Daily notes – Service Steam, Pushpay, IDP Education

Service Stream (SSM) – Continues to deliver, story unchanged… Pushpay (PPH) – Christmas giving the first thing to go… IDP Education (IEL) – The business of English is thriving…

Service Stream (SSM) – Continues to deliver, story unchanged

Service Stream has been a fantastic stock to own for the last five years, and it’s not hard to see why. Revenue has grown 62% from $389m in FY14 to $631m in FY18. The real story, however, has been in the margins, which have gone from 3.2% in FY14 to 9.8% in FY18, meaning that a 62% increase in revenue has resulted in a five-fold increase in EBITDA. Moreover, with a beginning EBITDA multiple of only 6.5x, this five-fold increase in EBITDA was leveraged into a ~10x increase in the stock price as the multiple crept up to the current level of ~12x.

The math is simple, yet no less amazing to behold as investors incrementally adjust expectations upwards as a company that has previously underperformed catches the wind and begins to gather strong operating momentum.

The company continues to deliver on both the revenue front and the margin front, with incremental growth coming through reasonably priced acquisitions. Whilst the margin and multiple story expansion stories are probably closer to the end than the beginning, if not already started to level off, the narrative on this one probably remains unchanged – NBN design and construction, activations and maintenance, growing utility maintenance business, new technology roll-outs such as 5G providing ongoing opportunities, and all this coupled with an ‘undemanding valuation’. So it’ll keep going until it stops.

Pushpay (PPH) – Christmas giving the first thing to go

This paragraph on page 4 of the quarterly results release was most interesting to me:

“While this increase (in processing volumes) was significant, a combination of factors led to this result being lower than Pushpay had expected. Although the number of transactions that Pushpay experienced was as expected, the average gift size across the Pushpay platform was lower than in the previous corresponding period due to a lower proportion of large non-recurring gifts typically received in the last week of December.”

I suppose I shouldn’t be surprised. Charity donations are discretionary, and when the stock market is tanking, and people are feeling poorer, they’re less inclined to give money to charity. Other discretionary sectors of the economy would also have suffered during this period, which goes to show just how strong the wealth effect is for an economy and how vital it is that there be a stable and steadily increasing ‘feeling’ of wealth for people to keep spending.

With that aside, one gets the sense that the market is currently grappling with how big the market is for Pushpays services. They now only have approximately 6,000 customers. Granted some of those customers are very large indeed, with upwards of 50,000 members. However, this represents 55% of large churches in the US, which begs the question: how much growth runway is there left?  

Sure they’ll likely be able to double revenue, but can they 5x revenue, and how quickly can they do it? For this reason, they’re stuck languishing in the 6th percentile of most expensive companies in the All Ordinaries, while their more illustrious WAAAX peers mostly inhabit deciles 9 and 10. You’d think that any evidence that suggests that Pushpay can grow top-line revenue faster for longer, especially into new verticals outside of churches would result in something of a re-rate.

IDP Education (IEL) – The business of English is thriving

Revenue for the HY was $304m, up 26%, while EBITDA was up 33% to $66.8m. IDP conducted 660,000 IELTS English language tests during the HY, up 18% and 45,900 English language courses, up 13%.  

Asia represented 67% of revenue and 72% of EBIT. India delivered strong growth in all business lines during the HY with Vietnam and Bangladesh also critical contributors to the Asia segment’s performance.

English language testing margin improved in India and Australia as price increases were effective in H1, but this was largely offset by the increase in volumes from lower-priced countries. It follows that there are possible pricing opportunities in lower-priced countries as they become more developed and wealthier.

The company is also increasingly making use of technology to market more effectively as well as deliver products and support customers more efficiently, which will result in higher margins as the company scales its technology platform and conducts more testing via digital.

Potent structural growth trends in key markets for international education and the use of the English language underpin IDPs success,  and these fundamental trends will only become more dominant over time. It’s somewhat surprising that an Australian company is responsible for such a large share of the market for teaching and testing the English language, and that they own the defacto standard for English testing but, such is the way of global commerce, and this only serves to highlight these trends at work.

By Danny Sandler

Founder of Ocean Asset Management.