What added value this month
The performance was driven across the portfolio given the strength of the market. We have detailed some of the better performing companies in August we own from the more than 30 companies that we own in the portfolio.
PointsBet (+84% in 2 weeks)
PointsBet (PBH) is a gambling business that operates in Australia and the United States. There have been legislative changes in the US that have resulted in what is effectively a land grab for existing gambling licences.
The US sports betting market is big and Americans are crazy about their sport and more so placing bets on sports. In 2018, the US Supreme Court allowed States to legalise sports betting. 18 of the 51 States have legalised sports betting since the court decision. PointsBet is one of the companies who reacted quickly and starting acquiring licences in individual States, the law means that online players have to tie with with licenced on premises wagering venues. PBH took 4% of market share in New Jersey and are well prepared to expand into other States when they legalise sports betting.
Since legalisation has recently been enacted, every bookmaker is entering the market roughly at the same time. It is crucial for a bookmaker to build its brand name and a strong loyal customer base in this new market. The recent NBC Sports deal is a great way to get exposure to target customers. NBC Sports is the largest sports network in America. NBC got 20% of PBH including shares and options. NBC has a strong incentive to advertise PBH, and from this PBH can develop their reputation in America.
We took a small position in PBH because we saw the potential in US the market and the size with which the industry could be. In an ideal world we would have traveled to the US to get some more conviction and make the position more meaningful.
PBH announced in conjuction with their results that that had struck a deal with US broadcaster NBC and that NBC would become a strategic shareholder in the company. In a market driven by positive news flows, the share price doubled on the back of the strategic alliance and the shares went on a run from the $7 level, to at one point being intraday over $16.
We took the opportunity to exit the position and lock in an 84% profit from a very short holding period.
We still like the outlook for the company but we are now cautious about its valuation.
Redbubble (RBL), one of the companies we have written about previously in our newsletter, links buyers and artists in one market place, with over 1 million independent artists supplying unique designs, and an audience who amongst other things have spent over $20 million on face masks with those unique designs printed on them (refer back to our previous note for a more detailed explanation of what they sell).
RBL essentially provides a print-on-demand service for independent artists, solving artists’ overstock and inventory risk problems.
Well know comedian and actor Ricky Gervais was last week giving the site a mention to his Twitter followers, after joking about buying his wife a T-shirt with his head printed on it. This just provides further evidence that company is gaining traction in key international markets.
We have taken some profits in Redbubble, again on valuation grounds.
Nearmap is one of those companies that should gain more traction in a world that is socially distancing. It is a an aerial imagery company (a bit like what you see in google maps but more detailed, less blurry). Nearmap focuses on capturing images that cover around 60% of the population (that is a bit confusing). They focus on providing detailed aerial imagery of suburbs and cities based on the density of the population. This gives them a great chance of selling the use of those images to the businesses in those populated areas. Imagery coverage is in four countries, the United States, Canada, Australia and New Zealand.
You might wonder who would use this service and how much demand there actually is for aerial imagery. Well its big and its growing, trades contractors love it when quoting jobs. Take for example a fencing contractor. They can provide a quote to a prospective client all while sitting at their PC, saving the time of driving to site, measuring up and then driving to the next job, most can be quoted online quickly. Councils in some regions are requirings aerial images attached to development applications and at the same time councils can compare before and after photos of developments to ensure that they comply with their development application. I know a growing number of "tradies" using the service. Architecture, construction and engineering, utilities and government are the key users but the industries using this service will grow.
The annualised contract value increased by 18% to $106 million. The churn rate for the second half was low at 2%. So the product appears to be sticky, showing the resilience of the subscription revenue base and the dependability of the product.
Management noted that there was no discounting to Covid vulnerable businesses during FY20.
The shares have staged a strong rebound from the march lows and are now trading at levels that are above their pre-covid levels. We are still holding this position.