Watchlist: Mastermind episode with Julia Lee

HOSTS Alec Renehan & Bryce Leske|4 July, 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.

It’s the return of the fabulous Julia Lee, who is the CIO of Burman Invest, who once again joins them again on the podcast. It’s for a fan-favourite Mastermind style episode, where all three of them pitch three different stocks. Will Bryce the retail whisperer, keep his trend by picking something in that space? What bizarre unlisted stock will Ren pitch? And what interesting ideas are on Julia’s watchlist?

If you want to let Alec or Bryce know what you think of an episode, contact them here

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Bryce: [00:00:16] 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 Bryce and as always, I'm joined by my equity buddy Ren. How are you going? [00:00:30][14.7]

Alec: [00:00:31] I'm very good, Bryce. I'm excited for this episode. One of our favorite episodes here. We're back for another mastermind episode. [00:00:39][8.5]

Bryce: [00:00:44] But that only means one thing and it means we are joined by Julia Lee. Julia, welcome. [00:00:49][4.6]

Julia: [00:00:49] Great to be here. Thanks. [00:00:50][0.7]

Bryce: [00:00:51] So Julia is chief investment officer at Burman Invest and has been on the show multiple times and we very much appreciate her time. If you have just joined us for the first time here at Equity Mates. Welcome. The idea of these episodes is that we will each put forward a company that we've had our eye on or that has come across our desk in the last few days. And this is not a buy. This is not a hold or a sell recommendation. It is merely just an opportunity for us to talk about our research process and a bit about the stock and bounce ideas off each other and get each other's thoughts. So that is what we're going to do today. One stock each, no time [00:01:30][38.9]

Alec: [00:01:30] like the present, no time like the present. I mean, we've we've fallen into a bit of a running order here. So, I mean, let's keep it consistent. And that means you get to kick off proceedings Bryce. [00:01:40][9.7]

Bryce: [00:01:40] I get to kick off with a usually a well known stock. Julia comes in with a gem and then you come in with an obscure [00:01:45][4.9]

Alec: [00:01:48] APRON'S stock picks with my mother. [00:01:51][2.9]

Bryce: [00:01:54] So this one. So I'm going to be chatting about Kathmandu. The ticker is KMD. There's been a lot of discussion about this one in the Equity Mates community, so I thought I'd have a bit of a look at it, given my love of retail. And I'd just really like to get your thoughts on it as well. So Kathmandu, for those that have never come across it, it is in the specialty retail sector on the market. So I think JB Hi-Fi, super retail city, she can scally those sorts of companies. It is a New Zealand company dual listed with a market cap of about one point one six billion New Zealand Dollars. The Kathmandu company, or group, is a global outdoor lifestyle and sports store company with some iconic brands you may have heard and a focus on sustainability, which I'll touch on a bit later. It is building a portfolio of brands that provide a pretty good diversification across the world. Now, a few different sales channels and they're really trying to focus on seasonality, which is important for their growth. They're really focused on surfing and outdoors and they are fully vertically integrated. So they do everything from the design, the manufacture, distribution and retailers of all their products. So in terms of their brands, they have Kathmandu, Repco and another brand, oboes, and they operate in New Zealand, Australia, North America, Europe, South East Asia and Brazil with about three hundred and twenty eight retail stores and seven thousand three hundred wholesale doors as well. Company founded back in nineteen eighty seven and is based in Christchurch. So another one of those gems coming from New Zealand. [00:03:35][100.9]

Alec: [00:03:36] Can I interrupt there for a sec? I don't know about you, Julia, but I've never heard of the Oboes brand before. [00:03:42][6.5]

Bryce: [00:03:42] When's the last time you went hiking? [00:03:43][0.9]

Alec: [00:03:44] Is it a hiking Bryce? [00:03:45][0.7]

Bryce: [00:03:46] OK, I've never seen done on hiking boots. [00:03:51][5.7]

Alec: [00:03:52] I don't know. You're not going to say. OK, so it's a hiking boots boot company. Yeah. Footwear one of the best. [00:03:58][6.2]

Bryce: [00:03:59] The best. Well that's the I don't often go hiking on the side. I can't make an assumption on one of the best, but yeah, it's hiking boots. [00:04:08][8.6]

Julia: [00:04:08] Do you know Julia. Well, I'm just having a look online and all of the open shoes are on sale. Usually, you know, the high end ones retail for about three hundred and twenty bucks a pair at two hundred fifty five dollars at the moment. You want to buy them. [00:04:22][14.1]

Alec: [00:04:23] They go. You go. That is non sponsored, but do you mind to come in, you know, sponsor Equity Mates. [00:04:30][6.6]

Bryce: [00:04:31] So we'll have a look at the numbers revenue. About eight hundred million New Zealand compound, which is compound annual growth over the last five years, was about 14 and a half percent. Interestingly, though, from about twenty fourteen to twenty nineteen, the compound average annual growth has been six and a half percent. So they've really improved on that [00:04:55][24.3]

Alec: [00:04:56] covid was an outline of [00:04:57][1.2]

Bryce: [00:04:57] confidence in how high. Yes, profit of eight and a half million significantly impacted by covid pre Covid profit was about fifty seven million. They did have to shut a large amount of stores and given that there's no travel to the northern hemisphere for ski season in those sorts of things. They have been significantly impacted. It's been quite a journey for Kathmandu shareholders in terms of in terms of price. Remember, we're looking back at Kathmandu when we were at uni and it went on a pretty significant run and then just got absolutely slammed and has been on a bit of a rollercoaster [00:05:31][34.1]

Alec: [00:05:32] since Kathmandu, like starting in the ones getting to the mid threes and then falling back to the ones. Yeah. [00:05:38][5.6]

Bryce: [00:05:38] And then I think it Covid it hit 70 cents and now it's back at about a dollar fifty. So yeah, it's been on on quite a ride. I just want to touch on the three brands because you've mentioned that Ren oboes. So they bought oboes back in twenty, seventeen, twenty eighteen for about seventy five million dollars. It only contributes to about eight per cent of total sales, but it is in the footwear business. So this was an acquisition for them to get into that space and start hitting some international markets. Kathmandu, we all know Kathmandu, it's 31 percent of sales and they're really hoping that with a bit of renewed interest in local travel, that's where this is going to generate revenue, revenue from them in terms of camping and beach and footwear, because, as I said, the travel markets have really been hampered. But the big surprise packet is Repco. So they spent three hundred and fifty million dollars buying Repco back in 2019 at the surfwear market is valued at about 11 billion. So pretty big market. Repco has contributed to 61 percent of sales last year and it is very much part of their diversification strategy. And we know that through covid there was a huge increase in participation in surfing both here in Australia and over in Europe. So no wonder that it was a significant generator of revenue over the last 12 months or so. Oh, yes. So any questions thus far? [00:07:06][88.5]

Julia: [00:07:07] Yes, I have a question. So recently the CEO of Kathmandu. They've decided it would be Michael Daley who was the Ripcurl CEO for eight years. And what do you think that means in terms of strategy and direction? Does it mean that this is going to be a retail growth driven stock rather than more of an outdoor sort of hiking driven? So. [00:07:28][21.7]

Bryce: [00:07:29] Good question. Yes. So their previous CEO, Xavier Simoni, he did resign and I think November twenty, twenty twenty, I think. Yeah. And he's now heading up Austrade. Yes, sir. Mike Michael had been running Ripcurl for the last eight years and has obviously done a very good job. My my feeling is that there's no doubt the market that Kathmandu are playing in still has some pretty significant upside given where it is at the moment. Should borders reopen sooner rather than later? And Aussies get back out and start traveling again? I would be surprised if they don't refocus back on getting Kathmandu to revenue where it previously has been. But given that is performing so well, I wouldn't be surprised if they continue to try and push that as well. [00:08:19][49.4]

Alec: [00:08:19] Yeah, I would imagine that a lot of investors would be surprised that the biggest driver of revenue, not growth, but just like the biggest share of revenue, comes from Repco, given this stock is called Kathmandu. [00:08:31][11.9]

Bryce: [00:08:33] Yeah, well, I saw in some form somewhere there was it was on the investor call transcript. I think that someone asked if they're going to rename the group so that it's more reflective of the brand of or the collection of brands now rather than just your traditional Kathmandu. [00:08:47][14.4]

Alec: [00:08:48] What was the answer? [00:08:48][0.3]

Bryce: [00:08:49] There was no answer. Was kind of a next question situation from from the company? Yeah. They didn't really have an answer for that. [00:08:56][7.2]

Julia: [00:08:57] See, I'm old school. When I think of the ball, I think of the fashion brands in the selling costumes and the T and the shorts. But actually it's wet suits. So it's more surface marketing, I guess, the higher priced product. [00:09:12][15.1]

Bryce: [00:09:14] So just to close out the the thing that I obviously like about this in all retail companies that are capable of doing it is that they are generating greater penetration of online sales. They now have online sales of about thirteen percent, up from eight and a half. Kathmandu specific penetration is closer to fourteen and a half percent. However, Repco online sales growth has again been pretty significant across key markets. So one hundred and seven percent growth in the USA, almost 50 percent growth in Australia, and almost 80 per cent growth in Europe. So, yeah, they're doing pretty well on the online side of things. And for those that are interested in the sustainability piece are Kathmandu are a certified B corp, which means they meet the highest standards of verified social and environmental performance, public transparency, legal accountability and those sorts of things. And they have reached its carbon neutral milestone four years ahead of schedule. So. They've done well there. Whatever that means, though, [00:10:16][61.9]

Alec: [00:10:18] did they change anything or do they just buy credits is always my question, but let's not get into that. [00:10:22][4.2]

Bryce: [00:10:24] So look for me. This is a company that, as I said, I think has some pretty good upside. Should borders reopen sooner rather than later? You know, then there's going to be increased participation in outdoor and increased, you know, comp growth, which is important for retail stocks. And they had the previous CEO, Xavier, come in who restored earnings and profit growth and began the transformation from that Australasian company through to a global company. It's got pretty good free cash flow, lowish sort of net debt, and it has been battered by Covid. So if we're able to reopen our borders and get everyone back to the Northern Hemisphere ski season and stuff, I think there's some upside the bad case competition from big outdoor US brands, interest rates we spoke about last time. You know, if interest rates are to rise, potentially less discretionary spending. In case you ask me that question, Julian, put me in the hot seat. You know, the bad case is also that borders don't reopen sooner and we kind of stay in this holding pattern for longer than expected. And then obviously that short term growth becomes something for investors to consider. So, yeah, an interesting one to hear your thoughts. [00:11:41][77.2]

Julia: [00:11:42] A question is the growth story around Northern Hemisphere sales bouncing back? Because obviously domestic sales have been relatively strong given Australians and New Zealanders are traveling domestically and we're pretty leppitsch outdoors at the moment, given our lack of ability to travel. [00:12:00][17.7]

Bryce: [00:12:00] Yes. Is the short answer to that. [00:12:03][2.3]

Alec: [00:12:05] It's a really good forecast if you only want word it says. [00:12:08][2.5]

Bryce: [00:12:08] But yeah, I think it's that given the seasonality, we sort of restricted here and, you know, from reading the transcript calls that the company is really hoping that we can get more Australians traveling. And as such, I think the spread of sales across a 12 month period is going to be less concentrated in, you know, just the summer or just the winter. And for that, we need borders to be open so that we can get dual seasonality. So I think the growth component of this is is likely to be more on the Kathmandu business than, say, KOLO or oboes. But for that to happen, yeah, we're going to need more travel. [00:12:49][40.8]

Julia: [00:12:50] And what about the Ren with that growth going to come from? Is it Bali, Hawaii, or is it just more of a domestic focus strategy? [00:13:00][9.7]

Bryce: [00:13:01] Julie, you're asking the tough questions. No, I mean, I think that border with the intention to take it more international. I think they bought it straight from the founders, both Aussie guys. And it did have a bit of a small international presence. But they really want to get the growth from overseas. And we can see that that is happening at the moment, particularly with with online. So, yeah, they probably looking at US and Europe for for growth in that side of the business as well. [00:13:31][29.4]

Julia: [00:13:33] Sounds good. [00:13:33][0.6]

Alec: [00:13:34] So, look, I met you in Canberra, Bryce. And for anyone who's ever spent time in Canberra, everyone spends about six months permanently in a Kathmandu down jacket down there. It gets cold, but it feels like it feels like there is a lot of competition out there for that outdoor spend. And especially as they go global, there are bigger companies with deeper pockets over in the US and stuff like that come and do have any comparative advantages. [00:14:03][28.7]

Bryce: [00:14:04] I mean, they talk about their customer loyalty net promoter score. They feel like once they get customers in, they're pretty good at that with them through their loyalty program and and that sort of stuff. But a jacket is a jacket in my eyes. And I think here in Australia, in Australia, [00:14:20][16.3]

Alec: [00:14:21] not in as the [00:14:22][1.5]

Bryce: [00:14:23] thing here in Australia, they have a pretty strong brand, obviously, over in New Zealand as well. But there is no doubt that international markets over in the US Mac pack is a really big competitor for them, another very well known brand. So no doubt as competition, as they expand, competition is only going to get stronger. I couldn't give you the ins and outs on the quality of the jacket. How they make it should have done some due diligence on that. [00:14:53][29.8]

Julia: [00:14:54] But I think it is a jacket until you call it high up [00:15:02][7.1]

Alec: [00:15:02] until you're in the middle of a Canberra winter in a house with no hay [00:15:06][3.2]

Bryce: [00:15:06] to make very good jackets. So I can attest to that. I can attest to that. But yeah, I think that they're up against some pretty strong compared. As overseas, so, look, neither bullish or bearish just thought I'd do it on behalf of Equity Mates community because they've been talking about a lot. I remember when it hit 70 cents in covid and everyone was talking about this is a bias by world. And if you did, yeah, it'd be interesting to see where it goes from here. [00:15:31][25.6]

Alec: [00:15:34] Nice one. Julia would love to hear your stock pitch. So Bryce has discussed Kathmandu, ASX Tik-tok and Julia were very excited to hear what you have for us today, what stock are you bringing to the table? [00:15:53][19.5]

Julia: [00:15:54] So it's a bit of a controversial one, and it's Costa Group. And the reason why it's controversial is that recently came out with a disappointing update to the market. And usually I like to see positive momentum and an upgrade cycle in the stock. So it's a little bit different in it's more of a turnaround place. And the reason why I chose this is when there is a disappointing update to the to the market from a company. One of the questions I like to ask myself is, is these are the conditions that drove this downgrade or disappointing news going to last forever, or are they a one off thing? And some of the things that are drove that downgrade are a temporary thing. So I think this is an opportunity for longer term investors to jump into Costa Group and Kosuga, for anyone who doesn't know, is the largest horticultural company in Australia. So they do things like avocados, berries, oranges, citrus, tomatoes, mushrooms. So basically in the fruit and veg category. And they not only look at farming, but also packaging. They look at marketing and distribution not only to Australia, but also China and Morocco are key destinations as well. They have been around for a very long time. I think it started off as a fruit shop in Geelong in the eighteen hundreds somewhere, the late Covid. So a massive history in terms of fruit and veg in Australia. And look, at the moment what we've seen is strong international conditions, but weak domestic conditions. So it's really about the domestic conditions sort of bouncing back. So that's Consuegra. Do you want me to go into some of the details? [00:17:37][103.2]

Alec: [00:17:38] Yeah, sure. [00:17:39][0.3]

Julia: [00:17:40] I like to break it down because I like eating my fruit and vegies and I love their avocados. This over on toast. So let's start with avocados. And I guess when you look at the different categories, some of the things I look at is pricing and volume. So I think there the two key things that I look at an avocado is at the moment, if you've been to the fruit and veg shelf, it's all about the half. Avocado is very good quality at the moment. I could have been a grocer. Good volumes coming through, but weak pricing because there is a lot of supply. So it's you can buy avocados at the moment for a dollar. [00:18:16][36.3]

Alec: [00:18:17] Yeah, Bryce has been banging on about it in the office. No avocados are cheaper than apples. [00:18:21][4.6]

Julia: [00:18:22] Love avocados at the moment. Good volumes, but weak pricing there. So if we saw pricing coming up, that would be a positive thing. Bury's you're seeing good pricing, strong outlook. The very is looking pretty good at the moment. Citrus is an interesting one because in the first half of the year we saw hail and also fruit fly restrictions. And of course, that's a one off thing. So that's not going to last forever. So some of those conditions are going to reverse. And in fact, in the second half, growth should be driven by the citrus category. And the good news around citrus is that most of the yield is in the second half. So there is a seasonality element to it. So citrus should be strong in the second half and that should drive a rebound. Tomatoes, you may have noticed about a month or two ago were relatively cheap. You could get tomatoes for like three point fifty four dollars a kilo, but now pricing has come back up. So tomatoes are actually about seven dollars a kilo, if you can find it at that price. So tomato pricing is improving, which is a positive, and that bodes well for the second half. Now, the problem area was mushroom's demand is strong, but with mushrooms, you basically need labor throughout the whole year. So it's it's a 12 month thing. But you may have noticed in Australia, there's a lot of labor shortages going on because our borders are closed. So your traditional sort of fruit picking overseas travelers, they're not coming through at the moment. And those labor shortages are impacting on the mushroom market. But once again, I see this as a temporary thing. Once borders reopen and we see trouble coming back, then we should see those labor shortages easing. The other thing I try to look at is growing conditions as well as water. And, you know, a few years ago, we had drought, which was a major impact on a grower like Costa Group. But those conditions have also reversed and actually growing conditions are pretty good at the moment. So I think the market is sort of discounting Costa Group because of the recent bad news that it had and its discounting it on temporary measures. The other thing is that Costa Group is looking at another citrus acquisition that's been looking to expand in that category and it's made a few acquisitions. So they are doing it this kind of Covid. Racing around the three dilema, so once again, I think this is an opportunity to get into a quality agricultural company that's been impacted by short term factors and look like the key question I used to ask myself when I'm jumping into a stock is do I think that most of the bad news is already out there were priced in so that the good news starts to be priced in, the share price starts to move back up again? [00:21:05][163.7]

Alec: [00:21:07] Now, Julia, there's a there's a few a few points there that would love to touch on. You mentioned the acquisition and we're recording this on the 24th of June. And yesterday, they announced the 200 million dollar buyout of two P.H., which is a citrus grower [00:21:25][18.7]

Julia: [00:21:26] over in Queensland. [00:21:26][0.4]

Alec: [00:21:27] Yeah, yeah. So I was just I was reading about that before we started chatting today. And well, one thing that I read is that it takes eight years to grow a citrus tree, which just is a long time in in the business world. But a big part of that is about that, too, has a brand in Asia and Costa is looking at it to give them greater export supply into some Asian markets. Is that is that really does the long term thesis behind Costel like becoming a real agricultural exporter? [00:22:03][35.9]

Julia: [00:22:04] Yeah, I mean, if you have a look at the domestic market, they have made a few acquisitions, but the export story is really quite exciting and international performance has been strong, whether it's to China or to Morocco. So I think it does make sense to focus on the export market, which I think will only grow for them. So, yeah, the citrus and exporting citrus, I think is is a good strategy and one that's likely to pay off for them. I think what I like about Costa Group is when they do make these acquisitions, they do focus on strong cash flow and even within their business, they focus on strong, strong cash flow. So although they're doing a capital raising here to fund this purchase because of the size of the purchase, usually when you look at Costco, because of their strong cash flow, they're able to to invest and also grow organically with that cash flow as well, which I like. [00:23:01][56.8]

Alec: [00:23:02] And then you mentioned the constraints around farm labor for Costa. And hopefully, you know, everyone gets vaccinated, borders reopen and we can get more international travelers in. And and that's eased a little bit. But we did just see the Australia UK trade deal. And the one of the I guess the items in that was that British backpackers would no longer have to do the farm labor to extend their visas. Is that is that a concern or is will there be plenty of other backpackers that can fill that void? [00:23:37][34.8]

Julia: [00:23:37] Yeah, you know, when we have labor constraints, agriculture is still a major area for Australia. So I think that when you're looking at migration into Australia and visas, that when there are labor shortages, that our governments are actually quite good at trying to address that and make room for that. So whether it's issuing more visas to fill that gap. So, look, I'm not too worried because you're coming off a situation at the moment that because of covid-19, you're really seeing a lack of of travelers full stop. So from this position, I think you are going to see only improvement coming through even with that trade deal. So I'm not too worried about the labor, the labor needs, because I think that is going to be addressed and any improvement would be an improvement from now. So I think we're seeing a bottoming out in terms of those labor shortages because of vaccinations and also border slowly reopening. [00:24:35][57.3]

Bryce: [00:24:37] Julia, I remember they did have a massive Barrie issue a number of years ago as well. And when I think about Costa, I always think about, you know, the revenue mix between all the different products that they are growing. And I always thought that, you know, they were pretty heavy into avocados. But what is the mix? And like, how do you think about them being too reliant on, say, citrus and going hard on that? Should all of that come unstuck through that fruit fly or whatever it may be? How do you think about that longer term? [00:25:09][32.0]

Julia: [00:25:10] That is a good question. And Costa has been working very much on diversifying its crop mix, which I think is a huge positive. And obviously that mix would change year to year depending on the volume and the pricing. So I guess to give you a bit of an idea around what we saw last financial year, the biggest category was with citrus at 280 million dollars. And then you're looking at berries at about 200 million dollars. Mushroom almost. Two hundred million as well, and then tomato's about 120 million dollars, an avocado at about one hundred and fifty dollars million. So you're looking at a relatively well diversified company in terms of the different categories. Obviously, citrus has seen a large amount of growth to give you an idea of the amount of growth last financial year. You know, you're looking at sort of 280 ml in terms of revenue. But if you sort of went back five years, you know, you're looking at about one hundred and eighty million dollars worth of revenue. So there's been significant growth there in the citrus category and also targeting that that export market. So, yeah, I think when you're looking at the different categories, I think that citrus would have to be a key driver, especially given the acquisitions that they're making in this space as well. [00:26:33][82.9]

Alec: [00:26:33] So citrus berries, mushrooms, avocado, tomatoes. I'm just trying to think, is there anything that ties those five categories together like other similar like growing conditions, or does Australia have a comparative advantage in each of those? It just feels like a little bit of an eclectic mix of fruits and veg. [00:26:54][20.8]

Julia: [00:26:55] They're the same sort of would be around the citrus and the avocado. But I guess the difference is in also the VIP now, things like mushrooms, berries, tomatoes, avocados, you're getting all year round. So it's it's you know, it's not like the old days when you were only getting seasonal fruit. You're only getting the berries in summer. They're actually growing all year round now, which I think is a huge positive and really opens up the market for Costa Group, but also the export markets. We know that in terms of Asia, it's a massive growth market. So I think that's fine. Of the risks, of course, are that, you know, like any agricultural company, there's an impact to the stock. And we've seen that in the past, whether it's through hay or fruit flies or disease. So that's always a risk that's there for not only agricultural companies, but agricultural companies. So anyone raising fish or animals, but having a look at conditions, you know, I think growing conditions are sort of the best of them in Australia over the last five years. [00:28:03][68.2]

Alec: [00:28:04] Well, Julia Bryce has been getting stuck into me in the office from my basic fruit choices. I'm a big fan of bananas, apples and mandarins, whereas he's more on the exotic side of the spectrum. So I would love to see Costa get into some more of those meat and potatoes, basic fruits. Just to just for me, [00:28:23][19.6]

Julia: [00:28:26] I mean, the other thing with a company like this is that, yes, most people eat mushrooms, berries, tomatoes, citrus and avocados. So usually when I go to Harris, one of the things I'm always looking at is comprised of Bryce blueberry prices, avocado prices. And that's something I do every few days. [00:28:46][20.3]

Alec: [00:28:47] That's one thing we appreciate about you, Julia. You really embody that, like take information from everywhere around you. I remember when we spoke when infant formula was booming and you were scouring the shelves looking at what was being discounted, what was what wasn't available. It's a good lesson for us and for everybody in the Equity Mates community that there is so much data out there if you're if you know what to look. [00:29:10][23.1]

Julia: [00:29:11] I mean, it's really expensive at the moment. Have you noticed red meat lately? This is not the Bryce. [00:29:19][7.5]

Alec: [00:29:19] I wasn't noticed because he has a personal shopper. [00:29:21][1.5]

Julia: [00:29:24] And that's the other thing. Sometimes when I go to Coles or Woolworths because I love cooking beef cheeks and they're hard to find, sometimes they're not in stock at all. So I'm wondering if there's a shortage, but I do a bit more research and maybe the next podcast. Okay. [00:29:37][13.4]

Alec: [00:29:37] Okay. And then, Julia, one final question about cost. Unless Bryce says anything more, has this mouse plague affected, then the mouse plague? [00:29:48][10.6]

Julia: [00:29:49] Yeah, it's a good question. I think the mouse play has mainly impacted, you know, when you're storing silos of things like wheat and grains. So the thing is, a lot of these fruit now are sort of grown in greenhouses. And I don't think the mouse plague has impacted hugely in terms of cost to group as yet, but definitely the grain companies. But the flipside of that is that the grain crops much bigger than previous years because of growing conditions. So actually the crop size is probably going to offset the impact of the mouse plague, even though it's it's a big problem. [00:30:33][44.8]

Bryce: [00:30:35] People love it. Well, that was cost group. Thank you, Julia, as always. Certainly got a lot out of that. [00:30:40][5.6]

Julia: [00:30:41] I can't wait to hear anything unusual in international. [00:30:45][3.7]

Bryce: [00:30:46] Yes, unusual and international may or may not even be listed, I'm not sure. [00:30:49][3.4]

Alec: [00:30:50] It is definitely the least I can tell you. All right, Ren, it is time for yours. Take it away. [00:31:01][11.4]

Alec: [00:31:02] So as you guys know, podcasting is booming at the moment. It's the growth industry of the 2020s, is what I'm hearing from my sources. And this company that I'm going to talk about is highly exposed to this podcast, boom. But I'm also labeling it the most secretive IPO of twenty twenty one because we haven't seen any press about it in Australia. So the company is Acast Bryce. I'm pretty confident you're familiar with it, Julia. Have you heard of it. [00:31:37][35.3]

Julia: [00:31:37] No. [00:31:37][0.0]

Alec: [00:31:38] OK, so ACast operates a worldwide podcast marketplace connecting podcast creators with advertisers. And basically if you take a step back, every podcast you listen to from Joe Rogan to Equity Mates and everything in between is distributed by a podcast host. You know, we upload podcast files and then they get released to the world through Apple and Spotify and all of that. And ACost is one of those podcast hosts that sort of sits behind your Apple podcast. So you Spotify or anything like that. They were founded in 2014 in Sweden. And just a quick side note, Sweden is the home of audio Spotify, founded in Sweden, founded in Sweden. If you want to just do a digital audio startup, I feel like Stockholm. So you need to go. Yeah, yeah. [00:32:31][52.5]

Julia: [00:32:32] In terms of equipment as well, broadcasting equipment and things like that seems to be the center for Swedish thing. [00:32:42][10.0]

Alec: [00:32:42] Yeah, there you go. Well, I mean, if we're talking audio equipment, we have to give a shout out to road a great Australian company that is that is taking on the podcasting world. But that's not the stock I'm here to pitch. So I started in twenty fourteen by June. Twenty twenty one I cost had approximately twenty eight thousand hosted shows with approximately three billion listeners. It doesn't have a massive market share in Australia. It's got massive market share in Britain. I think it is 90 percent of the podcasts in Britain are hosted through a cost. It's growing in the US, it's growing in Europe and it's just iPod in Sweden. On the Nasdaq, it's the Nasdaq first north, I think is the exchange. But we haven't really seen any press about it in Australia or anywhere else, and I'm not really sure why that is. Yeah, it's a really interesting company for me. And I guess I'll talk about why I think the industry is interesting and then why I think ICOS is interesting within the industry. So podcasting is globally worth nine billion dollars and it's expected to grow at about just under 30 per cent a year to twenty twenty seven, taking it to about sixty five billion dollars. [00:34:06][83.8]

Julia: [00:34:07] And yeah, that's a [00:34:08][1.7]

Alec: [00:34:10] good industry, Evangelia. But, you know, that's driven by this transition from analog to digital audio. And the winners of that are really the losers of that are radio. The winners of that are Spotify, Apple Music and podcasting. According to Business Insider, 78 million Americans listen to a podcast at least once a week. So that's one in five. And that number has doubled since twenty sixteen. In a survey of marketers in 2015, 10 percent of them said they would likely advertise on a podcast in the next six months in twenty twenty. So five years later, that number was thirty seven percent. So listeners are growing, advertisers are moving across. There's a lot of tailwinds for that industry. And so then the question is like who? Where does it fit into all this? So as I said, like almost all creators are linked with a podcast host that distributes their shows and supports with sourcing advertisers and stuff like that in Australia. Some of the big ones are NOVA Australian Radio Network Listener, which is Southern Cross Austereo, Bushcare and then ACost. Globally, you have companies like Spotify that they bought a hosting platform. If Sirius Sirius XM, you have online companies like Pod, Bayen, Buzz Sprout, but ACost is a big player globally. So basically the way that they make money is taking a cut of advertising revenue that they source for their podcasters. And here's so I jumped onto Tica and fairly Equity Mates community. If you want to use Tica, it's free ticker ticker dot com slash Equity Mates. So I jumped. Want to. Tica and pulled some of their numbers all in US dollars last three years, revenue of 20 million dollars, then thirty nine million dollars and seventy two million dollars. So 90 percent growth, then 86 percent growth. That's not bad. They are not profitable. So those so in twenty eighteen they lost 10 million dollars, 20, 19, they lost 14 million dollars 20 20. They lost twenty one dollars million. So despite revenue growing strongly, their cost base is growing strongly as well. Costs have grown from 30 million to 53 million to ninety three million. So it's very much in that growth and expansion phase. But that revenue growth is good to say with this IPO. From what I could gather, they've raised between two hundred and two hundred and fifty million dollars US dollars. And that's important because until I had a look at their balance sheet and they didn't have a lot of runway, so they lost 20 million dollars in twenty twenty on their balance sheet. They had thirty five million dollars in cash, thirty five dollars million in receivables, 30 million in current liabilities. So net current assets of 40 million dollars and they lost 20 million dollars a year. So two years runway really. So I think this IPO gives them a cash buffer and hopefully they can continue to grow and capture market share in the growing industry. So that's the company. I want to talk a little bit about future prospects, because there's some interesting stuff happening in the space, but I'll pause there. Do you guys have any questions about the company? [00:37:37][207.1]

Julia: [00:37:38] Sure. You know him a major competitor who would be like, are they the biggest one in the world? [00:37:44][6.7]

Alec: [00:37:45] Well, this is a this is a great question and it's actually a nice segue into this future prospects stuff. So the industry, like there are some big competitors that are moving into this space. The the podcast hosting space traditionally was a lot of startups. There wasn't a lot of value in that part of, I guess, the supply chain. But now people are starting to realize that there's a lot there. So Spotify is loading up. They recently purchased megaphone for two hundred thirty five million. They've purchased a bunch of other things in the space, so they've bought the creative the creative house. Three hundred million podcast. Fifty six million and one hundred and fifty million. The ring nearly two hundred million. So that's almost a billion dollars that they've spent on podcasting. I heart acquired Triton Digital for 230 million and stuff, media for fifty five million. Sirius XM, the US digital radio player purchased Stitcher for two hundred and sixty five million and simple cost for thirty million to get into the space. And they've also invested seventy five million in SoundCloud so that they're trying to become a big player as well. And then Apple and Amazon are getting into the game a little bit. Amazon, Amazon bought one very creative between 300 and 400 million. Apparently Apple was sniffing around that deal as well. So it's a lot of those names that are either coming from radio like I Heart and Sirius XM or who are getting into digital audio like Spotify, Apple and Amazon that are all, I guess, shaping up to be competitors. [00:39:24][98.8]

Julia: [00:39:25] Sounds tough. [00:39:25][0.5]

Alec: [00:39:26] Yeah, yeah. [00:39:26][0.5]

Bryce: [00:39:27] But also what's interesting is that they are the biggest they have the most podcasts in the world on their platform. [00:39:36][8.7]

Alec: [00:39:37] Yeah. [00:39:37][0.0]

Bryce: [00:39:37] Wow. Yet seemingly don't have the firepower as some of these big competitors. So is this just a numbers game for them that they need to get more and more podcasts on as fast as possible and then start monetizing them as soon as possible? [00:39:53][15.8]

Alec: [00:39:54] Well, I think the in some ways, yes, but in some ways, like more is not better. I think what you've seen with Spotify strategy is they're going to target the big and they don't really care about the tail. You know, they want Joe Rogan. They want Barack Obama, they want Kim Kardashian. They won't get more media and then they want to make it all exclusive. I strategy is a little bit different. Like ACost is basically they want to be this, like, key point in the in the supply chain of podcasts, if you can call it that, where if advertisers want to advertise on podcasts, they go to them. And then if podcasters want to create podcasts that a cast has the best relationship with all the advertisers and, you know, the tech and good tech. So then it's just like the natural choice. And look, I mean, we can speak from personal experience that we were happy when we moved across. [00:40:52][57.9]

Bryce: [00:40:53] Yeah, it's just interesting. One is because we sort of believe that as time goes on. Advertising, the cost at which you can charge to advertise is obviously going to become less and less as more podcasts come on. So then it really comes down to the relationship that these companies have with advertisers. And I guess, you know, they're not going to be serving or do they have 30000 podcasts on there? At the moment, they're probably only serving the top one percent. [00:41:18][25.0]

Alec: [00:41:19] Oh, potentially. But I think the industry will say, like, it could go the way of the website where it's just all programmatic and it's like Google based. And then everyone gets some, but no one gets a lot. Or it could go the way of like, you know, radio or TV where it's like there's a few big stations and then there's a distribution that doesn't get much. It will be interesting to see how it plays out. But I think obviously this is just talking about we're not making buy, hold or sell recognizance, but I think a cast is positioned well to capitalize on the trend. The big question is just can they compete with the likes of Spotify? If Spotify decide we want to take the part of the value chain that ACost is focusing on, that Spotify aren't as focused on, if they decide we want to focus on that, it'll be interesting to see how they can pay. [00:42:14][55.3]

Bryce: [00:42:14] Yeah, it's an interesting one for me. Given their size. I'm surprised that their market cap and their balance sheet and, you know, it's okay to be the biggest in terms of having 30000 podcasts on your platform. But if only three of them, the BBC and The Economist, are the ones that you're trying to Equity Mates Equity Mates other ones that you generate revenue from, then you kind of have a command problem. So I think for them, it's making sure that they still get the biggest podcasts in the world, not just the most. [00:42:40][26.1]

Alec: [00:42:41] Yeah, yeah. I think they, you know, like Spotify, Apple, soon Amazon all take money from customers. Like that's their key focus. I just don't like they take money from marketing agencies. And I think it's a in some ways it's a different model. Like, I don't know if Spotify is going to resource a sales team to say we're going to compete for brief's we're going to pitch ideas like Spotify, want a programmatic advertising thing, and then they want to take subscription revenue from customers. So it feels like they're trying to chase different Dollars they're both chasing podcasting, advertising dollars. But I would be surprised if Spotify said we're going to build a global sales team to go and do the the big marketing agency shows and do bespoke campaigns. Yeah, I mean, look, I could be wrong like they got the money, but it's just like a cast has a different focus at the moment. [00:43:39][57.5]

Bryce: [00:43:40] Nice. Well, any say anything from you, Julia? [00:43:42][1.8]

Julia: [00:43:43] No, I thought it was really interesting in it's almost like winning a radio station company, but a modern one. [00:43:50][6.5]

Alec: [00:43:52] I don't know if they would appreciate being lumped in with some of the radio stocks that I have on the Australian radio. Stocks are doing that well at the moment, so hopefully I don't follow them. [00:44:03][10.8]

Julia: [00:44:04] No, but with the growth, I mean, the modern version. Yeah. A structural growth coming through. [00:44:10][5.6]

Bryce: [00:44:11] Well, nice one, Ren. Thank you. There you go. Another obscure one that [00:44:15][3.9]

Alec: [00:44:16] so obscure and you can't buy it in Australia. You might be able to through interactive brokers, but this is [00:44:21][5.7]

Bryce: [00:44:22] just a for you've got to get over to Sweden. Well, Julia, as always, thank you for your time. We certainly appreciate you coming on the show, sharing your thoughts and helping us think about how we do our research and think about the companies that we're discussing here on Equity Mates. So an absolute pleasure. [00:44:39][17.2]

Julia: [00:44:39] Always love chatting to you guys. Thanks for having me on. [00:44:42][2.3]

Alec: [00:44:42] Thanks, Julia. [00:44:42][0.0]


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