Category: Small Cap

Companies that are listed on a stock exchange like the ASX can be categorized according to their size, which is most frequently measured by market capitalization, or market cap. The S&P/ASX Small Ordinaries index represents ‘small caps’, those members of the S&P/ASX 300 Index that sit outside the S&P/ASX 100 index. It is a benchmark for small cap Australian shares.

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Norwegian liberally accessing the debt and equity markets since the start of the pandemic

Business Strategy and Outlook

Changes to consumer behavior surrounding travel–cruising in particular–as a result of the coronavirus could alter the economic performance of Norwegian Cruise Line Holdings over an extended horizon. As consumers resume cruising after the 15-month sailing halt that began in March 2020, cruise operators have had to add COVID-19-related protocols to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. On the yield side, it is anticipated Norwegian could intermittently see pricing competition to entice cruisers back onto the product once operators are back at full deployment. Further, there could be some pressure from the redemption of future cruise credits through 2022. On the cost side, higher spending to implement cleanliness and health protocols and oil prices could keep spending inflated. And the entire fleet will not be deployed until the second quarter of 2022, crimping near-term profits and ceding some scale benefits.

These concerns lead to average returns on invested capital, including goodwill, that is viewed, are set to fall below analysts’ 10.4% weighted average cost of capital estimate over a multiyear period, supporting analysts no-moat rating. While it is alleged Norwegian has carved out a compelling position in cruising thanks to its freestyle offering, the product still has to compete with other land-based vacations and discretionary spending for wallet share. It is resisted that it could be harder to capture the same percentage of spending over the near term, given the perceived risk of cruising, heightened by previous media attention. 

While liquidity issues remain concerning for cruise operators, Norwegian has liberally accessed the debt and equity markets since the beginning of the pandemic. Such capital market efforts signal Norwegian’s dedication to weathering a return to normalcy for demand. Given that the firm indicated cash burn is set to escalate to $390 million per month as it restarts the fleet, the $1.5 billion in cash of Norwegian’s balance sheet at year-end buys it sometime (even if there is no associated revenue) to facilitate a tactical full deployment strategy.

Financial Strength

Norwegian has accessed significant liquidity since the beginning of the pandemic, raising around $8 billion in debt and equity. In analysts’ opinion, these efforts signal Norwegian’s dedication to attempt to weather the duration of COVID-19. Given that the firm indicated cash burn should rise to around $390 million per month as it digests higher costs to restart the fleet, cash available to the firm should allow Norwegian time to successfully execute a tactical re-entry to sailing the seas, offering liquidity even in a tempered revenue scenario in 2022.With Norwegian’s 28 ships at the end of 2021, it is likely solid capacity expansion once cruising resumes, although it is likely some growth could be reconfigured, given shipyard closures. However, including recent debt and equity raises, Norwegian is likely to remain above its 2.5-2.75 times net debt/adjusted EBITDA target it had previously sought to achieve.  It is not seen Norwegian reaching around this range until 2028. The firm surpassed its debt/capital covenant of less than 70%, ending 2021 at around 84% (with restrictive covenants waived into 2022). The company is set to remain cash flow negative in 2022, but it is alleged could achieve positive EBITDA performance in the second half of 2022 (delayed a bit by omicron’s impact).Longer term, it is still held  that management will continue to order ships for delivery approximately every 18 months (and at least one per year in 2022-27) at its namesake brand and will opportunistically finance new ships through either compelling pricing in the debt markets or low-cost export credit agency guaranteed loans.

Bulls Say’s

  • As Norwegian is smaller than its North American cruise peers, it has the ability to deploy its assets nimbly as cruising demand rises, allowing for strategic pricing tactics. 
  • The rescission of restrictive COVID-related policies could allow cruises to appeal to a wider cohort of consumers, leading to near-term demand growth faster than is currently anticipated. 
  • Norwegian has capitalized on leisure industry knowledge from its prior sponsors as well as the addition of high-end Regent Seven Seas and Oceania brands, gathering best practices and leverage with vendors.

Company Profile 

Norwegian Cruise Line is the world’s third-largest cruise company by berths (at nearly 60,000), operating 28 ships across three brands (Norwegian, Oceania, and Regent Seven Seas), offering both freestyle and luxury cruising. The company is set to have its entire fleet back in the water in the second quarter of 2022. With nine passenger vessels on order among its brands through 2027 (representing 24,000 incremental berths), Norwegian is increasing capacity faster than its peers, expanding its brand globally. Norwegian sailed to around 500 global destinations before the pandemic. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Myer remains highly uncertain as it grapples with cyclical and structural industry headwinds

Business Strategy and Outlook

Myer targets the middle to upper market, selling exclusive brands in competition with department store David Jones. The five largest Australian department stores share virtually the whole of the department store sector between them. While Myer, with a market share of around 15%, and key competitor David Jones (around 10%) operate at the upper end of the market, they also compete to an extent with the discount department stores operated by Wesfarmers (around 50%) and Woolworths (around 25%).

With entry into the Australian market of brands like Zara and H&M, and online competition from players such as Amazon, it is anticipated domestic department stores will increasingly find it difficult to compete with the international disrupters because of limited comparable sales volume growth. It is seen online sales to become an even more meaningful percentage of sales during the next decade as consumers increasingly perceive online retailers as offering value and convenience. Myer’s strategy is to strengthen its online presence and is rapidly growing its e-commerce business, while rationalising its physical footprint to maintain productivity levels, owing to relatively weak sales growth in the brick-and-mortar channel. But it is likely competition from e-commerce to intensify.

While it is likely the online channel to grow faster than the brick-and-mortar channel to fiscal 2030, and Myer to partially capture its share of this e-commerce growth, Amazon Australia will pursue its piece of the pie, leading to a decline in the size of the sector’s addressable market. The outlook for Myer remains highly uncertain as it grapples with cyclical and structural industry headwinds. To account for this uncertainty, analysts require a large discount to perceived value before investing in Myer. In tough economic times, it is the discount department stores benefit from more frugal customer behaviour. It is expected earnings to improve gradually from fiscal 2022, with the removal of virus-related restrictions when a treatment and vaccine for COVID-19 become widely available.

Financial Strength

The balance sheet continued to improve, and Myer finished January 2022 with a net cash position of around AUD 217 million. This compares with net cash of AUD 206 million as of January 2021. A new four-year funding package secured in November 2021, eliminated near-term refinancing risk. Myer’s board reinstated the dividend, which had been suspended since fiscal 2018. The reinstatement of the dividend signals the board’s confidence in the underlying strength of the business and could improve market sentiment.As are many other retailers, Myer is committed to paying rent to landlords for its store portfolio. These operating leases are now on balance sheet with new accounting standards from January 2019.

Bulls Say’s

  • Myer is an iconic Australian department store brand resonates with Australians. Myer is hanging onto this perception by improving its stores and online offerings to meet customer demand.
  • Myer is well placed to rebound strongly if it can successfully navigate the current economic slowdown.
  • Strategic initiatives–aimed at vertically integrating retail from design, manufacture, and sales–ensure that Myer is capturing a higher share of gross margin and control of its exclusive bands.

Company Profile

Myer is Australia’s largest department store operator, with some 60 stores that are mostly spread across eastern states. Stores are generally located in areas of high foot traffic in major metropolitan shopping centres. Competitive advantages include a well-established brand and scale benefits from a relatively large revenue base. The brand is somewhat iconic among Australian domestic consumers. The group’s loyalty programme has more than 5 million members.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Ardent Leisure Buys Family Entertainment Venues in Colorado

Business Strategy and Outlook

Ardent Leisure’s underlying fundamentals is moderated by the wider macroeconomic factors that influence its operations and the current restructuring efforts to restore earnings after the recent upheavals. Of greater concern is the near-term impact of the coronavirus on Ardent’s operations and its financial position, especially theme parks. But cost-cutting and government assistance measures have provided relief. RedBird’s USD 80 million investment in June 2020 for an initial 24.2% preferred equity interest in Main Event secures the U.S. family entertainment chain’s funding position. Furthermore, RedBird has the option to acquire an additional 26.8% interest at a future date, with the valuation to be based upon 9.0 times EBITDA at the time of exercising the option, subject to a minimum equity floor price.

Beyond the current coronavirus crisis, Ardent Leisure possesses solid leisure and entertainment assets that all operate in intensely competitive markets. These assets compete for the leisure dollars of consumers who are spoilt with alternatives, especially in this online digital world, where most traditional entertainment activities can now be enjoyed in a virtual setting. Furthermore, most of the group’s businesses are relatively capital-intensive, particularly as Main Event expands its venue footprint and as Ardent strives to keep up with competing leisure options and stay fresh in consumers’ minds. The situation is exacerbated by cyclical factors, with consumer discretionary spending highly leveraged to swings in general economic conditions.

Financial Strength

Ardent has AUD 119 million of net debt on the balance sheet, as at the end of December 2021. This comfortable position with AUD 93 million in available liquidity for Main Event is mainly thanks to Redbird’s USD 80 million (AUD 100 million) capital injection into the U.S. business, in return for a 24.2% preferred equity stake. The Queensland government’s recent tourism-friendly three-year AUD 64 million loan package (plus AUD 3 million grant) also means the Australian theme parks unit now has AUD 18 million of available liquidity.

Bulls Say’s

  • COVID-19 has inflicted significant damage on Ardent Leisure’s businesses and the first and foremost question is how long it will take for businesses to return to pre-pandemic levels. 
  • Ardent Leisure’s businesses provide consumers with affordable leisure and entertainment destinations, although demand dynamics are highly leveraged to discretionary spending patterns. 
  • Competition is fierce for the group’s operations, with proliferating alternatives competing for consumers’ leisure dollars.

Company Profile 

Ardent Leisure is an owner and operator of leisure assets. Its theme park operations are situated in Australia, including Dreamworld and WhiteWater World on the Gold Coast. The group also runs Main Event, a growing portfolio of family entertainment operations in the United States, offering bowling, arcade and various other leisure activities.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Nitro Software expects attractive growth runway

Investment Thesis

  • Sizeable market opportunity of US$28bn TAM (company estimates which is based on ground up model taking into account customer contract values).
  • Established a solid foundation to build from – the Company has penetrated 68% of the Fortune 500 companies and whilst initial involvement with these companies may be small however it provides opportunity to scale up with these customers (approx. 10% of the Fortunes 500 customers have 100 or more licensed users).  
  • Structural tailwinds – ongoing migration to online with businesses looking to digitize manual, paper driven processes.
  • Looking to become a platform.
  • Attractive recurring revenue base via subscriptions. 
  • Investment in R&D to continue developing the Company’s competitive position and enhance value proposition with customers.   

Key Risks 

  • Rising competitive pressures, especially the larger players like Adobe Inc and DocuSign
  • Growth disappoints the market, given the company trades on high valuation multiples – growth in subscriptions, new customers and penetration of existing clients. 
  • Product innovation stalls and fails to resonate with customers. 
  • Emergence of new competitors and technology.

Bulls Say’s

  • Revenue excluding Connective of US$50.7m, was up +26%, and at the top end of the upgraded guidance range. Revenue including Connective was US$50.9m. Annual Recurring Revenue (‘ARR’) excluding Connective was US$40.1m, up +41% and in line with guidance (reaffirmed in October 2021 of US$39m – US$42m). ARR including Connective was US$46.2m, up +62%.
  • Operating EBITDA loss excluding Connective was US$7.4m, and including Connective was US$7.6m, in line with the upgraded guidance range of US$7.5m – US$8.0m provided by the Company in January 2022, and significantly lower than the guidance range of US$11m – US$13m provided at the beginning of FY2021.
  • NTO exceeded 1m active subscription PDF licences, reaching 1.1m at FY21-end.
  • NTO executed 2.2m Nitro Sign eSignature requests excluding Connective eSignatures, up +102%, and more than 22m eSignature requests including Connective.
  • NTO completed a A$140.0m capital raise and hence NTO retains a strong balance sheet with no debt and cash and cash equivalents of US$48.2m including Connective.

Company Profile 

Nitro Software Ltd (NTO), founded in 2005 & listed in 2019, is a global document productivity software company. NTO offers integrated PDF productivity, eSignature and business intelligence (BI) tools through a horizontal SaaS and desktop-based software suite. The Company helps customers move to 100% digital document workflows, eliminating paper and accelerating business processes. NTO serves customers around the world and counts 68% of the Fortune 500 companies among its customers. In total, NTO has over 12,000 business customers (who are defined as having at least 10 licensed users) and across 155 countries.  

(Source: BanyanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Small Cap

Invocare ltd operating revenue was up 11% to $527.1m with acquisitions executed in 2H20 contributing $26.7m

Investment Thesis

  • Trades in-line with our blended valuation (DCF / PE-multiple). IVC is currently trading on a 12-mth blended forward PE-multiple of 30.0x and 2.4% dividend yield. 
  • IVC continues to be impacted by Covid-19 and associated lockdown/containment measures.
  • Potential for increased death rates.
  • Continued cost control from strategic review and operational efficiency.
  • IVC benefits from demographics and long-term population growth.
  • IVC holds leading market positions in its core markets.
  • IVC has strong cash flow conversion and generation.
  • High barrier to entry with quality assets and a business model that is difficult to replicate.  
  • Increased competition from budget operators in Australia.

Key Risks

  • Continued reduction in death rate compared to expectations/forecasted trend.
  • Increased competition especially around pricing.
  • Protect and Grow 2020 does not yield incremental returns as anticipated.
  • Underperformance of funds under management.

FY21 Results Highlights

  • Statutory Revenue of $532.5m, up +11%.
  • Operating Revenue up +11% to $527.1m.
  • Operating EBITDA up +22% to $125.5m, with a return to positive operating leverage.
  • Operating EBIT up +36% to $77.8m.
  • Reported Profit After Tax of $80.2m, was higher than the loss of $11.5m in the pcp.
  • IVC achieved strong cashflow conversion of 105%, ROCE of 11.2% and leverage ratio of 1.2x.
  • Operating EPS of 31.6 cents, up 51% on pcp.
  • The Board declared a final fully franked dividend of 11.5cps which takes Full Year dividends to 21.0cps (equating to 66% dividend payout ratio).
  • IVC maintained a strong balance sheet with net debt at $144m at year-end, representing a leverage of 1.2x, a slight improvement on the pcp.  

Company Profile 

InvoCare Ltd (IVC) is the largest private funeral, cemetery and cremation operator in the Asia Pacific Region. It has leading market positions in countries like Australia, New Zealand, and Singapore. 

(Source: BanyanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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MVF reported solid 1H22 results; Growing above industry growth resulting in market share of 20.8% in key domestic markets

Investment Thesis

  • High barriers to entry with unique expertise and assets. 40-year heritage of leadership in science and innovation in ARS and women’s imaging, coupled with the depth of experience from the doctors and clinical team which will continue to underpin MVF’s future growth and maintain treatment success rates.
  • Aging Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favourable demographic tailwinds.
  • Improving balance sheet with flexibility to execute expansion strategies. Earnings increasingly become diversified as the Malaysian business gains momentum. 
  • Potential earnings diversification and growth via international expansion and increased presence in diagnostics.
  • Demonstrated capacity to perform well in terms of cost out and earnings growth despite tough conditions (i.e., lower cycle volumes).
  • Transparent and detailed disclosures.

Key Risk

  • Low growth environment impacting earnings.
  • Regulatory risk as changes in government funding may increase patient’s out-of-pocket expenses and thereby volume demand. 
  • Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue 
  • The Australian market does not rebound following this period of downturn. Population of males and females with fertility problems decline.
  • Loss of key specialists.
  • Loss of market share especially to low-cost providers, with one already appearing in Victoria.
  • Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment.
  • Execution of international forays into Malaysia goes poorly.

1H22 results summary:  Relative to the pcp:

  • Revenue increased +11.2% to $101m, largely driven by domestic stimulated cycles growth of +6.6% and average ARS revenue per stimulated cycle growth of +4.4%, partially offset by decline in ultrasound scan volumes. 
  • Adjusted EBITDA of $26.8m, increased +8.5% with volume leverage gained from increased domestic IVF activity partly offset by short-term margin declines in Ultrasound and Kuala Lumpur, pandemic related costs and $1m increase in medical malpractice and D&O liability insurance reflecting appropriate insurance policies in the current settings. 
  • Adjusted NPAT of $13.4m increased +11.7% and came in +3.1% ahead of management’s guidance. Reported NPAT declined -17.6% to $12.2m, primarily due to receipt of Job Keeper subsidies in pcp. 
  • FCF (excluding job keeper subsidy receipts in pcp) increased +51.6% to $9.7m, driven by 83% cash conversion of EBITDA to pre-tax operating cash flows and a decline of -42% in capex to $3.6m. 

Growing above industry growth and gaining market share

IVF industry fundamentals remain attractive including advanced maternal age and stable and continued government funding, which saw positive industry momentum continue in the half with industry volume growth at +3.6% and MVF recording above-industry growth of +6.6% resulting in market share gains of +70bps to an overall market share of 20.8% in key domestic markets. 

Company Profile

Monash IVF Group Ltd (MVF) offers assisted reproductive technology services, ultrasound services, gynecological services, in-vitro fertilization services, consultancy services and general clinical services to patients in Australia and Malaysia. MVF comprises 40 clinics and ultrasound practices and employs ~100 doctors and has a network of 650 associated health professionals. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Qube Working Towards Cost Effective Supply Chain

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook

Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains. 

It is alleged Qube to generate robust earnings growth over the long term on acquisitions, developments and organic growth. The domestic port logistics industry has traditionally been very fragmented, highly competitive, and inefficient. Currently, there are more than 250 operators providing port logistics services in one segment of the market. These are typically small operators with limited geographic scope offering limited point-to-point services. Qube’s strategy is to provide a broad range of services nationwide, touching multiple segments of the import/export supply chain. Analysts are supportive of this strategy and believe there is significant scope for further industry rationalisation. 

Consolidating the fragmented logistics chain should significantly improve Qube’s competitive position. Qube has already established a dominant market share in some specific port logistics offerings, particularly with regards to rail haulage services to and from Port Botany. Successfully developing its strategic land holdings into inland intermodal terminals should add materially to Qube’s future earnings and support cost advantages to less efficient peers. Qube aims to develop inland rail terminals as an alternative to moving container volumes from port via road. When fully developed, Moorebank will be Australia’s largest inland intermodal terminal. The bulk and general segments are highly fragmented and competitive but Qube is one of the largest players, with operations at 28 city and regional ports. The automotive stevedoring business operates in a duopoly market structure, holding long-term off-ship transportation, processing and storage contracts with major foreign vehicle manufacturers.

Financial Strength

Following the sale of Moorebank warehouses, Qube is in strong financial health. Gearing (net debt/net debt plus equity) was 10% in December 2021, well below Qube’s 30%-40% long-term target range. It has less than AUD 400 million in debt after receiving the upfront component of Moorebank sale proceeds, providing ample headroom to fund developments and bolt-on acquisitions. A special dividend or share buyback is likely in 2022. It is projected net debt/EBITDA to fall from 3.8 at June 2021 to below 2 times in 2022 and for the medium term. Qube’s businesses have delivered steadily increasing operating cash flow in recent years, though operations remain cyclical. Recent growth initiatives should generate strong future cash flow, though a large-scale acquisition or development project may require new equity funding. Qube has significant capital expenditure requirements including Moorebank development. Qube is committed to paying 50%-60% of earnings per share before amortisation as dividends.

Bulls Say’s

  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration. 
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving strong returns for Qube. 
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders

Company Profile 

Qube has three main divisions: operating; property; and Patrick. Operating undertakes road/rail transportation of containers to and from port, operation of container parks, customs/quarantine services, warehousing, intermodal terminals, international freight forwarding, domestic stevedoring, and bulk transport. Patrick is the container terminals business acquired from Asciano, and the property division includes tactical land holdings in Sydney. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Temple & Webster Group strong focus on reinvesting earnings back into business

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(Source: BanayanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Sectors Small Cap

Temple & Webster Group strong focus on reinvesting earnings back into business

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(Source: BanayanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Small Cap

Overseas Market, Pexa’s Next Frontier Of Growth

Business Strategy and Outlook

Pexa is the first electronic conveyancing, or e-conveyancing, platform for real estate in Australia. Real estate conveyancing has historically been a labour-intensive process which is vulnerable to errors, whereas digitisation has created efficiencies and reduced the likelihood of issues. Specifically, Pexa is an electronic lodgment network operator, or ELNO, which enables real estate owners to electronically update information about a property at the land title office, amongst other things. Pexa generates revenue by charging fees to facilitate real estate transactions over its network, meaning that the key drivers of its revenue are the number of transactions and the price per transaction.

With no competitors currently offering an equivalent e-conveyancing platform, Pexa has been able to establish a monopoly in the Australian e-conveyancing market. Pexa’s monopoly has been further supported by four out of six Australian states mandating the use e-conveyancing for real estate transactions. Despite attempts to increase competition within Australian e-conveyancing, Pexa–by virtue of being the first mover–is likely to remain the dominant e-conveyancing provider moving forward. ARNECC, or the Australian Registrars National Electronic Conveyancing Council, regulates ELNOs and are attempting to introduce greater competition through interoperability. Interoperability intends to open Pexa’s network to competing ELNOs, who are currently developing their own e-conveyancing platforms. However, ELNOs provide largely commoditised services and there is little incentive for customers to integrate with many different providers. First mover advantages are likely to result in Pexa remaining the dominant player in Australian e-conveyancing. 

Pexa’s dominant position in the Australian market means that overseas expansion represents the next frontier of growth. Replicating Pexa’s success overseas has the potential to be highly lucrative, however, this will involve numerous challenges and there is no guarantee of success. Pexa also has other revenue sources, such as data insights and venture capital. However, these are currently in infancy and are largely immaterial.

Financial Strength

Pexa is in reasonable financial shape and had AUD 220 million in net debt as at Dec. 31, 2021 which equates to a net debt/equity ratio of around 1.5. Debt will be drawn on a revolving basis, with covenants, interest costs and specific repayment dates yet to be disclosed. Pexa’s wide moat, high margins, and strong competitive position should mean adequate cash flows to maintain this level of financial leverage. It is likely Pexa’s Australian business to be a “cash cow” thanks to its wide economic moat, effective monopoly, low capital intensity, and relatively high margins. This should generate cash for sustainable dividends and enable deleveraging of the balance sheet.

Bulls Say’s

  • Pexa has a rare wide economic moat and a monopoly in the Australian e-conveyancing market. 
  • Pexa operates a capital-light business model and has strong margins, which should underpin sustainable fully franked dividends in the long term. 
  • Pexa may be able to leverage its Australian platform in overseas markets, such as the U.K., Canada, and New Zealand, offering significant growth and similar defensive revenue streams and high profit margins.

Company Profile 

Pexa is the first electronic conveyancing platform for real estate in Australia and derives revenue by charging fees to facilitate real estate transactions over its network. The emergence of electronic conveyancing creates a number of efficiencies and replaces the historical labour-intensive process which was vulnerable to errors. Having achieved dominance of the Australian electronic conveyancing market, Pexa is looking to expand overseas and replicate its success in international locations. The company was founded in 2010 by a group of Australian state governments with Australia’s “big four” banks beginning to transact on the platform shortly after. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.