Talking Money To Us | Danny Younis – Shaw analyst

Candice: [00:00:08] Hello and welcome to talk money to me. This is your need to know financial podcast. Thanks for joining us on our show, I'm Candice Bourke. 

Felicity: [00:00:15] I'm Felicity Thomas. Now, today we're joined by another one of our very own Shaw & Partners research analyst Danny Younis, who's responsible for covering the ASX, e-commerce, retail and tech based businesses such as companies like Adore Beauty, Audinate, Dust Group, Silk Logistics, Prosper, Open Pay and Premium, to name a few within his current research universe. So welcome, Danny. It's really nice to have you on the show. 

Danny Younis: [00:00:41] It's a pleasure to be here. Thank you. 

Candice: [00:00:43] So Danny is well known in the industry. He is currently a senior analyst at Shomon Partners and has been in that role since 2010. And like Felicity said, your expertise, you know, you cover the small to mid cap industry companies with a specific focus on exciting tech retail e-commerce businesses. So Danny has a wealth of knowledge when it comes to that sector in the ASX market. In fact, over 20 years, experience in the stockbroking and institutional banking industry and I think you've covered in excess of about 215 ASX companies over your lifetime. 

Danny Younis: [00:01:17] I'm in to my 12th year now I've covered about 80 90 stocks, just while I've been at Shaw. 

Candice: [00:01:25] You're busy. That means, you know, 83 stocks or companies really well. So that's that's very impressive. And you know, in what we've noticed since working at Shaw & Partners, you're also closely heavily involved with ASX companies that have recently IPO. Right. So just to name a few. Adore beauty, audinate, zip, dusk, zip it and silk contracts. You have also helped with that. So we're going to hear more insights into how you're involved in that side of the business and also like raising capital for businesses like brain chip and open pay and wiser in the past. 

Danny Younis: [00:01:57] Absolutely. 

Felicity: [00:01:57] Now, as a reminder, guys, our chat today is not personal advice. And even though we're registered advisors and analysts at Shaw and Partner, please note that this podcast and the content discussed does not constitute financial advice, nor is it financial product. 

Candice: [00:02:12] So, Danny, let's start off with. Can you give us a brief rundown on the current ASX technology and retail sector that you do cover? You know what's been going on that you've noticed of late? That's, you know, sparked your interest? Good and bad news. 

Danny Younis: [00:02:26] Yeah, absolutely. Look, there's always something happening in small caps and there's always something happening globally on a macro price perspective. So when I look at the two buckets that we're talking about retail, slash, e-commerce and technology, there's different parcels that really impact both those sectors. So I think the first thing to say is there's a certain element of fear out there in the market at the moment. Okay, so the geopolitical tensions with Russia, Russia and the Ukraine, they're impacting the market, the threat of interest rate rises. We're already seeing overseas central banks incorporating that into their strategy going forward. That is also playing into it. You're seeing a slowdown in the US as well in terms of consumer confidence and consumer spending outside of certain categories like lock in luxury goods and pets. That's also impacting as well in terms of specific things when it comes to retail. The real key issue here is slowing sales, which I'll talk about further down the track and the one in retail. Or sorry, the one in technology is really around a refocus away from sales and IRR. IRR is annual recurring revenues to something a bit more substantial, and I'll talk about the reasons why. But overlaying both those sectors, the number one thing that's been really impacting the last three or four weeks, in fact, probably since February reporting season is the COVID induced supply chain issue. That is a global thing impacting all industries, not only retail slash e-commerce, not only technology, so your cogs inflation, their your cost of goods sold, i.e. your raw materials. We're seeing a massive explosion in costs there and companies are being unable or unwilling or uncomfortable in pushing through price increases. To cover that, you're seeing operating expense inflation. It's not only hard to get stuff, but you've got to pay them 20, 30, 40 even per cent more than what you're paying them 12 months ago. In this environment, even if you're a developer or a systems engineer, you're right. You're also seeing much higher churn rates, particularly in retail, and you're seeing very high levels of absenteeism. Now that absenteeism is not a function of loss of stamina or unhappiness with the work that's being done. It's a function of Covid. So people being sick. I mean, one of the companies I cover silk at twenty five per cent of its staff off on its critical peak Christmas season out of its 700 staff off last year. So this is an indication of what's happening. So it's a combination of things that's really impacting both those sectors as the supply chain, which is Covid impacted. It's the geopolitical tensions that we're currently seeing playing out in the UK with Russia. And then Ukraine, and you know what that means for China's involvement and Australia's involvement, etc.. The interest rate and economic environment is also impacting. I think they're the main fundamentals that are really impacting the sector. And, you know, both sectors have derided considerably and they're the reasons why. 

Candice: [00:05:15] And so that's really great insight because there's a lot of moving pieces, right? But we all have to factor in as investors in the markets. But you touched on China in particular, right? And in particular, the Chinese e-commerce companies Alibaba have just been smashed of late. So I know you don't cover those in particular, but they're in your scope. So what are your thoughts on that? Do you think we're bottomed out there? 

Danny Younis: [00:05:36] So when it comes to retailers, China is absolutely the most important supplier of goods. I mean, something like 80 85, you can go as high as 90 percent of all products manufactured now for most retailers come out of China. So the court delays the Covid shutdowns, the restrictions by the government. You know, all these things have really played in terms of supply. So if you want to pass the retailers or the e-commerce segment further, I put it this way there are a couple of issues that are very intrinsic to retailers and e-commerce players that are not particularly specific or significant to other sectors like technology. The first one is inventory. Your inventory position is really, really important. It used to be, you know, up until one to two years ago. Pre-COVID, you could easily book your inventory from China in August, September, maybe even as late as October for your Christmas sales period. You remember Christmas cheer for retailers is the key selling point for some retailers. It can be 80 percent of their business for the full year and that one month. So what we've seen is a shift of retailers going from just in time inventory. So having that inventory, you know, two three months out before Christmas to having it just in case now. So you've got to order early. So we've seen a lot of our retailers and a lot of our logistics customers now ordering their Christmas inventory up to nine months early. That's actually starting in February March to ensure no one, they bypass the high container goods costs that are currently four times the current rate. Number two, that you don't have the delays that we saw over the last two years because of COVID. So you've seen a complete shift. So that's the first thing that's changed the whole e-commerce thing. The second thing is the online acceleration that's happening. The Alibaba's of this world, the Amazons of this world, they are really driving online penetration in Australia now in Australia. Retailers have been pretty slow on the ball on this. Okay, so Australia Post this week put out a report in terms of online ordering and calendar year 2020 one. Roughly about twenty four per cent of Australians didn't online order in 2021. That compares to over 50 per cent over the same period in Korea. Fifty three per cent of Koreans now use online more than they do visiting stores. And in the US and in Europe, online penetration is 30 to 40 per cent of total sales. So we've been very slow in that regard. Covid has been a wake up call for retailers. Now, one of the primary reasons why Australia has been slow in online acceleration relative to the rest of the world is twofold. It's our distance. It's the cost of getting goods here, and it's our disparity. Geographically, I mean, 90 per cent of the population are on the coast, and there's a big gap in the middle of Australia where it's very hard to ship goods. So the likes of Amazon's can't use dropship models here because you're looking at vast distances in the thousands of kilometres, whereas in the US you've got a very concentrated demographic, demographics across the various states there. So I think that's the second thing. I think the third thing really is around consumer confidence. Internationally, we are still seeing relatively resilient consumer confidence, particularly during Covid, when people have, you know, spend on the home, they spent more on services rather than physical goods. They looked after themselves seeking the beauty and personal care categories mean very, very strong, which is one of the reasons we like some of the companies we cover. So I think they're the specific things that are driving a. E-commerce will continue to accelerate going forward, but it won't be at the pace that we're seeing the Alibaba's or the Amazons are doing internationally. 

Felicity: [00:09:07] OK, so I guess basically to kind of wrap that bit up for our listeners, you do think that e-commerce will improve, you know, potentially by the end of the year or going into 2023, 2024, just not at the speed it was?

Danny Younis: [00:09:22] Absolutely. Yeah. You know, and that's why I said Covid has been a boon for investing into this online space. Why wouldn't a retailer here in Australia want to go online? I mean, it's cheaper as a cost to service. The margins can be higher, certainly not in the opening stages. You know, he imagines the higher because you need to spend money to to to build up that investment, that platform, the mobile app, et cetera, et cetera, get the sales and marketing out. But certainly after one or two years, your gross margins should be superior to your physical, in-store gross margins because you don't have a great need to staff, you don't need the rental payments, you don't need the additional supply chain issues that. You traditionally have within store, so absolutely the investment is valid and absolutely it will continue to grow here in Australia. I think if you look at Frost Sullivan, for example, and Bain and Company two independent researchers, they see Australian online as a percentage of total retail, getting to about 25 to 30 per cent over the next two to three years. Australia Post, in its reports this week, said they expect online here in Australia double over the next five years. That's the pace of acceleration that's happening. That pace, albeit, is very strong, but it's still not as strong as what we're seeing over offshore. 

Felicity: [00:10:33] Yeah, and that's really interesting. I mean, Candice and I are definitely a part of that 25 percent. I actually prefer online shopping and potentially, you know, even if something doesn't, I think that something's going to look really nice on. It doesn't, and then I still don't actually send it back. So I think they'd be making a little bit more money from people like me, 

Danny Younis: [00:10:52] and it's the returns where they don't make money. I absolutely agree with you, Felicity and Candice. You know, I shop online a lot. It used to be five years ago. I'll take a mile example. For example, five years ago, there was no way I knew that miles, either friends or colleagues, would buy a shirt or a pair of shoes online. Now it's normal because of, you know, very flexible return policies. Similarly, with suits and all that stuff, the furniture is still, if you go on bulky goods, it's still very difficult just why the next galleys of this world have struggled to move into the online arena. But certainly first for personal clothing, as long as you can offer very flexible return options. And that's what a lot of retailers do these days. I think online will continue to grow as our mindset continue to change, and that mindset change is really driven by millennials who really want to interact on the on their smartphones, 24-7, who want flexible return policies, who want convenience, who want the full range of products available globally. You know, instead of getting one version of your Royal Yeezy's and getting all five six different iterations globally. And are you getting price harmonisation, you know, for a long time and a ripped off here in Australia, the so-called Australia tax because of our distance, because we didn't have, you know, we couldn't see what the rest of the world were paying for these goods. Now we can instantly at the touch of our phones. Yeah. 

Felicity: [00:12:12] And you've got the buy now, pay later, which is another sector that you cover. So I guess coming back to Australia again, the reporting season just wrapped up. So I guess what were some of your key takeaways from this sector? 

Danny Younis: [00:12:26] If so, the two sectors that I look at, I alluded to them in my introductory comments. So let's get to retail first. The major one for retail at a reporting season was the slowing growth rates. Now, that should not be a surprise. You've got to go back. The last 12 months, most retailers, particularly those that were open with physical or bricks and mortar stores and the e-commerce players saw an absolute boon with people stuck at home and online ordering. It was absolutely massive. So you're now comping those very, very elevated growth rates from the last 12 months. In the case of dusk, online grew 120 per cent, physical bricks and mortar grew 40 per cent on the previous year. It is very, very hard now to get growth on top of those very, very high numbers. So what you are seeing post reporting season with retailers is a reset. You are now seeing growth rates either being flat or negative relative to last year. Now, negative on a prima facie basis looks bad, but as I said, you have to compared to what they were doing over the last 12 months, which is absolutely exponentially right at the top. There was no way they could replicate growth on top of, you know, effectively where they already were. So that's that's the that's the specific takeaway for retailers. The second, in terms of technology, I alluded to this in my introductory comments and that was around the shift away from sales and IRAs. Now the reason we're seeing that is any technology company can grow its sales by throwing our picks at it. You know, just invest in the business. You can gain customer acquisition aggregation, a guy who can spend money and buy a volume and transaction volumes, et cetera, et cetera. But that doesn't give you an underlying picture of how your earnings and your returns are on that spend. That is why the market is now thinking valuations based on sales and sales in a cocoon on their own don't mean much when you're not looking at how much is being spent to achieve those sales. So a good retailer for every dollar spent, you'd expect them to make a return on that dollar. But the reality is they don't because they got to invest in marketing or invest in sales. They've got to invest in their loyalty schemes. They have to invest in the store network, the platforms, et cetera, et cetera. So it's very, very hard in this environment to get a return on that dollar spend. So now it's a function the market's now moving towards earnings instead of sales as a key issue because your earnings incorporate the cost of delivering those sales, which is critical. The other one is and this is the first time I can remember this happening November. For most retailers, he's now equal to or larger than Christmas, the December period. I can't remember. November has changed over the last two years here in Australia. It's been a global trend. 

Candice: [00:15:09] So Black Friday sales you're talking about?

Danny Younis: [00:15:11] so you've got Black Friday sales, you got click frenzy. You've got Halloween at the end of October going into November. All those promotional periods are now driving forward the sales that you otherwise would have got at Christmas. So I think that's a spectacular change that we've seen in the last reporting season for retailers. So I think that's really important. The second thing is the flexibility, payment options. I think it was you, Felicity, who touched on buy now, pay or so. Australia has been a world leader in Buy Now, Pay Later. For the last two or three years, we brought it to the world. So that flexibility has been another thing that's that's really added momentum to volumes and transaction volume sales for retailers. You speak to any retailer that's as soon as they put in Afterpay open pay. Zip says or split it or whatever, they automatically saw a 10 to 30 per cent increase in their sales because of that option. The other thing that really came out is particularly in the technology space from the fintechs that we saw from reporting season is the big banks are still shedding market share in terms of catering to the millennials. It's really the millennials now who are driving consumer spending. Consumer spending patterns with technology is heading. And by that, I mean these millennials and we're talking people who are under the age of 25, so they are less likely to use cash. They are less likely to use ATMs. They are less likely to use credit cards and they are less likely to walk into a big four bank. I mean, I don't fit that category, but I can't remember the last time I had cash in my wallet. In fact, I don't even carry a wallet anymore. It's all on my phone. I barely ever carry my credit card. I haven't been to an ATM in months, and I certainly haven't been inside a bank, a big four bank for the last six months. So the millennials are really driving change in terms of convenience and the flexibility of payment options at the Post. The place is the point of sale. The other big change that came at a reporting season is the number of retailers now who are focussing on private label. Previously, it was all about branded products. One of the real ways to grow your margins and adore beauty of doing this dusk are doing this shaver shop are doing. This is to really put out your own private label. So the cost of production is much lower than a branded product. And you can, you know, as long as you're not cannibalising an existing product, skier or product segment, you can really grow that category for those that don't want to pay the big bucks for the branded products, and that will delight you 

Candice: [00:17:40] on the private label side of things. Do you know who started that trend? Like which retailer sort of tiny that idea?

Danny Younis: [00:17:48] It's been around for ages, so we know, you know, it is here in Australia. Kogan was one of the first movers in Kogan about five six seven years ago, moved to private branding because they saw they were getting ripped off from some of the big conglomerates like Samsung and Sony for the TV panels and electronics, et cetera, et cetera. You're really beholden to the price they charge when there's no other competitive product out there in the market. 

Felicity: [00:18:11] What about Coles or Woolworths? They've been ahead of the curve for ages forever. 

Danny Younis: [00:18:17] Absolutely, yeah. But for a long time, they had the strategy wrong, so they really pitched it on a price point, not at a qualitative level that the retailers who are doing private label really well now are those that are offering a product that is not only cheaper significantly than a branded product, but the quality is almost there. And that's why, at one stage, calls at three different private private label brands in a supermarket is now rationalise those down. So you want to be able to offer a product that has almost all the attributes of a branded product, but at a considerably cheaper price. 

Candice: [00:18:55] And so that's a really interesting insight into your role as an analyst, I guess. Do you have a checklist and ingredients list that helps you narrow down the universe, right? I don't even know how many stocks would be in your coverage. So how do you bring it down to the most compelling business that you want to follow and have conviction for for at least three five, you know, plus 10 years? 

Danny Younis: [00:19:16] Yeah, no. It's a really good question, Candice, because it's one I think about continuing on a continuing basis for every stock I cover. I probably look at 20. You know, we have a weekly stock selection committee here at Shaw and Partners, where the analysts present ideas for potential stocks that they want to cover. So what's the process that we do for this? So first of all, ideally, we want something that's market liquid and has a good market cap size. So we want something ideally that is over 100 mill market cap because once you get under 100 mill market cap, you're limiting yourself 90 per cent of the fund managers out there can't play in that space. Liquidity is always an issue. So I think that's the first thing. So the metrics that we look forward when we put forward. Companies potentially for coverage are as follows you're looking at you want a business that's good strong cash flow generator. Cash flow is the be all and end all. Ideally, if it's not an early stage company like a tech company, it should have good cash flows. It should have a strong earnings trajectory. It doesn't have to be profitable in the next one to two years. You know, we like to go along a journey of these companies, which is why we like a lot of tech companies where you can see that clear trajectory getting to EBITDA or earnings, profitability or even break even. You want a really strong management team. You know you want a management team out there that can under-promise and overdeliver. I mean, two classic examples, you know, Nick Scali, Anthony Scali, the CEO. He's been absolutely awesome for the last decade. He's continually on the promise and he's continually over delivered markets. 

Candice: [00:20:43] Love that, right? I mean, you 

Felicity: [00:20:44] love that everyone loves it, right? 

Danny Younis: [00:20:46] Silk logistics have done exactly the same thing. You know, 20 percent upgrade to the prospectus forecasts that were so confident in their business model that they provided not one year of forecasts in the prospectus for two years. Market loves to see that that's confidence in management and management's ability to execute. Okay, so that's really, really important as well. You want skin in the game, you know, ideally the founders or the management team own, you know, a stack of a shares or stack of the equity in the business because that also gives you comfort and they won't act against the best interests of the shareholders when they have that. You want an attractive sector that is very variable as well. You know, right now, buy now, pay later is on the nose. Fintechs are a little bit on the nose in assesses a little bit on the nose. The whole tech space is pretty much on the nose at the moment. That is the seasonality that you see in terms of ebbs and flows in the market. But if you're an attractive sector with recurring revenues, that is always an attractive proposition. The other things we look at is, you know, strong. I tell you what a business has actually got. I pay a lot of companies out there and mining services and technology and the Tories for this. Two things I always get from CEOs when I speak to companies is, you know, where's your IP? They'll often say we've got the leading platform in the market or the leading technology in the market. Then you've got to do a channel check and you say it's just like everybody else. Second thing I'll say is, Oh, we have no competitors, but then you've got to do a challenge. Everybody has competitors. There are very, very few companies out there that don't have competitors. So you really want strong IP and tech and you've really got to do your due diligence on that. The other thing is we want to see a company, particularly in the tech space, really investing in that technology continuously. The good companies do it a lot, you know, overnight, does it? You know, the R&D investment is is a significant percentage of revenues. A technology company should be spending anything between 10 and 20 per cent of its revenues in R&D. And good companies will do that. I mean, that's why I took Amazon 15 years to get profitable. You know, it's why it took Atlassian seven, eight years to do exactly the same thing. So you also want a competitive advantage. It's really hard to find a competitive advantage for companies, particularly in retail, where, you know, in apparel, for example, which is very competitive. There are plenty of competitors out there that that offer exactly the same product, just under a different brand and a different price point. Okay, so what is the competitive advantage that we can see in this business? If it's if it's a start up like tech, what's the monthly cash burn? Is it likely to require LICs of capital to keep this business afloat? And how far away is it from profitability? And then you will look at the macro things, you know what we call the top down view? Now what are the structural tailwinds and headwinds? Many companies have headwinds like in a rising interest rate environment. What does that mean for their business? But also many of them have tailwinds as well. You know, so many of them, what's negative for most could be a positive for them. Now, when we put all of that together, you then arrive at a business proposition and you look at it really from a Michael Porter analysis perspective. You know, SWOT analysis, strengths, weaknesses, opportunities, threats and then you try and build up a valuation of this business model of that you build it very you get to a valuation and you really want to see an earnings trajectory there. And it's not easy to do. You want to see top line growth, you want to see key drivers clear assumptions that will drive your earnings. What the addressable market looks like, how much of that addressable market in terms of market share they can win and you want, say, clean accounting standards and in terms of valuation, just to give you a little bit of flavour. I use three different valuation tools when I'm looking at a company, whether or not to initiate coverage on it or to model it. The standard one is DCF, a discounted cash flow valuation, and that's basically taking 10 years of cash flows. So it's taking your cash flows less your working capital and all your expenses and effectively discounting it back to a current day value. OK, so it incorporates things like your cost of debt, your cost of equity, a beta for volatility in the market. The DCF valuation is very attractive for a company where you can see and where you can model, you know, at least 10 years of earnings going forward. That's the first one I use. A second one is is what's called an enterprise value. Multiple enterprise value is basically a market cap plus unit that so you'll see often, you know, an easy multiple in terms of sales or a battery, but depending on where the company is in its maturity. So that is really a comp code to building up. Some of the parts to take the classic example, if you're a big company like Wesfarmers, you've got various businesses. You know, if Bunnings were doing 100 million in turn over a year, Officeworks is doing 100 million in turn over a year. Kmart and Target were doing $100 million each in turnover per year. You wouldn't pay the same prices for those businesses. You'd pay a higher price for the business that's growing faster. That has a better earnings trajectory that delivers higher margins. All that sort of stuff. And that's where the heavy sales multiple comes in as well. And the final one is we use a price to earnings ratio relative to the market. So if it's a really good business, it should trade at a higher valuation to the market if it's growing much faster than most businesses. So we use a composite of those three. Ideally, you know, one third, one third, one third. And I find that actually works really well because it allows you to see the differences in the valuation you can get across all three.

Felicity: [00:25:53] Okay, Danny. So after all of that, that is absolutely so fantastic. So you cover about 20 stocks. Is that right? And you know, what's the maximum number of stocks that you could cover if you want to add in a new one? Do you have to get rid of another one? I guess, you know, the other side of the track, you know, removing a stock from your coverage because, you know, episode with Jules, he said. It's very hard to break up with a company like a divorce. Do you feel the same way because I know there has been a stock that was removed from your coverage fairly recently? Xzibit, you know what went wrong?

Danny Younis: [00:26:27] Absolutely. Another really, really good question. So there's a few things happening there. So so to answer the first one, you know? Yes, right now I cover 10 stocks. Up until recently, I Covered 15, but I dropped a whole bunch for various reasons. How many should an analyst cover? Look, this is an ongoing debate, certainly with my boss. It's a debate we often have. I think 15 is the right number. You know, when I started, that shows I was doing twenty five. I got down to as low as five. Now I'm back at 10, needing to get to 15 by June. I think 15 is the right number in terms of analyst independence, in terms of analysts being able to apply equal time to each of those 15 names because that's the first part of the question in terms of dropping stocks. Yeah, this is a really interesting one. So I disagree with Jules. I'm actually ruthless. I actually don't harbour any affiliation with my stocks. I try not to fall in love with my stocks, and I'm certainly not suggesting Jules does. I can be absolutely ruthless. You know, I dropped eight over the last 12 months and I was happy with that.

Felicity: [00:27:25] Easy come, easy go. 

Danny Younis: [00:27:26] Yeah, absolutely. Because you're always looking for a better opportunity, you're always looking for a more compelling investment proposition that you can sell to the market. You know, in my work as a as a research analyst, 15 stocks is good because ideally what I would like is the one third rule. Again, you want to spend one third of your day modelling the business or updating your numbers or changing, you know, having a look at sensitivity analysis or reacting to news and updating your models on that basis. You want to spend one third actually doing the research, you know, riding the research, which can be either a company specific piece of research or a sector piece of research. And the third, you want to spend the remaining third on marketing. So getting out, speaking to your clients now my job here, Sean Partners, is I've got three counterparties that I need to deal with. So it's not only the the retail advisors or the high net worth segment, it's also the institutional market, the big fund managers who typically have $500 million and above in their accounts and you've also got corporate, said one third modelling one third research report writing one third marketing, I think, is the best mix now specifically and zip it what we're doing wrong there in terms of dropping it. I think there are several things that went wrong with Z, but and to be quite honest, I'm still a believer in the business. I actually really think there's a real business there that just is misunderstood in Australia. The reason Zabit is listing is number one its US base, so there's no real competitor here in Australia with which we can point to to compare to here in Australia. The second thing is the market didn't understand if it was a buy now, pay later play, which it wasn't. Or was it an e-commerce player like a like a Kogan, et cetera? So it was it was neither that as well. So it was sort of a hybrid e-commerce player that also offered a buy now, pay later financing proposition so the market couldn't get their head around that. The third thing I think is we listed this business during Covid or just before COVID hit. So we couldn't even get management to Australia, so no one here in the market had physically met the US based management team. That's a big call to make an investment proposition on company management who you haven't met face to face a one to one. So it's a new sector plus, you know, over the last 12 months, because of Covid, when they listed, you had massive volatility in bad debts. With this business, you know, bad debts went from eight per cent up to 19 per cent at one point, which is a very, very high number. When you compare that to three per cent for buy now, pay later or less. And the fintech lenders are three or four per cent or less. And then it went back to 12 13 per cent. So the business model has also changed because of what happened during COVID. So the issue there really is around this business. Three years ago was a $20. Revenue business, the following year, two years ago grew to 40 million. Then a year before this thing, it grew to 80 minutes, so double the guess he had three years of growth, you know, doubling every year. It is very, very hard to keep doubling of business once it gets to about 100 mill revenues, which is what this business is doing. So you obviously saw the slowdown in sales. So I think it's a long winded answer. But the reality is number one, the market cap was already small and listed at one hundred and fifty million. It's now, you know, some 10 million. The liquidity wasn't there. The management weren't available for roadshows. Covid impacted the business. It was a new sector which the market didn't understand and didn't know how to pigeonhole it in terms of who we compare it to. But fundamentally, it's a good business. I mean, when we listed this did it at a certain price. You know, the price now is a fraction of what it was, what we listed it, but the revenues are much higher. So it is a far better business. It's just that the timing wasn't great for one of 

Candice: [00:30:53] the key messages that I keep kind of listening to. When you when you go through that is it's very key for the businesses to understand their story and communicate that correctly with confidence to the market and to you as analyst so that the market can really get your head around exactly what it is. Because, like you said, if you're new as a concept or nothing to compare it, then you may get treated badly in the aftermarket, right? So. So in a moment, we're actually going to be hearing more about Danny's thoughts on the sector that he covers, you know, his thoughts on inflation. Hear more insights into how he does get involved with private businesses that become public. But before we do all of that, we're just going to take a short break to listen to our sponsors. 

Felicity: [00:31:37] You've had a lot of experience, Danny, in the past as a lead analyst on floating private businesses to the ASX. So recently, you're involved with silk logistics. Can you tell us a little bit more about the process you actually undergo with these businesses to help them list on the ASX? 

Danny Younis: [00:31:54] Absolutely. So usually the process starts about two years before listing. I've I've been involved in close to a dozen. I think IPOs here are in the last decade, most of the Ren to be done in the last five years and it takes, you know, it's a two year window to IPO. So what's the process involved? Usually, the analyst is brought in because they have the sector knowledge. Okay, so we really do the due diligence in terms of we look at the companies numbers, what they're projecting. We look at the management quality, the quality of earnings, what they're trying to do. You know, are they they capital constrained? Are they growth constrained? Where are the issues in the business? You know, a lot of the things that we look at, we're really when we initiated coverage on a company that I talked about. So that process is very elongated and it means multiple meetings with management teams. It means providing to them feedback on what I believe is happening in the sector. Is there appetite in the market for another buy now, pay later player, for example? I would argue probably not at this stage, given what's happened in that space. Is there appetite in the market for a SAS business at the moment? Absolutely. Because they have recurring revenues and the growth trajectory is there. One of the things I find with IPO's is, and I think, Felicity, you touched on this is you've got to deliver in your first 12 months. I mean, if you come out in the prospectus and say you're going to do X amount of dollars in terms of sales, are you really going to hit those numbers? Because if you miss, you know, you will suffer poorly. A classic example with me is that I worked on was shave. A short China shop is a fantastic business, but in its first 12 months it had some hiccups now, as hiccups were a function of a couple of things number one. They missed their earnings forecast for whatever reason. Number two, they had a very high reliance on a on a on a new product that they call Daphne Daphne, which is a hair straightener, which was competing against other hair straighteners in the market like today, which was the dominant player, you know, so they had a very heavy skew in Christmas for those sales did very well in the first year. Second year, the sales weren't so good. OK. So that company downgraded and the share price basically halved. It's taken four years for that company to get back to where that IPO price was. And they've had three great years in the last three years in terms of results. So there's a lot of work involved in getting a company to listing, but that's not the end of it. That's not where the company's work's ends because they have to deliver. And that is often the hardest thing. And I can talk to adore beauty that was another one know the issue of the diabetes. They reset their revenue growth targets a guy. So this business was growing at 60 70 per cent per annum pre IPO. It comes to market Covid hits, which should have been a beneficiary for a lot of retailers, including to some extent, adore beauty. But at pared down its growth forecast for the next one to two years down the sub 40 per cent, in fact, recently some 20 per cent. So the market at that stock. So it's a really important thing in building our relationship pre-IPO with these businesses. And you've got to be honest, you know, for every potential private business that wants to go public, you've got to knock back, you know, three or four for everyone that you take to the next step. And you know, when I look at ordinate, when I look at silk, when I look at adore beauty, when I look at dusk and open pay and zip, which we listed all those and I was involved in all those I probably had, you know, half a dozen to a dozen meetings, pre-IPO with the management teams on that, you know, you do site visits, you go look at the businesses, you know, pre-COVID, you'd go overseas and you'd have a look at the businesses, particularly in the for a US based business. So you've really got to kick the tires and understand the business model and really do your due diligence on the numbers. You know, what are the forecasts likely going to look like and how much certainty is there in those forecasts? And a lot can change in that two year period leading up to Christmas. You know, you can have things like Covid hit, for example, we can have a recession. It's an exciting process. It's one of the differentiating factors I bring to shows, you know, unlike most of the other analysts who haven't been involved in IPOs, I actually don't mind doing it. As you get closer to the IPO, you've got to be careful as an analyst in terms of compliance and regulations, the SEC is very strict. You know, we have a fantastic compliance team here and you have a very, very strong information barriers. Once you get closer to IPO, the analyst work becomes less important because it's now it's then turned over to corporate, who really has to drive that window to completion or execution to IPO. 

Candice: [00:36:16] One other thing that you've kind of touched on there is sometimes it's in the company's best interest, right to actually stay private for longer because if they're growing at 50 per cent each year for three or four years looks really great on paper to private investors. The market's going to say that get excited, but it's naturally going to mature and slow down, right? Every company has a lot. Cycles, so sometimes it's maybe been a beneficiary from your perspective in the seat that you sit in to stay private for longer. Get your groove, get your track record going and then your business will be more translatable and understandable to investors in the everyday market. 

Felicity: [00:36:53] They're doing it right. You've got Canva, for example. Exactly. They've continued to stay private and they can raise a lot more capital at a higher valuation doing so. 

Danny Younis: [00:37:02] Chemist Warehouse of the same, you know, they've always got both of them, always have investment bankers knocking on their door, saying, Let's go public, let's go public. And they like, it's not worth the hassle. You're absolutely right. And that brings the question. Something else that usually pops up during the IPO price is pre IPO process, and that is acquisitions. A lot of these companies that we see, particularly in the technology space, they're what's called roll ups and the market doesn't like roll off. So that's, you know, buying acquisitions to buy growth effectively. And we see a lot of that in the IPO market. So if you're growing at 50, 60 per cent per annum and suddenly you're you're only growing at 20 per cent, what's the only way that you can grow that business back up the 30, 40, 50 per cent. You make an acquisition and you make another acquisition, and so it becomes self-perpetuating. And then when you add up all those acquisitions, your actual underlying organic growth to three years out isn't that impressive. You've expended all this capital for what are effectively mature businesses, and that is a fundamental mistake that a lot of these technology companies make. I mean, even in the industrial space, when I Covid mining services, there was a classic company that I Covid, which I had my. They made 15 acquisitions in 10 years and I went back after I dropped coverage of it in after fund manager said, You know, could you do this exercise for me? I added back all the contributions from those 15 acquisitions I made over the last decade, and you got to a certain number, let's call it 200 million. But when you looked at the company's accounts, though, and nowhere near that 200 million. So clearly there'd been a loss of earnings. You know, they'd been massive attrition in those businesses and integrating them over the last decade. So you've got to be very, very wary of things like that. 

Candice: [00:38:40] Yeah. Might sound good on paper, but it's actually not translating to the bottom line. So stick to your knitting, is what you're saying and B being a compelling business. So I guess recently we have a few different episodes here at Talk Money to me. One of them is our order pad. I was pretty long and bullish on dusk. I'm a personal consumer of dusk. I keep buying candles, products and yet in the six months, the share price is down almost 20 per cent. So has dusk kept to their knitting? You know what is an update from your perspective on dusk and is it a buying opportunity? Do you think right now or top up?

Danny Younis: [00:39:13] Yeah, absolutely. It's still burns bright that one side say, Look, I conviction is very, very strong and dusk. And the reason I say this is look at the compelling, attractive thesis on this is as follows said unfortunately, dusk was released into a market that didn't understand the business. The market is ninety five per cent male and the overwhelming majority of pushback I got when I spoke to fund managers about this pre-IPO as well was our candles. Who cares? Yeah, not a good business. Sixty five per cent gross margins. Candles generates sixty five percent gross margin. That's not a misprint. Amazing from Lovisa, which does, you know, high 70s. And there's 60 listed retailers on the ASX. No other company has higher gross margins than dusk does 

Felicity: [00:40:03] and who does most of the like the consumer spending and shopping? Yeah, women. So absolutely 

Danny Younis: [00:40:10] remember. And you know, even though it's down 20 per cent, it's actually held up relatively well. We use this to Dollars kilowatt 2.60 still held up pretty well. When you compare it to say, a book topia or any of the others it lost during the same time, which are under water. So the other reason I like it is candles are 65 per cent. Okay? What an IPA that was about 50 per cent of their business in terms of turnover. Now it's about one third of their business where they are growing. The segment they are growing is it is in an even higher margin business. And that is if fragrance oils and you diffusers they are 70 to 80 per cent gross margin and that is now one third of the business. The competitive it, when we talk about competitive advantage to dusk, they're not competing against Coles and Woolworths or Chemist Warehouse or Priceline or your local markets who sell you 10 20 Dollars candles and they're not competing against you yet. Believe it or not, $200 candles, you know your Jo Malone's and so forth. They are competing in that 30 40 dollar category, which is, you know, it's a mestizo segment. It's a very, very strong skew to an average female who lives out in country or suburban or, in

Candice: [00:41:19] my case, up here in Newcastle. 

Danny Younis: [00:41:22] Absolutely. You know, so it's a fantastic business that mix shift from candles into higher margin generating and higher returning fragrance oils and diffusers. It's what's setting them apart from your bed body and bath, your body shops and all those other players that I talked about.

Felicity: [00:41:39] So Candice, you can still stay on the order pad then, so you don't need to remove it at this fantastic. 

Danny Younis: [00:41:44] You're getting a dividend yield of seven eight per cent, so you're getting a healthy yield. And I put it putting your money in the bank or, you know, like, I don't have many stocks that are offering you six seven per cent dividend yield. You get an expansion of your network, know the one hundred and twenty seven stores at the moment, they go to 150 160 over the next two to three years. They've implemented a CRM and a loyalty scheme, which is incredibly has incredible unit economics for their consumers. You know, more than half their sales now comes from repeat customers who spend more what's called average transaction value and who spend more frequently average order frequency. So that is the real positive that you want. Then you've got a really, really low cost operating model. If you walk into a desk store, there's not an abundance of staff there, particularly outside the key lunchtime traffic brigade. Then you've got the discount that they trade at relative peace with Shaver Shop. This is one of the cheapest listed retailers in Australia nine times. So your forward earnings, you're only paying nine times compared to a market average of 15 16 times. It is very, very cheap considering the dividend considering

Candice: [00:42:52] getting a seven per cent yield, like you're saying. 

Danny Younis: [00:42:53] Absolutely, and the only caveat with dusk right now is the reset of earnings. Remember, earlier I talked about that was cycling really, really strong growth over the last 12 months, particularly in online online is down 12 per cent at the back end of the first half result. That's not so bad considering if you go back to PCP, they are doing 40 per cent growth in the physical store network and 100 per cent growth in online. It's still a very, very good outcome. So absolutely hand on heart, very, very strong conviction. Still on that, I'm very comfortable on a valuation perspective, dividend yield perspective and earnings contribution perspective. 

Felicity: [00:43:30] So within your coverage, what is your number one stock pick going to be, you know, why can't our listeners ignore this position in their portfolios? 

Danny Younis: [00:43:38] It's going to be Audinate.

Felicity: [00:43:39] That's it. So can I say Cody's idea? 

Danny Younis: [00:43:43] So for those that don't know, ordinate is a professional audio visual player, so its technology is called Dante. Dante merely is an acronym for digital audio networking through the Ethernet historically where sound is emitted. We've used what's called analogue analogue is the reams and reams and reams of cables that you see in the rooves of office towers and rock halls, conference centres. Wherever this sound that in the back of your stereo is just in the back of your TV multitude of cables. The issue with that technology is it's expensive. It's low quality, particularly when you want to send video signals or audio signals. Long distances, it degrades, you know, when you're at a rock concert or a pop concert and you're in the up in the boondocks and you see that the singer's lips moving. But you don't get the sound until, you know, three or four seconds later. That's what's called latency in a professional environment that is unacceptable. You want very, very high resolution transmission of sound and video signals. The only way you can do that is via digital these days. And the reason this is my number one pick is because, unlike any other technology company that I can think of or. Knight do not have a direct competitor in this space. Their technology, which is called Dante, is the default standard in audio networking for digital globally. Even the canvas, the Atlassian's, the Amazon, they all have competitors. Even the Australian says business wise technology and great businesses, they've all got competitors. The only competitor to ordinate is the old analogue technology, and that is still dominant as that weighs down. You only have one choice to go digital and you want to go digital because it's higher resolution, its lower latency, it's lower cost, it's much more bandwidth, et cetera, et cetera. That tied in with the fact that when you look at the global ivy manufacturers, the audio visual manufacturers, globally, ordinate has signed on every single major one. I always put a challenge out when I talk to people about ordinate. Go find me one major audiovisual player out there that has not signed on to use Dante. It makes absolutely when you are the global default standard. You have to use this if you want to go forward if you're a house of worship. If you're a conference centre, if you're a transport hub, if you're a corporate tower or a retail precinct or a courthouse, a police station, a school, a university, anyway, where there is sound, you are looking to upgrade your system or build a new infrastructure facility. You are going to use this technology in the future. 

Felicity: [00:46:21] Sounds like a no brainer, to be honest.

Danny Younis: [00:46:23] Absolutely so. The other reasons I like it is the CEO is the founder of the business. He came out of the CSIRO giving the game Fantastic guy, so you know, skin in the game, which we talked about. It's got a large addressable market billion dollars plus. And remember, they're the only players in this space at the moment. Then they're moving into software and video as well. So they dominate audio right now. They are now moving into software and video, so it's building out that ecosystem, which no other player out there in audio visual space can play. This is the Prince story. The biggest professional audio visual player globally is Yamaha. Yamaha 20 Yamaha Ordinates number one customer and they one of their biggest shareholders. So it's the world's biggest professional, Ivy player says. Not only do we want to use ordinate, but we want to invest in this business as well. You know, we hold eight per cent of the equity there that is telling you something. So really, now it is a market adoption story, and it's about embedding that ecosystem. Unlike, say, Apple. You know, Apple has got a very strong ecosystem. Apple products working within the Apple, you know, Apple apps, Apple laptops, etc. they all speak to one another. Ordinates is different. The ecosystem for ordinary. It is brand and codec agnostic. It's plug and play with anything. You can put Donte Ordinates main product into any competing product out there in the market, and it'll work. It doesn't matter if the code Equity Mates audio, for example, is a MP3 or an AC file or a FLAC file. It will work with this technology. So being brand and codec agnostic is also very, very important in terms of getting that transition of that ecosystem to play through it. Definitely. 

Felicity: [00:48:02] What's your price target on Audinate for the next 12 months? 

Danny Younis: [00:48:06] It's 8.50. My view is post-COVID unwinding when everything reopens again globally and conference centres your houses of worship. If you're rock festivals, you live arenas, you casinos, your sports stadiums, your theme parks, your hotels resorts, they're going to do either of two one two things. They're either going to brownfield their infrastructure, i.e. upgrade their sound systems because it's been dormant for the last two or three years during COVID. While they have been shut down all the last five years in terms of wear and tear, or they're going to put in a new greenfields system. And in both cases, the only there's only one option out there. Okay, so we know that we've done the channel checks. We've spoken to everybody who say there is no other option out there in the market. So the caveat here is there is a short term risk and this is why it's the opportunity for me. And this risk is not a problem intrinsic or in endogenous to ordinate. It's an industry wide and that is the chip shortage issue. Yeah. Okay. So that is impacting all players. So the issue specifically with ordinates, they cannot get enough silicon to make these chips, cards and modules, guys. So they've had to defer some of their sales and prioritise their customer lists in terms of giving them know the chips, cards and modules that they require for the speakers, amplifiers, et cetera. Now remember, when we talk about the incremental cost, what they've done is when you're talking about $100000 amplifier or $50000 speaker to put in a $5 to $100 card or chip, it's an incremental cost. So they push through 10 to twenty per cent price increases means it goes for fifty dollars, 60, 65 or $100 to 120 on a sound system that's, you know, hundreds of thousands of dollars. It's irrelevant. So the push through is really, really strong. So the chip shortage is impacting right now. But remember, this is not the fault of ordinate. It's an industry wide. The big companies like Samsung, like Intel, like Microsoft, even Apple in terms of smartphone production that will play out probably till the end of this calendar year before we see an unwind. But when it does unwind, you want to be in this nine because right now it's six point fifty when it unwinds in December or later. This is back up to 11 12 Dollars, which is what it got to, you know, before COVID impacted it, 

Candice: [00:50:19] that you've heard it straight from the expert guys. AD8 is the code on the ASX. Obviously, it's not personal advice. Have a look at your own circumstances, but very compelling business, as Danny has alluded to. And in buying opportunity because short term, like you've said, 8.50, but really more upside to come once all of these, I guess issues ironed out that we're seeing play through the market. 

Danny Younis: [00:50:39] Absolutely. You know, this business we listed at four years ago at a dollar twenty two, we almost didn't. We almost didn't get it over the line. It was actually repriced, you know? And yeah, repricing an IPO is usually a no no for a lot of fund managers. Yeah, so we've priced at a dollar. Twenty two went to 11 Dollars. It's still now six 50 cents more than five and a half times where it was. This is the opportunity. Look, it's never cheap. And the one piece of pushback I get from the institutional market is when I got back to evade a sales long term. It's been trading a 13 14 times sale, so it's not cheap. Okay, but it's now 10 times. It's looking to raise the time if you want to be set for a long term proposition in a segment that is the default standard that uses every major Ivy player out there bar none. This is the business you want to invest in. Look it up

Felicity: [00:51:26] Well, you've sold me. I think I'm going to go buy Audinate tomorrow because the money 

Danny Younis: [00:51:30] as an analyst invest in stocks that I own. This is the number one one that I would go all in on. 

Felicity: [00:51:36] Fabulous. 

Candice: [00:51:37] So when you're busy looking through these companies, I guess a final question I want to ask you is, are you sipping on tea, tequila or coffee? What's your preference when you do your research into these awesome businesses? 

Felicity: [00:51:49] Hopefully not to kill? 

Danny Younis: [00:51:51] And, you know, read my LinkedIn profile as a lot of wine involved in my LinkedIn profile. 

Felicity: [00:51:56] So ask German German Riesling.

Danny Younis: [00:51:59] Well, yeah, so that's why investing wine. So it's not only, you know, an intimate thing. So look, I'm a multi beverage guy, so I'm across everything. I'm in my 20s. My coffee is my whiskies, my tequilas, my cognacs and especially wine. You know, wines are a big part of what I do. You know, it's part and parcel of my life admits it determines where I travel every year. You know, I've often said, if I do, I would never go to a country that doesn't have a vineyard. Although, you know, my partner, she she's agreed to disagree on that. But Multi Beverage is the way to go. And again, this is a millennial proposition that's really driving it. You know, 10. If you go back 10 years ago, you're either a B person or a wine person or a non-alcoholic drinker. 

Felicity: [00:52:41] Now things OK, but Kurt is absolutely fantastic. Well, thank you so much, Danny, for taking the time to chat with us. Our listeners absolutely love this episode as much as we loved it, so we'll see you next time.

Danny Younis: [00:52:54] It's a pleasure to be here. Thank you again. 

Felicity: [00:52:57] Wow, that was such a great chat. The three things that I really got out of it is one. Dusk is still on the order pad. That's a win. Do your own research on ordinate. It's a very interesting company and it has no direct competitor, which is just, you know, unheard of, really. And that e-commerce in retail is slowing, but it's here to stay. What about you?

Candice: [00:53:19] Definitely agree with those points. Love the fact that dusk is still very much a high conviction by I'm in the same boat as Danny, and I guess for me also, you know, it was interesting to hear that he was saying the supply chain kind of Covid issues. It has been it's such a blow for a lot of companies here in Australia and globally, but there is a light at the end of the tunnel that's coming through. And he was saying, that's kind of going to wash out by the end of this year, which is exciting. But the reality is in the inflated environment that we're in, the kind of normalised earnings that we've now seen for tech companies in particular post-COVID, expect higher cogs. That's going to be, I guess, a bit of a theme going through and a shift towards more earnings will be a focus, for sure. And then the biggest thing for me, Felicity, was just stick to your knitting, right? Find really compelling. Businesses that have a great track record are really good at beating their peers and stick for the long term. That's what we always say, right? Don't get caught up in the short term.

Felicity: [00:54:15] You love that saying stick to your knitting. That should be, you know, 

Candice: [00:54:19] I'm not actually a knitter at all, so maybe I should. So we hope you enjoyed today's episode, guys. But as always, before we sign off, please remember, although Felicity and I are financial advisor Sean Partners and Danny and Danny indeed is a analyst. Please note that our discussion today does not constitute as personal financial advice. You should always go out and seek your own professional financial advisor before making your investment decision. It is based on the company information and what we know at the time of recording, which is the 6th of April 2020. 

Felicity: [00:54:53] To now, make sure you also follow us on at Talk Money to Me podcast for daily market updates. If you enjoyed this podcast, please give us a review on Apple or Spotify. Five stars would be really nice. And remember, if you have any questions, please contact us team team at Equity Mates dot com. We will be back next week with our final analyst series. If you are an investor in the industrials, agricultural and health care space, this is one not to miss. Until next time. 

Candice: [00:55:22] See you then guys