6 Small Caps To Add To Your Watchlist

HOSTS Alec Renehan & Bryce Leske|14 April, 2021

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

Did you know Equity Mates has a TV show? Well, not really, but four times a week, for fifteen minutes, Bryce and Alec host a show on Ausbiz. Every day at 4.15, we break down financial jargon, talk to our favourite experts, and dive into the industries that interest us. In today’s episode, we’ve decided to feature two of our favourite recent chats: Tobias Bucks, from Ausbil Investment Management, and Nick Cregan of Fairlight Asset Management. If you think you’ll enjoy this content, come watch us live on Ausbiz, or catch up in your own time on our Youtube channel.

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BRYCE LESKE: [00:00:41] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Price and as always, I'm joined by my equity buddy Ren. How are you going? [00:00:55][14.8]

ALEX RENEHAN: [00:00:56] I'm very good price. Very excited for this episode, as always. I'm doubly excited for this episode because we've got double the amount of experts this week. We not normally every Thursday we have one. This week we've got two. [00:01:10][14.7]

BRYCE LESKE: [00:01:11] We do have two. And it is a bit of a different format. But that is because there's a lot going on in equity markets and we want to let everyone know about some of the additional content that we're doing that is equally as valuable as our expert interviews. [00:01:24][13.1]

Speaker 2: [00:01:24] Well, they are still expert interviews where they are. So for people who may not be aware, we're doing a TV show, I guess you can call it, although it's not really on TV, but let's call it a TV show, a TV show on a financial streaming service, Obie's. And we're doing four episodes a week pumping out the content pumping. And we think there's some great content there that we really want to make people who just listen to the podcast aware of and give you some insight from some of the investors and experts that we're speaking to, in particular, a concept that you came up with. It's a good one. Watch this Wednesday. Yeah. Where we get an expert investor on and we ask them for two or three stocks on their watch list. And we've heard some cracking stocks that I'd never heard of before. [00:02:13][48.6]

BRYCE LESKE: [00:02:14] Yes, we have two small cap managers today, Ren. One is Nick Creegan from Fairlight Asset Management, and the other is to buy stocks from Ausbil. And both are small cap specialists. Both have been on the show before, but have brought three new stocks each that they have on their watch list and or in their fund. And you're right, we have never heard of them. [00:02:37][23.2]

ALEC RENEHAN: [00:02:37] Yeah, we've heard of the managers. We just haven't heard of the stock. Yes, well, we've heard of some of the stocks, but not all of them. And like we love hearing experts break down individual stocks. It's just it's epic to listen to how they think about stocks, how they find these stocks. We know the equity markets community love hearing about individual stocks so they may not have heard of before or they're going to think about in a different way or, you know, they get a different perspective on. So we have selected these two interviews for this episode, but there's heaps of other good ones. Andrew Brown came on recently and did two companies controlled by billionaire families you've never heard of before. Yeah, we've had Roger Montgomery from Montgomery invest. We've had Julia Lee, an old podcast favorite. So it's just it's another great way to learn more about investing. So for the rest of this episode, enjoy these two clips. But if you want to see why I have a face for podcasting, I head over to osbey.com.au. You or you can head over to the equity markets YouTube channel and watch some of our old episodes and keep up to date with new ones. So the first cab off the rank. Do you have a preference price, Nick Creagan or Tobias Box? [00:03:50][73.0]

BRYCE LESKE: [00:03:51] Let's go with Tobias Box. [00:03:52][1.3]

ALEC RENEHAN: [00:03:52] All right. So first up, Tobias Box, portfolio manager at Ausbil Investment Management. Here's his episode of Watch this Wednesday. So Tobais we're in the middle of reporting season both in Australia but also overseas. We wanted to pick your brain for two reasons. First of all, because you're an expert in global stocks and we're particularly interested in what's happening over in the US. But a lot spoken about, you know, the big end of the market. Apple breaking a hundred dollars billion in revenue, Amazon breaking one hundred billion, Microsoft breaking 40 billion. But that's all been spoken about. We want to hear what's going on in the small end of the market with some of the small cap stocks that you've been watching. You've given us three before the show. So we're really in this episode. Just want to hear about these companies for people who are unfamiliar, what they do, and then anything interesting that's come out of the recent reporting season. So the first company you gave us was Trade Desk. It trades on the Nasdaq with the ticker TTD. So to kick us off, can you tell us a little bit about Trade Desk? [00:05:03][70.4]

TOBIAS BOX: [00:05:03] So the trade desk, just look to the trade desk is a leader in digital programmatic advertising. So effectively, any time you see an advert anywhere on any digital device, it's been paid for and people bid for that inventory because they want to access a particular user. And you see Facebook and you see Alphabet have big control over the Internet and they control, therefore a lot of the advertising. But in all the other areas of the Internet and all digital content, whether it's whether you're watching video on demand or whether you're watching something on your phone or looking at any website or any sort of digital or. Audio with audio, including obviously a lot of the podcast people listen to, etc., you want to advertise on that and to get there, you need someone to help you advertise and you need to know things. The first thing you need to know is who you're advertising to. And you want to know what the price is to pay for that advert and then you want to secure that. And the trade helps people do those three things. So if anyone wanting to advertise digitally that doesn't want to use Google and doesn't of Alphabet or Facebook, you end up using the trade desk. And that's where you've seen Amazon and the Chinese big players go and lots of players are now going. [00:06:16][73.1]

BRYCE LESKE: [00:06:17] So you actually spoke about trading desk when we got you on the show at some point last year. Have you brought it up again today, expecting good things this coming Friday from our reporting season, or are you scratching it off the watch list? What are you expecting to come out from their report. [00:06:35][18.2]

TOBIAS BOX: [00:06:36] with something, its position so we're expecting? Well, yeah, we sat through a lot of results. We've been shareholders for over two and a half years now, and it's gone up a lot in that time. And each time we go through a result, we get less and less nervous. Given what we know about the quality of the management team and what's going on this Friday, I think what's important for investors is stocks where that you can see that the investment case is very compelling. They will trade on expensive valuations and there's a lot of growth built into those. And so we first invested in trade this. There was a lot of unrecognized growth. We could see the market thought it was trading on 60 times earnings. It was actually trading near 40 times earnings. And it didn't market wasn't giving it credit for its growth profile. You fast forward to now and it's on over two hundred times earnings. The market clearly understands that it's going to go places. It's gone from a three-and-a-half billion dollar market cap stock to almost 40 billion dollar market cap stock. So there's a lot built-in. [00:07:36][59.8]

ALEC RENEHAN: [00:07:37] When does it stop being a smoke? [00:07:38][1.0]

TOBIAS BOX: [00:07:39] yeah, so it's a key point. So it leaves the indices and goes into the mid-cap indices and is probably the best watershed definition you can get. And that's up to the MSCI. So in the US market, things stop being a small cap and become a mid-cap and sort of the high teens billions. And in Europe and the rest of the world, it's slightly lower, about seven to eight billion. In Europe, you become a mid-cap. [00:08:01][22.6]

BRYCE LESKE: [00:08:02] Yeah, right. Just out of interest was how did COVID affect trade deficit? Did it make you reassess anything? Was it good for Trade Desk? What was the impact? [00:08:10][8.3]

TOBIAS BOX: [00:08:11] It was good, yeah. We reassessed everything in the portfolio. We did a couple of great emerging global titans that we thought would be structurally under pressure over the next few years, given how close it was going to play out, do with out-of-home advertising things about going into the city, airplane manufacturer, things like that. We're going to struggle. And we did add to positions we thought would benefit and people consuming digital content is you guys very well aware that [00:08:38][26.5]

BRYCE LESKE: [00:08:38] we actually may drive disk. [00:08:39][0.9]

TOBIAS BOX: [00:08:41] It's gone through the roof. I mean, the thing about the trade desk is we felt it was turning the lights on for everyone who wanted to access the Internet, you could find out who you were wanting to sell an advert to and you get a very good price. And if you put the money through Alphabet and Facebook, it wasn't as clear to us that you might have seen such a good deal. And that's just accelerated because Amazon, Disney, lets say all the Chinese players audible. Everyone's now using the trade desk. So, yeah, give me a call there in Sydney. [00:09:09][28.2]

ALEC RENEHAN: [00:09:10] You should look, we could talk about digital advertising in the trade desk all day, but unfortunately, we don't have all day. The next stock that you are having to look at is at core. I'm a Senate [00:09:23][12.8]

ALEC RENEHAN: [00:09:25] and that trades in New York with the ticker eight. So I haven't heard about this company at. Can you tell us what it does yet? [00:09:33][7.5]

TOBIAS BOX: [00:09:33] So they basically make electrical and plastic conduits for cables. So if you ever go into a car park, sorry, the best place people say it's got no electrical raceway. It's like aluminum hanging off the ceiling. It's got loads of cables. Or if you have a riser in a big building, there'll be a riser with power and telecom cables and demand for that. It's going up a lot. The reason why it's really interesting is also an emerging titan, just like the trade disk was emerging. And you might say now it's no longer really emerging. It is a titan now. But that core is also an emerging global titan with lots of unrecognized growth. Now, it's not in something sexy, it's in something really bog-standard. And actually people we didn't think really understood the business. We are finished in Chicago. I've met and met people in the States who work with them. I know what they do. And we saw the business with a management team that was cutting costs, improving manufacturing, improving its distribution and better delivery time to customers. Obviously, the key thing is if you've got a building site and tradesmen on site, it's not so much how much the. Trick conduit costs, it's more how much does it disrupt your build and the other trades if it's not there on time? And so that's the key point with this stock in November was trading on three times earnings. So let's just compare that to the trade desk that got up to almost three hundred times earnings. That's a very different multiple, but no less an area that investors can make money and you can find really good companies. [00:11:01][88.3]

BRYCE LESKE: [00:11:02] Well, this is why I love chatting to you, because you always bring these obscure companies and it's just like hearing would have thought to be investing in not in a company like this. You say they're becoming a titan. They just fresh into the space or, you know, their competitors are waning a little bit. What's the dynamic that [00:11:19][16.2]

TOBIAS BOX: [00:11:19] it's more more fragmented market? They've been there a long time. But but delivering conjuror in the US, obviously, it's a big thing and everywhere. And it's about being local. So we like them because, you know, they're never going to be more than 500 miles production to anywhere in the US, which is really important. They always deliver on time and we just see growth getting better and better. The stock was trading on three times earnings at twenty bucks in November. It's now on 60 bucks. They've delivered knock out results. Another knock out results and guidance is going up in the market. Still not looking at it. Three analysts cover the stock. That's three. Wow. So many more than the numbers are wrong. They've been wrong for the last two years. They keep undercutting it. So, you know, it's just I, I think it's interesting to make sure that people you don't get focused on what you think the next thing, whether it's robotic process, automation or anything else or A.I., that's great. And you should have made money out of that. But at the same time, don't forget what makes the world go round. [00:12:17][57.8]

ALEC RENEHAN: [00:12:17] Yeah, I guess I guess the question is, [00:12:20][3.0]

TOBIAS BOX: [00:12:21] will data centers. Right. That's the biggest missing data centers have driven these things growth hugely. Yeah. And the market's looking at it like it's a nonresidential construction play. Yeah. But that's just missing the news completely. Yeah. [00:12:34][12.9]

ALEC RENEHAN: [00:12:34] I feel like people would look at a company like this and think that it's making a commodity product and so like it won't have a lot of pricing power. It needs to make sure it's services first class. It needs to make sure it's cutting costs. But it's always going to be in a really competitive market because it's a commodity. Is that is that right? Or like how did you how did you look at the company and say something that other people weren't saying? [00:12:57][22.1]

TOBIAS BOX: [00:12:58] It's more of a commodity than lots of things, but lots of things are a commodity like robotic process. Automation is an interesting area of the future where you're going to get computers to basically work out what all the humans were doing, work out what it was that I work out how to do it better. And it's just software on its surface that is a commodity. At one point right now, they charge people for it. But given that it's a server, it's just service. So once that software is built, how do you premium price? And so the key question is how do you price something? And with software, we know how you price something, any software as a service, as add ons, even the games industry's worked out nest eggs and other ways and downloadable content and other ways to to make money. So it's about premium pricing always. And they've got an ability to price their product at a premium because they deliver it and they manufacture it. Well, yeah. And they also have other things like product and something like I can't remember the trademark that enables you to pull one cable through another cable easier. [00:13:55][56.8]

BRYCE LESKE: [00:13:56] So we'll try to do that. [00:13:57][1.5]

TOBIAS BOX: [00:13:58] It's so they are innovating. But I think the key when you say how does an investor look what I want to look at premium pricing. What is it about your pricing strategy? How can you charge decent prices and margins competitive? And it's fair. They've got to be fair because you never want to invest in a company that's not charging a fair price because you're going to lose that money. So, yeah, but at the same time, it's it's the way they work out their premium pricing strategies. And that's something people should always be aware of. Like whenever you saw those businesses, like real estate, dot com in Australia. Right. Kept on going up and they kept upgrading estimates ranges way much more than people originally thought. And the reason they just premium priced and it's just constant premium pricing strategy is not a really easy premium pricing strategy to sort of look at as a case study for an investor and work out what premium pricing means. And then if you see it in other businesses and they can actually do it in the market, will never realize we don't have the imagination to give credit for now. [00:14:55][57.0]

ALEC RENEHAN: [00:14:55] I just want to get a list of all the companies that you think can find your price, if that's a asset. [00:14:59][4.4]

TOBIAS BOX: [00:15:02] I remember leaving the interview last time I was on the show and really like I was actually just a final stock to us is generic. New York as well. And G and AC is the ticker. What's the deal. What's what's generic all about. [00:15:19][17.3]

TOBIAS BOX: [00:15:20] So that used to make it generate only generators for Rezaee and non industry hospitals, etc.. And then over the last five years they made a lot of acquisitions and transform to solving a local need in the US to solving that need on a local. Basis, but globally, and they've also now gone into smart grids and all batteries, so they've made a lot of money, they're really good at generators and you see a lot of things like a really bad grid system. Forest fires, hurricanes really drive up demand for their generators. But they went out and bought an Italian business that gave them access to the emerging markets. They bought a business that gave them all batteries that were businesses and smart grid technology, both on the hardware side and the software side. And they built an inverted business. So they got an inverted business is one of their acquisitions. So now they're everywhere when it comes to making power at the local, whether it's just your house or whether it's a small localized grid, somewhere where you've got a few houses in a few generation assets and they're all over that and that's what they're doing. [00:16:23][63.6]

ALEC RENEHAN: [00:16:24] So we companies like that where they do something really well and then they go, I guess, on an acquisition spree and acquire a whole lot of new companies or, you know, open up whole new business areas. There are some that work really well and some that don't value destructive. Was there anything in general, its latest earnings report that indicated whether the acquisitions were valued creative or value destructive? [00:16:50][25.8]

TOBIAS BOX: [00:16:50] Very much so. That was one of the key things we're looking at. And they were all accretive generally. If you find businesses go out and buy in other businesses, like what for you? And I think that's the key question. And in this case, they've made small acquisitions, small in terms of size, the company and the amount they paid for it. And they brought tech, they brought leading technology. And so why what for? Well, I'm going to plug that technology into my manufacturing and my distribution networks. That makes a lot of sense. [00:17:17][26.8]

BRYCE LESKE: [00:17:18] Do you go and do a full due diligence on the companies that they're acquiring just as much as you would on generic as an initial investment to understand yourself? It's a good deal. [00:17:27][9.0]

ALEC RENEHAN: [00:17:27] Eventually get the name of the company [00:17:28][1.1]

BRYCE LESKE: [00:17:31] just as you've got to sell or whatever. [00:17:34][3.8]

TOBIAS BOX: [00:17:37] Yeah, as much as we can. I mean, you can never certify that you have the something that's not going to go wrong, clearly, but you do as much as you can. And generally the good companies will be open and honest and say, look, here's the box, here's what we bought. And they'll tell you very clearly this is how it fits into our acquisition schedule. That's another thing. If a company comes out with an acquisition that is not well flagged, not in terms of who they've actually bought, but in terms of how much money, why and what for and how they're going to fit in. If it's not if it's unexpected, huge alarm bells like when the Indian IT company went out and bought a construction firm. And then two weeks later, the chairman admitted the whole thing was a complete fraud and they bought the construction firm for access to cash. And so it makes a weird acquisition. You got to be like, hang on. [00:18:26][49.3]

ALEC RENEHAN: [00:18:28] So it feels like the the structural there's a lot of structural tailwinds in that space, both in the know moved on batteries and all of that stuff. And then also, you know, we we lived through the bush fires in Australia and California had the same thing. And the demand for generators went up because of power outages and stuff like that. So it feels like there's a lot of structural tailwinds for this company. Is the market pricing that in a while [00:18:55][27.1]

TOBIAS BOX: [00:18:55] Does it try to? I don't think it is. You know, the share price has gone up a lot over the last two years. We go back company reported last week, early last week. We go back the week before the market was expecting pretty sure of this off top of my head, high teens growth, revenue growth for the next year and possibly the next few years. They came out and said, we're going to be twenty five to thirty percent. So roll forward a week. And there's the unrecognized growth being delivered to you in a result. And stock's up fifteen percent last week. Do I think it should be up more. Yeah, when you look at it it's accelerating. Why is it accelerating. Well, because the segment mix is making it accelerate. They're selling less generators, it's selling generators and loads of them, but they're also selling more of this other stuff and the market can see in the future. You've got a company that's gone from a niche leader in generators who some weird. Fund managers might say it is an emerging global titan and I'm buying loads and you roll forward and it's like, well, this thing's twenty five. Twenty four billion market cap doing three and a half billion dollars in sales. It's not yet a Titan, but it'll get there, I think. [00:20:04][68.3]

ALEC RENEHAN: [00:20:05] I feel like if we were going to label this episode, it would be emerging global titans. [00:20:09][3.5]

TOBIAS BOX: [00:20:10] So rule about [00:20:11][1.2]

ALEC RENEHAN: [00:20:12] a very diverse array of a range of industries, digital advertising, construction equipment and then electrical generation. [00:20:20][8.3]

BRYCE LESKE: [00:20:22] So that was Tobias Bux from Ausbil. Before we jump into Nick Craig and a reminder that we do have a live show coming up with a partnership with steak, it is a steak equitymates all access is the series that we're going to be doing. The first one is in Sydney on the twenty ninth of April. It is going to be live-streamed. We have sold out before, sold out. [00:20:42][20.3]

ALEC RENEHAN: [00:20:43] It's sold out tickets in less than two hours. [00:20:44][1.8]

ALEC RENEHAN: [00:20:45] We could even finish our cup of coffee. It sold out. But the good news is that it will be live streamed so you can get free access online if you head to our socials and there's links in there to follow and you can join us. As we deep dive into the beverages and alcohol industry, there will be prizes to be won. For those watching at home, booze packs Mirch, a whole bunch of stuff. We're going to be sitting down with five experts from within the industry, as well as some fund managers who are investing in beverages and alcohol. So we hope you can join it. It is free if you want to join online. And now, before we jump into our next watch, wed expert, a quick word from our sponsors. [00:21:24][39.1]

BRYCE LESKE: [00:21:26] So now we've got Nick Creegan, portfolio manager at Fairlight Asset Management on Equity MEIT'S on his watch list Wednesday, talking about three stops on his watch. [00:21:37][10.7]

BRYCE LESKE: [00:21:39] We are joined in the studio by one of our most popular and also favorite guests of twenty, and that is Nick Creegan from Fairlight Asset Management. Nick, how are you going? Very well. [00:21:52][12.8]

Nick Creegan: [00:21:52] And that was a very generous introduction. [00:21:53][1.1]

BRYCE LESKE: [00:21:55] I'm going through all the pretty ladies who knows me well. I'm here today, as Alex said, watch last Wednesday, three stocks. So, look, we might as well get stuck into it. Great. The first stock that you've sent on your watch list is Excel is Excel, and they're on the New York Stock Exchange. What's going on here? [00:22:20][24.8]

Nick Creegan: [00:22:21] Well, I thought sort of the thematic and I think a lot of people were probably talking about this theme of opening up and what sits behind that. And there's a lot of stocks that are trading at all time highs. So if you look at the digits, for instance, within of five or 10 percent of its all time highs. So Excel sort of participates in that in that space, but we think there's a little bit more value. So Excel is one of the only manufacturers of aerospace grade carbon fiber in the world. It operates in a really cozy duopoly between itself and a Japanese company called Tauri. And this massive barriers to entry here. So you need to be sort of certified by all the sort of aerospace certification programs if you want to make a change to one of the programs. It's sort of a 10 year program to to make those changes. So once you sort of specked in to an aircraft, it's very, very difficult to change covid kind of hits. And those sort of things throw a bit of a spanner in the works prior to covid. They'll be nicely profitable even through the 2008 2009 GFC. And during this period, obviously one hundred percent total closure of their major customers, which is Airbus and Boeing sort of set that business into a kind of a tailspin, if you like. But what we really like about it is the massive structural tailwinds behind it. So we think about sort of going back sort of a decade ago, carbon fiber was only sort of five to 10 per cent of the overall materials that went into a plane. If we fast forward now to sort of a three fifties, those those carbon fiber components are now 50 per cent of those planes. So you don't actually need sort of new planes to be developed as long as the existing fleet gets upgraded over time. And we're very confident that is going to happen as jet fuel prices increase. The major way of reducing your weight is by using carbon fiber, which is some sort of five times lighter and 30 per cent more durable than aluminum. So we just think that that is going to compound out over time. [00:24:13][112.8]

BRYCE LESKE: [00:24:14] I like the number of puns you've included in me that. So it feels like the aerospace industry loves the duopoly. Obviously, Airbus and Boeing, the big duopoly, but there's another duopoly here. Why so over its Japanese rival? [00:24:32][17.9]

Nick Creegan: [00:24:33] That's a good question. Hextall It's got a slightly stronger sort of financial history and the returns on invested capital, which is sort of our hallmark of how we look at businesses and how and how high quality they are, generates that number with greater consistency. So that's the major reason. The other sort of question which you sort of threw in there is an duopolies is why would you choose this over, say, another aerospace manufacturer into the aftermarket market, if you like? For us, the big piece is that once the carbon fiber is used, it can't be respectful to another plane. So at the moment, there's a situation where it's interesting to see how it's going to play out. But there's essentially a huge car park appliance out there that you can rip parts out of. And using the existing aircraft, you can't do that with carbon fiber. So once it's used, it's you. So every aircraft that now rolls off a conveyor belt is now going to be using a sort of a higher percentage of those carbon fiber pieces. [00:25:30][56.6]

BRYCE LESKE: [00:25:31] Interesting. And so I guess if you're thinking about risks for a company like this, what are some of the risks that you're considering here? And I guess if your thesis were to change, what would you be looking out for? [00:25:40][9.8]

Nick Creegan: [00:25:41] Yeah, so it's actually one that we've kept it a low white until recently and we've been increasing it as that that margin of safety has been blowing out as the share price has moved away from what we think is intrinsic value. And the reason for that is it's probably riskier than many of the businesses in our portfolio. I think when we race through our strategy with you guys, you would have got the sense this recurring revenue is fully ingrained in your customer workflows. Very hard to get rid of you once you sort of in there and a very small percentage of your overall costs of of of a service or manufacturing facility or import, if you like, pixilate. And then nice sort of diversification of the customer base for sale. It's quite different. So off the bat, you sort of thinking, well, you've only got two major clients here, Boeing. An Airbus Airbus is the vast majority of that, the vast majority of revenues are coming from just one industry, which is aerospace. So there's some huge risk there already. The other element, which is we don't usually get involved in what we call heavy industrial businesses. So those businesses that can't generate a good return on their on their capital through a cycle. Exhales Proven to be able to do that in pretty much all environments until we hit covid. But we are also mindful that it does have quite a heavy capex or capital expenditure program. So it needs to put assets in the ground to generate those revenues, which inherently makes it a little bit more cyclical. So we are focused on obviously the key client risk where we're also very, very focused on the potential for this business to be a little bit more cyclical than those companies that we typically hold. [00:27:10][88.9]

BRYCE LESKE: [00:27:11] We could do a lot more questions on that, but unfortunately, we don't have the time. So we'll move on to the second company that you've given us that's on your watch list. Kopa Sepi is the ticker trades on the Nasdaq to start with. Can you tell us what this company does? Sure. [00:27:28][16.7]

Nick Creegan: [00:27:29] So as you know, we take a high quality approach to investing. And as I start to describe it, you're going to really question whether this is a high quality business. So high returns on capital through an investment cycle is what we're looking for. But Copart is the largest provider in the United States of essentially what is a junkyard service. So it's the opposite of quality junk. But our definition of quality is the actual returns you generate from the assets you put on the ground. And the Copart is absolutely amazing. So what they do is they provide a service for the insurance industry and they connect them to a large army of dismantlers and used car dealerships. So every time a car is either involved in an accident or there is a major hail storm event or some sort of event, they need to the insurance industry needs to get rid of hundreds of thousands of vehicles very, very rapidly. And so what we've what the industry sort of formed into is once again, you get the theme here, a duopoly between themselves and I.A and they've got about sort of forty five per cent market share each. And there's this natural sort of barrier barrier to entry that forms one's physical and the other digital. On the physical side, you literally have thousands of sort of independent lots around major metropolitan cities. It's very hard to get those leaseholds or landholdings again because essentially you're applying to the council for what would be a junkyard near residential housing. So so that's kind of implies there's no real way for people who would break into that industry. And the second piece is that natural digital when it's it's a bit of a sort of cliche these days talking about flywheels. But here is one. And it's essential that Amazon or eBay or whatever flywheel we're sort of more sellers begets more buyers and mobiles begets more sellers. So you rolled up all the insurance industry. Now that's attracting more buyers. That becomes more valuable to the insurance industry. And so that flywheel continues to roll on, so much so that they've now managed to expand into international markets outside of the US. And I think there's a long runway for that business to grow in Europe. [00:29:28][119.2]

BRYCE LESKE: [00:29:29] Fascinating. This is why we love talking to you, because it's coming up with companies that would just never imagine trying to find what is the process that you kind of go through to find something like that. [00:29:38][8.8]

Nick Creegan: [00:29:39] We run sort of screens across the market using Bloomberg and fax it as everyone else does. And that sort of drills is down to about two hundred and fifty companies that are of interest to us. And we run sort of some financial metrics as long as well as developed markets. We're only investing in four sectors that make things a little bit more manageable. But really, the special sauce is a lot of the time just getting out on the road in normal times and seeing and seeing businesses and asking them about their competitors and their suppliers. And you can draw these sort of maps into and about how industries work. And if you can plug those holes over time, it's usually the magics in the detail. And so you can sort of find these interesting little businesses that dominate natures of sometimes acting oligopolies or rational duopolies. And they sort of fly under the radar of most investors. But it's really just putting the hours in. You know, we're pretty boring guys with the right guys. [00:30:33][54.0]

ALEC RENEHAN: [00:30:35] So you mentioned international expansion there and you spoke about the market has in the states and it's got it's rolled up all the insurance companies. It's rolled up all the junkyards as it tries to expand internationally. Is it going to face that entrenched for with local players in other markets? You know, like has the Australian market already got companies that might have European countries already got companies with that and are going to be able to be successful in expanding? [00:31:03][28.0]

Nick Creegan: [00:31:04] Do you want a job, Ren? Because you're absolutely right. So as I explained in Spanish to Germany, for instance, it's less about taking on the incumbents, but actually changing the model. And so the model in Germany, for instance, with the country they're currently taking on, it's been a very antiquated but very different system. And so they've had to make some investments. And I'll tell you the reasons why. So in the States is very. It's very. It's very straight cut, so the insurance company maintains title of the vehicle until it's sold on the to the end dismantle or used car dealer or whoever it might be. But through that process, the person that was involved in that accident is no longer involved in managing that process. So they've taken out of that process. And it's highly efficient so it's corporate to corporate sort of dealing in that transaction in Germany. It's a very sort of antiquated system where the accident happens and then it's up to the consumer to figure out how to dispose of that vehicle, which is so backward for a country that's amazing and the automatic systems, et cetera. So copouts had to go in and actually make investments and they've said, OK, we're going to have to take tidally of these vehicles and then we'll change the model over time so the insurance company and the market guy can transact one to one. And so they've been developing this system and they've been growing exponentially as a result. But they've had to put some money in to sort of grow that model over time. So they're not taking on an incumbent. They just had to change the way the market works. [00:32:23][79.2]

BRYCE LESKE: [00:32:23] Well, fascinating. [00:32:24][0.4]

BRYCE LESKE: [00:32:25] So moving to the last stock in the can, that is Temenos. Hopefully, I pronounce that correctly. The ticker is SWX listed on the TNN. [00:32:35][10.5]

Nick Creegan: [00:32:38] could be. [00:32:40][1.3]

BRYCE LESKE: [00:32:41] that doesn't really match that. But anyway. [00:32:44][2.5]

Nick Creegan: [00:32:45] That thinks it's listed I think it's listed in Switzerland, but they're headquartered in the U.K. It doesn't matter that they basically dominate the European market for for banking software. So if you're a bank still sort of 80 per cent of the software, especially for the majors, they'll develop their own core banking software and usually the other software that sits adjacent to that which helps their their employees sort on board clients and do digital marketing, Internet banking, that sort of stuff. In an adjacency but Ren 80 per cent of that software still developed internally with Temenos is spent the last sort of 10 to 20 years longer than that, developing a client base, which that referral base is, is becoming more and more powerful over time. So banks becoming more comfortable outsourcing what they used to say is their core competency as a result that the banking industry is growing at about the software banking industry is growing at about eight per cent per annum, but Temenos is growing share within that, which is really important. The big element for Temenos more recently is they're trying to break from Europe into the United States, which is a much bigger market. They've sort of given up on the core banking side there, but there's a lot to provide around that sort of second element that I describe. So the digital banking, Internet banking on boarding up clients, etc., and they're making some real toehold in the big element that they've seen recently sort of coming out of this code period, is that they need their sort of core guys, their consultants, et cetera, to be on the ground of their clients to help with these big sort of implementations. And so revenues were down some sort of 11 per cent in the last quarter, but they still generated 12 per cent earnings growth, which just talked to some pretty strong management within that business to sort of manage that cost base. So they're coming out of this period, accelerating their market share gains because they spend twice as much on R&D, the next largest competitor, and their win rate is twice as strong in their license software than it is the next largest competitor as well. The whole model is now shifting. And you guys might have had people on talking about how sort of software shifting from license to software as a service now and what that means for sort of recurring revenues, etc.. The big fear for terminals was that as they were making that transition, their margins were going to take a real hit. And so the market was positioned for this big downgrade. And the nice thing that sort of came out, we'll position ahead of that because we don't really care if next quarters or next year's earnings are down. The NPV of that project is you transition from license to software as a service in some 40 to 50 per cent higher over the life of that contract. So we were very happy to take a long term view as it's transpired. They've come out in their most recent investor update on their Investor Day, and they've said, look, our margins are going to be just fine. One hundred and twenty basis points adjusted and 40 basis points higher if you just use the gap earnings. So to us that time, [00:35:33][168.2]

ALEC RENEHAN: [00:35:34] well, we love software as a service companies. We love software as a service companies with a network effect. And obviously the the US market does as well looking at some of the multiples that some of those companies are trading at. Is there a network effect here like is does it improve interoperability between banks, if at all, using the same software? And is it one of those things that if terminals can start winning more and more customers, that will, I guess, to talk about flywheels again? It'll be this self reinforcing cycle with more and more banks want to use the same software platform. [00:36:04][30.4]

Nick Creegan: [00:36:09] In their investor update in the last one that they provided one of their arguments again. So if you think about Temenos, they're almost like the sap of banking. So they are the guys that put themselves out. There is a one stop shop. We've got all these different solutions that sit under our core banking infrastructure. But if you are an up and coming service provider or a software provider, you can plug in via APIs, but they also make the debate that if they are competing with those companies rather than partnering with them, how do they compete? And their big argument is all of these banks provide us their data voluntarily. And we're able to use that as benchmarking, Donna, to provide these banks where they're at best practice and where they're not. And that's how they can improve their services. So that is not so much a network effect, but it's an interesting way of sort of using that network, if you like, to provide a service to those guys, it allows them to get through. The second thing is absolutely so there is efficiency gains, especially in places like the states where you've got network payment systems, which increases the banks are moving away from because they're so antiquated. So usually you have to match the payments on it at the end-of-day basis rather than do real-time banking on a sort of second by second basis. Temenos can help with that by providing sort of drainpipes between the two banks. So there is that element. But I wouldn't I wouldn't call it the true kind of network effect that you get from a consumer-facing justice, for instance. [00:37:29][80.2]

Nick Creegan: [00:37:30] Yeah, yeah. [00:37:30][0.4]

BRYCE LESKE: [00:37:31] Well, unfortunately, that is all we have time for today. We can chat about this all day long and we certainly are going to have to get you back on for another watchlist Wednesday. So just a reminder, we had hexogen so copart to see and temenos Ticha and. [00:37:46][14.4]

BRYCE LESKE: [00:37:48] Well, there you go, Ren, that was two experts that we've had on Osbey for Watchlist Wednesday, if you did enjoy that content, as Ren said at the start of the show every Wednesday. You can join us on Obie's or it's available on demand on YouTube as well as the channel. [00:38:01][12.6]

ALEC RENEHAN: [00:38:01] So every Wednesday you can join us for watch this Wednesday, Monday, Tuesday, Thursday. You can join us for other Hospers episodes. So, you know, just more just keep that firehose of content pumping oil. [00:38:13][12.0]

Speaker 3: [00:38:14] That's right. So we hope you enjoyed it. Certainly a lot to gain from both of those experts and two of which we sort of deeply admire as well. So big fans, big fans and always good to listen to experts Ren rather than chat stocks with Internet stocks that have so not always good to hear. And we'll pick it up now [00:38:32][18.4]

DICLAIMER: [00:38:32] Equity mates Investing podcast is a product of equity markets, media. All information in this podcast is for education and entertainment purposes only. [00:38:40][7.9]


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