Private Market – Market Place

Primary Markets

More and more self-directed investors are learning an age old secret held tightly by large funds, family offices and industry superannuation’s funds.. ‘Illiquid return premium is real” You see it is commonly known in these circles that a return of approximately 400bps is on offer for holding investments that are not liquid versus the liquid equivalent. Eg. Private Equity verus Public Equity.

Wattle Partners for a long time has had this view and in fact that is what drives the return of the majority of the industry superannuation funds in Australia, upto 40% of the investment they market are illiquid and are the beneficiary of this so-called illiquid return premium.

Most SMSF’s hold only liquid investments, that is investments they can sell or redeem tomorrow, and hardly hold any investments that are not liquid, and as such are not the beneficiary of the illiquid return premium. In many cases it is not just asset allocation that drives returns it is also what type of investments are held.

One of the reasons why SMSF’s don’t hold illiquid investment, and I say one as there is many reasons to why self-directed investors don’t invest in illiquid investments, is deal flow. Eg. The ability to know about specific capital raises, private trusts, syndicates or new companies. If you are not well connected you would never see a lot of these offerings, in fact most are marketed straight to the investors that are away of the illiquid return premium; Family Offices, Institutions, wealthy individuals.

However, more recently there has been a global movement towards offering these type of investments to self directed investors, by creating a market place or a platform.

One such domestic platform that we believe has an excellent offering is Primary Markets. Primary Markets, as the name suggest, creates a market place for illiquid investments. Allowing investors to get access to illiquid opportunities, either for trading of existing illiquid investments, new capital raisings of either start up, expansions capital or IPO’s etc. The team at Primary Markets is headed by Nick Capp

that has a long history in Corporate Australia, with the current chairman being Brett Spork who was the former ceo of E-Trade and a director of Macquarie Bank. The head of Managing Director of Advisory at Primary Markets at James Green, ex head of Paterson Securities. This is a very experienced and knowledgeable team that has been doing similar things in a larger format for most of their career.

The platform has over $1.5billion of private companies on it and has raised or traded over $35million.

We recommend that all Self Directed Investors become a member, Membership is free at www.primarymarkets.com.au Some of the opportunities available on Primary Markets:

Secondary Trading

Multiple parcels of existing shares available for wholesale/sophisticated/accredited investors.

AIRR HOLDINGS LIMITED (AIRR)

AIRR is a member- based buying and marketing group that supplies its rural and peri- urban customers with a range of rural merchandise and animal feeds. These customers comprise members, who account for approximately 70% of sales, and wholesale customers. AIRR is not a franchise group. It is a buying group that offers its members buying power and the ability to compete by passing on the benefits of volume purchasing and a way    of increasing a members’ product range without the need to invest in inventory. With a network of eight warehouses nationally and stocking approximately 6,000 Stock Keeping Units (SKUs), AIRR is a one stop distributor. AIRR also has its own brands; Apparent (crop protection), and Independents Own [iO] (animal health, general merchandise and feed).

Key points

A long track record of profitable growth — AIRR has continued its long track record of profitable growth with a 12.6% increase in NPAT in FY18. This was the fifth consecutive year of profitable growth for the company following a dip in profitability in 2013 which was the only year of negative growth for the company in almost a decade due to a dry summer. CAGR in EPS from 2010-2018 was 20% while 2010-2018 DPS CAGR was 16%.

FY18 result demonstrated strong costs containment – AIRR reported FY18 revenue growth of 2% and EBITDA growth of 12.2% to $21.4m. The EBITDA margin expanded to 6.0% in FY18 from 5.4% the year before and has grown three-fold in the past nine years. Employment costs were 7% lower year on year due to the payment of a long-term incentive to management in the prior year.

Management budgeting for strong growth in FY19 – Management is forecasting revenue growth of 3.7% in FY19 and EBITDA growth of 12.8%, demonstrating the benefit of the company’s operating leverage and its diversification strategy.

Diversification strategy – AIRR has diversified its product offering by introducing its own branded products (Apparent and Independents Own [iO]) and since inception has introduced an additional member category and brand “Tuckers Pet and Produce” to service the pet and hobby farm market. Products are sourced directly from Chinese and local manufacturers, held in AIRR warehouses and supplied to members at competitive prices.

Acquisitions – AIRR has acquired, post balance date, Hunter River Company Pty Ltd, which is forecasted by the company’s independent valuer, CoggerGurry, to contribute $1.0m to EBITDA in FY19.

AIRR has superior ROCE —AIRR recorded a Return on Capital Employed (ROCE) in FY18 of 34%, an increase of 300 basis points over FY17 and compared with the median 12% ROCE of its peer group, Ruralco, Nufarm, Ridley Corp and Elders. AIRR’s ROCE has consistently outperformed its peers since 2012.

Valuation —AIRR’s Board has historically commissioned an independent valuation each year to fix the price for share transfers undertaken in the next 12 months. The most recent valuation was undertaken by CoggerGurry, the Group’s independent auditors, at 30 June 2018. The future maintainable earnings method was used and resulted in a valuation of $7.89 per share. In our view, the valuation parameters were conservative, discounting the peer group by 20% and applying a minority interest discount of 10%. We have also utilised a compco valuation, but include NZ company, PGG Wrightson, and US group Nutrien, which owns Landmark, a direct competitor to AIRR. If we apply the current peer EV/ EBITDA multiple of 9.99x and the same discount rates as used by CoggerGurry, we arrive at a compco valuation of $9.85 a share. This implies a price to earnings ratio of 10.3x, well below the 15x long term PE of the Australian share market. Under the PrimaryMarkets trading platform, the shares now trade at prices determined by buyer and seller demand and the last traded price was $7.89 per share, putting the company on a PE ratio of 8.2x and at a substantial discount to the broader listed market and its listed peers.

TYRO PAYMENTS LIMITED

Tyro is a provider of payments and banking infrastructure and services to Australia’s small to medium enterprises (SMEs). In FY18, the company processed $13.4bn in transaction volumes, a year on year increase of 26% and an acceleration of the 23% growth rate delivered in the prior year. The Compound Annual Growth Rate from FY12 to FY18 in transaction volumes has been ~29%. Our analysis demonstrates that there is support for valuing Tyro above the last traded price of $1.10 a share and the 6-month VWAP to August 31 of $1.078 per share.

Key points

Tyro reports strong FY18 revenue and customer growth — Tyro has reported FY18 revenue growth of 23% to $148.3M, driven by a 26% increase in transaction volumes and 27% lift in merchants over the prior corresponding period. Tyro added close to 5,000 new merchants to its payments business in FY18, taking the total number of merchants using the EFTPOS/payments platform to more than 23,000. Transaction volumes increased by more than 30% in 2H18 over the prior period. Tyro now commands an estimated 7% share of its target market of transacting small-to-medium enterprises in Australia.

Demonstrating the benefit of leverage — Tyro’s nascent merchant cash advance, unsecured loan product delivered $25.2m in loan originations in FY18, an increase of 127% and demonstrating the opportunity for Tyro to leverage its merchant relationships into ancillary products. This product has only been offered, so far, to ~4,000 of Tyro’s 23,000+ merchants. Similarly, activations of the Tyro Bank Account – a fee free and interest paying business transaction deposit account – grew 262% to 1,285 in FY18, versus 355 in FY17.

New Initiatives — Tyro has announced a series of “firsts” in recent months, becoming the first bank to launch “least cost routing”, and the first Australian bank to forge a seamless, all in one EFTPOS solution with Alipay for Tyro’s merchants. It has also secured exclusive rights with six of Australia’s leading hospitality Point of Sale (POS) providers to connect to the Tyro Platform designed to streamline connectivity to third party apps.

Successful leadership transitions — Long-standing NED Rob Ferguson stepped down from the board in July 2018, having completed a nine-month stint from June 2017 as acting Managing Director and acting CEO before handing the reins to new CEO Robbie Cooke in March 2018. Rob has been succeeded by NED David Fite who brings several years’ banking experience including senior and group executive roles at Westpac and Japan’s Shinsei Bank.

Reverse DCF demonstrates last traded share price of $1.10 is assuming conservative growth — We have conducted a reverse DCF to determine what is implied in the last traded price of $1.10. We have applied a WACC of 11.0%, Beta of 1.25 and terminal growth rate of 2.2%. Tyro’s last traded price of $1.10/share implies market share of 13.2% in 2028 and a compound growth rate in revenues of 12.5%, a conservative growth rate, in our view.

Compco valuation at a premium to last traded price — Our analysis has derived multiples from comparative companies in Australia and the US in the payments processing market. Including Australian peers, the compco valuation is $1.76/share, excluding the Australian peers, tis rises to $2.08/share, reflecting the relative size and maturity of the peer group.

Capital Raises

Growth equity opportunities for wholesale/sophisticated/accredited investors.

JUGGLE ST – CHILDCARE/HOME TUTOR JOB PLATFORM – A$1.25M SERIES A CAPITAL RAISE:

Since launching in December 2014, Juggle St has created a neighbourhood marketplace providing a real-time job platform to help working families manage their busy lives. The marketplace already has over 52,000 registered users across Australia and New Zealand. The Company is revenue generating and on track to be cashflow positive in early 2019.

More information

In Australia, women’s workforce participation is 59.4%. One of the most difficult parental challenges is finding and sourcing reliable, trusted help in an efficient and speedy way. There are 2.1m working mums in Australia, this is Juggle Street’s target customer (aka Kelly). On average Kelly lives on Juggle Street for 15 years.

Kelly is responsible for the majority, if not all of the childcare decisions in her household. Juggle Street was created to solve Kelly’s multiple pain points. Juggle Street is NOT just a babysitting app, it’s an on-demand job platform built for many family jobs, including before and after school care, nannying, Au Pair, home tutoring, and in-home age care to name a few.

Unique real-time supply & demand guarantees fair market pricing:

  • Parents set the price they are willing to pay for each job
  • Helpers decide if the job is “worth it” and apply or decline
  • Hourly rates posted and accepted average between A$10-A$30 p/h
  • Helpers get paid cash by the family at the end of each job

Juggle Street’s disruptive business model has created an affordable, scalable marketplace built on its world leading technology platform. Juggle Street is unlocking an entirely new market of people who offer Local Services like babysitters, nannies, Au Pairs and home tutors but have never before advertised online. Juggle Street has a unique supply and demand pricing mechanism with a leading-edge scalable tech platform. In July Juggle Street expanded its childcare offering to include Au Pairs and launched into the burgeoning Home Tutoring market. Juggle Street will launch in New Zealand in August, with the UK targeted as the next geographic expansion.

Services:

  • Childminding
  • Home Tutoring
  • In-home age care (launching 2019)

Revenue Model:

  • Families – Juggle Street is free for parents to join and connect with trusted helpers in their neighbourhood. To transact with helpers, families have the option to pay for each job they post or subscribe to a
  • Helpers – Juggle Street is free to join and use for helpers (potential future revenue stream).

Investment proposal

Series A raising A$1.25m:

• Amount raised: A$905,000

• Amount available: A$345,000

• Pre-money valuation: A$5.0M

• Share price: A$0.26 each

• Post-money equity position –

– A$1.25 mil = 20.29% equity

– 18.47% fully diluted

• Total raised since July 2014 $2.4m

Board of directors

The Company recently added Hugh Bickerstaff and Marina Go to its board. Hugh Bickerstaff, chief investment officer at Investible, has joined as non-executive director, while Marina Go, chair of NRL club Wests Tigers and non-executive director of organisations including Energy Australia, has come on as a non-executive director and Chair.

TSM – FIELD SERVICE MANAGEMENT SOFTWARE – A$3M CAPITAL RAISING:

TSM (or The Service Manager) has extensive experience in delivering leading-edge software solutions in the field service management industry. With a team of 15 and an active customer base of 400 companies, the Company is well-established and poised for significant growth. TSM recently launched ServiceVu, its next-generation pure cloud product infused with the DNA of our legacy product developed over 25 years.

The Field Service Management Software market is poised for significant growth over the next 5 years:

  • Field Service companies (e.g. HVAC, Electrical, Plumbing) have traditionally been tech averse with a low-level use of vertical specific job management software adoption (<25%)
  • Large Australian market with 80k companies worth over $50B annually
  • Increased competition, consolidation and cost pressure driving need to streamline and

optimise businesses

There is a significant unmet need in the market for a solution which is flexible and has specific workflows and features for market verticals:

  • Alignment to business workflows most important factor on software selection from market

research

  • Ability to implement business rules, validation, automation, report customisation and integration with other systems are critical to a company’s efficiency and effectiveness
  • Competitor’s products are inflexible and cannot cater for vertical nuances (e.g. HVAC services (installation vs maintenance) and customer base (residential vs commercial) vary dramatically).TSM is seeking A$3M in growth capex (pre-money valuation of A$7M) to accelerate development and marketing of ServiceVu over the next 18 months providing additional cutting-edge functionality, enabling international expansion and establishing TSM as a leader in Field Service software across multiple market verticals.

Use of funds

• Accelerate development of service management platform (~A$1M)

– Further development of ServiceVu including an HVAC specific variant, through the hiring of an additional 2 full time developers

– Engagement of UI experts to aid in software look and feel and creation of self-help training courseware and documentation to facilitate deployment (immediate)

– Hiring of support and training staff member

•  Establish brand/product awareness and promote trial of software (~A$2M)

– Increase brand awareness through marketing initiatives (SEO, social medial, advertising, conferences, website, collateral)

– Extension of existing dedicated sales team and sales channels in Australasia

– Hiring of dedicated sales team and development of sales channels in US

With ServiceVu (leveraging Microsoft’s .NET framework and hosted in Azure), TSM will rapidly scale and take advantage of the latest software trends such as AI, IoT and Augmented Reality to provide world beating software capable of handling the most demanding Field Service challenge.

The Biggest Risk to Markets

Forget a potential trade war, geopolitical unrest or ‘the Trumprisk’. Rising inflation is the single biggest risk to investors now.

Torsten Slok, Deutsche Bank international economist reaffirmed our thinking recently stating in a CNBC interview “I think inflation is the mother of all risks here.”

Traditional measures of inflation in the U.S. have steadily risen in recent months, after anemic price pressure for the near decade since the end of the global financial crisis. This comes at a time when the Federal Reserve is hiking interest rates and the economy is broadly enjoying a recovery, uncertainty surrounding the re-emergence of substantial inflation has once again captured the market’s attention.

Every investor has been waiting for inflation, literally, for the last nine years, since the recession ended in 2009. Everyone predicted an inflation event post the GFC as fiscal and expansionary policies were pursed so very aggressively, markets eventually grabbed hold but inflation stay scarily silent.

You could ask why are we starting to see inflation rise now, even after the fed has started increasing rates. The most likely answer is the strong US dollar, an extended and immense fiscal expansion lasting more than a decade pushing  the  economy toward  overheating, a very tight labor market, and recent (albeit modest) price pressure in the wake of trade war possibilities and the constant tariff talk.

It seems like the emergence of inflation has been well forecast, with a recent survey of fund managers by the Bank of America, resulted in a net 82 percent of respondents expecting the core consumer price index to rise over the next year.

Earlier this month, inflation numbers came in hotter than anticipated, signalling inflation pressures could be mounting. The Labor Department reported its CPI rose 2.7 percent year on year.

Slok said further evidence of rising inflation in the coming months would allow the Fed to hike interest rates perhaps more aggressively than the market is currently pricing in. This has been seen by the 10 year treasury note increasing to around 3.15% the highest it has been since the start of 2011.

“If you begin to see more realization of, well, maybe we will have some overshooting in inflation, that will certainly have implications not only for rates, but also for equities, and ultimately, also for the dollar,” he said, adding overshooting inflation targets doesn’t necessarily mean a breakdown in the equity market — so long as the 2 percent mark is not breached substantially to the upside.

“It depends a lot on what the exact profile for what inflation will be. The worry here really is that if inflation does overshoot to the upside, and the biggest worry is, is the market really prepared for more inflation? Then you could have more risks being injected,” Slok said.

 

Another Veteran investor Jack Ablin is also backing Deutsche’s call about inflation.  He believes the U.S. is inching closer to an inflationary environment not seen since 1980 due to two chief factors: Federal Reserve policy and the trade war.

“We’re starting to see some of it. For example, wage growth [is] trending towards 3 percent, [higher] oil prices and so forth,” the chief investment officer at Cresset Wealth Advisors.

Even though he views inflation as one of the biggest near-term risks facing investors today, Ablin isn’tpredictingthe 1980s’ cripplingrate near 15 percent. Right now, the Federal Reserve has a 2 percent target for inflation for 2018.

“I’m not worried about runaway inflation,” he said. “We kind of cured that in the late ‘70s and early ‘80s. However, in order to prevent runaway inflation, we need an aggressive interest rate policy.”

According to Ablin, it could prompt the Fed to overshoot — eventually lifting interest rates above fair value in order to keep inflation benign. Pair that with the U.S. looking to bring production back home, and Ablin predicts it’s a recipe for an inflation comeback. It’s a trend that’s been absent from the economy for almost four decades.

“This  trend  towards  mercantilism,  in other words   we   want   to  do  all  of  our business domestically and try to keep trade to a minimum, has the potential to  reverse  that pendulum that swung in favor of globalization, in favor of higher productivity, in favor of lower prices and start to shift that the other way,” he said. “The bond market is beginning to get a little concerned about it. Stocks are not there yet.”

He warns that ultimately higher inflation would undermine both stocks and bonds simultaneously, suggesting it’s not  too  early for investors to reduce risk by turning defensive. Ablin doesn’t have a hard timeline, but he sees the potential for inflation to hit stocks hard within the next couple of years.

He likes industries with pricing power such as health care, materials and energy. He also would look to make a move on one of the most interest rate-sensitive groups. “Short REITs,” Ablin said.

Hours before Powell spoke, Amazon.com Inc. announced plans to raise its minimum U.S. hourly wage to $15 effective Nov. 1, applying to more than 350,000 full-time and seasonal workers in the country. That followed moves by other large retailers, including Target Corp. and Costco Wholesale Corp., to boost pay. With interest rates increasing, any investment that lives of a fuel of cheap debt, like infrastructure or property trusts should be starting to worry.  Continue reading “The Biggest Risk to Markets”