Daily notes – GUD, ZIP, Bubs & Beach

GUD (GUD) – Another cyclical marker… ZIP Co (Z1P) – Lending money like it’s going out of fashion… Bubs (BUB) – Goat formula a hit… Beach Energy (BPT) – Leading the bounce…

GUD (GUD) – Another cyclical marker

Following on from the theme touched on in our weekly Inside the Market, GUD is another cyclical stock currently printing reasonable numbers, but is nevertheless making new lows. The company announced its H1 results showing revenue up 13% to $220m and  EBIT from continuing operations up 10% to $43.9m.

The automotive segment accounted for all of the growth in sales, achieving organic growth of 5% and acquired growth of 13%, for a total 18% sales growth. Margins for the segment decreased from 28% to 26%, due to acquired businesses operating at lower margins.

The water segment showed no growth in sales and margins decreased from 9% to 8% due to restructuring costs. According to the company, the impact of east coast drought conditions suppressed demand especially through the summer; hence revenue was flat.

Cash flow from operations was weak during the half due to increased investment in inventory and net debt increased to $142.2m from $92.4m. The company maintains that they are expecting similar performance in H2, with further organic growth in the automotive segment and improved performance in the water products segment.

Despite this, the stock has been sold down heavily and is now very close to its 52 week low and nearly 30% below its peak achieved in August 2018. The other major automotive components company ARB has also performed poorly over this period, with its stock price down nearly 35% since peaking in June 2018. Again, this type of performance from these cyclical sectors does not bode well for the domestic economy.

ZIP Co (Z1P) – Lending money like it’s going out of fashion

Without stating the obvious, this company is a lender and the consumers using their products are borrowers. Somehow the industry has managed to rebrand the act of ‘borrowing’ to the far more millennial-friendly ‘buying now, paying later’, which is an achievement in itself.

Be that as it may, the real innovation made by ZIP and others is that they enabled loan originations to be done at the point of sale, both online and more recently in the store, with the whole process, from application to funding, taking place while the customer waits. By removing the friction associated with borrowing money, especially for consumer purchases, these companies have been able to grow like wildfire.

ZIP announced that they now have over 1m active customers, up 20% in the last three months alone, which is an astounding number for a business that is only five years old. Revenue was up 28% from Q1 to $19.2m, and up 111% from the previous corresponding period (pcp). Receivables grew by 36% to $489m, resulting in an average loan outstanding to each customer of ~$477, up from the ~$429 reported for FY18. Interestingly the company announced that it had completed 1.2m transactions and $304.4m in total transaction volume, which means that the average loan originated on the platform was only ~$242.

So growth was good. The company now has a positive operating margin which will only grow as it continues to scale and there is plenty of potential growth ahead. Credit is easy, so at this point, there is no supply constraint on their growth, with NAB agreeing during the quarter to kick in a further $100m, taking total facilities to $631m.

It’s easy to see why these stocks (by that I mean Afterpay and ZIP in particular) have become battleground stocks. They’re heavily dependent on an accommodative credit environment and healthy economic conditions. There’s also the regulatory environment that’s not entirely kept up with this sort of small ticket consumer lending originated at the point of sale. However, the rapid consumer acceptance and take up of these types of lending products has shown that there’s enormous demand and that they will likely become even more prevalent in the consumer lending market. Further, it won’t be long before this type of low friction lending finds its way into the business lending market.

Bubs (BUB) – Goat formula a hit

The Chinese cannot get enough of Australian infant formula. First, it was organic (BAL), then A2 (A2M), now it’s goat (BUB).

Bubs is the minnow of the group by any metric but is starting to rack up some impressive growth numbers, especially into the crucial Chinese market. H1 revenue of $21m was up ~60% from the prior half and exceeded total FY18 revenue. Sales into China were up 23x compared to the same period last year, although this is off a tiny base.

The company is still burning plenty of cash, running through nearly $5m during Q2, leaving $26.7m in the bank at quarter end. With gross margins somewhere in the 30s, it’s hard to see how this company avoids a capital raising sometime this year. As long as this sort of sales growth is maintained and the market holds up, this will not be a problem. Goat infant milk seems pretty niche, so it’s questionable as to how big a product this can become, but we’ll see.

Beach Energy (BPT) – Leading the bounce     

Energy stocks lead the market lower last calendar year however have turned sharply this year providing strong outperformance during January. Beach is up ~40% from its December 24 low and is now back inside the trading range in which it spent most of last year, before the October sell-off.

Beach today raised its production target for the FY and narrowed its capital expenditure guidance. The revised outlook reflects better than expected output during H1 and the expected closure on its planned deal to sell a stake in its Otway Basin assets. Production is now expected to reach between 28m and 29m barrels, higher than guidance released in late October for an output of 25m-27m barrels. Capex for the year for the year is expected to be between $450m and $500m, instead of the previously forecast  $440m – $520m.

Higher production, lower capital expenditure. Stable or rising prices would also help.

By Danny Sandler

Founder of Ocean Asset Management.