Pembridgecap

A Wealth Creation Journal

Category: Investment Updates (page 1 of 2)

Dart Group – Mar 2020 Update

I am re-evaluating how much Dart Group (DTG) could be worth coming out of this crisis. In considering the reasonable price to buy DTG under the current conditions, one would evaluate the following factors – 1) chance of DTG survival (liquidity analysis); 2) loss incurred during this crisis, 3) competitive landscape, and finally 4) the normalised earning power coming out of this crisis.

1. Chance of survival

Based on GBP 1.5bn of cash and roughly GBP 800m of the annual fixed cost base, I estimate the following chances of survival. In theory, DTG can sustain itself for an entire year based on the current liquidity profile. However, there are a few catches. DTG customers pay upfront for their summer holiday. Typically Jan and Feb account for a bulk of the summer holiday bookings. If the current lockdown extends into the summer months, customers would want their refunds. This could severely impact the liquidity situation if it so happens. Many UK travel companies are issuing Refund Credit Notes (RCN) that is backed by the UK package holiday regulator, ABTA, to avert the liquidity crunch. In the case of travel company failure, consumers can buy another holiday using the RCN. ABTA’s backing ends on 31 July 2020 after which customer can demand cash repayment if they have not used the RCN to book another holiday. On the hotel side, DTG typically buys up some capacity to guarantee supply quality. DTG would have to balance the long term commercial relationship and the short term need for cash. Given the level of unprecedented fiscal and monetary policies that are announced, the government’s willingness to intervene is strong. While I would not count on that necessarily, it is a factor in considering the chance of survival.

Length of lockdown Chance of survival
3 months 99%
6 months 80%
9 months 75%
12 months 70%

The main point here is that on balance DTG’s chance of survival is very high even in extreme scenarios.

2. The loss incurred during this crisis

The first step to estimating the possible range of loss sustained in this crisis is to estimate the revenue decline. I used Jet2’s monthly traffic in 2018 and 2019 to approximate the amount of volume decline and layer on price declines.The table below shows the weight of each month traffic as % of the full-year traffic. So if we assume a three-month lockdown, there would be zero revenue in Apr / May / Jun which meant a loss of ~30% of full-year traffic. The actual traffic loss is going to be greater than 30% because the process of demand recovery is going to take time. For simplicity sake, I will use 5% to account for the volume loss during the demand recovery process.

Length of lockdown Volume Decline Price Decline Revenue Decline
3 months 35% 20% 50%
6 months 75% 20% 90%
9 months 90% 20% 95%
12 months 100% n/a 100%

The assumption of the price decline of 20% might be too generous but it does not really matter. Because the point of this analysis here is to show that the revenue decline is close to 100% as long as the summer months are lost.

2018 2019
Jan 3% 3%
Feb 3% 3%
Mar 4% 5%
Apr 6% 6%
May 10% 10%
June 13% 12%
July 14% 13%
August 15% 14%
September 13% 13%
October 10% 11%
November 5% 5%
December 4% 5%

Assuming 3-6 month of lockdown and a fixed annual cost base of GBP 800m, the loss incurred is likely in the range of GBP 400-800m.

3. Competitive landscape

On the supply side, the materially higher debt level will limit growth capex in the next 2-3 years. This would provide a favourable backdrop to medium term (2-3 years) ticket price recovery. However, it also provides an opportunity for new entrants with a clean balance sheet to compete against the incumbents as they don’t have to carry the cost of debt. On the other side, many smaller competitors will probably go out of business and free up more demand.It is not clear what this means for Easyjet’s venture into the package holiday. Maybe they are less committed to a large marketing budget to support the new business. Or maybe it doesn’t cost that much to push the packaged holiday business.For Tui, I think DTG is likely to come out of this in a stronger position relative to Tui as DTG’s balance sheet is stronger and a lot less asset-heavy versus Tui. Tui’s offline distribution network is going to be massive cost drag while DTG relies on more nimble independent travel agents.Generally, I do expect DTG to come out stronger relative to its core competitors.

4. Normalised earning power

Assuming that by 2024, the traffic volume is back to 11m per pax vs 14m in 2019. And assuming a pre-coronavirus ticket yield of GBP 82 and average holiday price of GBP 680, DTG’s leisure revenue looks like GBP 2.4bn. Putting an 8% EBITDA margin on the top, DTG would be making GBP 200+m. The normalised earning power is probably ~ GBP 150m. With a 10x multiple, DTG is worth ~ GBP 1bn. There would probably be another GBP 100-200m of net debt. That leaves the equity value around GBP 800m.So given the risk-reward and the opportunity cost, I would consider buying DTG shares around GBP 300-400m market capitalisation which gives me an IRR of 25%.

Live Portfolio – Update #2

Make two small adds to Yixin Group (1%) and AddCN (1%) respectively @ 1.64 and 230.

 

Avanza 4Q 2019 Update

Avanza reported strong results and continued to grow its customer base which is up 17% year over year from 837k to 976k in 2019 (Avanza report its customer base in terms of the number of funded customers). A growing customer base is the single most important metric for long term value creation. It demonstrates that Avanza continues to be the most attractive retail investment platform in Sweden. Avanza’s customer base is ~10% of the Swedish population but only has 4.2% market share in the Swedish savings market. Avanza announced the ambition to increase savings market share to 7% by 2025 which means a double of savings capital from SEK ~400bn to ~800bn. This should then translate into a doubling of revenue.

 

Stock brokerage is high switching cost business, especially for retail investors. The high switching cost works both ways – it protects Avanza existing customer base from poaching by other online stock brokers but also deters Avanza’s attack on incumbent financial institutions. Avanza is winning market share because it is the lowest cost broker in Sweden AND provides a user-friendly investment platform.

 

Revenue grew 14% which was mainly driven by net interest income growth. Net profit grew 28% due to lower operating cost growth of 6%. Riksbank decided to go against their peers and raise repo rates in Sweden. The repo rate in Sweden is now at 0%. This has helped to increase net interest income by 70%.

 

The new CEO, Rikard, is very ambitious and continues to build on the customer-focused culture that has driven Avanza’s success in the past.

 

My view on Avanza remains the same: the best value-for-money investment platform in Sweden that has a very user-friendly online platform. It has an incredible mind share with young professionals, and as they progress in their careers, their savings on Avanza will grow too. There are two main optionalities with Avanza:

 

1) interest rate sensitivity where every 1% increase in interest rate will lead to incremental interest income of SEK 300m (2019 net profit is SEK 447m). I don’t count on it for the investment case to work but I consider a very valuable;

 

2) Avanza might grow into an online bank and offer more services to its existing customers hence increase product per customer and then revenue per customers

 

Trading at 36x P/E, Avanza is not cheap. But the strong growth visibility and the long growth runway means that I can be patient. Since my initial purchase in 2017, the stock is up 55% and generated 14.5% annualised return albeit with huge volatility. Over a longer time period, I believe Avanza is a 10-15% annualised return investment with very limited downside risk. Maintain current position and will add if Mr Market presents attractive opportunities to do so.

Live Portfolio – Update #1

Sold all Bitatuo shares and swapped into Yixin group shares. Believe that given the probability of success is the same for two stocks, Yixin clearly offers better risk-reward. Yixin has around 10-20% upside while also offering 15% upside. Bitauto, at current prices, has less than 3% upside but more than 30% of downside.

Live Streaming My Investment Portfolio

I am not sure if there is much benefit to broadcast my portfolio online. But it certainly sounds FUN! I was born in a small village with a very auspicious sounding name which loosely translates to mean a hundred victories. I really love that name and in honour of the village, I am calling my portfolio – Invictus. I hope it also brings me many victories in the years ahead.

I have included here is a breakdown of my portfolio as of 31 Dec 2019 and Invictus’s performance since inception in 2016.

  • Invictus Gross Return is the return after trading cost, admin fees and so on…
  • Invictus Net Return is the return after I applied an artificial fee structure of 0% fixed charge + 20% of the profit above 5% return. Unfortunately, nobody is paying me any fees now but I am determined to change this!
  • While I could not care less about what the index does in any month, quarter, and year, it is the best yardstick to measure performance over the long term

Here is how I will update my portfolio on this blog:

  • Every investment action will be updated here with at most 2-3 days of delay
  • I will try to explain all of my investment decisions as much as possible but no promises here
  • Every 6 months, I will provide a comprehensive portfolio update with performance and detail portfolio breakdown as seen above
  • Every 6 months, I will write a letter to explain my thinkings in more detail

Please feel free to share any feedback/comments with me! Even better if you share an investment idea with me!

Disclaimer: All information and material presented here are based on a virtual portfolio where there might or might not be actual trading activities behind it. The information contained herein is not intended to be a source of investment advice, credit analysis and trading recommendation. The sole purpose of this document is to document general investment thoughts and reflections on different businesses.

 

Games Workshop – 1H 2020 Results Update – The Best Is Yet To Be

07:57

1H 2020 (6 months ending 1st Dec 2019) results were excellent! What a privilege to be a partner in this spectacular business! Especially the kind of hardworking partner where all I have to do is just sit and watch.

The most exciting part of the earnings release was the doubling of the licensing income from GBP 5.5m to GBP 10.7m due to the launch of a new video game. A big part of my investment thesis on GW relies on the increased monetisation of its Warhammer IP beyond just miniatures. While this is a step in the right direction, I fully expect the licensing income to be lumpy and would take years to materialise fully.

In the meantime, the core miniature business is firing on all cylinders….

The revenue grew 18.5% to GBP 148.4m which is above my long term expectation of 10-15%. New games and miniatures release schedule will impact the growth in a specific period. My long term expectation remains unchanged in this regard.

A more detailed study of the revenue growth reveals some encouraging signs. GW breaks down revenue into three channels – Trade, Retail and Online.

Trade channel is 52.6% of the total revenue and growing the fastest at 27.2%. Trade is mostly made up of local mom and pop hobby stores which stocks a variety of trading card and board games such as Magic the Gathering & Catan. These hobby stores are usually the centre of local hobby community which is very similar to GW’s own retail stores. There are 4900 distributors at the end of 1H 2020. The distributor count grew 11.4% and the annual revenue per distributor grew 14.2% to GBP 31.9k. The annual revenue per store for GW’s own retail store is GBP 173k. So there is a 5x gap. Over time, distributors should increase retail sales productivity to close this gap.

Retail channel is 31% of the total revenue and growing at a slower rate of 7.5%. Retail consists of Warhammers stores owned by Games Workshop. The store counted increased by 2.5% while the revenue per store increased by 5% on a YoY basis. Finally, the online channel grew 15.6% and makes up for 16.5% of the total revenue base.

Opening retail stores will help to build brand awareness and seed the initial Warhammer community in a new locality. However, the independent hobby stores is likely to remain the most important driver for revenue growth for the next few years. Because it is uneconomical for GW to open stores everywhere. Online will remain a complementary channel to help fans acquire miniatures that are not stocked in the local hobby store.

Due to the completion of the new factory and optimisation of operational controls, the gross margin has expanded by 2.5% to 69.5%. Different revenue mix of newer vs older miniatures in any one period lead to fluctuating gross margin. Gross margin of an older miniature is higher as the fixed cost of building a plastic mould is amortised over a larger volume. I would expect the gross margin to fluctuate between 67-70%. The core operating profit was GBP 48.5m which was up 37.8% due to the beautiful effect of operating leverage. Core operating profit margin stood at 32.7%.

Investment consideration – at ~GBP 67 per share, GW is valued at roughly 25-28x 2020E earnings. While it is not cheap on a headline basis, I am holding onto my positions due to 1) healthy top-line growth + operating leverage and 2) a very positive prospect on IP monetisation.

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