Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Duro Capital (Australia) partner and portfolio manager Chadd Knights.

What’s hot right now?

For much of the past two years, parts of the services sector including tourism, leisure and hospitality have had a very difficult time.

The combination of COVID-19 concerns, government mandated store and border closures, a lack of staff, rising costs, and next to no consistency in operating conditions have all contributed to the turmoil.

“As spending on these services went into free-fall early in the pandemic, spending for some goods, including almost anything within the home, saw a big uplift,” Knights said.

“We think that while spending on goods may continue to grow, tourism, leisure and hospitality are well positioned to regain a lot of lost ground.

“With $245 billion of private savings that Australians have accumulated, easing restrictions, and “over expenditure” on household goods during lockdowns, the resulting pent-up demand for services bodes well for our chosen stocks.

“Our top three picks within the services sector (defined by the end customer) include Camplify (ASX: CHL), Viva Leisure (ASX: VVA), and Smartpay (ASX: SMP).”

Knights said all three businesses are well off from their 52-week highs despite adding tremendous business value, which recent historical results don’t capture.

 

‘The Ukraine crisis is contributing to a de-rating in multiples’

While the Ukraine crisis is causing market volatility, market declines caused by geopolitical events have historically bounced back quickly.

From a fundamental perspective, the Ukraine crisis isn’t likely to have a material impact on most ASX listed businesses, Knight said.

“It might have a very small effect on consumer confidence, but we wouldn’t expect it to be meaningful or long lasting,” he said.

“We certainly don’t think that it will impede the execution plans of our chosen stocks nor adversely affect their financial performance in the long run.

“The Ukraine crisis is contributing to a de-rating in multiples, but in the long-run, multiple expansion is a small driver of returns.

“What matters is earnings growth – the precursor to that is revenue growth and on that front, these three companies are charging.“

 

Top Picks

Viva Leisure (ASX: VVA)

VVA operate health clubs within the health and leisure industry.

They operate a range of different types of facilities from big-box clubs to boutique studios. The group consists of 130 owned locations as well as being the master franchisor for the Plus Fitness group of ~200 clubs.

“With mandated club closures for much of the past two years, VVA haven’t been able to present clean financial results that are representative of where the business is at.

“As mandated closures ease and VVA can operate for a full 6- or 12-month trading period uninterrupted, our view is that the market will begin to realise how under-appreciated the business is,” Knight said.

Based on June 2021, the business was on track to achieving an annualised EBITDA of $20m (and even higher if adjusted for non-mature clubs) prior to snap lock downs.

Since then, the group has continued to grow, adding a further 15 locations.

“Club unit economics are strong with a pre COVID-19 EBITDA margin of 22% despite reinvesting for growth.

“We think that the sustainable margin is significantly higher at 27-30% – the group has a target of 400 owned clubs by 2025 and assuming similar unit economics to pre COVID-19, we think that by 2025, the business should be annualising at least $100m of EBITDA.”

Knight said private, single operator clubs sell for 3-4x EBITDA, and we think that 6-10x for a large, listed operator is warranted.

“With a current EV of ~$181m, we expect meaningful upside if management deliver and limited downside if they fall short,” he said.

 

Camplify (ASX: CHL)

CHL is Australia’s largest and fastest-growing campervan, motorhome and caravan peer-to-peer (P2P) sharing community with smaller but growing operations in NZ, the UK and Spain.

Think of them as the Airbnb for RVs.

“As border restrictions ease, we think that CHL are well positioned to capture a share of any surge in domestic travel. Restrictions easing are an added benefit as the business has been growing through the turmoil even whilst borders were closed,” Knight explained.

“Most RV owners sell their RV within two years citing idleness or economic reasons – CHL solves this by allowing an RV owner to rent out an idle RV to earn an income.

“In Australia, RVs on the platform earn an average of $6,000 per year and a hirer can rent an RV from $40 per day from the widest
fleet available.

“The P2P marketplace model is very much in its early stages of penetration and in all of the markets that CHL operate in, they have 1% of the market.

“In Australia, there are ~740k registered RVs of which CHL have ~6.5k on the platform. With a clear value proposition to RV owners, we think the runway is promising.”

The business is annualising $16m in revenue, having grown by more than 100% per year since FY19 driven by strong growth in gross transaction volumes, the take-rate, and additional revenue streams.

“Management have executed well during these tough times and while we expect growth to slow, we think the business is worth a multiple of the current share price over a three-year view,” Knight said.

 

Smartpay (ASX: SMP)

SMP is Australia and New Zealand’s largest independent full-service EFTPOS provider with more than 37,000 EFTPOS terminals in the market.
SMP’s terminals are skewed towards hospitality and retail.

As restrictions have eased recently in NSW  and VIC, they have already started to reap the rewards, with transaction values up 57% quarter-on-quarter (Q3 vs Q2 of FY22) and a record month of revenue in December.

“SMP’s value proposition to the merchant is clear with an option of no fees charged if you process at least $10,000 per month in card transactions,” Knight said.

“This compares to pricey and complicated contracts with the incumbent Big 4 banks which command most of the market. The differences are translating into SMP winning larger merchants.

“SMP only have 8,883 terminals out of an addressable market of ~250,000. The runway is promising and with a clear customer value proposition, we expect their market share to grow significantly over time.

“Unit economics are strong, and we estimate high incremental EBITDA margins on each terminal, which is masked by reinvestments for growth.”

Stripping out the NZ business, the Australian merchant is acquiring business trades on three times current annualised revenue (which grew 81% YoY in Q3).

“For a business with significant runway, a clear customer value proposition, a highly experienced management team and improving unit economics, we feel as though the market is severely under-appreciating the potential,” Knight said.

 

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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