A few interesting results and situations I thought worth discussing, held but not large positions.

DMP FH24

One common outcome of poor results and pressure on the share price is that management is much more forthcoming with information about their businesses.

And so it was for DMP. Some interesting perspectives were delivered.

The model requires growth to succeed, DMP plans to have a network 1.9X larger by 2030. If that happens then the stock price will be higher. For that to happen franchisee stores (3x larger than the corporate store network) need to grow and that occurs when franchisees are making an adequate return that they then have confidence to invest in new stores. DMP management has intimate knowledge of this equation and what is required to spark growth.

The QSR industry is a dogfight. The battle is fought out amongst various fast-food chain offerings and what can be to outsiders’ small differences can impact results in a big way. One theory that I think we can discount is that Domino pizzas are no good or that certain countries don’t eat pizza, the point is QSR is big in almost all countries but execution of products and price against strong competition can determine a broad range of outcomes. So what is happening with the various markets?

DMP markets break down into those going well and those significantly struggling. ANZ and Germany are the big markets doing well, while Japan, France and Taiwan are struggling. Japan and France are large markets for DMP and Japan is relatively recent entry.

During the last results call it is apparent that management is looking closely at what works and what doesn’t in these markets. Successes in other markets such as aggregator partnerships, new products, and daytime promotions are being assessed for cross-fertilisation. World-class execution requires micro-management for each market.

Interesting points on France are that management has determined that offline pickup is weak, this is where competition is most severe, France is a big QSR market and very competitive, the competition (burger/chicken?) has a larger media budget and DMP needs to improve in offline pickup which is a large market in France. DMP seems to have missed the low-price point battle in this market. There seems a be a large class of people that are going to eat a burger, pizza or chicken and pick the best value on the way home, pricing for value is critical. As I said a dog fight.

Japan is a different market with infrequent buying cycles that make it harder to assess launch successes and stock issues. DMP believe they have a very good understanding of what the market wants, are research lead and are targeting barbell menus with 1000Y as a tipping point, ie need profitable products under this level.

Overall market growth, DMP see the ANZ pizza market growing, Japan pizza taking some share and seeing some momentum, Germany pizza growing, France DMP gaining share in a flat pizza market, and Netherlands pizza growing. The markets are ok.

In terms of franchisees, there was information on the underlying profitability. Franchisees usually start buying around 3X EBITDA. They need to see a track record and base profits and they will commit to new stores. DMP disclosed group franchise partner weighted average EBITDA per store for the last four years. These have fallen from $138k in 2021 (C19 peak) to $95k in 2024. The cost of a store is $300k of which DMP incentivises $100k.  the economics on these numbers are still ok, but I suspect there is a long tail so the average needs to be higher to stimulate the required growth but is not an insurmountable task. It sounds as if the franchisees geared up acquiring new stores into C19 given the excess profits and need to deleverage to start buying again, a timing issue.  

A bear story is that DMP management is spread too thin, in very competitive markets and will struggle to earn returns. That in turn undermines the profitability that is required to generate the franchise investment to drive the outsized growth we have seen in the past with this one. That is a genuine concern. Add to that the fact that DMP raised money and then downgraded, which would not go down well with institutions. That is why the share price is where it is at.

What impressed me in this call was the level of detail, research and knowledge the company has in its markets and a proactive plan to turn this around. Not that the model is broken, but the strategy to protect margins was in hindsight wrong, it let competitors in under the targeted price levels and DMP lost share. That is now recognised and being addressed.

At $40 the share price to me assumes that the current all-time lows in margins in Japan and France (could be losses or close to it) continue and that seems harsh given the optionality the company has.

That’s my view could be wrong

PXA FH24

I hold this stock at a modest weighting, it is a complex story, and markets don’t like complexity.

My thesis on PXA is quite simple, being that the Australian business is a natural monopoly and that replicating the business in the UK which makes sense from an industry efficiency point of view will see a much higher stock price. What is going wrong here?

The accountants have done a great job in blurring the profitability of the base business. PXA was created through a divestment from LNK which in accounting standards effectively means an acquisition market value. That brings on a huge goodwill asset on the balance sheet that then is amortised. That amortisation demolished profits while the goodwill demolished ROE measures. All of this is accounting nonsense, imo, and cashflows are the important measure and they are relatively stable.

The Australian business is exceptionally strong. Regulatory spending for interoperability, which in my view is a waste of time and resources but is a cost of play for PXA, must be borne and overcome. Like many tech companies, there are costs to maintain the lead and the company spends 10-15% of revenues on capex which seems high and should decline over time. We also saw evidence of pricing power for the exchange. I have very few criticisms of this business it is critical infrastructure, doing a good job, the race has been run and won here, and should be priced accordingly (ie high).

What has management been doing with these rivers of gold? Spending it that’s what. In fact I have been quite disappointed with management, they appear to have been kids in a candy shop and sprayed capex into moonshots domestically while undertaking a huge endeavour to replicate the business in the UK. There is now a new CFO who sounds much more disciplined.

The domestic product add-ons look to be a sideshow, imo, I'll be happy if they wash their faces, ie generate enough cash to support their growth.

The UK venture, I wrongly believed would be in full swing by about now. The share price would be in the high 20s and everybody would be happy. Not so by a wide margin. The ability to succeed in Australia was helped by the government backing and then the ability to coordinate banks, law firms, brokers etc to all engage. There appears much less willingness on the part of institutions to assist the move to the UK. That means, longer, more costly, and more chance of failure, even though the model is effective and proven in Australia. Effectively all the company’s free cashflow has been put towards these endeavours.

Progress in the UK has been slow and management has made a couple of acquisitions to assist with garnering flow that came with some operational issues. Importantly new management was put in place in the UK and traction and momentum appear to be building. Encouragingly, a few banks have signed up to test the product albeit on available resource terms. This CY is shaping up as a crunch year for milestone success in the UK.

Management has made some poor moves in execution and could be criticised as naïve. The chairman and CEO are still in place, but a more disciplined tone has emerged in terms of expenses and results. The UK head is a key hire.

Fortunately, the Australian business, imo, underwrites a $10-15 share price. There is little doubt in my mind that it is a great business and will be difficult to seriously damage. The expansions can be looked at as optionality, with the bear case being an ongoing (years) cash drain without an end in sight, which is a possibility, but an exit to just leave the Australian business I think is already priced.

Held -persevere, if UK surprises then the stock could go much higher, imo.

MIN FH24

Did he really say that, balance sheet issues? well, Fxxx You! A lot is going on at MIN, an awful lot, is the pressure starting to tell on the CEO? MIN is a deep dive I will be undertaking over the next few weeks, there are a lot of balls in the air here. What did we learn from the result?

First back up, MIN is a darling on the ASX, it is (rightly) the favoured resource play, and it allocates capital rationally, often counter-cyclically, which differentiates it from many other resource companies that spend when they get the cash, ie top of the cycle. Not that long ago MIN was not well known and under the radar, that is no more. The company is spending enormously in a few different areas, confidence in and execution by management is critical at this juncture. Many times, have we seen the commodity cycle turn just as companies are over-exposed to capex with high debt. The commodities here are lithium and iron ore. The company also has its cash-generating mining services business, perhaps the best in Australia, but MIN is very much reliant on the iron ore price holding until debt comes down.  

What stood out to me was the evolution of the iron ore business. Traditionally, MIN has had short-life, high-cost mines, the newest venture, Onslow, will see MIN emerge as a real fourth force in long-life low-cost mines joining BHP, Rio and FMG. Numbers are just on the blackboard until we see the real operating numbers but faith in management's ability to deliver is high in this case, due to the track record. Management stated at current prices ebitda of $2.5b pa is expected from Onslow. MIN also flagged selling down a stake in the infrastructure which would help the balance sheet but appears to irk the CEO. The debt schedule looks ok with US placement market utilised, (low covenant), and not repayable until 2027, with debt to peak 6/24, when cash is expected from the capex. Currently, ND is $3.5b.  On the surface, it looks under control, assuming stability in the iron ore market.

As we all know the Lithium price has crashed and on my numbers after capex it looks marginally CF breakeven, which is probably a good outcome given what has happened. The company highlighted that they have used the excess cash to accelerate the strip, potentially helping FCF going forward. The strength of the MIN operations will be on display, with a poor price, and those industry players that survive unscathed will be in a better position coming out of the downturn. The diversification will help MIN weather the downturn compared to pure plays.

Management gave a longer-term outlook on volumes for each business and they highlighted how aggressive growth expectations are. The MIN figures are 2028e on 2023 volumes. Mining services +250%, Lithium +412%, Iron Ore +411% as well as establishing a new sizeable gas business. The gas business looks like a work in progress and could be placed into LNG, methanol or urea production, so lots of options and a lot of progress are required. The company is also establishing a new division Engineering and Construction, a full design and construction team, again a sign of expected strong growth.

In a call out to what returns are expected Min says 20% ROIC is expected all the time, but that the current (huge) capex is expected to garner 25% ROIC by 2025, and dedicated capex in 2023/4 will deliver 30% ROIC, big numbers.

Some numbers on iron ore costs per $/t were given that were US$47 into China plus $9/t shipping and $9/t infrastructure. Highly profitable at current rates. Probably puts them high versus existing operators but well below the current marginal producer.

More work to do on the valuation given the large amount of data coming out, and the enormous growth plans. Given the growth, it will swing on the LT Iron ore price, important by the time they get to the full run rate 50mtpa in cy2027. At this stage I think below $60 is ok but not great value, especially given the Li price. A sensitivity analysis is critical for Min at his stage, I suspect it is a $55-85 range but we will see. We need to watch the progress on Simandou for all iron ore companies as the bear case. As an aside Simandou is part of the Vale Brazilian deposits when Africa and South America were joined, so they are high quality.

For me, I think of having limited exposure in this area most likely through MIN and maybe the royalty company DRR which I hold. I hope to get some upside numbers done over the next couple of weeks, after some serious number crunching!

held