Investing in Strong Leadership
When it comes to equity investment, the prowess of leadership can be a defining factor in a company's success. Visionary leaders inspire, unite, and drive businesses towards achieving enduring shareholder value. In the Month Ahead for July 2023, we spotlight four companies distinguished by their exceptional leadership.
Endeavour Group
Endeavour Group (EDV) is Australia’s largest retail liquor and hospitality business with a retail network of around 1,700 stores across two key brands – Dan Murphy’s and BWS – and operates a portfolio of around 350 licensed venues providing a range of hospitality services including food and beverage, gaming and accommodation.
EDV has strong market positions with ~40% share in the retail liquor sector (vs #2 Coles with ~14% share) and ~9% share in hotels (vs #2 Australian Venue Co. with ~4% share). We believe the share price weakness over the past 12 months reflects the market’s concern around the potential for tighter poker machines regulation, increased capex due to higher hotels acquisitions and whether management can achieve their 15% return on investment by year two, and the extent to which consumers will keep spending in hotels as cost-of-living pressures increase.
We see these concerns as valid but believe them to be more than reflected in the current share price. Using a sum-of-the-parts valuation, if we apply a multiple for the Retail division that is broadly in line with where Woolworths (WOW) and Coles Group (COL) are currently trading, at EDV’s current share price we estimate the market is valuing the Hotels division at 4x EBITDA.
Finding a direct comparison in the listed space for hotels is not easy but we note that the likes of Aristocrat Leisure (ALL), Tabcorp (TAH), Star Entertainment Group (SGR) and Sky City Entertainment Group (SKC) are all trading on EV/EBITDA multiples of 6.5–12.0x. Therefore, we think the balance of risks for EDV from here is weighted to the upside.
Goodman Group
Goodman Group (GMG) is an integrated property group with operations throughout Australia, New Zealand, Asia, Europe, the United Kingdom, North America and Brazil. GMG is the largest industrial property group listed on the Australian Securities Exchange (ASX) and one of the largest listed specialist investment managers of industrial property and business space globally.
With continued increases in interest rates and persistent inflation (most notably construction costs), risks surround the REIT sector. Therefore, when buying shares in real estate companies (or trusts), it is important to seek out businesses that can push rents up to combat these headwinds - companies with actual pricing power.
This has driven our preference for industrial property ('sheds'), given the strength of those underlying operating markets. Given real estate's sensitivity to higher interest rates, we prefer those active managers who can grow Assets Under Management (AUM) and add value from an active buy, build, manage strategy. To this end, strong balance sheets are also key to navigating any decline in book values.
With these preferences in mind, we see a buying opportunity in industrial property giant Goodman Group (GMG), as a high-quality, founder-led group with a robust balance sheet and real pricing power.
GQG Partners
GQG Partners (GQG) is a global asset management boutique, that manages over US$95bn in funds across four primary equity strategies. The business has a philosophy of client alignment (fee structure and staff ownership), highly effective distribution, and scalable strategies that have enabled rapid funds under management (FUM) growth since being founded in 2016.
Against structural industry pressure on management fees, GQG's relatively recent inception has allowed its founders (CIO Rajiv Jain and CEO Tim Carver) to create a sustainable model suitable to the current industry backdrop.
GQG's long-term investment performance has been solid (outperforming its strategy benchmarks) and the group’s investment style has seen this delivered with less volatility and through various market conditions. This outperformance has resulted in GQG continuing to attract fund flow (US$5.9bn in 2023 to May) whilst most domestically listed peers are seeing outflows.
The group has exceptional global distribution which it expects to leverage over time through additional teams or funds. Whilst key man risk (Rajiv Jain as CIO) is high in GQG, we think the valuation and dividend of around 9% outweigh the risk. GQG has delivered strong results against a tough market backdrop - with some market performance, we think the stock can perform well.
Corporate Travel Management
After hitting a recent high of $21.62 in mid-April, shares in Corporate Travel Management (CTD) have fallen to under $18.00. We note that the entire travel sector has been sold off in the last couple of weeks despite some generally positive updates, albeit they might not have included the earnings upgrades the bulls had hoped.
CTD is the world’s fifth-largest corporate travel management company. This founder-led business successfully managed the COVID travel downturn without raising new equity to restore its balance sheet, unlike many of its peers. Throughout COVID, its balance sheet remained strong and it has no debt.
It was one of the first travel companies to declare a dividend. Following two attractive acquisitions made during COVID, material new client wins and structural cost savings and automation benefits from its technology, CTD will come out of COVID as a much larger business. Pre-COVID, CTD had a strong track record of reporting double-digit earnings growth and industry-leading margins and we expect that this will continue in the future.
We think the current weakness represents a great buying opportunity for patient investors. When travel demand eventually recovers, we think CTD’s share price will be materially higher than it is today. Based on our forecasts, CTD is trading on an FY24 (full recovery year) PE of only 16.5x, the cheapest it has been in some time (pre-COVID it traded on 25x).
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