Is Healthcare a Safe Haven for ASX Investors?

by mktogether-blogs | Feb 21, 2024 | Healthcare, Market Insight

Healthcare accounts for approximately 10% of the S&P/ASX 200 index and is widely regarded as a reliable and defensive sector that provides returns that are relatively uncorrelated with the rest of an investor’s portfolio and the economy at large–often with less volatility. After all, spending on healthcare is usually non-discretionary–when you need it, you need it–and health challenges occur regardless of the state of the economy. Unlike certain other sectors, such as consumer staples, it is also an area where consumers are willing to spend a greater amount as their wealth increases. An ageing population (as we are experiencing in Australia) is another tailwind for the sector, and technology advancements can also create new opportunities for both revenues and positive patient outcomes.

In addition to the other benefits described above, the healthcare sector is also one of the rare parts of the Australian share market where companies have proven their ability to compete on the world stage. One challenge for the Australian market is its small size, which can limit the long-term growth potential of companies in many sectors, particularly retail. (There is a limit to how many stores are needed for a population of “only” 25 million, especially when competing with global online marketplaces).

However, many of Australia’s leading healthcare companies are not just a ‘big fish in a small pond’ but are also global leaders in their respective fields. This includes former government spinoff and biotechnology juggernaut CSL Limited (ASX: CSL), hearing implant specialist Cochlear (ASX: COH), sleep apnea device manufacturer Resmed (ASX: RMD), and disinfection device developer Nanosonics (ASX: NAN). Each of these businesses has successfully expanded its operations around the globe, driving much higher growth and profitability than investors would typically expect from companies in the healthcare industry.

Not all healthcare companies on the ASX are global champions and not all have been successful in their overseas endeavours. Ramsay Health Care (ASX: RHC), for example, has had difficulties navigating the more complex and government-controlled economies in places like France, when attempting to replicate its private hospital model. Nor are all ASX healthcare businesses capable of producing high growth rates. NIB Holdings (ASX: NHF) has managed to deliver very attractive returns for shareholders based on a strategy of taking market share in the private health insurance industry, but Medibank (ASX: MPL) has generated a meagre 1.5% compound annual growth rate (CAGR) in revenue since its IPO, given how high its market share was 8 years ago. While capital growth has not been remarkable, Medibank’s total shareholder return has still been above the market over this time though, supported by consistent profitability and a strong dividend.

There’s no doubt that the Australian healthcare industry can provide interesting opportunities for patient, long-term investors – if shares can be bought at the right price. To align with TAMIM’s principle of “buying well,” it’s important to recognise that investing in healthcare is not a free pass to buy at any valuation.

A Pandemic Beneficiary

Listed on the ASX in 1987, Sonic Healthcare (ASX: SHL) is a leading provider of medical diagnostic services. It was the first company to operate pathology/clinical laboratory services on a global basis and today is the world’s third-largest provider. It is the largest laboratory medicine company in Australia, Germany, the United Kingdom (U.K.) and Switzerland, the second-largest in Belgium and New Zealand, and the third largest in the United States (U.S.). Sonic is also the second largest provider of radiology services in Australia (with over 120 radiology centres and 300 specialist radiologists/nuclear physicians) and operates Australia’s largest medical centre network (under the Independent Practitioner Network brand) and occupational health network (under the Sonic HealthPlus brand), with over 2,000 general practitioners across more than 150 centres.

Demand for pathology services continues to grow as medical professionals request more testing, the type and availability of testing continues to expand, the population in Sonic’s target markets continues to age, and pathology testing becomes increasingly outsourced (there is some pressure from government price controls). Radiology services also have strong tailwinds from an ageing population and greater use in diagnostics by medical professionals. Sonic is the undisputed leader with ~37% market share for pathology services, which has caused it to expand into other services (such as radiology) and internationally, including in the large and highly fragmented U.S. market.

Laboratory service providers were major beneficiaries of COVID-19 testing around the world and have experienced a “boom and bust” in their share prices. Investors enthusiastically bid up these companies on the back of extremely high profit margins from testing revenue, and investor enthusiasm has waned as this revenue has dissipated.

Source: 2023 Annual Report

It wasn’t all bad news for Sonic though, as it was able to use these testing profits to strengthen its balance sheet–which it is now using for acquisitions and share repurchases. Additionally, its share price is now below pre-pandemic levels and trading in line with its historical average P/E multiple despite a much better balance sheet–meaning that it should be able to boost earnings with future acquisitions and share buybacks.

An Emerging Global Champion

Headquartered in Melbourne, Pro Medicus (ASX: PME) is a provider of healthcare imaging software to hospitals, diagnostic imaging groups and other health-related businesses in North America, Australia and Europe. In particular, its key products and services are Visage RIS (a radiology software system for managing imaging departments) and Visage 7 (a medical imaging technology used to securely store and digitally transmit electronic images and clinically relevant reports). Revenue is produced in the United States (82%), Australia (13%), Europe (4%) and Other (2%), while Visage 7 generates >85% of the company’s revenue.

Customer feedback is that Visage 7 is a faster and more efficient product relative to what competitors are offering (allowing radiologists to undertake 10-20% more analysis) and its cloud-based deployment has improved reliability and reduced downtime. This has allowed Pro Medicus to win ~7% market share in the U.S., where it is now in 9 of the top 20 best hospitals in the U.S. Its financial metrics are also incredible, with a CAGR in revenue and earnings per share (EPS) of more than 27% over the past decade. Its operating profit margins are among the highest of all listed companies at more than 67% and its capital-light software model means incredibly high returns on capital (approaching 50%) and that the majority of the company’s profits translate into cash.

While it is difficult to come up with enough superlatives for Pro Medicus’ financial performance to date, the downside for investors just discovering the company is the incredibly rich valuation. Indeed, companies in healthcare and those with recurring revenue and strong balance sheets (Pro Medicus has no debt) are undoubtedly worthy of a higher-than-average multiple, the current valuation on PME shares is truly breathtaking at more than 160 times FY 23 EPS and approaching 80 times FY 23 revenue. With a superior product, a huge addressable market and great momentum, the outlook for Pro Medicus appears strong. But at this valuation, caveat emptor (buyer beware)–if there are any hiccups in its future, the share price reaction could be severe.

Proceed but with Caution

The healthcare sector of the ASX is an exciting place to find local and global champions capable of generating long-term above-average shareholder returns that are not correlated with the rest of a portfolio. It is generally more resilient to economic downturns and can often provide consistent revenue and earnings growth as the population ages and consumers increasingly choose to prioritise their health.

Unfortunately, this is no secret to the majority of Australian investors and valuations are currently quite high across the sector. However, the potential long-term rewards mean it’s worth doing the work to take advantage of any opportunities that may arise. Savvy investors should seek opportunities where there is a favourable balance between earnings growth potential and current market valuation, ensuring that investments are made with a clear understanding of the inherent value and future prospects of healthcare companies.

No FOMO: Patience and ASX Small Caps

by mktogether-blogs | Feb 20, 2024 | Reporting Season, Stock Insight

In today’s fast-paced world, the demand for instant gratification has permeated almost every aspect of life, including investing. The allure of quick gains often overshadows the virtues of patience and long-term thinking.

As markets surge, with the S&P 500 reaching new heights, it’s easy to get caught up in the short-term frenzy.

Take Super Micro Computer (NASDAQ: SMCI), for example, whose share price has soared over 700% in the past year, despite far less remarkable earnings growth. This is textbook “sentiment” action, marked by surging buying volumes and an auction-like frenzy, which often puts speculation above fundamentals.

Source: The Kobeissi Letter

Patient investors resist the lure of FOMO (fear of missing out) when sentiment moves out of sync with reality. They remember that over the long haul, earnings growth is the most significant driver of share price changes.

Overly positive market sentiment often leads to multiple expansion and, if earnings growth can’t keep up, can result in a sharp reversal. As Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” This highlights the risks of relying solely on sentiment for investment decisions, as the true strength of a company’s financials is revealed when market conditions change.

Amidst the focus on more sensational stocks, opportunities often lie in areas where sentiment has yet to catch up, such as small caps or companies with improving fundamentals that remain unrecognised by the broader market.

Last week, two of TAMIM’s Australian equity holdings, Viva Leisure (ASX: VVA) and Reckon (ASX: RKN), released earnings reports with little fanfare. Despite the quiet reception, these updates hint at promising opportunities for patient investors, fitting the mould of companies with improving fundamentals yet to be fully recognised by the market.

Reckon Ltd (ASX: RKN)

Reckon Limited (ASX: RKN) a market leading software provider to small to medium sized businesses and legal professionals released their full year results last Tuesday.

Group revenue reached $53.4 million, a 4% increase from the previous corresponding period (PcP). Recurring revenue demonstrated a parallel growth of 4%, totalling $49.1 million. The company experienced a noteworthy upswing in operating earnings (EBITDA), soaring by 10% to $19.7 million compared to the PcP. Net Profit After Tax (NPAT) witnessed a substantial improvement of 36%, reaching $4.9 million. The Group’s operating cash flow for continuing operations, net of development spend, decreased to $4.8 million despite the drop in development costs. The net debt stood at $2.8 million. The company declared a fully franked dividend of $0.025 per share in September 2023.

A significant growth area for the legal business is cloud practice management in the US. Reckon’s Legal Group reported impressive subscription revenue growth, increasing by 17% to $10.8 million.

Marketing expenditure continues to be a focus as legal firms in the US predominantly use desktop software. The Legal Group demonstrated consistent growth, serving 8 of the 25 largest law firms in the US and 6 of the top 10 law firms globally.

Reckon Group CEO, Mr Sam Allert commented:

“Reckon continued its H1 performance into the second half of the year delivering to its plan of maintaining revenue growth in the highly profitable and cash generating Business Group to provide the flexibility to invest in its proprietary product, Reckon One, together with the high growth opportunities provided by our US and UK focused Legal Group.”

“Cloud revenue and user growth in the Business Group remains a focus in a competitive market. We continue to look for opportunities to increase our client base as well as the potential wallet share from customers with add-on partners, including partners in financial services and payments processing. The cash generated by the business at 52% EBITDA margin (28% adjusted EBITDA margin after development costs) allowed us to continue to invest in Reckon One and mobile accounting and payroll solutions to facilitate the migration of customers from our legacy platforms and to entice new customers. The development of Reckon One and the migration of customers from our legacy products remains a multi-year journey, but we are focused, and it is underway. Reckon Payroll was a highlight of the year as we transitioned users from some legacy payroll solutions to our new Reckon One based payroll product.”

Viva Leisure Ltd (ASX: VVA)

Viva Leisure Ltd (ASX: VVA), a leading player in the health and fitness industry, reported impressive financial results for the first half of 2024 (HY2024).

In addition, strategic initiatives such as acquisitions, refurbishments, and technology investments contributed to the company’s overall positive performance. Driven primarily by organic growth, Viva’s revenue increased by 17.3% reaching $79.1 million. This flowed through to operating earnings (EBITDA) which increased 18.6%, totaling $16.6 million for the first half. The increase flexed Viva’s enhanced margins and operational efficiency.

As we’ve written previously, Viva Leisure offers a diverse range of facilities within the health and leisure industry. Viva Leisure’s mission is to connect fitness and wellness to as many people as possible and aims to provide its members with affordable, accessible and high quality facilities.

Membership and Utilisation

Membership increased by 9.8% to 180,071 in owned locations, and by 6.2% to 345,317 in all locations.

Utilisation continued to grow in owned locations increasing to 70.9%, indicating continued strong demand and customer satisfaction. Viva estimates utilisation based on maximum capacity per location, being 2 members per square metre for Health Clubs and 1 member per square metre for Boutiques. Improving utilisation rates across the portfolio enhances margins with limited additional costs for new members. Utilisation decreases temporarily as new locations open and rises as locations add members. Viva’s long term utilisation target is 75-80%.

Despite exiting the Fitness Passport corporate program as a part of the restructure plan, Viva added 6 owned locations and 7 in all locations, demonstrating resilience and strategic expansion. Furthermore the removal of Fitness Passport resulted in the removal of 8,395 low-yielding members, with a minimal impact on net revenue.

Financial Position

Viva’s cash balance as of 31 December was $4.3 million down from $6.8 million at 30 June 2023.

The company generated operating cash flow of $27.5 million, an increase of 12% on the prior period. Considering Viva’s significant capital requirements, a substantial portion of its operating cash flow is reinvested into the business for building leases and equipment payments. In addition, Viva noted that it is in late-stage due diligence for several acquisitions, expected to be funded through a combination of debt facilities and existing cash reserves. Viva has begun the process of drawing against the bank fit-out facilities to support capital allocation for earnings accretive investments and to optimise leverage on the balance sheet.

The TAMIM Takeaway

Both Viva Leisure and Reckon present compelling investment opportunities for patient investors. In the whirlwind of rising market sentiment, investors must stay grounded in their principles and avoid FOMO.

At TAMIM, our resolve is to ‘buy well,’ focusing on the long-term potential of smaller companies with improving fundamentals, particularly those showing promising earnings growth. When there’s a growing divergence between share price and earnings growth, patience becomes even more vital. Eventually, this gap must close, and it’s in these moments that patient investors, firm in their convictions, can realise significant gains.

Disclaimer: Viva Leisure Ltd (ASX: VVA) and Reckon Ltd (ASX: RKN) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.

Investment Wisdom: Buying Well

by mktogether-blogs | Feb 19, 2024 | Investment Philosophy, Market Insight

On a Behind The Memo podcast last year, renowned value investor Howard Marks stated that: “What I learned from my first 10 years of experience is that good investing doesn’t come from buying good things but from buying things well. The difference is more than grammatical.”

As a quick refresher, Marks has a net worth of approximately US$2.2 billion (according to Forbes) and is co-chair of Oaktree Capital, alongside Bruce Karsh. Founded in 1995, Oaktree Capital is an investment company that manages approximately US$189 billion in investment funds, predominantly for institutional investors such as insurance companies, U.S. pension plans and sovereign wealth funds. Marks, Karsh and their team have an exceptional reputation for contrarian investing and risk management. Not only this, Marks is extremely well-regarded for his books Mastering the Market Cycle and The Most Important Thing. The latter of these is based on a series of memos to Oaktree clients, which are available on Oaktree’s website and have exceptional insight and experience on the topic of investing over more than 30 years. All this is to say that Marks’ comments on the topic of investing are extremely well-founded and worth paying attention to.

So what are Marks’ thoughts? His most influential experience was the contrasting views and performance of both high-yield bonds (otherwise known as “junk” or “non-investment grade” bonds) and the so-called “Nifty Fifty” at the beginning of his career. Back in 1978, one of the major ratings agencies Moody’s defined a B-rated bond as “fails to possess the characteristics of a desirable investment.” This definition was based on the fact that the company issuing such bonds was viewed as low credit worthiness. However, it included no assessment of the price an investor was paying to buy the bond or the yield the investor was receiving to compensate for the higher risk. It was simply an assessment that because the company was of low quality that it was a poor investment. Marks, however, started investing in these securities and has generated attractive returns on a consistent basis–in the bonds of some of America’s riskiest public companies. Conversely, the wisdom of the time was that the Nifty Fifty were so great, their market positions so strong, and their growth prospects so compelling and certain, that there was no price too high to pay for these businesses. Perhaps similar to the Magnificent 7 today (to use a loose analogy), the Nifty Fifty were a group of 50 companies on the New York Stock Exchange with exceptional market positions and financial metrics. Many of these truly great businesses of the era are still around and flourishing today, such as Coca-Cola (NYSE: KO), American Express (NYSE: AXP) and Texas Instruments (NASDAQ: TXN), while others have entered bankruptcy or languished into obscurity, such as Sears and Xerox. More significantly though, if you purchased a basket of the Nifty Fifty in 1969 and held them until 1974, you were sitting on losses of more than 90%–owning portions of the best companies in America. This juxtaposition of events had a profound impact on Marks and led to an incredible career investing in high-yield bonds.

Margin of Safety

Marks’ advice goes hand-in-hand with that of the so-called father of security analysis and value investing, Benjamin Graham. As well as being known as the mentor for famed investor and chairman of Berkshire Hathaway (NYSE: BRK.B) Warren Buffett, Graham was a highly successful hedge fund manager in his own right and the author of Security Analysis (1934) and The Intelligent Investor (1949). One of Graham’s key concepts in these books is what he calls “Margin of Safety.” This is the concept of buying a security at a significant discount to its intrinsic value–that is, what you believe it is worth. This increases the chances of a profitable trade and minimises the risk of a significant loss in the event that something unexpected occurs.

While this might seem like a simple idea, investors don’t always seem to put it into practice. The share price fluctuations that you see every year, month and even day are a testament to the swings in investor psychology that can heavily influence the prices people pay for various investments. Graham described this phenomenon as “Mr Market”, an imaginary investor who was prone to erratic swings of pessimism and optimism. There’s no shortage of examples of these mood swings, including the extreme optimism surrounding the Nifty Fifty in 1969. Graham’s advice was to take advantage of these ups and downs–to use prudence and fundamental analysis to evaluate the company in terms of its true underlying value, and to buy when the share price represented an overly pessimistic scenario and to sell when it is overly optimistic.
Graham also provided a framework for analysing the value of companies listed on the share market, with specific details on evaluating a company in terms of its assets or earnings power. Perhaps more importantly, though, he also encouraged investors to consider their temperament and capabilities (which he called “enterprising investors” and “defensive investors”). Rather than technical ability, this is likely one of the most important aspects of investing. There are countless stories of people not achieving their investing goals, even in outstanding mutual funds (such as those managed by Peter Lynch) and index funds. Morningstar’s “Mind the Gap” study has shown that investors in an index fund on average have returned 1.7% per year less than the fund’s performance–purely from buying and selling the fund at inopportune times (that is, attempting to “time the market”). Or as Graham put it: “the investor’s chief problem–and even his worst enemy–is likely to be himself.”

Wonderful Business or Wonderful Price?

Similar to Howard Marks, Ben Graham was notorious for looking to buy a dollar for fifty cents. His disciple Warren Buffett, on the other hand, has evolved from this belief under the influence of the late Charlie Munger. Buffett is well known for stating that: “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Buffett maintains that it would be best for most investors to think of using a punchcard of 20 slots for their entire history of investing, while Graham had a huge amount of turnover in his portfolio.

There are undoubtedly many ways to approach the field of investing. Yet what all highly successful investors appear to have in common is that they take a fundamental approach, understand what they own, and are firm but flexible with their strategy. Most importantly, they do not let the market tell them at which prices they should be buying or selling–they don’t let FOMO cause them to overpay and they don’t lose faith in their analysis simply because the share price is down.

Disclaimer: Texas Instruments (NASDAQ: TXN) is held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.

Three ASX Resilient Retailers Posting Impressive Results

by mktogether-blogs | Feb 15, 2024 | Reporting Season, Retail, Stock Insight

As company earnings reports roll in, investors will see multiple examples of why it pays to be an optimist and to ignore apocalyptic forecasts. For much of late 2022 and 2023, the media was fixated on rising interest rates and the potential of a damaging recession. As a result, while some retailers had seen share prices recover strongly as the world emerged from the pandemic, the momentum reversed as increased costs and slowing sales emerged.

First level logic dictates that in a rising interest rate environment retail businesses face a multitude of challenges. Higher interest rates typically lead to increased borrowing costs for consumers, impacting their disposable income and reducing spending on non-essential items. Economic uncertainty and talk of a potential recession further deters consumer confidence, prompting cautious spending behaviours. These cost of living pressures place additional financial strain on households.

Despite these pressures, higher-end retail brands may be less affected, as their clientele often enjoys greater disposable income and may even benefit from higher interest rates. While Australia does not have the retail behemoths like Amazon (NASDAQ: AMZN), the following three ASX listed retail stocks have posted better-than-expected results and have seen their share price surge as a result.

Nick Scali Ltd (ASX: NCK)

Nick Scali Limited (ASX: NCK), the furniture retailer, released its 1H FY24 results, reporting a net profit after tax of $43.0 million, surpassing the guidance of $40-42 million set at the October 2023 Annual General Meeting (AGM).

The Group generated revenue of $226 million which fell 20% from the prior period with gross profit declining 29%. On a more positive note, written sales orders reached $212.7 million, up 1.1% from the Prior Corresponding Period (PCP), with flat Like For Like (LFL) orders. Q2 FY24 orders increased by 8.2%, driven by a robust November and December period on the back of Black Friday and Christmas sales. Online sales orders under the Nick Scali brand totalled $14.7 million, a 22.5% Year on Year (YoY) increase. Notably, the gross profit margin improved to 65.6%, up 3.6% from 1H FY23, reflecting operational efficiency. Operating expenses were $4.8 million lower YoY due to stringent cost controls.

Cash generated from operating activities increased 15% to $66.7 million despite the drop in receipts from customers.
Nick Scali repaid $20 million of corporate debt following the acquisition of Plush, reducing the outstanding balance to $28 million. The company returned capital to shareholders via a fully franked interim dividend of 35 cents per share. The outlook, recent trading in January 2024 continued the positive momentum, with written sales orders up 3.6% YoY. Overall, Nick Scali’s better than expected financial performance, strategic expansions, and efficient cost management indicate resilience and potential for sustained growth in the competitive furniture retail sector.

Cettire Ltd (ASX: CTT)

Cettire Limited (ASX: CTT), the esteemed online luxury fashion retailer, has unveiled a formidable financial performance for H1-FY24.

Boasting a remarkable 90% year-on-year increase in gross revenue, reaching an impressive $460.5 million, the company attributes this success to substantial growth in both order volume and average order value. Sales revenue reached $354.3 million, with an evident shift towards repeat customers accounting for 58% of gross revenues. This underscores heightened average spend per order and increased order frequency, reflecting positively on customer loyalty.
Strategic investments in paid acquisition, has significantly fueled rapid growth, resulting in an impressive 83% year-on-year increase in active customers. Notably, Cettire maintained operational profitability, achieving an Adjusted EBITDA of $26.1 million, equivalent to 7.4% of sales revenue. Operating cash flow demonstrated robust growth, increasing by 81% to $65 million, driven by a capital-light business model and favourable working capital dynamics.With an enviable cash balance of approximately $100 million and zero debt as of December 31, 2023, Cettire has strategically positioned itself for global growth opportunities. Looking ahead to H2-FY24, the company maintains a focused approach on maximising profitable revenue growth, self-funding initiatives, and further advancing customer-centric strategies, particularly in readiness for the Chinese market. January 2024 witnessed positive trading momentum, marked by an 80% YoY increase in gross revenue, reinforcing Cettire’s optimistic outlook for the remainder of the fiscal year.

JB Hi-Fi Ltd (ASX: JBH)

JB Hi-Fi Ltd (ASX: JBH) released its first-half results on Monday, reflecting a challenging market environment.
The home consumer products retailer previously flagged a difficult upcoming period with the Group seeing a 2.2% decline in total sales to $5.16 billion. Earnings before interest and tax (EBIT) fell by 19.3% to $386.7 million, accompanied by a 19.9% decrease in net profit after tax (NPAT) to $264.3 million. Earnings per share mirrored this trend, down by 19.9% to 241.8 cps. The Board responded by declaring an interim dividend of $1.58 a reduction of 20%.
Clearly the market had low expectations going into the result, despite the financial decline shares rose 7.13% on the day and sat at all time highs. JB’s earnings are typically greater in the first half of the financial year due to heightened trading during Black Friday and the Christmas period.
Group CEO, Terry Smart said:“We are pleased with our performance as we cycled the elevated customer demand in the prior year. As expected, we saw the trading environment become more challenging, marked by heightened competitive activity and increased on-floor discounting. Our focus remained on maximising customer demand through delivering consistently high levels of customer service and driving best value for our customers.”

“We are pleased with our performance as we cycled the elevated customer demand in the prior year. As expected, we saw the trading environment become more challenging, marked by heightened competitive activity and increased on-floor discounting. Our focus remained on maximising customer demand through delivering consistently high levels of customer service and driving best value for our customers.”

The TAMIM Takeaway

“In the short run, the market is a voting machine but in the long run, it is a weighing machine” – Benjamin Graham.
Reflecting on the journey of Nick Scali, Cettire, and JB Hi-Fi through the turbulence of market sentiments, these stories underscore the essence of strategic foresight in investing. Embodying Benjamin Graham’s philosophy, these narratives highlight the potential for discerning investors to see beyond momentary pessimisms to the enduring value of robust business models.These retail results reflect a mix of both positive and negative indicators for investors to consider. While the present financial figures reveal challenges, most are not as negative as forecasters were predicting just six months earlier. Long term investors appear to be looking beyond the immediate horizon, focusing on the anticipated potential for improved results in FY25 and FY26. The prospect of a potential reduction in interest rates adds a favourable dimension to the market outlook, presenting an opportunity for investors to capitalise on the potential for more favourable financial conditions.

Staying rational amid pessimism and finding opportunities in chaos are essential, yet challenging, for navigating market ups and downs. This approach, while difficult, offers discerning investors the chance to uncover significant opportunities beyond the apparent turmoil.

Three ASX Gaming Stocks Gearing Up for a Strong 2024

by mktogether-blogs | Feb 7, 2024 | Stock Insight

The gaming sector, having navigated the turbulence of the COVID-19 pandemic, is on the brink of resurgence.

Firstly, the pandemic-induced restrictions significantly curtailed the operations of casinos, gaming venues, and related establishments, causing a temporary dip in revenue for many gaming companies. Yet, as the world steadily emerges from these constraints, an anticipated surge in consumer engagement with gaming activities is expected to fuel sector recovery.

Moreover, the shift towards online and mobile gaming during lockdowns has accelerated a trend that was already gaining momentum. Companies with a strong online presence or those that successfully adapted to digital platforms are likely to continue benefiting from this growing market segment.

Our exploration into the ASX gaming sector reveals select small-to-mid-cap stocks that stand out not only for their current undervaluation relative to industry giants but also for their strategic appeal as acquisition targets in the global gaming market. This insight transcends the conventional anticipation of revenue and earnings growth upon sector normalisation, suggesting that deeper, contrarian analysis could uncover opportunities that extend well beyond the immediate horizon of post-pandemic recovery

Ainsworth Game Technology Limited (ASX: AGI)

Ainsworth Game Technology Limited (ASX: AGI) is dedicated to the design, development, manufacturing, sales, and global distribution of cutting-edge gaming content and platforms, spanning electronic gaming machines, related equipment, services, as well as online social and real-money games.

In its most recent financial results, revenue increased by 20% compared to the prior corresponding period (pcp). The company anticipates a sustained growth trajectory in revenue in the upcoming periods, propelled by the commercialisation of key initiatives across pivotal regions in Australia and the Americas.

In late 2023, Ainsworth was reported to have engaged Macquarie Capital for a strategic review, exploring the option of going private to fuel its next growth phase. This move would be aimed at enhancing shareholder value by assessing the company’s strategic alternatives.

Following this news, Ainsworth reported a notable upswing in overall product performance, particularly in global markets which accounts for 79% of its revenue. The company, in its December market update, reported positive results for the six months ending December 31, 2023, projecting a normalised Profit before Tax of approximately $18.0 million, reflecting a noteworthy increase of $2.5 million or 16% from the PCP. Following the strategic review, the notable improvement in outcomes suggests the company is preparing for a possible takeover, aligning its operations for optimal attractiveness.

The most apparent suitor for a takeover is the significant shareholder Novomatic, which acquired just over 52% of the company in 2016. The alignment of Ainsworth’s Chief Executive Officer, Harald Neumann, as a former executive of the global gaming giant, further strengthens the conviction that a takeover offer may be imminent.

Tabcorp Holdings Ltd (ASX: TAH)

Tabcorp Holdings Ltd (ASX: TAH) operates a portfolio of leading Australian brands spanning wagering, media, and integrity services, with national scale and reach. Its current structure is the result of the demerger of The Lottery Corporation Limited (ASX: TLC) in May 2022, creating separate entities for Lotteries and Keno businesses under The Lottery Corporation and Wagering and Media, and Gaming Services businesses under Tabcorp.

In a significant development, Tabcorp secured an exclusive 20-year licence in Victoria, effective from August 2024. The modernised terms of this licence, fostering fair competition in taxes and fees, are estimated to contribute a substantial $140 million pro-forma increase in Group Earnings Before Interest, Tax & Depreciation (EBITDA). The licence entails an upfront payment of $600 million in June 2024 and fixed annual payments from 2025-2043, amounting to an indicative value of $864 million, financed through existing debt facilities.

For the first time in many years, Tabcorp is poised to benefit from significant tailwinds. Pressures on online players, including an augmented point of consumption tax and societal demands to curtail advertising, may lead to the exit of major international players from the Australian market or potentially prompt a takeover offer for Tabcorp, positioning it strategically in this evolving landscape.

Jumbo Interactive Ltd (ASX: JIN)

Jumbo Interactive Ltd (ASX: JIN) is a digital lottery specialist.

The company provides lottery software platforms and lottery management expertise to the charity and government lottery sectors in Australia and globally. Jumbo was founded by Chief Executive Officer Mike Veverka in 1995 and listed the business on the ASX in 1999.

Part of Jumbo’s operational model involves purchasing lottery tickets from The Lottery Corporation (ASX: TLC) and reselling them online at a premium. Despite The Lottery Corporation’s pricing influence, Jumbo has demonstrated resilience by implementing price increases, leading to a notable revenue boost of 29% per paying user. Recent strategic moves, including a 14.8% increase in Powerball prices, have had minimal impact on demand, with a marginal decline in tickets sold.

Positioned amidst limited online alternatives and stringent industry regulations, Jumbo is well-placed to capture a growing online market share. We estimate lottery sales are tracking 10% higher than the previous year and benefiting from recent high-profile draws, such as the $200 million Powerball. Jackpots are a significant driver of revenue for any lottery retailer. The more jackpots, the more interest generated by punters. As Jumbo gears up to release its upcoming half-year results, the recent uptick in share price performance hints that the market is beginning to recognise the underlying opportunity.

The TAMIM Takeaway

The trajectory of gaming stocks post-COVID-19 lockdowns is marked by numerous promising factors including the resurgence of consumer demand and the accelerated shift towards online gaming. We feel the above mentioned companies find themselves in an evolving market, presenting as enticing options, compared to the large cap industry leaders.

These companies, having weathered the storm of COVID-19, are well-positioned for growth beyond the normalisation of sector activity. For investors with a penchant for strategic foresight, these companies have offered compelling entry points recently and are worth watching as the year progresses.

Disclaimer: Ainsworth Game Technology Limited (ASX: AGI), Tabcorp Holdings Ltd (ASX: TAH) and Jumbo Interactive Ltd (ASX: JIN) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.

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Is Healthcare a Safe Haven for ASX Investors?

An Emerging Global Champion

Proceed but with Caution

No FOMO: Patience and ASX Small Caps

Viva Leisure Ltd (ASX: VVA)

The TAMIM Takeaway

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<img decoding="async" class="wp-image-10401 aligncenter" src="https://tamim.com.au/wpv1/wp-content/uploads/2024/02/Three-ASX-Small-Cap-Delivering-Impressive-Results.png" alt="" width="508" height="339" />

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