Pinned straw:
07-Feb-2024:
Rapid-profitable-growth-delivering-H1-Adj-EBITDA-of-$26.1m.PDF
CTT-H1-FY24-Appendix-4D-and-Financial-Report.PDF
CTT-H1-FY24-Results-Presentation.PDF
Market Like!
Tony Hansen at EGP would be relieved...
As you can see with his market capitalisation bands, over half of Tony's EGP CVF portfolio is invested in microcaps with market value of less than $200m. Of the 8 disclosed positions that made up his top 10 positions as at 31 December, 7 are ASX-listed (Tellus is unlisted), so here (below) are the share price performances of all 7 of those listed companies over the past 3 years:
Smartpay (orange line, +51.06% over 3 years) has come good in the past year, and BWF (Yellow, +16.25%) has a positive return, but Cettire (CTT) is the outstanding performer in the portfolio, having shot the lights out in Oct/Nov 2021, then fallen back to a negative return in the middle of 2022 before shooting up again over the past 12 months.
This only shows share price movement, so does not include dividends, so with dividends added the return on Dicker Data (black line, -3.78%) would become positive over the three year period, and the same is probably also true with Shriro (green line) because they do pay good dividends, but UOS (purple line) would remain a negative return and the PPK return over 3 years would absolutely remain negative, despite the spin-out of PPK Mining Equipment (PPKME) which is worth very little and is also very illiquid. Further Reading: PPK Group's difficult transition to be a technology company - Australian Manufacturing Forum (aumanufacturing.com.au) [31-Aug-2022]
The above graph may help explain why Tony's EGP Concentrated Value Fund (CVF) has underperformed their own benchmark index (the ASX200 Total Return Index):
Source: https://egpcapital.com.au/wp-content/uploads/2024/01/2023_12_1.pdf
Tony likes small companies, but his best performer, Cettire, has a $1.2 Billion market cap, so it's NOT small. Neither is DDR, at over $2 Billion. The second best performer of those 7 has been Smartpay (SMP) which has come back up over the past year, and their m/cap is now $353 million, however PPK, BWF and SHM all have m/caps of less than $90 million.
Life can be tough at the small end, even for a full time professional fund manager.
I don't know if Cettire fits this discription well because I don't follow the company closely, but I personally prefer to have a core of larger companies that are high quality in terms of their management, their business model, their industry position, and their total shareholder returns over 5 and 10 years - or longer when applicable, and then I can add some higher risk smaller companies in around the edges. Smaller companies are much more likely to triple or quadruple in price than larger companies are, but larger companies - as long as they are good quality larger companies - are also generally less likely to lose 80% of their market value over one, two or three years. You can make a living out of investing at the smaller end if you are very, very good at it (like @Wini clearly is!) but for us mere mortals, it can be difficult to do it consistently, year after year.
I like a mix of companies, but the majority of my larger portfolios are larger high quality companies - like CSL, TNE, ARB, NST, WES, FMG, NWH, MND, MIN, MAQ, ALU, AD8, ABB, CDA, JLG, NCK (mid-sized but still very high quality), and so on... and then I'm more comfortable having exposure to smaller companies with higher risk but potentially higher upside potential, like EGL, AVA, DVP, GNX, etc., understanding that they may trade sideways or even head south east for a while before they take off, if they take off, but I can afford to have a few that don't, and sell out of those at a loss at some point when I accept that my investment thesis for that particular company is busted, as I have done with ZNO (sold in early 2022), 5GG (April 2023) and EVS (July 2023). All small positions at the time I bought those three, and even smaller positions when I sold them, but they've dropped further since and even if they rebound I'm not going to be unhappy because I followed my process.
I should point out however that share price movement doesn't determine whether or not my investment thesis is on track or busted, unless it's share price movement over a LONG period of time that alerts me to the fact that I must be missing something important about this company and I need to do some more research to find out what it is. I have never invested in Cettire (CTT), but if I had, say three years ago, I would have been feeling fairly smug about that in October and November 2021, but I would sincerely hope I would NOT have sold out in the first half of 2022 just because the share price was heading the wrong way, unless I was trading the stock, and planned to buy back in when they were back in an uptrend, but as an investor rather than a trader I should have held, as long as the business was going OK. The reality is a little more cloudy however because if memory serves, Cettire did not live up to their own guidance during that period so it appeared they were not scaling as well as had been expected and the rapid topline sales growth wasn't there either, so the hype came out of the stock.
However, this latest report seems to prove that there was a decent business underneath all that and those were just teething problems rather than a house of cards collapsing. But like I say, I don't follow them too closely. Not really my sort of business. I've never really been into the new wave of online only retailers (Kogan, Temple & Webster, etc.) - I prefer Nick Scali (NCK), ARB & Wesfarmers (WES, who own Bunnings, Officeworks, and dozens of other brands) where they can sell online in addition to in-store. But each to their own.
I reckon they'd be some happy Cettire shareholders today. It would be nice if they can go on with it tomorrow like NCK did today (+5.93%) after their +16.57% rise yesterday on the back of their stellar report.
Thursday 8th Feb, 2024: 
Yeah they did!
NCK Reported Tuesday, SP +16.57% (+$1.99 to $14.00), then rose another +5.93% yesterday (Wednesday, or +$0.83 to $14.83).
CTT Reported Wednesday, SP +25.24% (+$0.80 to $3.97), then rose another +5.54% today (Thursday, or +$0.22 to $4.19).
NCK even managed to rise another +10 cents today (+0.67%) to $14.93, suggesting these big moves on the day they report (+16.57% for NCK, +25.24% for CTT) was/are NOT the market overshooting to the upside. Because they ARE going on with it on subsequent days.
I'm not convinced that Cettire is anywhere near as high quality as Nick Scali is, but then Cettire is much younger so they don't have the benefit of the long and consistent track record of excellent shareholder returns that NCK has, and perhaps Cettire will also have a great track record themselves one day. I'm still not buying any CTT, I am happy with my current Consumer Discretionary sector exposure (which includes NCK), but it's worth noting that the market has treated these two great reports in similar ways - a big spike up on the day, and then a reasonably decent move up on the next day as well.
I had heard that there are studies that show that the majority of companies whose share prices rise sharply on the day they report tend to be even higher one month later, and that makes sense in the context that some people don't manage to digest new information as quickly as others, and broker reports (and upgrades, and increased target prices) take a day or three to come through and get read.
It's interesting, because I'm one of those people who like to buy good companies when they're down, hopefully due to temporary issues rather than structural ones, although I'm often happy to increase my exposure as they rise, as long as it's a steady rise, but I rarely buy into a company or buy more stock in a company that's just had a double digit percentage increase in their share price. I suppose I buy my shares like I buy my groceries; I have a shopping list, so I know what I want to buy, but I'm happy to wait for some of those items to go on special (get cheaper) before I load up. And if Avocadoes go to $5 each, I'll get something else instead. Avocadoes are good, but they're not that good.
Some people like to buy shares that are rising. I do too sometimes, but I prefer them to have fallen first before they start rising. Like NCK - I bought them most recently at $9.34 each on April 27th last year (2023) - I'm not trying to pick the bottom - just picking a price I'm happy to pay, and comfortable in the knowledge that every time NCK gets sold down, the bounce back within a few months.
Six weeks after I bought back into NCK at $9.34 (on 27-Apr-2023), they were down at $8.30/share (June 6th), so $1/share lower, but I wasn't concerned. I wasn't trying to pick the bottom, and I clearly didn't, but they came back up, as they always do. In the Covid panic in early 2020 they got down below $4/share, and in mid-June 2022 the NCK SP had fallen from $16/share (on 15-Nov-2021) all the way down to $7.10/share.
Anthony Scali seems to be very candid about the risks to the business so he does tend to frighten the market at times with his frank assessment of potential risks the company may face, many of which are out of their control, however the market may eventually get used to the company's tendancy to underpromise and overdeliver, and also to the superb navigational skills that NCK management have demonstrated when facing obstacles, bumps, potholes, potential dead-ends/roadblocks, etc. The best management teams can even handle wrong turns, as long as they realise reasonably quickly that they've made a wrong turn and get back on track without too much damage. I can't think of an example where NCK have had to do that, but there may be one or two. They tend to be fairly measured and responsible when expanding into new geographies and expanding in terms of the range of things they sell (beyond furniture I mean). On the whole, they tend to stick to their knitting; they keep on doing what they know they do best.
Enough about NCK already - back to CTT - it's early days, and Cettire management seem to be not too shy in relation to self-promotion and setting high targets for themselves to aim at - which means they ARE a different type of management to the one at NCK - but it doesn't mean they will necesarily be less successful over their journey. It's a different style, and perhaps it's what we should expect - and what is required - from a young company that's fully digital so there are no stores out there to drive by and no TV ads about their latest specials, and they have to get the word out that (a) they exist, (b) they provide a decent service for their customers and (c) they make a reasonable margin while they're doing it. Not big margins, but decent, and if they can scale well from here they can make a lot of money, even with single digit margins, as long as they have higher volumes of sales growing at a good clip.
Source: CTT-H1-FY24-Results-Presentation.PDF (Slide 5)
I've added the green curved line to show sales revenue trajectory to date, and I've also circled the EBITDA margins in orange, which seemed to have settled at around 7%.
Correction: I did mention in my straw yesterday that I seemed to remember that topline sales growth seemed to have suffered or been lower than anticipated in that early 2022 period - which would have been H2 of FY22, but the sales growth actually looks fine - so I was wrong about that. It's the negative EBITDA margin in FY22 (when they actually lost money) that did the bulk of the share price damage; it looked like they couldn't scale without significant cost increases, but they've since got their costs back under control and shown that they can scale and maintain a 7% EBITDA margin (see note at the bottom of the slide above about this measure) while doubling sales in FY23 (compared to FY22) and being on track to possibly double sales again in FY24, or go close to it.
So, yeah, 7% is not high when you compare it to the 65.6% gross profit margin that NCK enjoy or NCK's 19% net profit margin after tax ($43m profit after tax on $226.6m revenue for the half - Source: NCK-1H-FY24-Investor-Presentation.PDF, page 2), but CTT's sales revenue for the half was +56% higher than NCK's ($354.3m vs NCK's $226.6m) and CTT's revenue is growing a lot faster as well, so I wouldn't be too unhappy with Cettire's margins if they can maintain them and also maintain anything like this sort of top line growth.
And I guess that's the nub of it for me, I'm not sure that they can maintain all of that. They might well do, but I can't be confident around that. I don't see strong competitive advantages like I do for a bricks-and-mortar retailer like Nick Scali who have built out a substantial network of stores and are an established brand that almost every person within their target market (us) know well. But then perhaps there are less risks with Cettire, like they have many suppliers, so if they have any major issues with one or two of them it probably doesn't result in a big problem for Cettire or their bsuiness model, whereas NCK deal mostly with a handful of Chinese supplier as far as I know, although their website claims they source furniture from all around the world.
In March 2018, Anthony Scali, the MD of Nick Scali (whose father Nick Scali founded the company), entered into an agreement with Jason Furniture (Hangzhou) Co., Ltd (KUKA) to sell 11.04 million of his shares (half of the Scali family holdings at the time) to a subsidiary of KUKA for $7/share. At the time, Anthony said the family would continue to hold 11.04 million shares in Nick Scali following the transaction, representing 13.63% of the company. They have sold down further since, and now hold 7.95% of NCK. KUKA is a Chinese company listed on the Shanghai Stock Exchange with a market cap of approximately $6 billion at the time (in March 2018). KUKA is a manufacturer and designer of furniture sold to approximately 700 customers in 120 countries, with annual sales of $1.4 billion in 2017. The Chinese company is one of the largest manufacturers of furniture in China, and had been a supplier to Nick Scali for more than 10 years. If they still supply NCK, it will now be around 16 years. (Source: Nick Scali's MD offloads half his shares to Chinese company (businessnewsaustralia.com) and Scali sells half stake in $77 million deal (insideretail.com.au))
KUKA then sold their entire stake in a block trade (using UBS) in early September 2019 at $6.65 each according to the AFR (UBS in Nick Scali block trade; Kuka sells out (afr.com)), being 35 cents/share less than they paid for them. Go Figure!
Anyway, back to risks and suppliers. Perhaps NCK has some supplier risk, but then again, perhaps not - they don't disclose too much and I would expect that Anthony and his team have contingency plans in place if there are issues - I imagine he wouldn't have put all of his eggs in a single basket. In fact, long-standing relationships with reliable suppliers could well be another competitive advantage that NCK enjoy. One advantage that Cettire have is a much larger TAM - being a fully digital retailer, in terms of all the buying and selling being done online, means they can be a truly global retailer, selling to anybody with a computer or phone and the ability to pay up front for what they want to buy. That's also an advantage that NCK have over many other physical-store retailers - NCK's customers pay up front for their furniture and then NCK order it from China and then deliver it when it arrives at their store or warehouse, so they not only do NOT have issues with any bad or doubtful debts, they also have excellent cashflow. But that applies to Cettire as well of course, as online retailers also charge up-front for goods before they are sent to the customer.
But yes, Cettire's total addressable market is a LOT bigger than NCK's is, and their ability to scale quickly apears to be much more favourable, as you would expect with most online retailers. And Cettire can add stuff to their range as quickly as they can code it in I suppose, as long as it's considered a "luxury item", they'll sell it, so it's just a matter of negotiating a favourable price with the manufacturer or supplier. I imagine that like many online resellers, the gear they sell is usually shipped directly from the manufacturer or supplier to the end-customer and Cettire just clip the ticket for organising the sale via their website. If so, perhaps their low margins are simply because they can't get bigger discounts from their suppliers and if they don't provide a reasonable discount to their customers (compared to what they would pay in-store at a physical store) then CTT may lose their appeal and their customers, so it's a balance; their business model appears to be negotiating discounts for bulk purchases and then passing some of that discount through to their own customers so that they (Cettire) represent value to those customers.
I reckon I'll watch Cettire for a couple more years and see how they go. I may get interested at that point if they have been able to maintain this sort of momentum through until then, or something close. I'll also be interested to see how they allocate capital in terms of returns to shareholders vs reinvesting into further growth or accelerated growth - hopefully their business model is relatively capital-light and they won't need the cash so will be returning it to shareholders, but if not, I'll be interested to see where it's being spent. And that's all assuming they've been able to maintain or increase those margins.