The Coronavirus is here but I’m willing to bet (at least with a small amount of money) that in 1, 3 or 5 years from today, ASX investors will look back and kick themselves for running away — rather than toward — their investment portfolio.
PLEASE NOTE: THE AUTHOR HAS UPDATED THIS ARTICLE. PLEASE CLICK HERE FOR THE LATEST ARTICLE DISCUSSING SERKO & WEBJET.
Of course, please know that I’m strictly applying my ‘investor lens’ to this tragic issue. I don’t mean to make light of the fear and tragedy the world is experiencing right now. I’ve repeated this many times, including in one of my most recent Australian Finance Podcasts, but I’ll say it again:
If you’re suffering or have lots of anxiety (like me at times), please talk to your doctor or take a look at the Beyond Blue website. Right now is as good of a time as any to reach for your phone and call people who can help.
3 ASX shares I’m watching… like a hawk
Before I continue, here’s another caveat: the next few years are going to be rough on companies — really rough — but the depths of the falls and the ensuing recession will be felt far worse amongst some companies. However, other companies will flourish for many reasons (that are beyond the scope of this article).
My plan to avoid blowing up my capital in the next year or so requires me to follow a few simple yet powerful rules. The companies I invest in, must be:
- Net cash minimum (cash balance minus debt must be positive to allow for considerable downside)
- Free cash flow positive, or thereabouts, after a significant reduction in cash receipts from customers
- Run by aligned management with plenty of ‘skin in the game’ (not much has changed), and must be…
- Backed up by very positive long-term tailwinds (think cloud computing, online delivery, marketplaces, health tech, etc.)
To say “Webjet shares have been poleaxed” in the past 3 months would be an insult to poleaxes.
Webjet is a digital travel business spanning both global consumer markets (‘B2C’) and wholesale markets (‘B2B’). It was established in 1998 and now claims to be the leading online travel agency (OTA) in Australia and New Zealand. Webjet says it was the world’s first to use ‘Travel Services Aggregator’ technology and is now leading the industry in blockchain innovation.
As of 31 December 2019, Webjet reported cash of $157 million with borrowings of around $190 million. However, not only that the company has also withdrawn profit guidance amid a spike in short term travel cancellations. Unfortunately, Webjet appears to have some meaty trade payables which make its working capital position a little cloudy right now.
In my (not so) humble opinion, Webjet is in a tougher place than most companies right now. That said, as a long-term investor, Webjet is an extremely appealing, capital-light, high quality business, so I have little doubt it can survive. The questions are, how long does it take for travel statistics to rebound, and will it remain in its current form as a public company?
Keep in mind, Webjet is basically just a website connecting airlines and hotels to consumers and businesses. It can cut costs (it has said it will take $10 million out of the business in FY20) and it can scale fast, in the right environment. That’s why I’m watching it.
Serko is a New Zealand software company founded in 2004. Serko listed on the New Zealand stock exchange in 2014 and on the ASX in 2018. Serko’s travel management software is used by blue-chip Travel Management Companies (TMC) which in turn use their software to book corporate/business travel for large clients. Serko also offers a growing expense management technology platform which is also sold through TMCs to help companies keep on top of their financial reporting and record-keeping.
See my Webjet comments, above…
Shares of companies in the travel management and leisure sectors have been smoked.
Please keep in mind that Serko creates software which is sold through the travel companies — such as Corporate Travel Management Ltd (ASX: CTD). Meaning, although its customers are TMCs, it’s a cost that’s effectively passed along to blue-chip corporate clients like banks, miners and other multi-nationals. It’s once removed from the Webjets of the travel world.
To be clear, I suspect Serko will indeed be walloped in the near term — try finding a company’s shares that won’t be — but I’m confident in the long-term outlook for Serko, provided it doesn’t need to lean on banks or private money for short-term loans. That’s because one thing I’m watching is its potential to crank free cash flow, which seems to be marginal in the short run.
Serko told the market this week that it, “presently has a strong cash balance…”. On face value that sounds great, but if I put on my analyst-designed management-double-talk cap, that doesn’t sound overly reassuring.
That said, I believe Serko, as a company, is well run and it had virtually no debt or unusual liabilities on its balance sheet back in September 2019.
All-in-all, Serko is definitely one I’m doing more work on because I believe if it gets through the next 12 months it won’t take too long (maybe 2-3 years) to move well beyond current valuations.
3. EML Payments
EML Payments develops financial technology to provide solutions for payouts, gifts, incentives & rewards and supplier payments. It issues mobile, virtual and physical cards to some of the largest corporate brands, processing billion of payments each year, managing more than 1,400 programs across 23 countries in North America, Europe and Australia.
EML is a fine business, highly scalable and loaded (pun intended) with long-term growth potential in multiple verticals. Meaning: multiple ways to win.
However, in the short run, EML is going to get whacked because shoppers probably won’t want to be loading as much on their gift cards, or gambling, nearly as much as they did in 2019.
That said, if it gets through this — EML shares could be worth multiples more than they are today. Again, I’m talking over 3 years or more.
The reason I’m watching EML shares but I don’t own it (yet) is because I’m still working through its large acquisition of PFS and how that will shake out on the balance sheet.
EML is one for my watchlist.
Playing the odds of investing
Right now, each day on the market makes it seem like shares are guesswork.
However, keep in mind that long-term investing has and always will be a game of odds.
Not “gambling” as most people think of it.
Long-term investing is about making sensible inferences about the current environment and future fundamentals of business and industry.
I know that I won’t be right about every company I invest in — but I don’t need to be.
If I can buy 10 companies in the next six months of 2020 and let’s say each is offering 100%+ upside to my intrinsic valuation. If 5 of these companies go bust, I’ll break even. But if just three companies go bust (which I’m confident I can achieve) I’ll be very happy I took the risk when I did. And if I can buy and hold those winners for 10 years or longer (which I plan to)… just imagine how the odds skew in my favour.
With cash assets (bonds, term deposits, etc.) likely going to zero or negative, right now I’m looking for good places to put my long-term dollars, and hopefully before peak uncertainty starts to retreat.
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Disclosure: At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.