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One has to admire the guerilla marketing tactics of the world’s great online companies. It’s hard to open a newspaper without another story gushing about Amazon’s potential to stomp on Australian retailers. Pity we don’t talk about how many retail jobs will be lost.
Then there’s Airbnb, another global disruptor that will supposedly shake our accommodation sector to its core. If Airbnb’s cheerleaders are to be believed, everyone will stay in a stranger’s spare bedroom on holidays rather than a well-known, safe hotel.
Nobody will eat at home anymore as we order food online each night and UberEATS delivers it to our door. This food-consumption revolution will rock the takeaway-food sector and providers of food ingredients, such as big supermarket chains, will struggle.
And forget about watching free-to-air TV. More consumers will be hooked on Netflix or other streaming services where TV programs are downloaded on demand. Watching live TV and accompanying advertisements will be so last century.
Don’t even think about reading a newspaper, listening to the radio, or pursuing a billboard ad. We’ll all be getting our news via Facebook and Google, and watching, reading or listening to content mobile devices. Google and Facebook will be the world’s last remaining newsagents.
Don’t get me wrong: Amazon, Airbnb, Uber, Facebook, Google, Netflix and co are incredible businesses and hugely disruptive. We’ve seen the transformative effect of their digital products and business models on entire industries and companies. These and other disruptors will make life tougher for incumbent companies across industry.
But like any megatrend, hype often runs ahead of reality and company valuations. The Amazon threat has wiped billions off the combined market capitalisation of our retail sector. A more sober analysis suggests some retailers are well placed to survive the online threat from disruptors.
The good news is that market over-reactions create opportunity. Top-down trends are important, but what matters most is company earnings, how they affect forecast valuations over the next two to three years and comparisons with the current share price.
On that score, several valuation opportunities are emerging, in part because of irrational fears about the effect of global disruptors. The share-price declines in the companies below are not solely due to competition fears. But there’s no doubt that hype about disruptors has played a part in slumping share prices for several high-quality companies.
Here are four:
The fast-growing hotel chain soared from a $1.80 issue price in its 2015 Initial Public Offering (IPO) to $4.71 later that year. Investors loved Mantra’s leverage to the boom in in-bound Asian tourists and its prospects for organic growth by opening hotels.
Then investors fretted about Airbnb’s effect on Mantra. Fund managers opined that more consumers would favour cheaper home-based accommodation via Airbnb over Mantra’s offering. Airbnb’s disruptive effect on hotel operators overseas would be felt here.
That’s a legitimate concern. But Airbnb’s share of the city-room supply in Sydney and Melbourne is estimated to be below 4%. I cannot see older Asian tourists, tour groups or young Australian families – key market segments for Mantra – flocking to Airbnb. Business travellers will also take some convincing to give up their fancy hotels.
Airbnb will take market share off local accommodation providers, but that threat is well and truly priced into Mantra’s valuation after heavy price falls in the last 12 months.
At $3.03, the market is overlooking Mantra’s potential to open hotels, upgrade others and fill them with Asian tourists. That opportunity will dwarf a few points of lost market share from a smaller segment of travellers who want the Airbnb experience.
The veterinary and Petbarn chain has had a tough few years. After increasing tenfold to peak at $10.78 in 2014, Greencross has fallen to $6.10. Management changes, concerns about rising competition for veterinary clinics and acquisition fears weighed on the stock.
Now, there are concerns that Amazon will eat into Greencross’ pet retailing business. Apparently, we’ll all order pet food and accessories via Amazon, instead of going to Greencross’ Petbarn.
That may be true for price-conscious consumers who seek the cheapest pet food. But the threat overlooks Petbarn’s integrated in-store offerings. In addition to pet products, Petbarn offers services such as pet washing and grooming and in-store vets.
Amazon cannot compete with Petbarn as a one-stop shop for pet owners or provide a similar customer experience (for owner or pet) that combines products and services. In some ways, Petbarn is almost like an outing for pets and pet lovers, who may be more loyal to leading pet retailers than many realise.
Greencross looks undervalued at $6.10 and will be a takeover target for private equity, if its share-price woes persist. Morningstar has a buy recommendation and $8.50 valuation.
There’s no doubt that online food-ordering platforms, such as Menulog, and UberEATS and other food-delivery services are hugely disruptive. The ability to order food online from a variety of outlets and have it quickly delivered will change how many Australians eat.
This trend is well-established in many inner-city locations in our East Coast capitals. One need only look at how the number of UberEATS, Deliveroo or Foodora couriers, or experience slow in-store service because the bulk of the outlet’s production is servicing online orders.
The trend could disrupt established quick-service restaurants, such as McDonald’s or KFC, that have low or no presence in the home-delivery market. Consumers can now access takeaway food from a wider range of suburbs and even order from fancy restaurants.
Competition, always intense in takeaway food, will go up several notches, as virtual restaurants are formed, where food is ordered online and cooked in an industrial kitchen, without the labour or rental costs of a shopfront.
But I see online food ordering and home delivery as an opportunity for Collins Foods, owner of more than 200 KFC stores and 20 Sizzler restaurants. Collins also has 60 franchised Sizzler restaurants in Asia and is cleverly expanding in Europe via KFC acquisitions this year.
Collins is delivering solid same-store sales growth, particularly at its Australian KFC outlets. The company’s European acquisitions should provide the next leg of growth over three years and underpin a share-price re-rating.
I see real potential for KFC in online food-ordering and home delivery. Its brand recognition and valuation proposition are valuable competitive advantages over smaller rivals that target the take-home market via technology.
Far from being disrupted by the likes of Menulog and UberEATS, KFC could be a disruptor as its uses technology and the logistics to service a larger market.
The market could not get enough of the outstanding car-parts supplier (then known as Burson Group) when it listed on the ASX in April 2014 at $1.82 a share in an IPO. By mid-2016, Bapcor traded at $6.30 as the market re-rated its growth prospects.
It has since fallen to $5.26 in a rare bout of share-price weakness by its standards. Some analysts are concerned that Bapcor will lose market share to Amazon, as consumers buy car parts online, to save money.
This threat is overstated. For starters, about 80% of Bapcor’s revenue comes from trade customers: principally, mechanic workshops that order parts. Bapcor services thousands of mechanic workshops around Australia and has a formidable network that even Amazon would struggle to replicate. Relationships with mechanic workshops are key.
Price-sensitive car enthusiasts might order cheaper parts online, via Amazon. Super Retail Group’s auto division has cause for concern. But I cannot see mainstream consumers rushing to order car parts online or mechanics moving in droves to Amazon.
At $5.26, Bapcor trades on a forecast Price Earnings (PE) multiple of 16 times – the lowest since the company listed. That’s despite no fundamental news to suggest Bapcor’s growth prospects are weakening.