ELCHE. On this occasion we suggest four shares that we have included in our recently launched fund Gesem W-Health & Sports Fund. They are from companies that in one way or another are benefiting from the growing popularity of sport and outdoor activities. It is a trend that started quite a few years ago although with the crisis caused by covid-19 it has accelerated considerably, and it has helped many companies from the sector grow at double digit rates, with exceptionally high margins.
It is a sector which, with the new technology, is seeing how new companies proliferate as they adapt and use artificial intelligence, machine learning… in the world of sport to improve the performance of athletes, prevent injuries, promote faster recovery from injuries or strain, improve the spectators’ experience in the broadcasting of sports events…
Our four securities chosen this time are The Hut Group, Mips, Brunswick and Monster Beverage, which we analyse separately hereinafter.
THE HUT GROUP (THG)
It is a company that supports the ‘digital first’ philosophy, which means that all its transactions, actions or campaigns are mainly intended for a digital environment. The company is highly diversified geographically speaking, 34% of its revenue comes from the United Kingdom, 26% from Europe, 24% from Asia-Pacific and 16% from North America. It started off as a supplier of e–commerce for private labels in 2004 and, due to its success, in 2005 it started providing services to improve digital platforms for companies like Tesco. That is when it really started to make a name for itself; by 2009 it even reached the number one positions on the Tech Track 100 list of the Sunday Times, a classification of private British companies with the highest growth levels. In its 16 years of history, THG has become an end-to-end platform that specialises in developing internationally renowned digitization strategies and its clients include companies such as Procter & Gamble, Nestle, Johnson & Johnson, Honda, Disney, Daily Mail, Nintendo, Mercedes…
On its way it has acquired some of the brands that were previously its clients. It started in 2010 by acquiring MyBag and Lookfantastic and since then it has bought companies whose business model is purely digital, that is to say, they sell online through e-commerce and focus on personal care and health. Moreover, in all of them THG has added an approach related to luxury and lifestyle, giving the brands a certain distinctive character, which enables them to raise the prices.
Nowadays, the company is completely vertically integrated, taking part in the development of the e-commercewebsite, product manufacturing (in the case of personal care products and food), storing products, custom packaging, international shipping (including all the processes: dispatch to the airport, fulfilment, freight forwarding through THG Air, home deliveries and even an order tracking and seller-customer communication platform, which is all enhanced by the data analysis and machine learning), brand development and rebranding (they have a study where advertising campaigns are created and carried out), advertising campaigns through both traditional and digital forms of media and through influencers (they have the biggest network of influencersin the world where more than 360 take part), the translation of the website to internationalize it –it can be translated into 31 different languages, data analysis and the assessment of marketing strategies…
When it comes to the figures of the company, 50% of its sales come from its own brands. Some of its own brands from the beauty and personal care sector and its wellness brands would be included in this segment (sportswear, sports nutrition brands such as MyProtein…). Then 31% comes from its own brands that sell third-party products and 19% of its revenue comes from the THG Ingenuity platform. Since 2016 its sales have multiplied by more than 3 times reaching 1600 million pounds sterling and an EBITDA of 150 million pounds (9.2% margin).
This is a Swedish company that makes helmets and thanks to its patented MIPS BPS protection system it has managed to position itself as a world leader in helmet sales. The advantage of the MIPS system is that it is especially designed to provide protection against rotational motion. Rotational motion combines the angular velocity and the acceleration, through which this angular velocity increases with each unit of time. These two variables are taken into account when it comes to minimizing the impact caused by rotational motion. This type of impact is very dangerous for the brain and it can stretch and strain the brain tissue.
The main component of the MIPS helmets –which makes them so valuable, is precisely that it reduces the rotational motion in an impact that would otherwise be transferred to the brain. This component is also protected by a patent, which is a substantial long-term competitive advantage.
MIPS BPS is a simple layer that allows the helmet to slide slightly relative to the head and it mimics the brain when it slides slightly inside the head to reduce this rotational motion in an impact. This simple layer can easily be fitted into new helmets and existing helmet models, which means that the company can sell both the full-face helmets and the main component layer separately, to therefore satisfy the demands of practically the whole industry given that, as aforementioned, it is patented technology and it is unique in the way that it deals with the rotational motion in an impact.
At the moment, its main source of revenue is the industrial safety helmet, which is where most of its income comes from. The two following segments are very similar to each other, standing for a bit more than 20% each one. They are sports where helmets must be worn such as American football, skateboarding, cycling… and motorbike helmets. The company’s turnover went from 86 million Swedish kroners SEK in 2016 to 364 million SEK in 2020. For 2021 sales are expected to increase by 40% to 511 million SEK. The company operates with extremely high margins (35% net margin, EBITDA 50%) and a cash conversion ratio of close to 100%.
An American company from the marine industry. It makes and sells recreational boats; some of its other brands are that of Mercury engines, Quicksilver boats, Crestliner, Bayliner, Whale accessories, Ancor, BEP… to name but a few. In spite of the pandemic the company has ended this year with more than a 5% growth in sales and a 23% increase in net profits. When it published its month-end closing results, it announced that it was going to increase the recreational boat production capacity due to the «unprecedented increase in the global demand». The forecasts for the next quarter from the management are optimistic and the growth rate is expected to remain the same in view of the second half of last year, that is to say, more than a 15% increase in sales.
In the last five years the net margin has improved by more than 200 basis points reaching 9.3%; meanwhile the EBITDA margin has increased by more than 400 basis points reaching 17.7%. The volatility of its results is very low with growth in profits almost every year since 2010. For next year double digit figure growth is expected (15.9%) along with new improvement in the margins, which will help increase the net profits by more than 25%. The stock quotes in the year have now gone up by more than 30%, despite this it has Trailing P/E lower than 16x and an EV 12M /EBITDA of 11.5x.
It is an American company that makes and distributes energy drinks. The company was set up 100 years ago, when Hubert Hansen and his children started selling pasteurized drinks under the brand name Hansen Foods. Since then, the company has changed radically and today we know it as Monster and the brand that we directly associate with extreme sports, parties and young people… Nevertheless, to triumph in a business as simple as that of energy drinks you have to add something special that nobody else has. To be precise, Monster decided to focus its brand on a very specific type of customer: young people, active, who like partying and extreme sports.
So, we see that its leading brands Monster, Burn and Nos are associated with sports like skateboarding, snowboarding, motorbike and car racing; in general action sports where adrenaline and energy are essential. The latest trend that Monster has tried to make the most of is gaming, which it has become actively involved in by organizing events, sponsoring teams… This very obvious customer orientation approach is one of the main reasons for its outstanding success. Everything around it is focused on this type of customer, the logo itself, the name, the website of each of its brands, the corporate website, even the annual report, everything. This has resulted in average growth rates of above 10% a year for the last 20 years, its margins increase year after year reaching EBITDA margins of 60% and net margins of close to 30%.
The market in itself is a duopoly mainly controlled by Monster and Red Bull. However, once again Monster has a certain advantage over its main rival, brand diversity. Red Bull is Red Bull and although it is featured in many sports where it competes with Monster, it is still Red Bull. Monster on the other hand is not only Monster; it is also Burn, NOS, Full Throttle, Relentless, Mother, Reign and Predator. All these brands are very well positioned in micro-niches within this niche. NOS, for example, is closely associated with the Nascar car races, Burn and Relentless with discos and music festivals, Full Throttle and Reign with the world of fitness and body building… Furthermore, while Red Bull hardly has any different flavours, Monster has a wide variety of flavours among its different brands, which makes its products a good alternative to Red Bull.
It is a leading company in its market, with very wide margins, with a double digit growth rate that is expected to continue in the next few years and with competitive advantages that will help it protect itself from its main competitor, Red Bull and any possible new competitors too. This has enabled it to revalue itself on the stock market by more than 770% since it was first listed on Nasdaq in 2011 and companies like Coca Cola have acquired 20% of the company, making it the main shareholder of the company.
Sergio Serrano, the General Manager and Kevin González, the analyst of Gesem AV