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.
What has happened to Lendlease?
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.
Expansion that leads to “Di-worse-ification”
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.
It’s Not All Bad!
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.
The TAMIM Takeaway
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.
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.
This week’s reading and viewing list covers Copper’s Boom Story Has Some Truth — and Lots of Hogwash, Interviews with Microsoft CEO Satya Nadella and CTO Kevin Scott About the AI Platform Shift and Jamie Dimon says the U.S. economy could have a hard landing.
📚 Interviews with Microsoft CEO Satya Nadella and CTO Kevin Scott About the AI Platform Shift (Stratechery)
📺 Jamie Dimon says the U.S. economy could have a hard landing (CNBC interview)
While March results and the subsequent reporting in April/May are quite subdued compared to the chaos of earlier months, we are still subject to a number of high quality companies reporting their earnings.
Last week, two of the TAMIM holdings reported impressive numbers which enthused the market. We take a deeper dive into what drove the investor reaction and the performance below.
Gentrack Group’s Strong Tailwinds and Future Prospects
Gentrack Group Limited (ASX: GTK) reported strong financial results for the first half of FY24, with revenue increasing by 21% to $102 million compared to the same period last year.
We discussed the idea of Gentrack being a future tech darling here.
Excluding one-off revenues from insolvent customers in the prior period, the underlying revenue growth was an impressive 58%. The company’s operating earnings stood at $12.3 million, tracking well against its full-year guidance. However, the statutory net profit after tax declined to $5.3 million from $7.9 million in H1’23, primarily due to the absence of one-off profits from the exit of a high-margin customer in the previous period. Gentrack’s Utilities segment experienced a 17% increase in revenue to $86.5 million, with underlying revenue growth of 60% when excluding the one-off revenues from the prior year.
The company secured new customers, including in Saudi Arabia, and witnessed strong growth in its core markets of New Zealand, Australia, and the UK. Annual recurring revenue in the Utilities segment grew by 49%.
The Veovo division, which serves airports, saw a 49.4% increase in revenue to $15.5 million, driven by new customer wins in the UK and the Middle East. Non-recurring revenues more than doubled, fueled by project implementations and hardware sales. Annual recurring revenue in Veovo grew by 16%. Gentrack invested $12.9 million in a 10% stake in Amber, an Australian energy technology company, to develop innovative solutions for household batteries, EV chargers, and smart devices.
The company’s cash balance stood at $39.3 million as of March 31, 2024.
Looking ahead, Gentrack has upgraded its revenue guidance for FY24 to approximately $200 million, up from the previous guidance of at least $170 million. The company expects operating earnings to range between $23.5 million and $26.5 million (12%-13% margin), reflecting continued investment in strategic R&D and international expansion. Overall, Gentrack’s results demonstrate strong growth across its Utilities and Veovo businesses, driven by new customer acquisitions, upselling, and upgrades.
We feel that Gentrack has some of the strongest tailwinds and revenue growth potential for the next 5 plus years. In our view all global utilities have to upgrade their billing systems with the Gentrack tech stack resonating well with customers. This is now the fifth upgrade to earnings this year.
The company is well-positioned to capitalise on the transformative trends in the utilities and airports industries, with a focus on innovation and international expansion.
OFX Group’s Solid FY24 Performance and Promising Outlook
OFX Group Limited (ASX: OFX), a leading provider of online international payment and foreign exchange services, reported strong financial results for the year ended 31 March 2024, in line with its guidance.
The company’s performance was underpinned by strong execution, synergies from acquisitions, and a strategic pivot towards the lucrative B2B segments. The company’s net operating income (NOI) rose 6.3% year-over-year to $227.5 million, driven by a 2.1% increase in fee and trading income to $229.7 million. Underlying operating earnings grew 3.4% to $64.6 million, and excluding the Paytron acquisition, it increased by 8.2%.
However, underlying net profit after tax (NPAT) declined 10.1% to $33.8 million, primarily due to higher operating expenses associated with the Paytron integration and core business growth.
The B2B segment emerged as a key growth driver, with revenue increasing by 4.8% to $146.1 million, fueled by a 3 basis point margin expansion and a 5.2% rise in transactions. The Enterprise segment, in particular, witnessed a remarkable 32.8% revenue growth, and the pipeline of prospects increased from 67 to 77. The Consumer segment, however, experienced a 4.4% revenue decline due to lower transaction volumes and average transaction values (ATV).
Geographically, the US market remained resilient, with transaction volumes up 19.6% and revenues up 14.2%, supported by a strong economy and favourable USD exchange rates.
The UK market also performed well, with an 18.7% revenue increase driven by a 9 basis point margin improvement and higher transactions. Additionally, European revenues skyrocketed 140.6%, with active clients increasing by 16.3%.
OFX continued its on-market share buy-back program, acquiring 8.6 million shares for approximately $14.3 million, demonstrating its commitment to enhancing shareholder value.
The company plans to launch a new integrated Corporate platform in Q1 FY25, offering accounts payable, invoicing, expense management, and Corporate card services globally, unlocking new revenue streams beyond FX services.
Looking ahead, OFX expects to grow NOI by at least 10% per annum, with an underlying operating earnings margin of 28%-30% over the next three years. The company is well-positioned to benefit from further industry consolidation, leveraging its strong balance sheet and cash generation capabilities.
For FY25, OFX is confident in achieving its goals through organic growth, margin expansion, new client revenue, contribution from new revenue streams, and additional trading days.
With implied forecast operating earnings of $70-$75 million OFX trades on a multiple of 5.5 whilst also trading on a price to earnings multiple of 13. With a bullish medium and long term outlook, net cash of $25 million and growing, we believe there is significant merger and acquisition potential. Discover valuable insights on our top three stocks to watch for potential takeovers here.
The TAMIM Takeaway
Gentrack and OFX have delivered impressive financial results, underscoring strong tailwinds in their respective industries.
We believe the two TAMIM holdings are well-positioned to leverage industry trends, with Gentrack focusing on utilities and airport innovations and OFX on expanding its corporate platform.
With net cash positions and promising growth prospects, both companies present exciting futures for both long term investors and strategic investments.
Disclaimer: Gentrack Group Limited (ASX: GTK) and OFX Group Limited (ASX: OFX) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
This week’s reading and viewing list covers Valuation Multiples: What They Miss, Why They Differ, and the Link to Fundamentals, How To Beat The Market w/ Bryan Lawrence and Risk Seeking vs. Mitigating.
China’s journey in vehicle production is a tale of rapid transformation and global ambition.
From its early days of manufacturing basic, low-cost cars, China has grown into a powerhouse of innovation, particularly with the rise of electric vehicles (EVs). Central to this narrative is BYD Company Limited (1211.HK), a company that began humbly but has now emerged as a formidable competitor in the global EV market. BYD’s ability to produce high-quality vehicles at competitive prices has fueled its expansion into international markets. With a strong focus on sustainability and cutting-edge technology, BYD is not just participating in the EV revolution but leading it.
As it begins to rival industry giant Tesla (NASDAQ: TSLA), BYD’s ascent highlights China’s evolving role in reshaping the automotive industry.
What is BYD?
Founded in 1995, BYD or “Build Your Dreams” is a global high-tech leader in New Energy Vehicles (NEV), committed to technological innovation and sustainability.
With over 29 years of growth, BYD has significantly impacted sustainable mobility across Automotive, Rail Transit, Renewable Energy, and Electronics. BYD’s advanced technology and intelligent performance have transformed the global NEV industry. The company operates in over 400 cities across 70 countries and six continents.
A Fortune Global 500 company, BYD is listed on the Hong Kong and Shenzhen Stock Exchanges.
International Expansion
BYD’s international expansion in the electrification front is particularly compelling due to its strategic advantages and aggressive growth targets.
Leveraging vertical integration and automation, BYD is able to produce electric vehicles at remarkably low costs, with some models priced around $10,000 USD. This cost efficiency allows BYD to significantly expand its market reach, making vehicle ownership possible for many in emerging markets who previously could not afford it. This expansion is not only beneficial for BYD but also for suppliers within the supply chain, though it poses a significant challenge for competitors.
We believe in the current market only Tesla has a viable chance to compete effectively against BYD.
However, in May US president Joe Biden announced a new tariff increase on EV’s from China, increasing from 25% to 100%. The protectionist policy was immediately denounced by Tesla boss Elon Musk who opposed the tariff and was quoted as saying “Neither Tesla nor I asked for these tariffs”. As the auto inventory downcycle begins to bottom out and re-industrialisation accelerates, BYD is well-positioned to capitalise on the next upcycle in the energy supply chain, particularly for AI applications. While geopolitical tensions remain a significant wildcard, these conditions present opportunities to accumulate positions in companies poised to benefit regardless of political shifts or policy changes towards China.
BYD’s strategic moves and competitive pricing in international markets not only expand their global footprint but also reshape the automotive industry by making sustainable mobility accessible to a broader audience.
The Threat to Tesla
BYD is emerging as a formidable threat to Tesla in the EV market, with its rapid growth and strategic advantages.
The tug of war over who is the largest EV maker globally continued in the March quarter. Having taken over from Tesla in December, BYD handed back the title after selling 300,114 EVs in the first quarter of this year. This was down from the 526,409 vehicles sold in the previous quarter. Tesla also saw a decline for the March 2024 quarter but delivered 386,810 units.
As discussed earlier, BYD is aggressively expanding its global footprint, with plans for new factories in Thailand, Brazil, Hungary, and Indonesia.
It is also unveiling advanced hybrid systems, faster charging capabilities, and improved batteries, demonstrating a commitment to continuous innovation. In contrast, Tesla appears to have shelved plans for any all-new vehicles for years and will look to cheaper variants of the existing Model 3 or Y.
Like Tesla, BYD doesn’t just produce vehicles.
BYD is one of the world’s largest EV battery makers, producing its proprietary Blade LFP batteries in-house. This vertical integration allows BYD to control costs and quality, giving it a competitive edge over Tesla, which relies on external suppliers like Panasonic and CATL for batteries. Tesla is working on its own 4680 batteries but production is still relatively low and key technical hurdles remain.
Despite significant price cuts, BYD has maintained impressive gross margins of 21.9% in Q1 2024, compared to Tesla’s 17.4%.
BYD’s net income grew 10% year-over-year in Q1 while Tesla’s earnings plunged 47%. The current price war in the EV market, exacerbated by rising interest rates, has forced manufacturers to lower prices to attract consumers. This has eroded Tesla’s previously best-in-class profit margins, while lower-margin businesses like BYD might also face risks. However, BYD’s success in vertical integration—a strategy also employed by Tesla—could help it achieve better efficiencies and more robust operating margins in the future. BYD’s ability to produce critical EV components in-house, including batteries and software, gives it a significant edge.
BYD’s operating profit margins currently resemble those of legacy automakers more than Tesla’s, its ongoing improvements in scale and efficiency suggest that it could further challenge Tesla’s dominance in the global EV market.
The TAMIM Takeaway
With its vertically integrated operations, diverse and affordable product lineup, rapid global expansion, and impressive financial performance, we feel BYD represents a significant threat to Tesla’s dominance in the EV market.
While Tesla struggles with ageing models, slumping demand, and eroding margins, BYD continues unveiling advanced technologies. BYD’s ability to produce high-quality EVs at remarkably low costs allows it to undercut Tesla and gain market share, particularly in emerging markets. Despite significant price cuts, BYD maintained record gross margins and improved profitability. As BYD aggressively expands its global manufacturing footprint, it is well-positioned to capitalise on the accelerating transition to electric mobility and reshape the automotive industry, posing an unprecedented competitive challenge to Tesla’s EV leadership.
Disclaimer: Tesla (NASDAQ: TSLA) is held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
