Three global stocks and why we like them
Recent press has been dominated with reporting season and that reality TV show known as Federal Parliament. For serious domestic investors, the press has probably not been an ideal source of information on investment opportunities elsewhere. So, to bring you up to speed with what we like elsewhere in the world, which is I’ll confess a fairly narrow alternative, I thought it might be useful to discuss three global stocks we own in the Montgomery Global Equities Fund and why we like them.
Before accessing the Montgomery Global Equities Fund Managed Fund on the Australian Stock Exchange (ASX code MOGL) be sure to speak with your personal professional adviser. The same goes for investing in any of the stocks mentioned.
51Job’s is a Shanghai-based online jobs portal. The company provides small and medium-sized Chinese enterprises a critical online portal to advertise for, and recruit, white collar staff with revenues derived from fees charged to employers for placing job advertisements on 51job Weekly and www.51job.com. An infinitesimally small charge ensures the 51Job proposition provides employers with the highest ROI of any job advertising medium.
We originally invested in Nasdaq-listed 51Job between US$40-US$50 per share, on the basis that the company would benefit from the secular tailwinds of print-based job ads in China migrating online. We also believed that the price 51Job were charging an employer for a Job advertisement was such a small fraction of an employee’s salary that they would eventually raise prices. It also helped that a third of the company’s market capitalisation was represented by net cash and the shares were trading on a circa eight per cent trailing free-cash-flow yield. Finally, we were attracted to China’s online job portal space being favourably structured as a duopoly between two virtual equal number#1 market participants; 51Job and the Seek-owned (ASX:SEK) Zhaopin (NYSE:ZPIN).
Back when we purchased the shares, the price implied a gradual slowdown in employer account adds and no growth in Average Revenue Per User (ARPU). Since we acquired the position however, management has executed well on their strategy, and both the unique employer accounts count and ARPU have grown healthily.
And back in 2017, management confirmed they would raise prices, effective February 1, 2018. It was the first significant price rise since 2011. For capital-light platforms such as 51Job raising prices can have a material impact on operating earnings.
We believe 51Job still enjoys a long runway for growth. The company’s approximately 502,000 accounts represent just 10 per cent of the estimated number of small to medium Chinese enterprises that are online. Moreover, there are another estimated 80 million small to medium enterprises that aren’t online yet. So, 51Job serves just 10 per cent of online employers in China and just a fraction of a percent of all the small to medium enterprises in China.
Back when the share price was US$110/share we estimated the share price was implying the number of unique employers to grow at high single digits over the long term. Historically however the number of new accounts has grown in the ‘teens’ and as we mentioned, the potential market has hardly been dented so high rates of growth could continue for a long time.
The share price, we estimated, also estimated ARPU to grow at 30 per cent in FY18, and then slowing down to just 3 per cent p.a. longer-term.
In our view this represented a key mispricing. At US$110 per share, the market did not appear to be factoring in the potential of 51Job to continue to raise prices in the future. Given western equivalents, such as SEEK in Australia for example, charges about A$200 for an average white-collar job ad, which is about 2.6 per cent of the average Australian white-collar monthly salary, and 51Job advertising costs a fraction of one percent of the average Chinese white collar monthly salary, we believe a three per cent annual increase in ARPU over the long-term could be unduly conservative.
And keep in mind that the one-child policy now means that the proportion of the population that is working age is beginning to decline.
We currently expect 51Job to increase its pricing significantly over the medium to longer term, resulting in significant revenue growth and margin expansion. Of course, our view could change at any time.
The aforementioned estimates however were implied by a share price of US$110.00. Today the share price sits at just over US$70 after the share price slumped on the back of a recently announcement that 51Job is focusing their sales force efforts on higher value customer accounts, with the belief that reducing the number of clients per sales person can deepen penetration and boost overall customer spend via cross-selling and up-selling.
St James’s Place (LN:STJ)
St James’s Place is a UK wealth manager with a vertically integrated business model including a network of more than 3000 advisers and almost 600,000 clients.
We believe there’s a ‘virtuous circle’ at play here. Partners are attracted to the STJ platform by attractive economics, better brand, infrastructure and support and lower business expenses. Clients on the other hand, are attracted to the quality service, and among things, the cheaper access their adviser provides to global fund managers thanks to significant scale.
Meanwhile the company’s future revenues could benefit from long-term structural drivers such as the ageing population, the need to self-fund retirement, increasing financial complexity and a generally wealthier population.
We believe the current share price implies low single digit growth in both partner numbers and flows per partner. Over the past few decades however, growth in both metrics has amounted to mid to high single digits.
Moreover, management has guided to growth in advisers of 6-8 per cent and productivity increases up to the low teens, versus current estimated market implied expectations that new business flows almost stall from here.
Finally, we believe there is still a long runway of growth from consolidation and switching – for example, SJP has only 40 per cent share of client assets.
We believe Facebook is one of the greatest advertising businesses in existence and one of the most powerful advertising businesses ever created due to the treasure trove of data it has amassed on its users.
Unlike previous social platforms (think Myspace), Facebook has authentic user identities, and it represents the first time that a business has mapped a physical person to an online existence on a large scale.
One ex-Facebook employee we spoke to likened an advertiser’s use of the Facebook platform to “using a drug” because Facebook can offer extreme granularity with its targeting. Facebook offers advertisers the ability to target in on very specific cohorts of people. As advertisers become accustomed to Facebook’s superior targeting capabilities, a result of their rich data sets on users, it becomes difficult to switch to other advertising platforms.
It comes down to a question of ROI. While it’s difficult to comment on the ROI of FB vs other platforms (due to measurability issues), at a minimum the ROI of ad spend on non-digital mediums is much harder to prove. Intuitively, due to FB’s user targeting, it’s ROI should be very strong vs other platforms/advertising mediums.
At circa US$180 per share we currently believe the share price implies the following:
- Monthly active user (MAU) growth to taper down to low-single-digit % growth.
(Note, adopting such a rate, and using global population forecasts, Facebook’s MAUs as a percentage of the global population would move up from 20% in FY15 to 40% in FY30. But Facebook already has circa 28% penetration of the US & Canada population).
- ARPU growth of approximately mid-teens over the next five years, and then mid-single-digit to high-single-digit percentage growth beyond. On the surface, this might seem like aggressive ARPU growth, however there is a path to high growth if Facebook more aggressively monetizes it’s non-US user base. Currently the company earns an ARPU of about US$83 per user in the US. Elsewhere it earns just US$27 in Europe, US$9 in the Asia Pacific and just US$6 in the Rest of World.
Meanwhile, Facebook has only monetized its Facebook and Instagram platforms. It has not begun to monetize the opportunity it has with WhatsApp and Messenger.
At any time, any of the above companies, or their competitors, could make an announcement or behave in a way that changes our thesis as described above. The price could also change, presenting a different risk reward profile for us. At anytime we could change our opinion and our view of the company or its prospects and we may not publish that change.
For investors interested in gaining exposure to a portfolio of global opportunities, investigate the Montgomery Global Equities Fund, managed by Montgomery Global Investment Management. Access is available on the Australian Stock Exchange and the code is MOGL.
The Montgomery Global Funds own shares in 51Job, St James’s Place and Facebook. This article was prepared 30 August 2018 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade any of these stocks you should seek financial advice.