"So I take it you believe the headwinds facing the business are cyclical rather than structural?"
With little doubt in my mind, I see what is happening in the company now as little more than the usual cyclical ebb and flow that is a characteristic of the industry.
For years, people have been mis-diagnosing and incorrectly defining the FLT business model as either a “retailer” (presumably because the stock is covered by the retail analyst at major broking houses), or as an IT business when, in fact, what it really presents is a critical input into the algorithm that drives airline economics - namely, the marginal dollar – in what is a highly fixed cost business.
I see FLT as an intermediary between airlines and their customers, and the only intermediary that has the sort of brand resonance and scale that makes it indispensable to the optimal financial operation of airlines.
FLT’s commercial moat lies in it being the best by far in what I call the “business of catching marginal bums”.
No one other organisation can deliver the marginal bums-on-seats that are critically-important to, and the most profitable ones for, airlines, like FLT can with its scale and brand presence.
"...curious to know if you believe SGH & SEK are amongst the other good businesses that have suddenly become cheap."
Short answer: No
(Specifically, one is a good business, I think, but it hasn't become cheap yet and the other I'm not sure is a good business.)
Starting with SEK: I think its “peripheral” businesses, such as the education business, are nothing overly unique and differentiated, and while I think its core online jobs board business is fundamentally sound, I’m not sure it will always be bullet proof.
And when I distil those thoughts, I get an overall business for which I don’t want to pay 25x P/E and 16x EV/EBITDA, because those types of valuation multiples reflect, to me, a business that is pre-eminent and which is likely to always be that way…. And I’m not sure I will always be able to say that for SEEK. For example, given how fast things evolve and change in this sort of technology-driven business I cannot say with much certainty that, in 10 years’ time, SEEK will still be as dominant as it is today. Scope for disruption seems more than possible.
Given that, I want to pay less than 25x P/E and EV/EBITDA in the mid-teens.
For, on very similar multiples, I am being offered shares in the market by businesses that I am far more certain will indeed be around in 10 years’ time in their current shape, form and leading industry position (companies such as CSL, RHC, RMD, DLX, ARB, REH)
As for SHG, while I have not studied SGH’s financial accounts in any great detail, I have to say I am not a fan of this sort of business model which is, essentially, a professional services roll-up strategy (in this case the professional service in question is lawyers and legal practices).
And while SGH looks "cheap", at less than 7x P/E and 4.5x EV/EBITDA (I've purposely italicised "cheap" to denote that I haven't gotten round to scrutinising the quality of the forecasts), what I don’t like about these sorts of “people businesses” is that they lack scalability and are therefore difficult to grow organically. (By their very nature, professionals are self-driven, more challenging to manage and besides, invariably their work gets invoiced to the customer by the hour, so all you are really doing is selling is someone’s time and there are natural caps on both the dollar rate at which any professional’s time can be billed, as well as the amount of time people can - and indeed want to – work.)
In my observations, most professional roll-up stories come unstuck at some point or – at best – they simply stall.
There are many examples of this:
PRY (Medical GPs):
Big question marks exist today in investment circles about the accounting practices and the justification for the value of the goodwill that has been recognised.
GXL (Vets):
They eventually gave up rolling up vet practices and decided instead to get into pet car retailing. The jury is out on whether they have ended up overpaying for the retailers they have acquired in recent years; I suspect they have.
WHG aka Crowe Horwath (Accounting and financial advisory practices):
They always struggled to exercise control over the individual practices they acquired. Company nearly went to the wall, in my view. They were finally taken out for cents-in-the-dollar, compared to peak valuations.
VEI (Opthalmologists):
The eye specialists had all the negotiating power and all that ended up happening was a transfer of value from VEI shareholders to the form of the specialists in the form of higher and higher salaries and retention bonuses. (There was also a company of radiologists that was listed in the early 2000s which befell a similar fate as VEI: the radiologists employed by the company (Gribbles was its name) – at a time when qualified and experienced radiologists were in scarce supply – needed more and more money thrown at them to prevent them departing the business)
COF (Geotechnical engineers):
Made too many acquisitions at the top of the mining boom, and are now having to get rid of – at a cost, naturally - all those specialist “human assets” they paid too much for a few years ago.
LYL (Structural and mechanical design engineers):
Almost identical story to COF (see above)
ONT (Dentists and dental practices):
This seems to be one of the few professional service roll-up stories that seems to have been successful, but I strongly suspect that is due to the particular individuals involved in driving the company, more than it is due to dental industry somehow being a great business per se.
Ultimately the problem with roll-up strategies involving people businesses is that the acquisitions need to keep getting bigger and bigger for them to make any material difference.
And with larger-sized acquisitions comes increased risk and too often I have seen executives in these sorts of situation - under pressure to keep growing - pay less heed to risk and become less disciplined in prices they are willing to pay for acquisitions.
I'm not asserting that this is definitely the case for SGH; I'm just making reference to my observations made in the past.
(20min delay)
