Three is the magic number
With apologies to De La Soul for hijacking the title of one of their hit songs, we discuss here three companies that are currently held in our domestic funds. All three can be found in the portfolios of The Montgomery Fund and The Montgomery [Private] Fund, managed by Sean Sequeira, Alan Kwan and Daniel Chan. Corporate Travel Management is also held by Gary Rollo and Dominic Rose in the Montgomery Small Companies Fund.
Altium (ASX: ALU), up 36 per cent in 1 year
Altium, a business which develops and sells computer Software for the design of electronic products was purchased by The Montgomery Fund in 2015.
At the time we wrote, “More detailed information has come out regarding their historic subscriber numbers which demonstrate a pleasing trend. For financial year 2015 we expect the subscriber base will have grown to approximately 28,000 to 29,000. Further upside is apparent should churn continue to improve – churn reduced from 27.13 per cent in financial year 2014 to 23.58 per cent over the first half of financial year 2015. Churn improvements become increasingly value accretive as the firm’s subscriber base continues to grow.”
Altium’s key offering is its end-to-end ecosystem for the manufacturing of electronic devices beginning with its market-leading Altium Designer software system for designing printed circuit boards (PCBs).
Altium has selectively acquired companies to further enhance its ecosystem. As clients take up one service, the other services become more convenient than competitor products and Altium embeds itself into the customer’s workflow.
Altium has launched its Altium 365, which is a cloud-based collaborative electronics product design platform that unites PCB design, mechanical computer-aided design (MCAD), and data management, with teamwork.
Altium 365 converts software clients to the company’s cloud offering, improving the user experience and enabling seamless customer upgrades while simultaneously creating a moat around the business by protecting Altium against software piracy. The cloud also enhances the appeal for clients because it provides Altium with the ability to update software more frequently (annually for Altium versus bi-annually or tri-annually for competitors).
Altium has experienced a significant increase in higher-value subscriptions, in tandem with the improved functionality and usability of its offerings. The company increased its market share through COVID versus their competitors whose share flatlined or declined.
In 2021, in a third-party validation of the quality and potential of Altium’s products, SanFransico-based software giant Autodesk bid for Altium, a bid that was rejected.
Reflecting improving revenue per user (RPU) Altium’s management has upgraded their original longer-term revenue target of $500 million with 100,000 subscriptions by FY26, to $500 million with just 75,000 to 90,000 subscriptions. Of course, if the company achieves its original 100,000 subscriber target, this will result in revenue of between $555 and $670 million, while retaining the monetisation of the Cloud network as a free option.
Corporate Travel Management (ASX:CTD) down 3.21 per cent in 1 year
Sean, Alan and Daniel first purchased CTD, a provider of travel management services to the corporate market in 2015 for the Australian Eagle Trust Long Short Fund after the company reported a material increase in its total addressable market.
CTD was added to The Montgomery Fund during COVID with the company’s management impressively navigating it through the crisis. Being a company that sits outside the ASX 100, the maximum weight is 2.5 per cent of the portfolio.
Unlike CTD, which benefitted from a net cash position, competitors were forced to raise dilutionary equity capital for daily operations through COVID. CTD remains in a net cash position.
When CTD did raise funds, it was for the acquisition of U.S. based corporate travel company Transport & Travel (T&T), which doubled its footprint in America – the largest travel market in the world.
CTD already had a meaningful footprint on the east coast of the U.S. and the T&T acquisition expanded CTD’s significant presence to the west coast.
CTD’s market capitalisation remains 30 per cent below its pre-COVID level even after including T&T. When one considers both Webjet and Flight Centre have returned to their respective pre-COVID market capitalisations (because they both raised money), the market may not be factoring-in the upside potential of the acquisition, associated synergies, cost outs and a faster recovery than the rest of the industry.
With the T&T acquisition and an expected return to normal travel industry conditions, CTD Management expects to increase Earnings before interest, taxes, depreciation (EBITDA) from a pre-COVID $165 million to $265 million by FY24. And management’s strong track record provides confidence they will be able to deliver.
Treasury Wine Estates (ASX:TWE), up 17.68 per cent in 1 year
Treasury Wine Estates is best known for their Penfolds premium wine brand. The current position represents the second time a Montgomery large cap fund has held TWE. It is also the second time Sean, Alan and Daniel have owned it. It was previously held by the Australian Eagle team in 2014, just as the Asian market for wine was surging, led by China.
Back in 2014, 25 per cent of TWE’s profits were derived from five per cent of sales volume, led by Asia (mostly China). As the range of profitable channels grew such that 50 per cent of profits were derived from 11 per cent of volume, the share price also surged. The stock was then sold.
Sean, Alan and Daniel purchased TWE in 2022, believing TWE has solved their legacy U.S. inventory problems (by selling the lower margin commercial division, which mass-produced cheaper wines).
While, Australian/Sino relations remain tense and tariffs in place to protect China’s domestic wine producers, and despite the fact TWE’s Chinese wine production makes no money, the broader Asia division of TWE has recovered well. Consequently, the company has been able to maintain margins in Asia.
Recently, TWE acquired a small luxury producer called Frank Family Vineyards in the U.S.. The company enjoys similar margins to Penfolds of over 40 per cent. TWE plan to double Frank Family Vineyards production and maintain present margins.
As a result of, and to overcome the recent geopolitical tensions, TWE has also established a global production footprint for Penfolds (France, US, China). Calling the venture “Multi Country of Origin”, it reduces the Penfold’s dependency on Australian-produced wine.
In addition to these various avenues for growth, TWE remains on target to meet its FY25 profit margin, and further ‘cost outs’ are planned.
The Montgomery Funds own shares in Altium, Corporate Travel Management and Treasury Wine Estates. The Montgomery Small Companies Fund owns shares in Corporate Travel Management. This article was prepared 19 May 2023 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 these companies you should seek financial advice.