsustainable. The poor performance of the acquired business led to massive write-downs and ultimately drove Slater & Gordon into severe financial distress, leading to a dramatic fall in its share price and a subsequent debt restructuring.
There are some success stories with CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH), two ASX winners in global markets.
CSL has expanded its global footprint through strategic acquisitions, such as the purchase of Novartis’ influenza vaccine business. Acquisitions have allowed CSL to diversify its product offerings and enter new markets. The company has heavily invested in research and development, enabling the business to create a robust pipeline of innovative products. This commitment to innovation has helped CSL stay ahead in the highly competitive biopharmaceutical industry. CSL has established a comprehensive global manufacturing and distribution network, ensuring that it can efficiently produce and deliver its products worldwide. This network includes state-of-the-art facilities in key markets, allowing for local production and quicker distribution.
Cochlear has a well-established presence in over 180 countries, supported by a network of service centres and clinics.
Cochlear is renowned for its cochlear implant technology, which has significantly improved the quality of life for individuals with severe hearing loss. Continuous innovation in their product offerings has kept Cochlear at the forefront of the hearing solutions market. Cochlear has built a strong brand reputation as a leader in hearing solutions. The company has also formed strategic partnerships with medical professionals, research institutions, and healthcare providers to enhance its market presence and credibility.
Lendlease’s decision to retreat from its international construction and development operations exemplifies the challenges many Australian companies face when attempting global expansion.
Overextending into unfamiliar markets, underestimating local nuances, and intense competition from established players led to significant financial losses for Lendlease. The company’s strategic realignment to focus on its core Australian business and strengths highlights the importance of disciplined capital allocation, adaptability to local markets and a clear competitive advantage when venturing abroad.
Lendlease’s experience is not the first and is unlikely to be the last tale of an ASX-listed business pursuing aggressive global growth, emphasising the need for rigorous due diligence, localised strategies, and a firm grasp of their core competencies to avoid the pitfalls of diworseification.
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Disclaimer: Lendlease Group (ASX: LLC), NAB’s (ASX: NAB) and Wesfarmers (ASX: WES) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
