Sohn Hearts and Minds: The Australian Fund Manager Coverage

David Allingham, Eley Griffiths - Stock pick: Pinnacle Investment Management

Pinnacle Investment Management is a multi-boutique fund manager that owns stakes in 16 Australian fund managers across Australia of between 23 to 49 per cent. It is led by CEO Ian Macoun who is said to be famous for picking star portfolio managers.

David Allingham says with $90bn in funds under management today, Pinnacle has the capacity to grow to $300bn based on its existing number of managers that also includes Hyperion Asset Management. And that’s before it expands offshore, which is expected in 2022 once the borders reopen.

“When you buy a share, you buy a share in 16 underlying managers,” says Allingham. That “gives you diversification by asset class, style and by strategy and there is no key man risk which makes it very unique in the asset management space.”

The firm’s three areas of growth come from the existing managers, the seeding and starting of new greenfield managers and by acquiring managers. They provide infrastructure, back office support, compliance and distribution, allowing the firms to focus on managing money.

Over the last five years, compound earnings per share growth of 56 per cent, up from 5 cents to 37 cents as at June 2021. Allingham expects revenues to at least triple overtime as FUM climbs to the forecast $300bn.

“With up to 20 per cent upside to margins as Pinnacle scales its revenue, it will lead to extraordinary EPS growth overtime,” the fund manager says. “We also think there is transformational acquisition potential to roll this model overseas by acquiring managers and distribution capability.”

They have an EPS long term target of above $2 a share.

 

Gavin Baker - Stock tip: Coinbase (COIN)

Gavin Baker, managing partner and CIO of Atreides Management, a $4.5bn crossover firm based in Massachusetts, recommends investors hold Coinbase, a platform for investing in cryptocurrency.

Two simple conditions are needed for the platform to succed, he argues: that the fiat world persists for at least several decades, and that cryptocurrencies are “real – here to stay”.

“If these two conditions are met Coinbase is likely to be a successful investment,” he says.

The programmable nature of cryptocurrency “lets a company like Coinbase generate a wide variety of insularity revenue streams and these ops are simply not present with brokers that focus on fiat currency,” Baker says.

“We believe the subscription and services revenue line – which has already bagged $US600m dollars, going over 12 hundred per cent year on year – those are annualised numbers – will be over 50 per cent of revenue within several years.”

Joyce Meng, FACT Capital - Stock pick: Beauty Health Company (SKIN)

US-based Beauty Health Company’s core asset is HydraFacial, a patented skin treatment offered at beauty spas and clinics whose popularity has grown via social media with the hashtag hydraglow. The treatment costs around $200 a session and is recommended on a monthly basis. According to Meng, its “savvy” product design, much like the vacuum cleaner, is the first of its kind to show customers what has been extracted from their skin, creating ideal content for social media platforms.

“If there is anything we have learned in the last year and half we live in a Zoom and Instagram world where everyone wants to look good on camera,” she says.

The company’s serums, boosters and other tips used in treatment are said to be highly customizable and its ability to personalize treatment has helped the HydraFacial system “become more of a platform rather than a one trick pony that is vulnerable to fads,” the fund manager adds.

On RealSelf, which is said to be the definitive review website for medical treatments, HydraFacial has a 99 per cent “worth it” score which means that of the two thirds who try it for the first time they become repeat customers.

Meng is forecasting 30 per cent durable and organic growth driven by accelerating equipment placements and a price target of $40 a share for 40 per cent upside. While the company was growing at a 52 per cent revenue CAGR, or compound annual growth rate, it was still held up a 30 per cent during the pandemic.

“For a 30 per cent compounder we think that valuation is attractive for the growth,” she says. “The company (also) has $900m available for M&A deployment and given the track record of the management team and board we suspect that there will be a financially accretive announcement made in the near term.”

Markus Bihler, Builders Union - Stock pick: Wise

Founded by Taavet Hinrikus, who was one of the first employees of Skype and Kristo Kaarman, in London, Wise was created out of a shared frustration over the excessive fees charged by banks to transfer money internationally which would take days to clear.

Whereas a bank would typically charge $40 to 50 to transfer $1000 overseas, Wise charges an all-in fee of $5 to transfer cash via its platform with the money arriving at its destination almost instantaneously. Ten years on, fintech is listed in the UK with a market of 11 billion pounds and this year growing is just under 40 per cent of revenue or 25 percent EBITDA margin.

According to Bihler, the market is poised to grow to over $20trn of money transferred internationally by the end of the decade, driven by personal remittances, cross border ecommerce, international tuition fees medical tourism and real estate investment. That’s up from $12trn in 2020.

“We invest in companies that over proportionally benefit from that expenditure of young consumers,” says Bihler.

They are estimating that the structural shift in consumer behaviors of young people that are typically born between 1981 and 2012, will benefit the potential top line of a company like Wise, because of the 20 per cent structural long term growthspending patterns and the changing behaviours of consumers that are shifting towards fintechs like Wise.

Bihler says the company has strong customer economics that is driving high profitability, with EBITDA margins of 25 per cent and a free cash flow to equity of 20 cents and above per dollar of revenue. Over the next five years, the fund manager expects the target share price to hit 30 pounds by 2027, a 27 per cent five year annualised return.

 

Nick Griffin, Munro Partners - Stock pick: Onsemi

Munro Partners’ Nick Griffin has pitched Nasdaq-listed Onsemi as his stock pick at this year’s Sohn Hearts & Minds conference, labelling it the ‘hidden hero’ of the path to decarbonisation.

“This is a company intent on moving into intelligent power and intelligent sensing. We see them going from being a cyclical grower to a structural grower as they prosecute this opportunity,” Mr Griffin said.

“We see the revenue growth of this company accelerating more than 10 per cent per annum over the next five years. But what’s more exciting is the margin opportunity: margin should go up as they pivot their products to higher-margin solutions.”

US-based Onsemi, formerly ON Semiconductor, has a market cap of $US26bn and is a leading semiconductor manufacturer specialising in intelligent power sensing solutions.

Its growth opportunity will come from the push to decarbonise the planet, Mr Griffin said.

Alongside the car market, power markets, the circular economy and even the switch from petrol pumps to electric will all be driven by semi-conductors, he said.

The reason Onsemi is the pick of the lot is because of the CEO, Hassane El-Khoury, and CFO, Thad Trent, Mr Griffin said.

 

Phil King, Regal Funds Management - Stock pick: Short Flight Centre

Regal Funds Management co founder, Phil King is recommending that investors sell shares in travel company Flight Centre, arguing that the stock has rebounded too strongly since its lows of last year with the company still facing headwinds with the shift to online travel bookings.

King, who is the only fund manager at the Sohn Hearts & Minds conference tipping a short, said Flight Centre’s shares have doubled from a low of $8.75 last year with the onset of Covid to their current levels of around $17.33.

“We think it is too much. We think it is a short,” he said.

King said Flight Centre, whose shares peaked at $69 in 2018, was a popular stock with retail investors who saw it as the “go to stock” for the reopening of the economy.

But he said that while people were excited to see the international borders open up, “we think it is going to be a bumpy road out of lockdown.”

Mr King compared Flight Centre to US company Zoom which had been a market favourite last year as the world discovered its product, but its shares had fallen this year as investors became more sceptical about the company’s long-term financials.


Yen Liow, managing partner Aravt Global - Stock pick: Gitlab

Gitlab is a founder-led software business that is focused on DevOps which is is rapidly growing into a large market with pricing power that is expected to last for decades. Liow stumbled upon the company while researching Atlassian, which itself generated 20 times the return on capital since its IPO.

“We kept on hearing from our conversation with our developers in the community that this company has fantastic software which they believe will become one of the emergent standards for years to come,” he says. “Imagine getting onto Atlassian at the start of the ride. We believe that company is GitLab.”

The $15bn company listed on the Nasdaq in October and trades about $80m a day. Its focus is on source code management within the so-called DevOps stack, where a duopoly exists with Microsoft’s Github and now GitLab. Where Atlassian has created a $100bn business focuses on one core focus in the DevOp stack, Gitlab is focusses on the entire cycle, with leadership in almost three segments.

“DevOps is highly complex; there is no single platform that allows developers to go through this entire process without using different sources of software. GitLab is uniquely positioned to solve that problem. They are investing aggressively throughout the entire DevOp cycle.”

In seven years, the company has been growing at almost 70 per cent, with a run rate of almost $230m a year. Some 90 per cent of the business is subscription based, with 88 per cent gross margins and 97 per cent gross revenue retention.

“We believe GitLab has an opportunity to grow almost 10 fold in the coming decade,” says Liow. “Software developers are among the most valuable employees in the world and that they will be an extremely valuable place to sell software into.”

 

Beeneet Kothari, Tekne Capital Management - Stock tip: Delivery Hero

Beeneet Kothari of Tekne Capital Management has chosen Delivery Hero as his stock pick at the Sohn Hearts & Minds conference, saying it is the best way to play the innovation and last-mile logistics trend.

‍Mr Kothari, whose pitches in the last three Hearts & Mind conferences have delivered on average returns in excess of 80 per cent, described the markets for on-demand delivery as “enormous”.

“When you add up groceries, apparel and electronics, we’re talking about a market that has tens of trillions of dollars at stake.

“And there is a new breed of last mile logistics infrastructure companies that are purpose built for on-demand delivery, and our new e-commerce world.”

Delivery Hero is a European multinational online food-delivery service based in Berlin, Germany and listed on the Frankfurt stock exchange. It covers more than 50 countries and 1.7bn people and is the number one player in 95 per cent of its markets.

“Most meaningfully it is founder-led. That means the management team and the CEO and founder have an owner’s mentality, and they invest for the long run. This is probably the best management team in the business,” Mr Kothari said.

“This CEO saw the transition in last mile logistics and concluded that he could either disrupt himself, or be disrupted. Four years ago, Delivery Hero made a huge strategic move from being a third party player to a first party logistics provider.

Mr Kothari compared the transition Delivery Hero is making to similar transitions made by Netflix and Facebook.

“And the stock trades at a massive discount to its peers: A third of the multiple.

“We think there’s potentially more than 400 to 500 per cent upside in this stock for the patient investor.”

 

Eleanor Swanson, Firetrail - Stock tip: Megaport

Firetrail Investments’ Eleanor Swanson has tipped ASX listed telco software company, Megaport, as the best stock for 2022 at the annual Sohn Hearts & Minds Conference.

Swanson said the company, which was founded in 2013 by Australian entrepreneur Bevan Slattery, has the potential to grow into one of the largest telcos in the world.

She said Megaport was “the most exciting tech adventure this decade.”

She said its network was faster, more flexible and much cheaper than those of traditional telecommunications companies and had loyal customers who continued to increase their spend by 50 per cent a year.

She said the company, which is currently trading around $20 a share, with a market capitalisation of $3bn, had the potential to double its share price to $40 giving it a market capitalisation of more than $6bn by the end of next year.

Swanson, an early enthusiast for Afterpay at Firetrail, said Megaport was now growing at 30 per cent a year and was doubling the size of its potential market share to $14bn.

The company has delivered a return of 55 per cent over the past 12 months.

But she said its recent deals with five US networks including Cisco and VMware had given it a “sales force army” of 40,000.

She said Megaport’s customer base was set to take off as “more than 40,000 salespeople pounded the pavement telling businesses around the world about their story.”

“In 2022 Megaport will work with the giants of industry to deliver a better network to thousands of businesses.”

“The little challenger network is now on the precipice of greatness.”

Babak Poushanchi, Cota Capital - Stock pick: Avalara

One of the biggest unsolved problems is taxes which remains consuming, complicated and error prone. Businesses still manage their taxes with a combination of pen and paper and excel and the complexities are only increasing. Babak Poushanchi says Avalara, based in Seattle, is solving the problem. The software company has grown at an annual revenue at a rate of 30-40 per cent over the past decade and has more than

“It continues to have big opportunity ahead with less than 5 per cent market share,” says Poushanchi. “The business model is predictable with over 90 per cent of its revenue reoccurring and 74 per cent gross margin. It has the bold vision is to help automate and be a part of every transaction in the world.”

The fund manager says the company is very well positioned to grow from a roughly $700m revenue business today to a multi-billion dollar revenue business over the next four to five years. And the shares, he says, offer a “compelling investment opportunity.”

Avalara business is driven by four major secular tailwinds including the “explosion” of e-commerce, the generational shift to the cloud, increased focus on ROI and the heightened regulatory environment.

Current domestic market opportunity is said to be big and is estimated to be about around $15bn, which is up from three years ago at the IPO when the company estimated it to be $8bn.

Qiao Ma, Coopers Investments - Stock pick: Techtronic Industries

Fund manager, Qiao Ma has tipped Hong Kong based global power tools and outdoor equipment company Techtronic Industries at the Sohn Hearts & Minds conference on Friday.

Portfolio manager of the Asian Equities Fund of Coopers Investments, Ma said Techtronics, which is listed on the Hong Kong stock exchange, has two well respected brands which largely sell into the US market – Ryobi for the home handy person and Milwaukee for professional trades people.

Founded in 1985 by German engineer Horst Pudwill whose son is now involved in running the company, Ma said the company’s shares, now trading at $HK170 could easily rise to $HK215 in 12 months’ time.

The company has a market capitalisation of $US39bn with annual revenues of $US9.8bn.

Ms Ma said although Techtronics was an industrials company producing power tools it was “really a technology company at heart”, having moved to use state of the art lithium batteries for its equipment.

Ma says the company has been growing its sales by 13 per cent a year for the past 13 years and its profits by 26 per cent a year over the same time.

“That tells you one thing -- Techtronics is not growing sales by cutting prices,” she said.

“It is increasing its volume and creating premium end products and commanding a very health product margin.”

She said Coopers was “incredibly excited about its future.”


Jay Kahn, Flight Deck Capital - Stock pick: Bengo4

Jay Kahn of Flight Deck Capital has pitched Nikkei-listed Bengo4 as his stock pick for this year’s Sohn Hearts & Minds conference, following the recent acceptance of the electronic signature in Japan due to the Covid-19 pandemic.

Japan’s version of DocuSign, Bengo4 already holds much of the market, Mr Kahn told the conference attendees.

“Bengo4 operates in a market where over the last decade it was illegal to use electronic signatures to certify a legal document, a mortgage document or bank document.

“When COVID hit over the last year and a half, the Hanko stamp (traditionally used) was tremendously inefficient and a bottleneck to getting business done in Japan.”

Earlier this year, the Japanese government said it would allow electronic signature as an official form of certification for government documents.

Japan was woefully under penetrated in terms of e-commerce and software as a service, Mr Kahn, who launched Flight Deck in May, said.

“In terms of software, Japan only has four companies worth more than $5bn in the SAAS space traded on the Nikkei. We think that’s nonsensical and not sustainable. And over the next 10 years, we think there will be multiple multibillion-dollar software companies created in Japan.

“We are very much in the early stages of the J curve penetration in terms of the rapid adoption of the new signature in Japan over time.”

The market in Japan could grow to be worth $US3.2bn, up from its current $90m, he said.

“This company Bengo4 is attacking this market aggressively and is a breakaway leader. The document signature market is not one where 10 to 15 players end up succeeding, it is winner take most.

“As a result, we think that Bengo4 has the potential to be a multi bagger from here.”

 


This article was originally posted byThe Australian here.

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