European Equities

Seeking the quality tech in European equities

What’s very clear though is that product and customer service still matter
April 2018

Philip Webster

Director, Portfolio Manager, European Equities

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Risk Disclaimer

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

 

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

 
 

There is so much written these days about disruption and technology, with the pushback almost always being lofty valuations. I’ve heard it so many times, and I’m not dismissing it, but multiples are an archaic method of valuing these businesses.

I normally start with a very simple question when it comes to these business models: ‘is this really technology or is it just a more convenient way of doing exactly what we have always done?’

We seem to want to give these businesses a label I don’t believe they deserve. What we are actually seeing is simple evolution, do you still have your Nokia 810 or a ‘modern’ smartphone? The appropriate question therefore isn’t simply: ‘is it tech’, but will we continue to evolve the way we consume news, clothes, food, media….the answer being: almost definitely yes.

 

The new norm

It’s been helpful for the current crop of successful businesses that industry incumbents were asleep at the wheel, allowing these newer entrants to build some commanding market positions. Whether you’re buying clothes through Zalando, food through Delivery Hero, or holidays through Traveloka (emerging market Expedia), these are the new norms.

What’s very clear though is that product and customer service still matter as they always have done, and if anything, we have become even more demanding. The bar is therefore high and Amazon keeps raising the standards so this isn’t an easy space to play in at all; often you just see the successes and you don’t hear about all those that have tried and failed.

 

The challenge of avoiding the losers…

The crux of the above is that it’s difficult to pick the winners and more importantly, miss the losers. Add in the complexity of a dynamic and fast-moving backdrop, and what you believed was a strong moat gets eroded very quickly.

 

…and where you can find quality

There are also very few good quality technology businesses out there that you can own across the European markets, especially early in their evolution. We therefore recently initiated a position in Rocket Internet, which brings with it a considerable number of desirable qualities you would want to see from the sector; skill-set, capital, platform and advice for digital start-ups.

Rocket describe itself as an ‘incubator and investor in technology companies with proven business models, providing operational support and help to scale internationally’. I would caveat this slightly as these are early cycle, pre-market, businesses so these require a very unique skill-set, which Rocket has proven it can nurture. The two most recent listings are Delivery Hero (€7.1bn market cap) and HelloFresh (€2.2bn market cap) but it also has a whole stable of businesses that it can pull through to the market over time.

 

Back to the ‘pushback’

Referring to the start of this note, and you’re waiting for the pushback: ‘but it’s expensive’. Well, today it has 68% of its market cap in cash and when added to the value of the two listed stakes in Delivery Hero and Hellofresh, it was at a discount to the current market price. You can see this below, circled in red.

To add to this you were also getting the rest of the business for nothing which is crazy given another business in its stable, GFG (Global Fashion Group), has sales of €1.1bn.

Risk Disclaimer

Past performance should not be seen as an indication of future performance. Stock market and currency movements mean the value of, and income from, investments in the strategy are not guaranteed. They can go down as well as up and you may not get back the amount you invest.

 

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

 
 
Rocket market cap broken into cash, the Delivery Hero stake and the implied rump

 

Source: Bloomberg as at 15.01.2018. Figures subject to rounding. For the purposes of illustration only and should not be construed as a recommendation to buy or sell the mentioned security.

If you look hard enough, there is value to be found in the technology space and unique solutions like Rocket. Would I have paid €50 when the market was way too exuberant? No. But when there is a proven business model, with a strong cash position and you are getting assets like GFG essentially for nothing, this was a very easy call for us to make. The share price has rallied 18% year-to-date so this discount has now unwound but we still feel it’s cheap on our conservative analysis.

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