Collections

The case for investing in global stocks is hard to disagree with: more choice, more diversification, and more representation of sectors. Currency tailwinds are a potential bonus. Your super fund likely has at least 25% in global stocks. So, why don't you? 

Often it's just the challenge of knowing where to start. So, before the local reporting season dominates the airwaves, we're taking this chance to look for some hidden gems in offshore equity markets. 

We asked three of our partnering global managers for the most underappreciated stock in their portfolio, and to outline the thesis. 

Read on for three global gems from Jordan Cvetanovski from Pengana Capital Group, Bill Pridham at Ellerston Capital, and Paul Mason from Paradice Investment Management


Significant rerating possible for Rakuten in the coming months

Jordan Cvetanovski, Pengana Capital Group

Rakuten (4755.T) is a profitable e-commerce and fintech business with a market cap of Y1.2 trillion (~A$16 billion). It has been investing significantly to build the world’s first fully virtualised mobile network. 

The company has grown its revenue at an average of 16% per annum over the last 5 years, yet the share price has more than halved in this time.   

We think the market is underappreciating Rakuten as it appears to be overly focused on the upfront costs of building out the mobile network and excessively concerned about the likely return on investment.

We think that this misses the point entirely as the investment in the mobile network is designed to enhance Rakuten’s ecosystem, which currently includes various e-commerce websites providing services such as online shopping, hotel booking and consumer to consumer trading, as well as financial services over the internet, which includes banking and credit cards. 

The mobile network will not necessarily need to be super-profitable in a standalone sense, because it will further increase the cross-use of Rakuten’s services and increase the lifetime value of Rakuten’s members through, for example, the preinstallation of Rakuten apps on the mobile phone.

Furthermore, Rakuten has made many highly profitable investments in the past, such as entering fintech and investing in Lyft and Pinterest at an early stage and should be given the benefit of the doubt. 

On a sum-of-the-parts basis, we think that Rakuten is severely undervalued

With the full launch of the mobile network planned for April this year, a successful launch should result in a significant rerating for Rakuten.


LiveRamp: Connecting tomorrow’s returns to today

Bill Pridham Ellerston Capital

We consider LiveRamp (RAMP.US) to be the most underappreciated position in our portfolio right now. We have been taking advantage of this to add to our position. 

Our strategy is to connect tomorrow’s returns today and that basically involves identifying high-quality businesses in the Global Mid/Small cap space which are currently undergoing a period of change with future potential returns being mispriced by the market today

LiveRamp is going through a period of such change as its business has been transformed over the past year. 

Today, it has a market cap of US$2.9bn (~A$4.2 bn) with just under US$800m of net cash on its balance sheet after buying back over US$800m of stock in the past 18 months.

Revenue has been guided to c.US$380m this year which represents 33.5% growth. Management expects to reach a $1bn revenue run rate in the next four years which represents a high 20% revenue CAGR at very high incremental margins over the period.

LiveRamp provides the infrastructure to connect all the world’s data sources to all the places this data can be utilised, be it desktop, tablet, mobile or even your connected TV. It views itself as the Switzerland of data as it provides a platform for companies to access and share consumer data to deliver more effective personalised marketing where consumer privacy is becoming increasingly important. 

Very few companies really want to share data directly with Facebook or Google and given LiveRamp hosts over 200m consumers, it provides scale similar to these online megacaps with significant network effects.

LiveRamp sold its traditional advertising business (Acxiom) a little over a year ago for US$2.3bn and subsequently emerged as a pure-play subscription business for marketers to target consumers online in a secure, private manner.

We believe the market is not fully aware of LiveRamp’s business proposition as the industry standard for connecting data while near-term earnings have been dampened somewhat as it carried non-recurring expenses associated with the transformation. 


Equiniti: Similar to Computershare but faster-growing and cheaper

Paul Mason, Paradice Investment Management 

Shareholder services provider Equiniti Plc is a long-term UK holding for the Paradice Global Small Cap Fund. The jewel in the crown of Equiniti is the Investment Solutions Segment which provides a range of shareholder registry services to some of the largest companies in the world. Equiniti has similarities to the business models of Link Administration and Computershare.

In addition to pure share registry, Equiniti also offers other outsourced value-added administration services ranging from payroll, employee benefits, remediation services in the banking sector and pension plan administration. Each of its divisions enjoy high predictability of revenues and sticky retention rates.

US Shareholder Services is the business we believe is most overlooked by investors. Equiniti entered this market via the acquisition of Wells Fargo Shareowner Services, and subsequently invested in the business to bring it in line with the rest of the Equiniti technology platform. It now counts JPMorgan, Mastercard GE, Shell and Honeywell as US customers, just to name a few. The US market is highly fragmented, giving Equiniti the runway to grow organically at 8-10% per annum, whilst also offering the potential for inorganic growth via further acquisitions.

Despite offering what we believe are more attractive growth rates, £760 (~A$1.5 billion) Equiniti trades at a ~25% discount to Computershare and Link Administration

We largely attribute this to Equiniti being a UK Small Cap name caught up in the ‘Brexit Discount’ and our opinion that there is a broad misunderstanding of the US Market’s long term growth potential.   

Conclusion 

With around 50,000 listed stocks across the 200 exchanges globally, most investors don't have the time or resources to narrow the field down to a few select names. Jordan, Bill and Paul have thankfully done exactly that and provided you with some high-quality ideas for your further research. 

Interestingly, they are all small caps (by global standards) and are all tech companies (Ecommerce/fintech; Data platform; Online registry services). 

Rakuten is an E-commerce and fintech business that has seen its revenue growth and share price diverge for 5 years, and that Jordan Cvetanovski argues is not only severely undervalued but has a potential catalyst as soon as this April that could result in a significant rerating.

LiveRamp is not a household name, but Bills wrote it's the industry standard for accessing and sharing consumer data for more effective personalised marketing. Revenue growth is guided to 33.5% this year, and in the high 20% level on average over the next four years. 

Equiniti has similarities to the business models of Link Administration and Computershare,  but despite more attractive growth rates, Equiniti trades at a ~25% discount to these local names. 

More to come

If you enjoyed that, stay tuned for more, as we also took the chance to ask Jordan, Bill and Paul to discuss the global stocks they have held the longest, as well as global stocks that are better versions of their ASX counterparts. Please hit FOLLOW to be the first to get the reports for each.