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New Additions to the Portfolio

Baby Bunting Group Ltd (ASX:BBN)

Last month we purchased shares in Baby Bunting (BBN) following a sharp fall in its share price. The baby goods retailer updated the market on its half-yearly results, reporting lower-than-expected earnings in the first half.

We like BBN for the following reasons:

1. It currently trades at an attractive relative and absolute valuation. At its current share price of $2.70, BBN trades on an FY24 sales multiple of ~0.6x, a P/E of 14-16x (our estimate) and an implied value of $4.8m per store. This is cheap compared to its historical average of 1.1x sales, ~30x earnings and $7.6m per store.

2. It has a long runway of sustained and robust earnings growth. We expect BBN’s earnings to grow organically at double-digits over the next decade, aided by new store rollouts, a maturing store network and margin expansion.

BBN's earnings should be materially higher over the next several years, driven by a doubling of its store network. This has a two-pronged effect on earnings. Firstly, new store openings are accretive to earnings. A mature store generates ~$8m in revenue and earns ~20% EBITDA margins. It typically takes a new store around five years to reach maturity. Secondly, as the size of BBN's store portfolio grows and becomes more mature, the company should benefit from economies of scale, causing margins to expand over time. This should result in earnings growth outpacing revenue growth.

Smartgroup Corporation Ltd (ASX:SIQ)

Towards the end of last year, we added Smartgroup (ASX: SIQ) to our holdings, with our average price being around $4.60. Smartgroup provides employee management services in the form of salary packaging, remuneration solutions, fleet management and workforce optimisation.

At the time of purchase, the business was trading on a P/E of ~10x. With stable, consistent cash flows, a history of revenue growth and margin expansion, the business has generally sold for nearly twice that multiple. In addition, the demand for novated leasing (significant source of revenue) often increases with rate rises, as the cost of borrowing makes purchasing vehicles outright less desirable. Finally, a large portion of SIQ’s employee customers are within the healthcare space, and this sector will undoubtedly grow over time.


Any information has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives., financial situation or needs, It is not an offer or invitation for subscription or purchase, or a recommendation of any financial product and it is not to be relied on by investors in making an investment decision. Past performance is not a reliable indicator of future performance. To the extent any general financial product advice is provided in this document, it is provided by Glennon Capital Pty Ltd ACN 137 219 866, AFSL No. 338 567. An investor, before acting on anything construed as advice, should consider the appropriateness of such construction and advice having regard to their objectives, financial situation or needs.

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