NEWS
12 Jul 2024 - Hedge Clippings |12 July 2024
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Hedge Clippings | 12 July 2024 If there was one topic aside from inflation and interest rates that was set to dominate the news in 2024, it was going to be elections - or more importantly their outcome. 64 countries, plus the European Union, have held, or are due to hold elections this year, representing 49% of the world's population. You would expect therefore to say "Democracy Rules" - except it doesn't always apply. The potential for change in Russia (even though elections were held) was limited to say the least, as it was in Bangladesh, or Pakistan, where the most popular politician, Imran Khan, was in jail. Last week's UK election is another case in point: Democracy, of a sort, took place with an overwhelming vote of no confidence in the ruling Conservative government, although only 59% of the population thought it was worth the effort to vote on the day. Presumably a fair proportion of the 41% who didn't vote were still following the UK's WWll era slogan "Keep Calm and Carry On". Meanwhile, a fair proportion of the 61% who did vote will have to do the same for the next 4 years. However, the result was lopsided. While the winning Labour Party control 412 or 63% out of the total of 650 House of Commons seats, they received only 34% of the overall vote. Much of the skew can be blamed on the UK's system of first past the post voting - although if blame is to really be apportioned, Rishi Sunak and his 4 predecessors in 10 Downing Street should really shoulder it. This system saw 12.2% of the vote cast for the Liberal Democrats, who won 72 seats, while arch-spoiler Nigel Farage's Reform UK party out-polled the Lib Dems with 14.5% of the vote, but only won a paltry 5 seats for their efforts. As above, Democracy of a sort, but we have to admit better than that available - or not, depending on your view - in Putin's Russia, or for that matter Xi's China, where he was unanimously elected by almost 3,000 delegates of the National People's Congress last year. Australia's political system may not be perfect, but proportional representation, thanks to our preferential system, sure beats the heck out of the UK, let alone China and Russia! Which leads us to the looming election in the US, where earlier today Joe Biden was mumbling and bumbling his way through an hour-long news conference following the end of the NATO Summit commemorating its 75 years' existence (six years short of Joe's own age). In between slips of the tongue (mixing Putin with Zelensky, and for a moment naming Trump as his Vice President) Biden sounded more like he was at an election rally than a summary of the NATO deliberations. Meanwhile Trump, thanks to the US Supreme Court's ruling on presidential immunity, was busy filing an appeal against his conviction on criminal charges stemming from hush money paid to a porn star. Unless Biden has a change of heart, which it seems he's unwilling to do, one of them will end up as President of the free world come November. Whichever side of politics you're on in Australia, thank your lucky stars you're here! News & Insights Down-trading Megatrend | Insync Fund Managers Why invest in global equities | Magellan Asset Management June 2024 Performance News Bennelong Australian Equities Fund Glenmore Australian Equities Fund Bennelong Long Short Equity Fund |
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12 Jul 2024 - Performance Report: Cyan C3G Fund
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12 Jul 2024 - Performance Report: Argonaut Natural Resources Fund
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12 Jul 2024 - Performance Report: Bennelong Long Short Equity Fund
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12 Jul 2024 - Fast food profits
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Fast food profits Montgomery Investment Management June 2024 I have previously written here that one of the most repeatable ways to make money on the Australian Stock Exchange (ASX) is to buy into a retail store rollout story early. Catching the steepest part of the 'S' curve when revenue and profit growth are accelerating while head office becomes simultaneously more efficient usually produces good results thanks to the accompanying rise in the share price. And when like-for-like sales of existing stores are still growing and the number of new stores being added is high in proportion to the number of existing stores, jumping aboard early provides an even more beneficial tailwind. Store growth ambitions are often disclosed in a company's initial public offering (IPO) prospectus and within twelve months, investors usually have a good idea about management's ability to deliver on the stated plans, as well as customers' love for the concept. Recent retail success stories Some recent and not-so-recent examples include Lovisa (ASX:LOV), which sold its product through 60 stores in 2012. When it was listed in 2014, it had grown to 220 stores. Eight years after listing, Lovisa distributes its jewellery through 449 stores. And since it listed, the share price is 976 per cent higher. JB Hi-Fi (ASX:JBH) listed in October 2003, with just 25 stores, issuing shares at $1.55. Today, with 316 stores (including acquisitions of Clive Anthonys and The Good Guys) the shares trade at $58.46, a return of 3671 per cent, or 19.1 per cent per annum over 20 years, excluding dividends. The furniture retailer Nick Scali (ASX:NCK) was listed in May 2004. At the time of its 2004 full-year results, it reported sales of $43.4 million and earnings of $6.7 million from just 10 stores. The IPO price was $1. With 85 stores today, and more than 90 Plush stores, the share price is up 1378 per cent at $13.78, or 14 per cent per year over 20 years. Guzman y gomez IPO Recently, the healthy, fast, Mexican-inspired food chain Guzman y Gomez launched its prospectus for an already fully subscribed IPO to list shares on the ASX on 25 June. With its first store opening in 2006, and 185 stores in Australia currently, Guzman y Gomez's management has already proven to be one of Australia's fastest-growing quick service restaurant (QSR) teams. Guzman y Gomez plans to have over a thousand domestic stores in the next twenty years. This compares with McDonalds (NYSE:MCD) Australia, which opened its first store in 1971, reached 869 stores in 2011 and now has 1043 stores. Elsewhere, Subway, which launched in 1988, has 1227 stores across Australia today, while Domino's (ASX:DMP), which set up shop in 1983, now has 736 stores. And like Lovisa, JB Hi-Fi and Nick Scali before it, Guzman y Gomez lists 'new store openings' as its top source of future growth, stating, "new restaurant openings in Australia are expected to be the primary contributor to Guzman y Gomez's network sales growth over the long term. Guzman y Gomez believes there is an opportunity to grow its network to more than 1,000 restaurants in Australia over the next 20-plus years. The company believes that it has substantially built the team, restaurant pipeline, and infrastructure to be able to open 30 new restaurants per annum over the near-term [it opened 26 in CY23], increasing to 40 restaurants per annum within five years." As an aside, there are also 16 stores in Singapore, five in Japan and four in the U.S. Not only are store openings going to continue, they are expected to accelerate. That's the first source of growth. Importantly, individual store economics are extremely attractive, with Guzman y Gomez expecting to achieve a return on investment (ROI) in line with existing stores of approximately 50-55 per cent on new corporate restaurants and its franchisees to achieve an ROI of approximately 30 per cent on new franchise restaurants, with the difference being due to the royalty paid by franchisees. Not only is the number of these highly profitable stores expected to grow significantly and accelerate, but restaurant margins are also expected to improve. Guzman y Gomez restaurant margins improve with volume, and volume rises as Guzman y Gomez stores mature. In 2023, corporate restaurant margins were 14.4 per cent. In 2024, that margin is expected to rise to 17.1 per cent and 17.8 per cent in 2025. At the same time, the Franchise royalty rate is expected to rise from an average 7.6 per cent in FY23 to 8.3 per cent in 2025. And as the store count grows, the general and admin related costs should come down. Indeed, the company is aiming for a reduction in G&A-to-network-sales from the expected 6.8 per cent of sales in FY25. Accelerating store openings, continuing like-for-like sales growth, expansion in restaurant margins and franchise royalty rates should all add up to strong earnings growth, something investors are desperately seeking in an environment marred by slowing economic growth and heightened interest rates. What remains for investors to consider is the price they might be paying for all this growth. Cornerstone investors, which include Aware Super and Copper Investors, are acquiring their shares at $22 each following a 250-for-one share split. That price represents a very high price-earnings (P/E), so one might wonder what the cornerstone investors see that's worth paying up for, especially given at that multiple there will be any number of investors who turn their back on the opportunity. So is Guzman y Gomez the ultimate investor Mexican standoff? Valuation considerations Most investors value QSR businesses on an earnings before interest, tax, depreciation and amortisation (EBITDA) multiple basis, and the number on the prospectus is about 38 times, which, again, is very high. Importantly, it's worth understanding that 38 times includes the losses the company is currently incurring in the U.S. strip out those losses and the multiple applicable to the Australian business is about 32 times. It's also worth acknowledging a change in the terms between the company and its franchisees. When Guzman y Gomez first launched, the standard franchise contract included an eight per cent of sales royalty. Given Guzman y Gomez franchisees earn abnormally high returns on investment, Guzman y Gomez changed that franchise royalty to eight per cent of sales up to three million dollars per store and 15 per cent above that. All new franchise arrangements are struck on the new terms and old franchise arrangements, when they come up for renewal, will move to the new platform. Assuming Guzman y Gomez didn't open another restaurant ever again and existing stores traded without any further improvement, the shift to the new contract terms would see the EBITDA multiple falls from 32 to approximately 28 times. Meanwhile, if the company also opens its targeted 30 stores next year, never opens another store again after 2025, and these stores trade in line with existing stores, the EBITDA multiple falls to 23 times. It is clear from the prospectus, the company plans to open many more stores in coming years. International comparisons Despite Guzman y Gomez's prospectus appearing to play down its international growth opportunities, it may nevertheless be worth comparing the adjusted EBITDA multiple to global peers. A relevant comparison would be Cava (NYSE:CAVA), which IPO'd in the U.S. in June 2023, also at U.S.$22 per share, funnily enough. Upon listing, Cava shares surged 89 per cent to U.S.$42 amid that clearly welcomed long-term sustainable growth stories, especially category-defining brands. Cava has about 200 stores and trades at 82 times EBITDA. Meanwhile, Chipotle (NYSE:CMG), which is obviously the behemoth in the space, and arguably mature, with 6,000 stores, trades at 34 times. With an already proven store concept, a significant store rollout opportunity ahead, and a proven management team to execute that store rollout, some investors are clearly arguing the multiple is reasonable. And with existing shareholders (including your author) escrowed until August 2025, the supply of shares may be tight. Investing in the rapid rollout of a successful store concept has been one of the easiest and most repeatable ways to make money in the Australian stock market. The listing of Guzman y Gomez in June this year will help determine if that strategy remains relevant. Author: Roger Montgomery Funds operated by this manager: Montgomery (Private) Fund, Montgomery Small Companies Fund, The Montgomery Fund |
11 Jul 2024 - Performance Report: Glenmore Australian Equities Fund
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11 Jul 2024 - Performance Report: Bennelong Australian Equities Fund
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11 Jul 2024 - EMD outlook: election fever
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EMD outlook: election fever abrdn June 2024 We look forward to the numerous elections that have the potential to shape the asset class and what it could mean for investors.There is rarely a dull moment in emerging market debt (EMD), and the first six months of 2024 have been no different. While the opening half of the year hasn't produced the blockbuster returns of 2023, there have been plenty of talking points. Most notably around elections and debt restructurings. Bond outlook pieces often mention developed market monetary policy as a driver of returns, and rightly so. For emerging markets (EMs) in 2024, however, a different theme has emerged- elections. To date, voters have gone to the polls in Bangladesh, Taiwan, El Salvador, Pakistan, Senegal, India, Mexico, Turkey and South Africa. We don't have time to run through the individual country outcomes but there are a few that warrant a closer look. Let's turn our attention to Pakistan. In January, a civilian government came to power, pledging fiscal consolidation and promising to build foreign exchange (FX) reserves. Sound familiar? That's because it is. Pakistan is now looking to enter a record 24th International Monetary Fund (IMF) programme. The question remains: will the outcome be different this time? The early signs are promising. Ongoing disinflation has allowed the central bank to loosen monetary policy. The balance of payments recently turned positive. But let's not get carried away. This story is still unfolding, and we'll keep a close eye on developments over the coming months. In Mexico, the election of Claudia Sheinbaum, a protégé of the current president (AMLO), is expected to maintain the political status quo. Sheinbaum will need to focus on reducing the deficit from 6% of gross domestic product to a manageable level. The fiscal deficit blew out in the run-up to the election, as AMLO increased unfunded social security payments - among other social transfers - in a bid to shore up support. It certainly did the trick. Sheinbaum will also have to reckon with Pemex, the state-owned energy company groaning under heavy debt and declining crude production. AMLO's decision to include Pemex's amortisation payments in the national budget for the first time also increased the deficit. It's hard to see how Sheinbaum will address these issues in the near future. Democracy alive and wellLiberal democracy has come under pressure over the last few years. It was therefore encouraging to see the world's largest democracy, India, go to the polls in a general election that was generally seen as free and fair. Such is the scale of proceedings that voting took place over six weeks. President Modi has walked away wounded but victorious. His BJP party remains the largest in congress and coalition partners are unlikely to block his planned economic initiatives. Finally, in South Africa, the loss of the ANC's majority for the first time since the dawn of democracy shocked the party. For the moment, things are likely to remain the same. Yet, looking ahead, there's an increased chance of the government collapsing, leading to either parliament choosing a new president or calling for new elections. Stay tuned. What does this mean for investors?Why are we focusing on country-specific events? Because it's in idiosyncratic stories where we see the most compelling investment opportunities. This plays to our strength in EMD: fundamental bottom-up research to generate alpha. At an index level, spreads across bond markets, including EMD, are tight compared with historic levels. Meanwhile, investment-grade spreads have been unattractive for several quarters. We remain underweight here. Over a year ago, we identified value in the distressed and CCC segments. The near completion of several debt restructurings has validated this view, leading to outperformance. Recently, investors accepted Zambia's debt restructuring deal, crafted by official creditors, the IMF and the private sector. These deals should lead to renewed inflows into Zambia and bodes well for Ghana and Sri Lanka, which are negotiating their own deals. While we haven't seen credit-rating upgrades for CCC-rated issuers - where the most significant spread changes have occurred - further narrowing of spreads is likely should such upgrades occur. What's the outlook?And so to the US Federal Reserve. Its decision to delay rate cuts has notably affected EM local bond markets, which are particularly sensitive to shifts in interest rate cut expectations. At the end of May, the EM Index was down -2.7% year-to-date. Despite the current challenges, rate cuts in EMs are coming. Monetary policy remains tight, growth is lagging long-term averages, and base effects mean inflation should continue to fall. Despite the macro backdrop, local bond markets continue to price-in tight monetary policy. We're holding positions and adding selectively in anticipation of the market delivering elevated returns in the coming months. After lagging EMs in 2023, EM Corporate Debt has outperformed in the first half of the year. Fundamentals remain in good shape, reflected in the low default rate year-to-date. At the end of April, the rate stood at just 0.7%, well-below the historical average. Most defaults in this asset class are coming from China's high-yield property sector. Like the sovereign market, spreads have been tightening recently, reaching near-historic lows. Despite this, the high absolute yield of over 7% remains appealing. For now, there seems to be little that could halt the momentum of the spread rally. Finally, a quick word on frontier local markets. What's changing? The answer is: a lot - and for the better. Policymakers are building external buffers, inflows into the local market are contributing to the rebuilding of FX reserves, and financing from commercial and official sources is on the rise. Meanwhile, fiscal consolidation and tightening monetary policy are helping to establish policy anchors. Finally, high nominal yields and attractive carry in countries like Pakistan, Nigeria, Kenya, and Egypt mean that these markets are garnering investor attention and are worth considering for investment. Author: Leo Morawiecki |
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Funds operated by this manager: Aberdeen Standard Actively Hedged International Equities Fund, Aberdeen Standard Asian Opportunities Fund, Aberdeen Standard Australian Small Companies Fund, Aberdeen Standard Emerging Opportunities Fund, Aberdeen Standard Ex-20 Australian Equities Fund (Class A), Aberdeen Standard Focused Sustainable Australian Equity Fund, Aberdeen Standard Fully Hedged International Equities Fund, Aberdeen Standard Global Absolute Return Strategies Fund, Aberdeen Standard Global Corporate Bond Fund, Aberdeen Standard International Equity Fund, Aberdeen Standard Multi Asset Real Return Fund, Aberdeen Standard Multi-Asset Income Fund |
10 Jul 2024 - Performance Report: DS Capital Growth Fund
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10 Jul 2024 - Performance Report: Airlie Australian Share Fund
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