Opportunities in Europe are prolific
After a number of years of zoom meetings rather than face to face meetings with our portfolio of companies, I finally managed to leave Australia and visit our investments in Europe as well as attend a Latin America conference. I managed to meet 63 companies over a period of five weeks. As Buffett says, be greedy when others are fearful. I have never seen so much fear in European equities before and this chart says it all for how much fear there is around Europe. As an anecdote, I was talking to one of our traders at Morgan Stanley, and she said that US investors aren’t investing in Europe at the moment. I attended a European Industrials conference, and normally there would be numerous investors from North America, but this year I only noticed one.
I met numerous companies across a variety of industries including industrial automation, aerospace, technology, banking, diversified financials, healthcare and consumer. There are many high-quality multinational corporations operating out of the United Kingdom, Switzerland, Germany, France, Spain, Northern Italy and the Nordics. These companies could be listed in the US and many of them have a greater proportion of their revenue and earnings generated out of the US than they do out of Europe. The general feedback from these companies is that their operations continue to perform quite well in both the US as well as most of Europe. Short-cycle industrial companies are starting to see a drop in confidence and orders in Europe seem to be coming off a bit this quarter. However, these companies are getting the benefit of a weaker currency from their US operations.
Given the significant fall in the Euro and the pound, the value of European stocks should rise as you translate their USD earnings back to Euros or pounds. However, this has not been the case as the liquidity squeeze, that we are currently seeing in global markets, is hitting European markets just as hard as the US. We have recently invested in some wonderful companies in Europe which include Learning Technology Group and S4 Capital.
Learning Technology Group
Learning Technology Group (LTG) is a global provider of software for workplace digital learning and talent management with over 5000 employees in 34 countries. The company has a strong track record of generating strong revenue and earnings growth, both organically and through acquisitions. Over the past seven years revenue has grown at a CAGR of 50%, while EPS has grown at 45%. I have followed the company for about eight years now and have met the Chief Executive Officer and founder, Jonathan Satchell a number of times. I sat down with Jonathan and their chief financial officer, Kath Kearney-Croft, in their London offices this month.
LTG’s software spans across educational and compliance training regarding health and safety, corporate policies and industry regulations. They also offer talent management systems for human resources departments. Their software and content are strong across a number industries including financials, retail and autos. The majority of European banks use their training modules for global risk and compliance. Companies like Jaguar use LTG’s software to train their dealer groups on the specifications of the cars that they sell. This includes using 360 technology to see the inside of vehicles and move around to explore their features, as well as sales manager skills curriculums and onboarding curriculums for new sales consultants.
The group recently completed a major acquisition of GP Strategies, a leading provider of managed learning services and workforce transformation, for $394 million. The group is on track to extract significant synergies from the acquisition with 1H22 earnings almost doubling over last year. Despite earnings per share expected to grow at 58% this year, the stock has been caught up with the large fall in small capitalisation stocks, given its market capitalisation is only 1 billion pounds.
The company is at the cutting edge of learning technologies, even developing augmented reality and virtual reality modules to train employees. I witnessed a virtual reality module the company developed for Anglo American to train their underground miners and it was very impressive. The group also has a tremendous opportunity to cross sell their learning technology software into the deep customer base of large corporates that GP Strategies has developed. They will also benefit from the new working environment that we find ourselves in post covid as human resource departments juggle with the need to manage and train staff both remotely and onsite.
What impresses us about the company is not only their strong technology and software in the learning and human resources vertical, but their financial discipline and capital management nous. We like to invest in owner-managed companies as typically the founders have built the company from scratch and know the inside-out of the business, but also because they are incentivised alongside the shareholders. Jonathan Satchell (the CEO) owns 9% of the company. Andrew Brode, the chairman, owns 15% of the company. Andrew has quietly built $1 billion of wealth growing technology businesses. He sold one of his early businesses to Wolters Kluwer and was managing director of Wolters Kluwer’s UK operations for 14 years before starting up LTG group. I have a great degree of respect for the 25 billion Euro business that Wolters Kluwer’s team has built over the years and I can see the same playbook being used at Learning Technology Group.
The valuation has de-rated from a PE of 40x to only 12x over the past year. We expect the stock to rebound sharply over the next year as the company continues to deliver on its strong earnings growth track record. Even if this re-rating doesn’t occur quickly, we expect the earnings to continue to grow at an attractive rate, with management targeting EPS to grow from the current 8 pence to 14 pence by 2025.
Similar to Learning Technology Group, S4 Capital is run and owned by owner managers that have a strong track record of building out large companies over time. I had the privilege of sitting down with S4 Capital’s chairman, Sir Martin Sorrell, at their headquarters in London. Sir Martin is well known in the media industry given that he was the founder of WPP Group, the largest advertising and PR group in the world. He founded S4 capital in 2016 and has quickly acquired a number of leading digital advertising and marketing businesses globally. Also similar to Learning Technology Group, over 70% of their revenues are derived from North America, despite being listed in London and getting caught up in the flight of capital out of Europe.
S4 capital’s businesses focus predominantly on digital advertising content creation for multinational corporations. Media Monks is their core content creation brand while Mighty Hive focuses on media buying for their clients. Their biggest customers include Google, Apple, Meta and BMW. These technology and consumer giants chose to work with S4 capital given their leading expertise in creating digital campaigns that incorporate virtual and augmented reality as well as a deep knowledge of all the digital portals to advertise through and their ability to deliver to their clients the best return on investment. While the company has been growing quickly through acquisitions, they have also delivered impressive organic revenue growth with growth of 40% in 2019, 20% in 2020, 45% in 2021 and they are on track for 25% growth in 2022. As digital spend continues to capture a bigger proportion of advertising budgets, S4 is in a prime position to continue to win market share from their larger peers in the industry.
We have taken the opportunity of a recent sharp decline in the stock to start accumulating a position. The company has been hiring ahead of the increase in revenue with their headcount growing by 25% in the first half of the year. This has placed some short-term margin pressure on the first half earnings, but the margin is expected to return to normal levels in the second half of the year. Despite macroeconomic concerns around Europe, demand for S4’s services continue to see strong demand globally, particularly in the United States, where 70% of revenues are derived. We believe that S4 is in a strong position to weather the fears around an inflation driven consumer recession and drive significant shareholder value creation over the next few years.
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