Sid Ruttala continues his journey through the ASX 20. This week his notes visit and review Brambles (BXB.ASX) and Amcor (AMC.ASX). A must read for the Australian investor.
Author: Sid Ruttala
The earlier parts of Talking Top Twenty, can be found here:
Brambles continued to surprise on the upside with stellar numbers. Sales revenue for 1H21 was up 6% with underlying profit growth also up 5%. Even more pleasing was the fact that much of the growth came from cost minimisation, efficiencies and price realisation (as opposed to volume growth). The automotive segment continued to lag given Covid headwinds but this was more than compensated for within the broader retail segment as retailers increased inventory levels to keep up with elevated consumption (i.e. stay-at-home). The pandemic also handed the company a catalyst (temporary or otherwise) for CHEP, their global pooling franchise – a segment facilitating the reuse of a pool of pallets and containers.
CHEP America’s continued to deliver an increase of 8%, driven primarily by increased demand by existing customers and increased price realisation (both positives in my view, indicating strong revenue stickiness). This has largely offset the decline in the container business in both Latin and North America, standing at negative -6%. Although the increases in the pallet business is likely to be somewhat transitory, the declines in the Integrated Containers Business (IBC’s) is likely to be lifted as economies come out of lockdowns and industrial production comes back to pre-pandemic levels. This all goes to showcase the advantages of a diversified revenue stream.
Again, kudos to management for increasing efficiencies across the business and maintaining the payout ratio at 53-55% (including share buy-backs) for the foreseeable future. A blessing for the dividend starved investor. Assuming the share buybacks and payout stays consistent, the forecast Net Debt/EBITDA stands at an enviable 2.1-2.3x based on company guidance going into the new financial year. A well capitalised business. The numbers also tell the story of strong relationships with existing customers and a disciplined strategy that saw it divest of the IFCO plastics business and the CHEP recycled business. This is a management proposition.
Red Flags & Risks The big risk remains external shocks, especially with regards to the Eurozone business. The automotive numbers should, in all likelihood, come back to pre-pandemic levels and should see it compensate for some of the transitory tailwinds as a result of Covid (i.e. within the retail and consumer staples business). Nevertheless, it may pay for investors to keep a key eye on new automotive registrations and car sales within the larger Eurozone market.Another risk pertains to Brexit and, although an FTA (Free Trade Agreement) is in place, management has indicated that there is uncertainty around transport costs and border checks. To date, this has acted as a tailwind for top-line growth given the requirements for UK retailers to increase inventory. That being said, the business will require some additional investments, in the heat treating of pallets for example.
Expectations Personally, I continue to remain optimistic about the company. It may not be the sexiest of propositions but management has continued to deliver for shareholders and it remains a good risk-return proposition.
Dividend Yield
A dividend yield of 2.5%, assuming a share price of $11.31 AUD.
Amcor Plc (AMC.ASX)
This could be another reflation trade as the numbers for Amcor are likely to grow, especially within the healthcare segment, as elective surgery volumes increase back to pre-pandemic levels. With flexibles packaging remaining its biggest segment, this is where the next key catalyst is likely to come from. Nevertheless, looking at the numbers so far, sales growth came in at 0.2% with flexibles likely to come in at 0.9%. This remains a play on the bottom line rather than top line growth.
The Bemis acquisition continues to please. This is somewhat surprising in my opinion given my cynicism about serial acquirers (Amcor has made 25 acquisitions since 2010). In this instance however, the synergies seem to be showing up in the numbers. Management has indicated that it remains on track to deliver $70m USD in synergies for fiscal year ‘21 and on track to hit $180m USD by fiscal year ‘22. Scale continues to deliver for Amcor.
Drilling down further, the cost of sales (COS) and operating expenses continued to flatline, COS coming in at 79% while operating expenses came in at 10.1% (excluding R&D). This indicates that Amcor continues to face unfavourable raw material costs. The company is still trying to refocus its product mix and rigids remain a problem despite representing a declining proportion of overall revenue.
Given the level of acquisitions it is perhaps unsurprising that the company’s net debt/EBIDTA is standing at 2.9x following the Bemis acquisition. The company has received some catalysts given the low interest rate environment but we would like to see greater attention paid to 1) refinancing existing facilities; and 2) extending the duration so as to lock in the rates, especially in the likelihood of increased inflationary pressures.
Red Flags & Risks AMC is an unusually complicated company for the everyday investor to assess properly. Operations now span 43 countries with a 20% exposure to emerging markets. This makes both currency risk and geopolitical uncertainty key to evaluating the overall risks to the business. This was evident recently in their operations in Argentina where inflationary pressure and political uncertainty has made it extremely difficult to de-risk this part of the business.Expectations A complex business that will continue to behave as a defensive rather than a growth play. I still do not see any catalysts that may rerate the underlying security but, as I’ve mentioned previously, the price-action is a traders nirvana as it sticks to the $14-16 AUD mark. A strong AUD can be disproportionate in its impact upon the business but could again see opportunities arise for individual traders. You would want to know what you’re doing if you were going down this route though.
Dividend Yield Assuming a share price of $15.50 AUD, then the current yield stands at about 4.5%. On a nominal basis, our expectations are that this will go up at a high single-digit rate over the coming decade or so.
As always, do your own research before making any investment decisions.
Sid Ruttala is an investment specialist within the TAMIM business. He has been actively investing on the ASX for over a decade and has a passion for reading and all things economics, stock markets and history.
Sid Ruttala continues his journey through the ASX20. This week his notes visit and review Newcrest Mining (NCM.ASX) and Woodside Petroleum (WPL.ASX). A must read for the Australian investor.
Author: Sid Ruttala
If you have missed them, the earlier parts to Talking Top Twenty, can be found here:
Before proceeding to the numbers for Newcrest. Let me start with the disclaimer that I personally remain bullish on the yellow metal despite recent messiness in the price action. This is due to 1) inflation expectations; 2) real yields (which are arguably already negative in the US) and 3) long-term bearishness on USD (given fiscal incentives and increased debt issuance) to which it has an inverse correlation. That said, my ‘prediction’ of $3000 USD does seem some way away. It is not unfathomable however for the shiny metal to cross the $2000 USD rubicon with short-term catalysts, including the Basel III requirements that changes the treatment of gold on the balance sheets of dealer banks (transforming it into a risk-free asset so long as physical bullion is held) and making it increasingly expensive/difficult to short the market.
With all that said, we come back to NCM. Solid results so far from Newcrest with management continuing to show balance sheet discipline as well as committing to a payout ratio of 30-60% free cash flow with a minimum set at 15c per/share. Numbers-wise, AISC (all in sustaining cost) margins came in at $842/oz, up 48%, but slightly below the $862/oz it was the last time we undertook this exercise (though this can primarily be attributed to spot prices). Production for 3Q FY21 came in at 512koz, slightly below the previous quarter but primarily due to maintenance at Cadia and Lihir which was in line with my expectations. Underlying profit came in at $553m with EPS of 67.7 cps (121% higher). FCF (Free Cash Flow) came in at $439m.
From a deleveraging perspective, net debt was reduced to $330m despite the acquisition of Red Chris. To give a little context around this, debt stood at approximately $3.7bn in 2014. Looking more in-depth, production across Cadia surprised on the upside while Lihir continued to disappoint somewhat and Red Chris, with a decline of 19% in production, is still very much a work in progress (largely driven by weather events). Management has indicated that the company continues to take advantage of a buoyant copper price however, with current revenues being 29% copper and expected to be lifted to 39% by 2030.
NCM also delivered its Initial Resource Estimate for Red Chris during the quarter, with 13 MoZ of gold and 3.7Mt of copper for open pit. We expect the coming project feasibility study (PFS) by the end of September and this is likely to be a key catalyst for the underlying share price during the year. NCM, in my view, remains undervalued in comparison to its peers with the market discounting the copper mix (i.e. in comparison to ASX100 gold producers) with approximately 0.7-0.8x NAV using a spot price of 1900USD/oz.
Red Flags & Risks: I remain of the view that NCM offers a better risk-return proposition among gold majors given the reserve life of 21 years, a number significantly higher (by about 50%) than their nearest competitors in Barrick (ABX.TSE) and Newmont (NEM.NYSE). Previous concerns included cost management and operational leverage but management has been showing decent momentum in its discipline. The biggest risk going forward is macro rather than company specific. That is, the short-term volatility in both Gold and Copper markets. Jurisdictional risks are also rising, especially in terms of the exploration projects in Chile (where the tax regime is likely to change substantively), Covid-19 also put a cap on exploration, especially in Ecuador.
My Expectations: We remain optimistic about the price of gold given the global monetary and fiscal policy environment. The key catalysts are likely to come from Havieron and newsflow around the box cut excavation in Red Chris. If the current pipeline is executed correctly, production could double across both projects in the coming decade. For me, it was not a buy at the time of my previous notes but, given the current valuation, it is now a proposition worth considering.
Dividend Yield: Assuming a share price of $27.60 AUD, then the current yield stands at about 1.45%.
Woodside Petroleum (WPL.ASX)
Again, a disclaimer before proceeding further into the results. My macro view around the energy markets, and Brent in particular, is bullish. Saying that, when I previously made my predictions on the market I was expecting a recovery to $80 USD/barrel by the end of the year, even I was not expecting the recovery to be this quick. Brent futures at the time of writing are currently tracking at $71.83 USD/barrel. Granted, it has been helped in part by recent cyber-attacks across key pipelines in the US. The fact that the price action has been bullish despite Covid-related headwinds in India, the 3rd largest consumer, is a clear indication that there is significant upside before the year is out as India comes back online. India, by the way, accounts for close to 6% of global consumption because of her reliance on diesel. What surprised me however was the production stateside, which has continued unabated in the Permian Basin. We now expect supply bottlenecks to come through later than expected (i.e. due to a lack of investor appetite for financing any further higher-cost production or new exploration).
That brings us to WPL, a company that remains at the forefront of the Federal Government’s ambitions when it comes to LNG production and domestic gas supply. Numbers wise, production came in at 23.7 mmboe (millions of barrels of oil equivalent), a 5% decline but in line with expectations nevertheless. What was disappointing however was the realised sales price with nearly half the delta coming from sales volume timing (that is the hedge book). The company has in my opinion been rather too conservative in its approach. Nevertheless, revenues were up 22% QoQ to $1.2bn USD. What has been pleasing is the LNG side. Though the company has indicated a blow-out in capex, relating to the North West Shelf JV, and low-pitched legacy contracts (pertaining to the same), they have been taking advantage of higher prices across the Asian markets. Importantly, the Pluto T2 and the works across the KGP interconnecter seem to be progressing as they should, with a final investment decision to come shortly in the 2H21.
Woodside also updated Sangomar capex which was increased to $4.6bn USD (an increase of $40m), reflecting increased costs in the current operating environment. My view was that the original guidance was on the optimistic side, especially for a company known for its conservatism. Nevertheless, this is where the next set of growth for this company is likely to come from and we still remain of the conviction that management showed some substance in its acquisition from FAR and its pushing out of Lukoil. WPL maintains a strong balance sheet with Net Debt remaining at $2.5bn, likely to decrease substantially in the event of a sell-down of Pluto over the coming 24-months (WPL’s exit of the Kitimat LNG project in Canada is also likely to add another $40-50m USD profit to the balance sheet, though they have indicated that this will be excluded that in the dividend calculation. Prudent but disappointing for the short-term investor).
Red Flags & Risks: The company remains well-capitalised. Their goal of net-zero emissions by 2050 should also see it become more palatable for the ESG focussed investor and institutional flows. The bigger risk however remains short-term volatility in the price of oil and OPEC. Broadly speaking, the vaccination uptake across the bigger consumers, such as India, will be key to the future of the spot market and WPL as a result. It is a reflation trade.
My Expectations: In my previous notes I had mentioned that I would look to accumulate at anything below $20 per share, this is now anything below $25 per share. Long-term price target, assuming an oil price of $80 USD/barrel, is $45.
Dividend Yield: The yield is a solid 5.7%, assuming a share price of $24 AUD.
On a nominal basis, this is likely to stay consistent for the next 12-24 months and there is potential for significant upside thereafter.
Disclaimer: WPL is currently held in some TAMIM individually managed account (IMA) portfolios.
Robert Swift takes a look at the current situation around inflation and looks at how we can invest to maintain our spending power in real terms. A must read for those now receiving next to nothing for their bonds and fixed income.
Author: Robert Swift
Inflation is here. It really never went away. Hedonic methods of calculating what was already an imprecise gauge of price changes, have obfuscated, and of course lowered, the official figures. If you wish to see what pre-hedonic calculations would have gauged inflation levels to be today, check out the two charts below on inflation as per the 1980 methodology and the 1990 methodology. Both by courtesy of Shadowstats whose authors provide a plethora of ‘real’ economic data.
We also have an admission of sorts that inflation is here and, woops, higher than promised. Don’t wait for any apology. It’s not entirely the current Administration’s fault. The asymmetrical approach to interest rates, inflation and sound money in general started with ‘Maestro’ and has snowballed since.
Nonetheless a perverse sort of Gresham’s Law is applying here – bad policies continue to drive out good. Inflation is the new good thing and we should welcome it. Yet as Ronald Reagan said in 1978, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
Memories indeed are short.
We are potentially near the end of the liberal era of economic policy with which Regan and Thatcher were associated? Prepare for more government, more rules, and different risks.
Since none of us is going to be in charge of macro-economic policy (at least anytime soon) and we have to invest to maintain our spending power in real terms, against this backdrop of understated inflation and carefully massaged negative real interest rates, how should we proceed?
The answer is to look at certain equities as a better inflation hedge and also a hedge against risk of catastrophic corporate failure. Essentially then do not ignore equities even if you are at an ‘advanced age’ .
Conventional wisdom states that the allocation to fixed interest should rise as you get older. A rule of thumb is that you should have your age as a % in fixed income. So at 60, you should have 60% in bonds. At current levels of interest rates and inflation, this will almost certainly guarantee an erosion in real purchasing power. Don’t do it!
Two dimensions should be used to assess which are the better equities to currently overweight if you wish to buy inflation protection:- one is Governance as in “ESG” (which we think still improperly used); the other is sector membership and the stability of revenue growth and asset base.
Below we show how and why better Governed companies have a better survival rate and thus should have a lower discount rate applied to their dividends. These companies are still currently undervalued.
We then show that in the last 40 years, the risk of catastrophic loss in certain USA sectors has been much greater in some than others. Any investor with a time horizon beyond 5 minutes should thus weight their equity exposure to companies in these sectors.
We have written before on ESG and why we think G is relevant as a risk factor but not necessarily as an alpha factor. We show again below the wide range of ESG cores from different ESG ratings agencies, courtesy of Northfield (no alignment).
This article provides a recent assessment of ESG scores and how they are barely useful.
Nonetheless, good G as measured by its impact on corporate financials, IS useful. Sensible leverage, correct levels of re-investment, and staff retention are all part of any Fundamental or Qualitative assessment in deriving the correct discount rate to apply to a companies’ future earnings. Good G can produce lower discount rates through higher survival rates.
Below is some analysis of the performance of high G companies in a crisis. Think of it as built in downside protection to favour high G companies.
Sector membership matters too. It is always surprising to ask investors how long they think the average company lasts. It is not forever. Many companies fail and will continue to fail. Go back and watch any sporting event from 40 years ago. How many of the companies on the advertising billboards are still around today?
What really hurts compounding of returns is a catastrophic loss of capital; it only takes a few stocks to seriously fall for the poorly designed portfolio to suffer serious damage. So how to avoid this risk? Check out the table below:
Companies meeting these criteria are priced and behave as “index linked corporate bonds”. In this regard they are unique. They provide a decent yield compared to the pitifully low or even negative rate on ‘safe’ government bonds and the current yield on index linked bonds which of course is negative; AND they offer a measure of hedge against inflation since equities are a claim on nominal growth which conventional bonds are not. Index Linked bonds do provide a hedge against inflation but with negative yields, they are expensive. Buying an index linked bond with a negative yield of 1.5% and not a utility company with a dividend yield of 4% is giving up annually, a 5.5% return.
Equities we own in this space include AES Corporation (AES.NYSE), Quanta Services (PWR.NYSE), Johnson Controls (JCI.NYSE), OneOK (OKE.NYSE), Enbridge (ENB.TSE), Terna (TRN.BIT), ENEL (ENEL.BIT), Rubis (RUI.EPA), General Mills (GIS.NYSE), Iron Mountain (IRM.NYSE), ENN Energy (2688.HKG), Verizon (VZ.NYSE).
We view this as getting a yield in line with corporate bonds, AND the index linking of an inflation proof bond. These companies will have a greater chance of survival in the long run if history is a guide. The chances of a policy mis-step are now high so this is the time to be thinking about survivor strategies.
Currently therefore we are overweight Utilities, Infrastructure and Industrials. Given their superior survival characteristics, their lower P/E multiples and higher dividend yields they look attractive, Add in the likely buying frenzy to be unleashed as other investors scramble to get behind the newly discovered infrastructure spending plans in the USA and Europe, the best place to have risk would appear to be in these companies rather than the now very vulnerable to regulation, non tax paying, non-voting share class issuing, expensive stocks of yesteryear.
Lastly here is a slide of returns over the last 18 years accruing to equities, government bonds, infrastructure equities and blends of each. Even during this period of ‘growth’ equity excitement, one didn’t lose out too much by having exposure to defensive stocks in sectors with high chances of surviving a shock.
The great thing about the stock market is that complacency, one trick ponies, and luck, get found out over time. Betting on price momentum with an absence of thoughtful rigorous analysis on valuations, risks, and portfolio construction tools and without any knowledge of long term history, is a disaster waiting to happen.
Robert Swift manages TAMIM’s Global High Conviction portfolio. A portfolio of global equities from major developed global exchanges, it holds 50-80 of the best ideas from Robert and his team. The portfolio uses a systematic and consistent approach to stock selection and portfolio construction to deliver strong risk adjusted returns while focusing on attempting to preserve the wealth of our clients.
Today we are writing about the fast growing sports betting industry emerging in America and a mid cap that is well positioned to benefit. PointsBet (PBH.ASX), one of 2020’s hottest stocks, is an online bookmaker offering sports betting services in Australia while also launching operations in the sport betting market in America. They currently have market access to fourteen US states and are looking to capitalise as an early mover in the new online gambling market in the US. Ever heard the saying “the house always wins”? PointsBet might be the opportunity for investors to win from gambling without the “house cut”.
Author: Adam Wolf
US Sports Betting Market
In 2018 the US Supreme Court passed a judgement that effectively ended the federal ban on sports betting. Since then, twenty states have legalised online sports wagering and 80% of states have either legalised sports betting or introduced legislation to do so. The legal sports betting market presents a rather compelling opportunity for participants, with the total addressable market at maturity predicted to be in the vicinity of $53bn USD. By legalising sports betting state governments can benefit from the enormous taxation revenue gambling brings. Given the large budget deficits governments have amassed as a result of the Covid-19 response and relief, this is something that may be rather appealing. Legal sports betting will also deter people from illegal gambling which cannot be taxed or regulated, a major benefit for state governments and we expect to see most states legalise some form of sports betting in the next few years. The main players in the industry include DraftKings, FanDuel and BetMGM, PointsBet are looking to capture a small piece of a very big pie by achieving a 10% market share in the states they operate in.
Key Financial Metrics
Market Cap: ~$2.2bn AUD Cash and cash equivalents as of March 31: $328m Q3FY Revenue: $65m (up 246% QoQ)
Source: PBH company filings
NBC Partnership
In 2020, PointsBet announced a 5-year deal with NBC worth over $500m AUD. NBC are one of the biggest broadcasters in America and have over 180m viewers, they also hold the largest sports audience in the US. This deal provides PointsBet with a spectacular runway to execute their strategy and scale their platform in the US. NBC were also issued a 5% stake in PointsBet and hold options for a further 66m shares; they are well incentivised to ensure PointsBet becomes a dominant player in the market.
iGaming Opportunity
PointsBet have developed their own igaming platform inhouse. They recently launched their inaugural igaming product in Michigan, which will offer customers access to online casino games. They expect to launch igaming in New Jersey later this year. JP Morgan sees the igaming industry eclipsing $4.6bn USD by 2025.
Banach Acquisition
In April, PointsBet announced the acquisition of Banach Technology, funded through cash and script consideration worth $43m USD. Banach is a leading provider of ingame betting products across multiple sports, allowing customers to place ingame wagers. The acquisition will increase PointsBet’s product offerings and contribute to a higher gross margin. The real strategic value in this acquisition is that Banach currently provides services to some of PointsBet’s biggest competitors. PointsBet will honour the contracts and then cease to provide these services, keeping the IP for their own platform. This will put PointsBet’s ingame offerings ahead of their competitors and will force competitors to build their own models. Within three years PointsBet sees in-play betting representing 75% of all wagers, up from the current 50%. Banach is also part of PointsBet’s focus on building a strong inhouse tech stack. This is proving to be important as PointsBet management highlighted that they were one of the few operators not to have technical issues during the Super Bowl.
With a cashed up balance sheet and no debt, we expect to see more acquisitions that are accretive to PointsBet’s growth in the US market. Most recently, PointsBet acquired Premier Turf Club to strengthen their foothold in the US racing market. This is a timely acquisition given that New Jersey are in the process of legalising fixed odd betting on horse racing.
Source: PBH website
Upcoming Legislation:
Canada
On April 22nd the Canadian House of Commons passed bill C-218, the ‘Safe and Regulated Sports Betting Act’. Now sitting with the Senate, there are still some final hurdles to get through before the parliamentary session ends on June 25th but it is looking like Canada has seen the revenue potential like their southern neighbours and are heading in the same direction in terms of legalisation. This would provide PointsBet with another huge addressable market to enter and it would appear that they have every intention of doing so. PBH hinted at the Canadian sport betting opportunity in their half year results presentation. PointsBet are well positioned to enter the Canadian gaming market after announcing a multiyear deal with the NHL as their official sports betting partner. Canadians love their hockey and PointsBet will have its name all over the upcoming hockey season.
(26 May 2021 Note: Bill C-218 made further progress in Tuesday’s Senate meeting, it was adopted at the second reading and was sent to the Committee of Banking, Trade and Commerce which will convene in the coming days.)
New York
Source: PBH Advertising | PointsBet have taken to partnering with legendary sports names like Allen Iverson (pictured) and, more recently, Shaquille O’Neal
We recently saw New York legalise sports betting. As one of the largest population centres in the country, this is obviously a stupendous opportunity for operators. Unfortunately, New York will only award licenses to a few operators and will tax them at 51% of their revenues. PointsBet will most likely not receive a license even though they do have a second skin agreement with a tribal casino in NY. Given the expenses involved and the heavy taxation, it’s not the end of the world if PointsBet doesn’t get immediate access to the New York market. We see New York issuing more licenses in the near future as they will face functionality issues with a lack of competition in their market.
Arizona
Arizona legalised sports betting in April and will issue up to twenty licenses through tribal casinos and sports teams. PointsBet should announce a partnership with one of the casinos for market access and they may even look to partner up with one of Arizona’s sports teams, as they have done with the Detroit Tigers. Arizona will be a big opportunity for PointsBet if they get market access as all participants will be starting from scratch. Arizona is one of the few states that hasn’t legalised daily fantasy sports. That is to say that Draft Kings and FanDuel will have no existing databases to work off, giving PointsBet a good opportunity to achieve more than their targeted 10% market share.
Florida
Florida have made huge progress towards legalising sports betting after reaching a deal with the Seminole tribe that would earn the state government annual payments of $500m USD. The Seminole tribe will continue to control the state’s gambling activities and details about how many operators will be participating are still unknown. There are some final hurdles to get through. Florida will be the largest state (by population) to legalise sports betting and a license to operate would be a huge addition to any bookmaker looking to capture a share of the overall US market.
Louisiana
Louisiana lawmakers moved forward on a bill to legalise both in-person and online sports betting, the session ends on May 31st but it is beginning to look likely that they will pass the bill before then. PointsBet have already secured market access in Louisiana and the hope is that first bets will be taken before the end of the upcoming football season.
Thesis
The past few weeks have been rough for all gaming stocks, including PointsBet, with PBH down 36% over the past three months. We believe PBH is starting to look like a compelling proposition at its current market cap of ~$2.2bn. PointsBet are establishing a position in a huge market that will only increase in size as more states pass legislation to legalise sports betting. It is also pleasing to see that they are building a strong suite of their own in-house technology, bolstered by their Banach acquisition mentioned above.
On the back of their partnership with NBC they have access to 180m viewers and we would back them to achieve at least a 10% position in the states they operate. In their latest quarterly, management said they are aiming to be operational in eighteen states by the end of next year which, three times the amount of the states they currently operate in.
Source: Illinois Gaming Control Board
Illinois’ wagering handle in March revealed that PBH had achieved a 8.3% marketshare and the recent cessation of online signups in Illinois will work in Pointsbet’s favour as they have the closest registration site to Chicago.
Source: PBH company filings
There are a variety of catalysts coming into play. Assuming they execute, the pending legislation in Canada, the expansion of PointsBet’s igaming product as well as new states in the US passing legislation should all provide decent tailwinds for PBH.
PointsBet’s biggest competitor, DraftKings, are currently sitting on a $22bn market cap, ~10x that of PBH. This valuation makes PointsBet look very cheap given their market access and partnership with NBC. You would think that PBH would look to list in America at some stage alongside their competitors – DraftKings (DKNG.NASDAQ), Penn National Gaming (PENN.NASDAQ), Caesers Entertainment (CZR.NASDAQ) – who are all worth many multiples more than PBH, a US listing could see a much more generous valuation.A theme we saw in the Australian sports betting market was the consolidation of sports betting providers as the market started to mature. M&A activity in the industry could also lead to a significant re-rate of PBH or potentially a takeover offer from a bigger player. The management team, lead by CEO Sam Swannell, have shown that they are more than competent at executing their US strategy and have provided early shareholders with enormous value since listing in 2019. They are the only Australian based sportsbook to be operating in the US market and have made plenty of key partnerships with sporting teams and organisations along the way. If PointsBet are able to execute their strategy in the US and Canada whilst remaining competitive in Australia, we can see them becoming one of the top tier sports betting companies with a market cap closer to the likes of DraftKings and Flutter Entertainment (FLTR.LON).
Disclaimer: PBH was previously owned in TAMIM portfolios but is not currently held. The author of this piece maintains an exposure to the stock having first bought at approximately $3.50 in April 2020. Price target: $20+ Spetember 2022.
This week we take a quick look at three companies that should benefit from borders reopening and the resumption of travel around the world. Typically, investors consider the Flight Centres (FLT.ASX) and Webjets (WEB.ASX) of this world when thinking of travel beneficiaries, but in this case we are examining a few tech-based businesses that, perhaps more indirectly, we believe will benefit.
Authors: Ron Shamgar
Smartpay (SMP.ASX) provides merchant terminals to small businesses in Australia and New Zealand. Their recent quarterly update in April showed growth continuing with 1,000+ new terminals added to their Australian base for the quarter. SMP is currently annualising $28m of revenues in Australia alone. In NZ, SMP generates $18m from terminal rentals and has about 25% share of the terminal market.
Source: SMP company filings
As travel resumes between NZ and Australia (and eventually other countries), we see retail spending for smaller merchants like convenience stores, cafes etc. increasing. A development which should benefit SMP. Prior to Covid, the NZ business received a $70m offer from Verifone and we believe another offer may emerge this year. Regardless, there are 1m terminals in Australia which provides a long runway for growth. We value SMP at $1.30.
OFX Group (OFX.ASX) is an international payments platform that allows consumers and businesses to make payments and exchange currency around the world. Half of the business is in Australia, which competes against the major banks, while the rest of the business is focused on the US and European markets. OFX processes $25bn in transactions per year and will generate $130m of revenue and $35m EBITDA this year (March 2021 year-end).
Source: OFX company filings
Apart from trading at an attractive valuation of 9x EV/Ebitda, OFX will benefit from consumer demand to exchange money for travel and the emergence of online sellers on global marketplaces, like Amazon and eBay, that require currency exchange when they buy and sell their products. As 2H earnings accelerate, we think the market will react positively to OFX’s year-end result at the end of May. Our valuation is currently $1.60+.
Life360 (360.ASX) is a US based technology business that provides an app, primarily for families, that allows them to locate each other, drive safely and call for help in case of an emergency. They currently have over 28m users globally and are on track for USD $110-$120m of revenues in CY2021. The company is trying to bolster its ability to monetise their member base with premium plans and we think the reopening of borders and easing of restrictions around the world, whenever that may be, will accelerate user growth.
Source: 360 company filings
Life360 is also targeting further acquisitions and a US listing, possibly through a SPAC vehicle, later this year. We view this development, if and when it eventuates, as a significant catalyst for their share price on the upside.
Disclaimer: All three stocks are held in TAMIM portfolios.
