To wind up the year we decided to take a tongue-in-cheek look at the year that was. There were a number of predictions being widely thrown around by those in the industry to start the year, unfortunately many of them turned out to be unfounded. So, let’s dive into 2019 in review!
Wow, it’s the end of 2019 and, while a full year has passed, it seems like yesterday that the markets were supposedly melting down after a ten year upward trajectory. A meltdown that thankfully never eventuated and (hopefully) will not be forthcoming in the near future. Granted, hope is a rather perverse emotion when it comes to looking at the markets objectively, but then again it is Christmas and we would rather end on an optimistic tone. Below are some predictions for 2019 that we never made but have been everso forthcoming by our esteemed counterparts in not only the financial press but the buy-side at large.
Prediction 1 – Central bank policy will reverse course and normalise
There was a healthy debate on this one in the TAMIM office leading into 2019, ultimately we came to the conclusion (by a narrow majority) that it would not be the case. It would be fair to say that, given Powell’s past and rhetoric in the lead up to taking his place as the Fed chair, most in the industry expected a clear break from the policy of his predecessors. While it did seem to have substance, this did appear rather presumptuous in retrospect. A freeze in the overnight credit markets and a rather bloody market sell-off and it seemed that they blinked immediately. As we have been saying consistently throughout, monetary policy is caught between a rock and a hard place so to speak. They will not only find it exceptionally difficult to reverse course but, in the absence of any catalyst, will find it hard to substantiate a normalisation of rates or the balance sheet.This trajectory/trend has now come closer to home where the RBA not only lowered the cash rate to historically abnormal levels but might very well undertake unconventional measures in the forthcoming year. It seems that Central Bankers having weak legs is a global phenomena. After all, it took Lowe a good two months from categorically ruling out QE to coming down to “maybe, it’s in consideration”. We wait with bated breath for him to throw the ball firmly in the governments’ court and blaming a lack of fiscal stimulus for any market corrections in terms of real assets.
In essence, the pundits were right, they did reverse course but unfortunately for that particular prediction it was a 360 degree turn and the end result is the same old, same old. While it was not called QE, the actions by the Fed in September this year with regards to the Repo markets came quite close to it (as we pointed out). As a gentleman that we were speaking with put it: “If it looks like a duck, swims like a duck and quacks like a duck…”
Prediction 2 – Active Management is dead
Here is one that we never hear the end of. It seems that because of the underperformance of a great deal of active managers in the current market environment, the whole industry is in decline and does not add any value. The problem is, this is contingent on time frame and how you look at it. Yes, value managers have found the current environment quite hard to perform in but that is just one component of the entire active management industry. As we have consistently said, different styles work in different contexts. Try looking at the performance of growth managers over the past ten years. Then it seems the counter argument is over the very long-run, the market outperforms. And here there is substance, because markets can survive centuries but managers unfortunately are constrained by a little thing called lifespan.
For us, maybe it did prove correct. Our benchmark in Asia is up 14.95% and we only did 17.72% (CYTD at 30 November 2019), a negligible performance if you ask me. This is even more so in our domestic equities portfolios where the ASX 300 is up 26.33% in 2019 so far and we have only managed a paltry net return of 53.52% in our Australian All Cap strategy (at 30 November 2019), an even greater gross underperformance. We would formally like to apologise for being foolish enough to attempt active management.
Humor aside, we still firmly believe that (taking away market context) there is always a place for human skill and intellect when it comes to managing portfolios. Think about the market as an ocean with currents, rising and falling tides. The key is, it is all well and good to go up on a rising tide, but it pays not be left standing naked when the tide retreats – that is where a good active manager might help.
So… Active management is dead, long live active management!
Prediction 3 – Trump will act like an absolute statesman as he grows into the role
Alright, no sane person quite made this particular prediction. But in all honesty, the Trump presidency has created significant buying opportunities for the markets. Not for the reason he seems to think but the sheer impact the Tweeter-in-Chief has had on day-to-day market sentiment. The key to understand is that most of it might be noise and look to the fundamentals or the outcomes. In terms of trade, most of the negotiations when it comes to details are ironed out behind closed doors by the likes of Lighthizer and his counterparts in Beijing with, in all seriousness, very little input from the President and we would go so far as to say, intentionally so. The mood of most the chaps at the US State Department is not likely to be nearly as hawkish as the President might like to make it seem.As far as we are concerned they have done an exceptional job in terms of navigating the intricacies of the phase one deal despite their top man seemingly working against them. This issue will not have a short-term solution but will lead to a gradual disentanglement of supply chains which, for the discerning investor, creates massive opportunities. Mayhaps a bit of active management might be required picking the right sectors and companies within them?
Aside from trade, the very nature of the Trump Presidency and its divisiveness is, believe it or not, not necessarily a bad thing. We got the corporate tax cuts and the sugar high as a result, deregulation that is (in the very near term) great for the markets. Sometimes, politicians not being able to do much as a result of legislative gridlock is a blessing in disguise. Mayhaps, the logic here is, the markets got what they wanted and might be happy to let Capitol Hill bicker over everything else so that on the flip-side there is at least a guarantee that there won’t be policy shifts that will be detrimental for the markets in the medium-term.
Prediction 4 – The property market is in for downturn
Simply put, nope. Didn’t happen and in the absence of a surprise economic downturn, not likely to happen. Granted, there might be headwinds that lead to certain dislocations, namely fluctuations in credit growth, but property prices are rather sticky even in a downturn. We continue to see steady population growth in metropolitan areas, especially on the Eastern Seaboard and to a lesser extent Tasmania. We might not necessarily achieve the same returns that we have been used to in the past but the quest for yield when the risk-free rate of return (i.e. RBA Cash Rate) is zero-bound should allow the market to steady. In some cases the opposite has been true with some of the best performing sub-groups of the ASX being REITS which have seen their yields compressed but their valuations appreciate to historic levels.We firmly believe that continued consolidation of the property market will create opportunities especially within commercial and industrial contexts. And, as we have demonstrated with our recent property transaction, you can still sustain a reasonable yield on a risk-adjusted basis if you are discerning about the matter.
Prediction 5 – We are in for another GFC
History is an interesting thing. As humans, our minds tell us to look for similarities in various situations in order to draw meaning and provide some semblance of a clue as to what is going on. After all, this is the reason why when we are young and shown a cat we are then able to extrapolate that information and look at other cats and know they are cats. It is why we think of a lion or tiger as a big cat and not a (house) cat as a small lion/tiger, context and reference points are crucial. Same with history, however there is a limit, history rhymes but it does not repeat. It is understandable that people have a sour taste in their mouths following the GFC and what that did to their wealth and savings. Trying to find similarities between now and then and making predictions that, just because there are some correlations, we will have the same outcome is a rather futile exercise. Correlation is not causation as my statistics professor used to say. As the graph below shows, if that were the case, than the rise in average global temperatures is a direct result of the fall in piracy.
That is not to say that we are suggesting there will never be a market correction but trying to time it or predict when it might be is a rather pointless exercise. More people have lost money trying to time the market than they have by staying invested through the tough periods. How many people panicked and went to cash (or a significant cash position) at the beginning of this year? And what did the market return this year? We can learn from history and understand the causes of specific events and identify catalysts that might be similar in nature so as to avoid them. We do so by being rational and reasonable, having a diversified portfolio across geographies and asset classes. When we say that, we are not talking about having a bunch of underperformers that hammer returns but true diversification where one can reasonably justify lower correlation.
We end our little tongue-in-cheek tirade with one final remark:
Markets are great at head-faking people, just when you think you understand them they shape-shift. The key is to enjoy the new shape and, if you can or if you’re really good, see what the next shape might be. If you’re not, just enjoy the spectacle.
Over the past few weeks we have tried to elaborate upon what is turning out to be one of the most interesting and dynamic secular growth stories of the coming decades and perhaps century. And so, we would like to use this article as a conclusion of sorts, namely addressing the why? And more importantly, why now?
Author: Sid Ruttala
If you wish to read the preceding articles, you can find them here:
I won’t beat around the bush any further, let’s get right into it.
Why?
For those of you somewhat familiar with previous articles, you are probably aware of my fascination with Kuhn and the notion of the paradigm shift. The transformations currently occurring across mobility are, in my view, just such a shift. A once in a generation change and opportunity. The fourfold schematic that we’ve elaborated upon so far is a simplistic and I hope effective way to distinguish the opportunities that are available for the discerning investor.
But coming back to the question of why (and it’s not complicated), here are a few numbers:
€20 billion
The amount of penalties that automakers face going into 2021 if they don’t meet new stringent CO2 emission targets9 Countries (and counting)
The number of nations currently discussing the total ban on internal combustion engines by 2030$2.5 trillion
The minimum value of the new ecosystem of businesses and services that are emerging within the segment by 2030
$8 – 10 trillion
The overall opportunity set over the next 50 years.
62%
The percentage of automotives that are used as Robo-Taxis in China (hint as to why this is a game-changer: think about the traditional automobile sales and private ownership).
$1.1 trillion
The most conservative projection for market revenues generated by mobility services in China
900 billion
Total sales of autonomous vehicles (projected to make up 40% of new vehicle sales by 2040).
If the above statistics are not incentive enough for the reluctant investor, have a look at the below video around the Hyperloop and think about the implications for domestic air carriers if such technologies are commercialised.
The point here being that just as the advent of the internet had vast implications in industries ranging from retail to media, the impact of which took anywhere between months and decades to play out, so too will changes in mobility be a thematic. The implications and questions are not limited to whether Tesla is overvalued or not, but what does it cost for me not to have some sort of exposure or at least awareness? You might have exposure to energy, telecommunications or even a supermarket chain, if you think that this thematic wouldn’t impact you, then think again. Taking the supermarket as an example, think for a moment about what it takes to get fresh produce from farm to shelf? For those that aren’t willing to adapt to new technologies and recognise efficiencies within the supply chain, what does their future look like? Think of retailers like Nordstrom or JCPenny. We’re quite sure that most investors in these companies didn’t look to the WWW (World Wide Web) while still in its infancy and see it as a threat to them.
Why Now?
I am not a believer in trying to time the market (I prefer the old-fashioned time in the market), but sometimes it is good to be aware. The best time to have invested in technology stocks would probably have been 2003 after the massive run-up in the dotcom bubble. After the bubble burst, you would’ve bought the capex that had been invested, the R&D and everything that went with it for pennies on the dollar.
1. Business Insider, https://www.businessinsider.com.au/self-driving-cars-at-peak-of-gartners-hype-cycle-2015-8
2. Forbes, https://www.forbes.com/sites/enroute/2018/08/14/autonomous-vehicles-fall-into-the-trough-of-disillusionment-but-thats-good/
3. Business Insider, https://www.businessinsider.com.au/waymo-says-it-will-start-giving-rides-without-safety-drivers-2019-10
My rule of thumb is always this: let someone else pay for the exploration and I would ideally like to buy at a valuation below whatever has been spent.
The mobility segment is at such an inflection point now (though one wouldn’t recognise it just by looking at the price action of Tesla or Nio Inc.). The more adventurous capital has already been spent (think about the $5bn cap raise just committed by Tesla in the past year). Further up the supply chain, across components like semiconductors, we have seen consistent capital outlay and we are beginning to see the commercialisation. This is helped in no small part by existing regulation (catalysed not only by the EU but by now a Democrat win in the US and across every major developed and developing economy, including China) and policy incentives.
The time is now. And if we have another sell-off, get even more aggressive (the adventurous capital is also the most flighty).
Recent weeks have highlighted the rather uncomfortable and somewhat frosty relationship between our nation and our largest trading partner. Hence we thought it might be pertinent to revisit the topic, something we first elaborated upon in the infancy of the Trump administration and his “trade war.” Much has changed and the situation continues to evolve.
Author: Sid Ruttala
In particular, I wish to give my two cents on where I see this situation heading and more importantly what it could mean from an investment perspective, especially given our reliance on China as an export market and what is probably going to be the largest consumer market in the world by this time next year. In particular I want to answer the all important question of where to next?
Some Context
Let me begin with some key facts that some of you may not be aware of. China’s growth this year, even in a world of Covid lockdowns, stood at 2% with consensus estimates for 2021 at 8%, the more optimistic standing at 9%. What does this mean and why does this matter? For one thing, if the Chinese economy were to keep its current momentum and trajectory, then it would be the exact size in 2021 that consensus estimates pegged it to be now back in 2019. To put it more succinctly in the words of The Economist, “it amounts to saying that China’s economic output will be as voluminous as it would have been had the coronavirus pandemic never happened.”
The nation with patient 0 handled itself efficiently but also came out, one could argue, stronger. The pecking order post-Covid has changed. Take India as an example, which saw its GDP contract by close to 10% in 2020. Or the US with its rampant and ever increasing Covid case count, dysfunctional political discourse and resurgent tribalism. The EU, with similar issues and a resurgent case count, is not much better. Vaccine notwithstanding, the global crisis has exposed many of the flaws within the Western world’s political framework and discourse, leaving many economies with some scarring that will take time to recover from, including consumer and business confidence. Contrast this with the resurgent consumer demand and credit growth in China where recent McKinsey surveys showed that 66% of the population believed that their finances will not be impacted for more than three months or not at all. This is especially relevant if one considers that despite its nominally “Communist” framework, whatever that term means for the CCP as it currently stands, there is no welfare or government support.
The Trade War and the lip service that followed suit not only enabled China to catalyse its own economic policy but also enabled them to put into action an evermore expansionary outlook (or try to). Even before the change in US administration, the policy makers in Beijing were putting into action a policy to transition away from reliance on export markets, including the US, through the curtailing of credit growth and corporate leverage, beefing up of local markets and increased self-reliance. The One Belt One Road (OBOR) is a way to not only secure China’s own supply chain but to also create the next burst of growth as the economy moved into the middle-income category where labor arbitrage (i.e. cheap labour) could not be relied upon further (though this was temporarily paused in 2020 as a result of Covid).
Source: Caixin
What has been evident is that policy makers are increasingly focusing upon and realising the fact that future GDP growth will come from developing an internal market with I (investment) and C (consumption) playing a greater part in the economy than has been the focus to this point. For some further context, I would suggest reading and reviewing the proposals put forth for the 14th Five-Year Plan (2021-2025) currently under review in the fifth plenary session. The focus is on “dual-circulation” and the drastic boosting of consumer markets while mitigating foreign risks.
In some ways, this is a page out of the US’ playbook whereby access to its own consumer and financial market allowed it to obtain the influence to not only export its systems but also its ideas/ideology through much of the post-WW2 era. Think back to Japan’s resurgence post-WW2 and the reliance of its own economic fortunes to that of the United States. This is perhaps one of the reasons that so much priority was placed upon the re-integration of Hong Kong into the broader Chinese state. It is also showcased by the fact that Net Exports, in terms of contribution to GDP, dropped from 35% in 2006 to a little over 17% in 2019 (and declining).
“When trade declines and exports drop, more and more Chinese products will be consumed and circulated internally,”
- Lin Yifu, dean and professor, Institute of New Structural Economics of Peking University. A vice chair of the expert advisory committee for the drafting of the 14th Five-Year Plan.
We will continue to see the expansion of China and its influence across much of SouthEast Asia and a carving out of a sphere of influence to include smaller nations such as Pakistan, Vietnam, Cambodia and much of Central Asia. The development of its own consumer and financial markets also offers China a primary place within the Regional Comprehensive Economic Partnership (RCEP), the largest trade deal signed in history. At the same time, it comes at precisely the time when the United States became ever more inward looking due to Trump’s isolationist “USA First” policies and pulling out of the TPP which had more merit in counterbalancing Chinese influence in the Asia Pacific than from a purely commercial point of view.
My thoughts on the process, especially when it comes to the political calculus of smaller nations including those in our backyard (i.e. Samoa, Fiji, etc), is along the lines of “better the devil you know”.
What does this mean? And why does this matter?
The Trump administration’s effort to counteract China and force a level-playing field for American businesses would have worked if it wasn’t for the unfortunate timing. The China of the 90s or even the early 2000s would’ve been the perfect target for such a confrontational approach. Unfortunately, the China of today is not what it was. It is in a position that when the deal was signed, much of the content was pretty much status-quo with increased buying of US goods that would’ve been necessary anyway (i.e. agricultural goods) given China’s own resource deficiencies.
I’ve mentioned in my previous articles that the Chinese state is not encumbered by the vagaries of election cycles or short-term approaches, their plans are multi-decade in nature and their projects (just as most autarchic regimes) are grand (think Three Gorges). The biggest incentive for the state is to avoid a repeat of the embarrassment that saw it fall from accounting for one-third of global GDP for much of human history to losing the opioid wars and the more recent WWII and Japanese occupation.
It is a state that is especially sensitive to perceived slights even if they are not intended as such. I am quite sure our Prime Minister is starting to find out.
Where to next?
The change in administration Stateside, especially given the cabinet picks that we have seen so far, suggest that the US might just come back to take its place within the multilateral framework. This is the only way in which to counterbalance Chinese hawkishness (the problem with Hawks and Nationalists unfortunately is that they exist on both sides – statecraft and economics only works when the parties are equally satisfied or dissatisfied). For the moment, it will be important to watch how the agenda is set come January. Unfortunately, the damage might have been done, so much so that any deals inked by an incoming administration may very well be dismantled or reversed by the next. Individuals can change their minds on a whim, the State cannot (or should not). In economics we call this path-dependence, it exists for a reason.
For us investors, we have a few key takeaways:
We will see China overtake the US as the largest consumer market in the world over the coming two years which has a twofold impact. The first, they have a lot more breathing space and can take a more confrontational approach since the power dynamic has now shifted. The second, it offers immense monetisation opportunities for the discerning investor (think everything from consumer discretionary to luxury goods) and I say discerning because all of a sudden the investor has to be cognizant of the political ramifications of policy. For example, if import restrictions make it harder for Penfolds and TWE, that doesn’t mean Chinese consumers stop drinking wine, they will just look for alternative brands.
We will see increased asset valuations as the corporate leverage decreases in preference for equity and the state places increased focus on developing capital markets.
Spheres of influence will be carved out which will once again offer opportunities. As I alluded to in my Mobility series, for example, the creation of artificial barriers to entry and hence economic rent-seeking by companies might not be convenient for consumers, but for the investor they can be profitable. If you want to see how this works in practise closer to home, read about the “Tattersalls heirs”.
The telco sector is currently the largest thematic exposure we have across our portfolios. It’s a sector we like because it’s defensive and has been a key beneficiary from the Covid remote working environment. Every 5-10 years we also see a period where the industry goes through large rounds of consolidation, mergers and acquisitions that can last several years.
Authors: Ron Shamgar
We have seen this begin recently. Think TPG merging with Vodafone, Uniti group acquiring Opticomm, Optus offering on amaysim’s mobile business and many other deals at the smaller end of the market.
Our top three picks in the sector are, in our opinion, undervalued and could even become one larger company one day
Uniti Group (UWL.ASX) is a fibre infrastructure play. UWL competes directly against the NBN and, following the acquisition with Opticomm (OPC), they now have 15% market share of Greenfield residential connections after the NBN.
Source: UWL company filings
Although UWL had to pay up for OPC following a bidding war against industry super fund, Aware, it does highlight the desired quality of an annuity, long life, cash generating fibre business. In addition, UWL recently received ACCC clearance for functional separation which means they can now sell internet services direct to consumers. This will allow UWL to capture more of the value chain margin and acquire more internet service providers (ISPs) in future.
We forecast UWL to deliver in excess of $100m of EBITDA in FY22 which places the stock on 11x EV/EBITDA. We also expect the stock to enter the ASX200 early next year. We value UWL at $2.00.
Aussie Broadband (ABB.ASX) is a pure play ISP provider which only listed a month ago and is already up 100% from its IPO price. Despite this, we believe it is still undervalued. ABB is the fastest growing (organic growth with no acquisitions) ISP brand in Australia with almost 90% year on year growth in residential connections, 310,000 during Q1 FY21.
ABB has taken 11% of all new NBN residential connections during Q1, a number which contrasts well to their current overall market share of 4%. This key metric is significant as it highlights that the company is taking share and is a good indicator of future growth.
Source: ABB company filings
Additionally, ABB is currently rolling out its own fibre infrastructure in the Australia’s main cities to connect directly to the NBN points of interconnections. This will allow ABB to save over $15m in costs and is all EBITDA margin by FY23. ABB can also sell add on services on this fibre to corporate customers.
We estimate that ABB will have over 500,000 residential connections by FY23 and EBITDA in excess of $55m. We value ABB at $3.00+ and believe it is a potential takeover target for UWL in the future.
Spirit Technology Solutions (ST1.ASX) is a modern IT services and telco provider, mostly to SMEs and corporate/government clients. ST1 is fast acquiring smaller telco and IT businesses and has recently entered the cyber security sector via two acquisitions. ST1’s strategy is to become a one stop shop provider to its customers. Offering not just internet/data connectivity, but managed IT services, cloud software and cyber security solutions.
Source: ST1 company filings
ST1 is currently annualising over $100m in revenues and EBITDA margins of about 15%. We believe more acquisitions will occur in 2H FY21 and, in our estimation, the company is well funded to complete one further deal. We estimate ST1 to exit FY21 on a revenue run rate of $150m+.
Part of our investment thesis in ST1 is backing its Managing Director, Sol Lukatsky, who has transformed this business over the last twelve months. We believe Lukatsky is focussed on crystallising shareholder value in the next 18-24 months through a merger or sale transaction. Once again, we see UWL as a potential acquirer as they have actually made a bid for ST1 in the past, almost two years ago. Watch this space. We value ST1 at 55 cents.
Disclaimer: TAMIM currently has positions in the three stocks outlined above.
Ron Shamgar provides an update on a number of the companies held in TAMIM’s Australian equities portfolios.
EML Payments (EML.ASX) provided a trading update for Q1 with revenues of $40m and EBITDA of $10m. EML’s transaction volumes have recovered strongly since the depths of the pandemic crash with GDV and revenue increasing +20% on Q4. The Gift & Incentive (G&I) segment was only down 11% on last year as shopping malls reopened globally. There is still uncertainty for investors as the Q4/Christmas period still is a key seasonal driver of earnings for the gift card segment with an incremental $19m of profit generated in the November/December period.
Source: EML company filings
EML is currently annualising over $60m of EBITDA based on last year’s seasonal peak, which is over 10% higher than consensus expectations. Our discussion with management in November points to steady volumes so far. There is a decent possibility that we see consensus analyst upgrades come in February next year.
Tesserent (TNT.ASX) is now officially an “8x bagger” for us since we bought in at 5 cents last year. The company continues to aggressively acquire cyber security firms in Australia but, more importantly, is winning new contracts organically which shows that the strategy is working so far. TNT provided the market with a bullish update in October, Q1 revenue was up 42% to $15m and annualised revenue run rate in excess of $100m.
Source: TNT company filings
The company is cashed up and now profitable. In addition, management has given a new annualised revenue target of $150m by June next year. Investors have responded well with the stock hitting our valuation of 40 cents during the month. We took the opportunity to continue taking profit. We expect more acquisitions and probably an expansion overseas. Based on their June forecast, we value TNT closer to 50 cents.
Spirit Technology (ST1.ASX) provided a Q1 update with revenue up 150% to $15.6m, 70+ new resellers signed and $30m of cash and debt for further acquisitions. We expect a deal to be announced before Christmas and we see greater focus on enhancing the company’s cyber security offering. We expect ST1 to finish FY21 with an exit run rate of $150m of revenues and EBITDA in excess of $22m.
Source: ST1 company filings
The business is operating in two segments of the market where we are seeing strong customer demand and consolidation (Telco/IT and Cyber Security). We believe management aspirations are to crystallise value for shareholders via a transformational transaction in the next couple of years. We value ST1 at over 50 cents.
AVA Risk Group (AVA.ASX) is a technology company compromising of AVA Global, providing risk management and logistics solutions, and Future Fibre Technologies, providing security solutions through electronic locks and fibre detection technologies. We took a position in AVA mid-year at 15 cents as we saw a new management team turn the business around and reduce costs while growing revenues. During October, the company provided a robust Q1 update with revenues up 73% to $17m and EBITDA up 522% to $7.7m. The company is cashed up with a net cash position of $11.5m.
Source: AVA company filings
We estimate FY21 EBITDA of $20m and a cash balance of $25m. The company has a strong pipeline of new business opportunities of which management expects to win a large share. In addition, the services division is looking to participate in ongoing industry consolidation and we believe a possible sale of the business could yield $40m+. The stock is now up 4.5x since we bought and we have taken the opportunity to take profit. The next catalysts to watch for are contract wins and corporate activity.
Redbubble (RBL.ASX) provided a strong trading update for Q1 that saw sales up 116% to $148m and EBIT of $22m with strong free cash flow generation of $27m. The business’ cash balance is at $90m. Historically, Q1 accounts for 22% of annual revenues so, on the current run rate, RBL is on track for EBITDA of $120m in FY21. The market is currently pricing in $70m. We track RBL’s global web ranking regularly as it’s a good measure of its growth trajectory over time.
Based on the data at hand and a seasonally strong Q2 sales period, we expect the next update to be very strong and well received by investors. RBL is currently the fastest growing and most profitable cash generating e-commerce company on the ASX, yet trades at a material discount on all metrics to its local and global peers. The recent CEO sell down of shares has dampened sentiment for the stock but we see this as a buying opportunity on a longer term basis. Our valuation is currently $7.00+.
Shaver Shop (SSG.ASX) provided a stellar first quarter update with sales up 20% to $49m, online sales growing 192% (now 33% of group sales), and NPAT up 185% to $4.9m. For perspective, SSG reported $11m profit for the whole of last year! Unlike many other retailers, SSG never received JobKeeper. We see the company benefitting from the structural shift online as consumers are still discovering the Shaver Shop brand.
Source: SSG company filings
We believe the company is taking market share away from traditional brick and mortar retailers and department stores. The personal care market in Australia is worth $11bn and we believe SSG will continue to grow and take share for the next few years. The stock is trading on an estimated 9x PE and a 7% fully franked yield. We see the 2H sales momentum as key for the stock to rerate to a multiple that is more reflective of its growth rates, a quality cashed up balance sheet and relative peer valuations. We value SSG at $1.50.
Healthia (HLA.ASX) announced a transformational deal to acquire the Optical Company for $43m. The business generated $36m and $5.7m EBITDA last year and diversifies HLA into the highly fragmented and defensive optometry sector. On a combined basis, the group is now a substantial allied health company with $180m of revenues and $30m EBITDA in FY22. Since listing, HLA management has delivered on expectations and has shown to be disciplined in its progressive acquisition of podiatry and physiotherapy clinics.
Source: HLA company filings
Pleasingly, the organic growth rate was 11% in Q1 showing that the business is not just growing via acquisition. The stock is currently trading on 5x EV/EBITDA, 8x PE for FY22 and has a 5% fully franked dividend. We believe the stock is now in the crosshairs of most fund managers based simply on scale and the market cap exceeding $100m. We expect a significant rerating of the earnings multiple in the next few months. HLA is a conviction holding and we value it at $2.25.
Enero Group (EGG.ASX) is a digital marketing and creative brand agency with offices in Australia, US and UK. The company is not being impacted by the reduced media and advertising spend experienced by peers as the majority of their customers are either in defensive sectors, such as fast-moving consumer goods (FMCG), and technology companies, which are prospering. The Q1 update released in October was almost jaw dropping with revenues up 11% to $37m but EBITDA up 81% to $9.8m (this number includes $1m of JobKeeper).
Source: EGG company filings
Underlying EBIT margins are now an industry best at 21%. Although revenue visibility for EGG is short, management expects Q2 to remain strong. The business is cashed up and we expect dividends and further acquisitions next year. We forecast 25 cents EPS and 15 cents of franked dividends. We took the opportunity to acquire shares as some long term stale holders have lost patience. We value EGG at about $2.50.
CML Group (CGR.ASX) provided a trading update and a digital rebrand to Earlypay. Management are trying to digitally transform the company from an “old world” invoice financing business to a “new world” fintech. The acquisition of Skippr has enabled the company to accelerate its onboarding capability of smaller sized clients from two weeks to 24 hours. This should see growth rates accelerate in future.
Pleasingly, the Q1 update is showing invoice volumes rebounding to FY20 annualised run rate levels of $1.7bn, although at a reduced margin due to customers repaying earlier than usual due to government stimulus assisting small businesses. The equipment finance segment is doing record lending of $3.5m per month with the loan book now at $100m. With their new fintech name and the business expected to return to growth mode in FY22, we believe CGR will slowly be rerated by the market and the takeover activity from earlier this year may resume. We value CGR at 55 cents.
Disclaimer: All stocks highlighted in this article are held in TAMIM portfolios.
