It’s difficult to remember a time when such a wide variety of Australian-based businesses were enjoying considerable success across the United Kingdom, particularly given it has long developed a fierce reputation as an investment graveyard for a variety of ASX-listed companies.
You only have to think back to QBE Insurance and National Australia Bank collectively burning $6.1bn in losses in just two years; Wesfarmers/Bunnings writing down $1bn in value and subsequently closing Bunnings UK; or Slater & Gordon’s horrendous $1.3bn acquisition of UK-listed Quindell.
Despite a softer underlying economy, continual rising inflation fears and ongoing political uncertainty surrounding the structure (and impact) of Great Britain’s exit from the European Union, a handful of small and mid-cap Australian businesses are instead enjoying a period of strong returns and growing market share across both the UK and continental Europe.
Here we look at three such companies.
Breville Group growing share
Home appliance manufacturer and marketer Breville Group (BRG), for example, delivered one of the better FY18 results. While the standout component of the FY18 numbers was the +16.3% sales growth generated out of the North American division, the +9.9% growth delivered from ‘Rest of World’ (comprising the UK, Europe and Asia) has been equally impressive - particularly in the face of a fairly tepid underlying retail environment in the majority of regions.
Via their UK/European brand ‘Sage’, the business has quickly established itself as a premium brand in the space, with the company now leveraging a well-established UK foothold to launch a series of direct-to-market entries into continental Europe. With flagged expansions into Germany and Austria this year (the business is already ranging in over 600 outlets across Germany) and scheduled launches into Switzerland and ‘Benelux’ next year, the business is certainly resembling the characteristics of a genuine global retailer.
It isn’t all plain sailing for the business in the UK, however, with a number of our own channel checks conducted this month indicating that competitors Jura and DeLonghi are performing better than we have seen in recent times. The appliance market is a fiercely competitive space and while we continue to feel Breville’s significant advantages in innovation and brand investment will continue to see strong sales momentum, we are watching the competitive environment closely.
Premier Investments and Smiggle
Of course an obvious challenger to ‘Australia’s next global brand powerhouse’ would potentially lie in children’s stationery supplier Smiggle, the brand sitting inside the ASX-listed retail conglomerate Premier Investments (PMV).
With ~67% of Smiggle’s total sales now occurring outside of Australian borders, the brand already represents a strong international offering with a sizeable physical retail store presence across Australia, New Zealand, the UK, Ireland, Malaysia and Hong Kong.
We have been particularly enthused with the rollout of the brand into the UK, with total store count now numbering 134 retail outlets (31 opened in the last 12 months) – a significant achievement considering the brand only launched in the UK in early 2014. While the physical ‘bricks and mortar’ store rollout has been impressive (though perhaps not unexpected - this is the same business that grew Just Group’s sales from $66m in 2008 to over $500m as at FY18), the rate of growth currently being experienced through both the company’s online offering and via a handful of recently announced department store concessions has provided some interesting growth optionality that previously hadn’t been expected.
Total sales from the Smiggle UK website, for example, already represent 15% of total sales generated across the region, a strong outcome given the online offering was only formally launched three years ago. For some comparison, online sales through the brands equivalent Australian portal equate to ~7% of total sales and has been achieved in twice the time as the UK experience.
A growing brand awareness across the UK and Europe and appealing online functionality have ultimately combined with the launch of a variety of new online initiatives (click-and-collect, e- receipts, additional payment options and increased search engine optimisation) to generate online sales growth via the UK website now significantly in excess of management’s original expectations.
Source: Company FY18 Presentation
The obvious attraction for shareholders here is $1.00 of sales generated via the online store generates materially more underlying earnings than the same $1.00 of sales delivered via traditional walk-in stores (given the underlying costs of delivering that sale excludes a variety of overheads such as floor staff wages, premises rent, store signage and upkeep etc).
This early international success and online acceptance of the Smiggle brand has seen the business now evaluating the potential for the brand to list on a variety of third-party websites (both Amazon.com and China-based Alibaba have been mentioned in recent updates) to take advantage of regions where management are not willing or not able to roll out a physical store presence (eg Thailand, South Korea or the Philippines).
UK tax changes positive for Xero
Cloud accounting software provider Xero Limited (XRO) continues to see strong growth with its own foray into the UK market, the business benefiting from a favourable regulatory tailwind provided by the UK Government’s ‘Making Tax Digital’ initiative.
This requires UK-registered businesses with turnover in excess of £85,000 to maintain digital tax records from 1 April 2019). While cloud-adoption of accounting software solutions across the UK and Europe had initially been slow, penetration has subsequently lifted dramatically – the UK market seeing cloud-based solutions growing from ~5% of the UK market in June 2017, to ~17% in June 2018.
Interestingly, a glance across Google search trends data for the word ‘Xero’ across the United Kingdom sees a similarly impressive +34% uplift in search queries for the FY19 year to date.
With an underlying market that is materially larger than any of its existing established customer base, the runway for growth out of the UK for Xero continues to look attractive – particularly when one considers the 17% penetration rate for the UK is well below that of Xero’s more mature markets (cloud solutions now represent ~45% of the accounting software market in Australia and ~60% in Xero’s original home market of New Zealand).
While the recent decision by the business to raise capital in a slightly unorthodox manner was a surprise (via the issuance of US$300m in five-year convertible notes to fund future inorganic growth opportunities), we continue to like global opportunity ahead for the business. The company used the capital raise announcement to provide a high-level trading update, with management highlighting they remain comfortable with current FY19 cashflow guidance and current consensus estimates.
This was an extract from Ophir's October monthly letter to investors