Daily notes – Praemium, Bapcor, Domain, Breville, Treasury Wines

Praemium (PPS) – Not enough growth… Bapcor (BAP) – Challenging economic conditions but no change to strategy… Domain (DHG) – Space for number two?.. Breville (BRG) – More products into more markets… Treasury Wines (TWE) – Asia strong…

Praemium (PPS) – Not enough growth

A new colour scheme wasn’t enough to distract us from the distinct change in the company’s growth profile. Revenue growth of 7% for the HY highlighted the deceleration in the company’s growth rate.

While the core thesis for the independent platform providers remains intact, the market sentiment regarding Praemium has shifted. The large independents such as Netwealth have now grown to a size where they can outspend the smaller players in product development, sales and marketing, which is sure to make it difficult for the smaller independents.

Not to mention the fact that the incumbents have slowly begun to realise that their dominant positions are now in peril and have started to respond in the form of pricing and new feature development of their own. All this is great for the customer; however, it is unclear what the industry will look like when it stabilises and whether there will be a place for the smaller independent operators.

Bapcor (BAP) – Challenging economic conditions but no change to strategy

Same-store sales growth of 2.1% in the Trade segment (which accounts for 51% of total revenue) was below expectations. Retail & Service profit was flat due to market conditions and continued company store expansion that is loss-making in the initial phase and resulted in lower margins for the segment.

Autobarn achieved same-store sales growth of 4% for company-owned stores and 0.2% for franchise stores, meaning total sss growth was in the region of 2.9%, which compares favourably with the like for like sales growth of 1.8% reported by Super Retail in their Supercheap Auto segment.

New vehicle sales in 2018 were 1.15m, down 3% from 2017 and ending four years of YoY growth. 60% of new vehicle sales were in the SUV & Utility categories; 33% in Passenger vehicles. Electric vehicle penetration continues to be minimal, <0.5% of new vehicle sales in 2018 were electric vehicles. There are an estimated 19.5m registered vehicles in Australia at the end of 2018, an increase of 2% from 2017 with an average age of 11 years.

Domain (DHG) – Space for number two?

Being number two in a winner takes all type of market is no fun. Domain is in this position. REA only has 3x the revenue in Australia (core digital), but has margins of 65% compared to 41% and 8x the market capitalisation. They were also able to grow revenue by 16%, twice the rate of Domains 8% revenue growth.  

Domain told the same story of soft listing volumes, which is consistent with what REA has said previously.

The real story, is why consumers would ever use a listing service with an inferior list? As REA becomes stronger over time, will this necessarily come at the expense of Domain? Consumers will converge on the service with the complete information – i.e. all the available stock, and sellers should prefer to pay only one listing provider, the one with all the eyeballs.

Presumably, some suppliers currently pay both, but nobody is paying just Domain. REA is well ahead in this race, and while there might end up being two strong competitors, it’s hard to see Domain being anything other than a weak number two in a market that doesn’t need a number two, other than to provide some constraint on the number one. That might be their only selling point.

Breville (BRG) – More products into more markets

The stock has gone sideways for more than a year, but the story on this one is simple. More products sold directly into more markets. And not just any ‘more’ products, products that are aspirational, more expensive and therefore higher margin.

The company launched into Germany and Austria in HY19, Benelux and Switzerland will be next, followed by Spain in HY20. German/ Austrian market entry seems to be so far working well with sales in the first six months after entry 42% higher than they were in the UK market.

For context, Benelux/ Switzerland is more substantial than ANZ in terms of both population and GDP.

The company showed robust growth in all markets including (on a constant currency basis) 7.1% in North America, 7.6% in ANZ and 32% in Europe. EBIT margin across the business was broadly steady at 14.2%, while ROE grew from 20.9% to 22.5%.

Treasury Wines (TWE) – Asia strong

The Asian market cannot get enough of Australian wines. That remains to be the TWE story.

Revenue growth was robust in the region at 31%, and the area now accounts for 26% of sales revenue and 45% of EBIT. The company makes $163 per case in Asia compared to $81.4 in the Americas, $38.8 in Europe and $77 in ANZ, while EBIT margins are 39% in Asia, 18.5% in the Americas, 15% in Europe and 23.2% in ANZ.

So yes, Asia is vital to the company. Moreover, with $2b in inventory sitting on the balance sheet, of which $1.2b is luxury inventory, strong Asian markets are imperative for the continued strength of TWE.

By Danny Sandler

Founder of Ocean Asset Management.