Other bloggers and people public about their investment decisions have spoken about that it’s harder to exiting something that you recently bought. This due to some type of shame factor of changing ones mind so quickly on sometime, one recently thought was a good enough investment idea to add to the portfolio. I have to confess to having similar feelings when writing about this decision to sell Valneva. But I try to ignore those thoughts and do what feels right, given the information I have at hand now. Finalizing my full write-up on Valneva in the post below cleared out things in a way, which I hadn’t been able to see before when I had just sat and read a lot about the company and some competitors. Also this time I got some valuable feedback from you readers (and even some more help from one particular reader on twitter). All in all this made my understand that I don’t have such high faith in the development pipeline for Valneva. I think the company is valued reasonably cheap given the cash they generate from their two vaccines in the market, but I think there is high risk of the research pipeline being value destructive and not constructive. This narrows the margin of safety significantly. Right now the company has announced the listing on NASDAQ, which I mentioned in my previous post, the stock is up another +7% today after rallying sharply this whole year.
So the reason to sell is my belief about the research pipeline. Not that I have been lucky and gotten a quick revaluation of the company (I think partly on back of the Corona virus scare). If I had a strong belief they would succeed with the launch of a Lyme disease vaccine, I would be happy to hold this company through the 5 year process they have in front of them. Instead I will sell my full holding as of today’s close. I bought into my position on the last day of 2019 @ 2.57 EUR per share, it is now trading at 3.375, a gain of 31%, a fantastic result in such a short time!
I almost want to apologizes for putting this out as my latest investment idea and then turning around and selling a few weeks later. But on the other hand, it has been a great stock pick performance wise.
Swedish Match – trimming to 8%
I haven’t updated my holdings page in a few weeks, but this holding after a continued rally is now 10.1% of my portfolio. The market seem to really have bought into the story that I believed in for a long time now, that ZYN will become a big product in USA. There are still some worries on the horizon with flavored cigars being banned in the USA. This is still a substantial part of Swedish Match revenue and profit. I have still strong conviction in this company long term, but I’m happy to trim my holding somewhat at these levels, I sell down my holding to a 8% position as of today’s close.
Nagacorp – increasing to 10%
My current holding size is 7.7% and given the recent sell-off I think this my current high conviction bet. I visited the Casino recently and I was very impressed with the operations the built up. I was equally impressed with how the country is transforming, much thanks to Chinese investments in the country. That Chinese can get VISA on arrival when they visit Cambodia is key to the continued growth on back of Chinese tourism. So the main reason for adding to this holding is the fantastic long term prospects. One of very few worries, where we probably will get an answer this year, is the gambling tax, which still has not been decided. If the tax comes in much higher than anticipated, we will see more downside in the stock. But I rather believe there will be a relief rally (i.e. tax will come in very favorably).
Obviously Nagacorp will be hurt by a significant slump of tourist due to the current Corona virus outbreak. But I believe that is short-lived and by summer tourism will normalize. I also believe Nagacorp will be less hurt by this than Macau, given that 50% of customers comes from rest of South East Asia, who will travel more than Chinese do currently. Another factor is that Macau is going to close all its casinos for 2 weeks now, it will probably not mean a flood of tourism to Nagaworld, but at least if some people still want to travel and gamble, there are not that many options during these two weeks. All in all, Nagaworld will in my view be less hurt than Macau, but has traded down much more than Macau stocks. Looking a bit further than the next quarter, this is a great opportunity to add to the holding (as of today’s close).
+ SaaS company with strong track-record of growth in number of customers, revenue and cash flow.
+ Providing services in a niche with strong tailwinds, companies need to find way to communicate with their customers online effectively.
+ Founder led with large shareholding from the founding team.
+ Operating out of Polish University city, young entrepreneurial city, with low staff costs.
+ Has invested in developing value adding services like ChatBot and Helpdesk, these are also sold as separate services.
+ Potential upside (if approved) in Polish preferential taxation of income generated by intellectual property rights.
+ / – Somewhat questionable that cash flow is shifted out as dividends instead of reinvested in such a nicely growing business. Current dividend yield is ~6%, which of course is attractive and it also significantly reduces risk that there is anything fraudulent going on in the company. It is after trading in Poland, a market I’m not so familiar with.
– Growth in number of customers have been on a downward trend.
– Competition increasing, both from freemium services and larger player with a wider offering.
– Reporting comes first in Polish which later is translated into English and some info only released in Polish (I thank google translate).
Background and Overview
The company has one prime product and three “add-on” services which also can be bought separately. As can be seen in the timeline above, the three add on services are fairly new products.
LiveChat which is the main product of the company is a software used by businesses to communicate with customers browsing their website. They see the product as a simple chat window placed on the website. The business owner and his agents, on the other hand, have access to the sophisticated application designed for communication and quick customers service. The company operates its products through a SaaS (Software as a Service) model. Examples of the product’s use are very varied. LiveChat solution can facilitate sales processes in e-commerce, serve as a recruitment supporting tool in education and HR and as a contact channel in industries which require personalized communications, such as real estate.
Knowledge Base platform lets companies create their own knowledge bases, which can be accessed by both their employees and clients
ChatBot is a product which allows the creation of conversational chatbots to handle various business scenarios. Their main goal is to automate corporate communications and to improve the effectiveness of customer service teams by addressing repeatable customer inquiries. The solution, introduced to the market, fits into the Company’s strategy to develop the offering of products for text-based customer communications. At the same time it responds to the now popular trend towards automation of communications using AI-based mechanisms
HelpDesk solution enables customers to leave a message for a company by using dedicated email addresses. It’s also possible for team members to create a ticket if a customer’s query came from other communication channels, such as LiveChat, Facebook Messenger, WhatsApp or a phone call.
The supervisory board seems to be a mix of company founders who are no longer active in the company and board professionals . The two founders who are still active are:
CEO – Mariusz Cieply has been with LiveChat since its founding in 2002 – first as software developer, later as project manager and now as its CEO. Mariusz is one of the main shareholders of LiveChat.
CFO – Urszula Jarzębowska has been working in LiveChat Software from 2002. She has 12 years of financial experience with both public and venture-backed companies.
The ownership proportions within the consortium which holds 47.1% is the following:
Marius Cieply (CEO) 15.57%, Maciej Jarzębowski 11.69% (who is a founder and (I guess) married to the companies current CFO), Jakub Sitarz 11.69% (Founder/programmer no longer active in the daily business of the company). The remaining ~8% of the consortium is not disclosed, but the CFO has a portion of that.
Business & Outlook
The company has a very impressive list of customers
The growth in number of paying customers can be shown in many ways, this is LiveChat’s own presentation:
Another way to describe this would be the following:
I think this gives a clearer picture of how customer growth has been on a steady downward trend for some time now. But it’s also quite clear in the MoM graph that it seems to have bottomed out, at least temporarily. Another aspect to this is the churn of customers, which LiveChat is not as generous with data on. But they do disclose that the churn has been stable around 3%. They also note that the leave ratio is much lower for larger customers (companies using the more expensive subscription plans and buying more licences).
We will come to competition soon, but obviously the customer growth is affected by strong competition which has entered the space. Livechat has previously been spoiled to with very little effort gain large traction, today they have to work harder. One channel they use are affiliate partners who get a kick-back for redirecting paying customers to LiveChat. I think you understand what kind of affiliates that is, you google for “best customer chat service” and you land on different homepages ranking providers, all with links to the providers. Overall LiveChat does not invest huge amounts of money trying to win customers, but is rather trying to use clever cheap ways. Like providing a very good blog/homepage of their services. This is if I grasped the competition correctly is more in line with how the freemium services/companies are acquiring customers. So judging from figures there seem to be a potential turn-around or at least flattening of a previous “nasty” trend, the stock market seems to think so too.
A big positive is the fantastic margins that LiveChat has historically held, which enabled the large dividend payments. It’s just a staggering generating such cash flows at the same time as the company has had yearly growth in the 20-40% range.
I think Poland instead of Silicon Valley is a big reason for this, wage levels are probably 20% of the Valley, but the quality of staff is definitely not 20%. In many ways it could be better, given this being one of few very attractive employers in the city. Historically many great companies were built in slightly off locations with staff that wanted to live there.
It’s undisputed by now, how businesses and consumers are moving online, the clothing industry being one of the ones most affected by this. Another example could be retail banking, which used to be a very personalized face to face experience. Today most people want to avoid visiting a bank branch. Overall all companies today have a challenge in communicating with their customers. This has obviously spurred growth in multiple new channels where companies tries to find new ways to connect with their customers. LiveChat has been riding on that wave and I think it’s a wave that still has a lot of runway left, giving this investment idea a nice tailwind. On the other hand the LiveChat growth figures are telling a story of slowing growth, that I account more to competition than that the actual market itself has entered a lower growth stage. According to the available market data and the company’s own estimates, the current value of the market for live chat type solutions may exceed USD 700m, with LiveChat having some USD 35m of that.
Zendesk has a nice graph showing how new ways of interacting with companies comes naturally for younger generations:
The market got a scare a few years ago, believing Facebook and Apple wanting to step into this space in a bigger way. Facebook would make it possible for customers to chat with companies on their homepage through Facebook messenger. Given that Facebook messenger is a well established channel it would not be strange that more and more companies moved more of their customer communication to that channel. LiveChat’s comment on this is: The company is developing a business ecosystem around its products, LiveChat and Chatbot, in order to be able to better address users’ needs. Thanks to these developments, they will be able to communicate with their clients via multiple platforms, not just using their website, but also via text message, Apple products, mobile devices, Facebook Messenger, social media communicators and platforms. For the interested reader a longer comment from around that time: LiveChat comments on Facebook chat.
Group’s growth strategy
This is taken from the company presentation:
The company’s development strategy is based on making continuous, balanced investments into further development of the LiveChat product, including in particular: a) functional development of the app; b) new communications channels;
• development of the ticket system
• mobile systems;
• social media;
• an integrated communications tool c) data-driven tools for larger corporations
Much of the above is based on the new services like Helpdesk, which recently launched. Overall LiveChat is mimicking much of what the market leader Zendesk is doing, which leads us into the Competition. I also learned from reading around on their blog that they have deployed clever tactics in the past to improve their LiveChat product. The company used a stand alone service called chat.io to play around and test new functionality without disturbing existing user-base. When a lot of new ideas had developed within the chat.io product, they merged them into the new LiveChat 3.0 version and started to roll it out to existing customers (Blog reference)
In interviews the CEO states that they are not afraid to charge properly for their product. It’s a premium product and they do not go for free versions (except a short free trial), since their experience is that it’s hard to convert a non-paying customer into a paying one. So they are confident they have a product which stand out in the competition. What does the landscape then look like in such a niche as chat-related services on company homepages?
I will focus on the two companies larger than LiveChat (tawk.to & Zendesk), which are at two extremes in their strategy of offering this product.
Visiting their homepage the first message is: “You never have to pay for live chat software again”. This is the largest freemium service of chat. Given it’s free it’s not surprising they have a huge number of customers, 2.2 million. As we know today, free always comes at a cost, like usage of customer data. There are also some other costs, like a monthly fee if you want to remove the tawk.to logo from the chat. Also they sell services of agents that talk in your chat for US$1 an hour. This obviously attracts a big set of smaller companies without the budget shelving out every month for a chat system and perhaps do not even have the staff to man such a chat. It is on one hand worrisome that such an attractive product is offered as a freemium/fully free service. On the other hand, as long as LiveChat can offer something significantly better, these companies might be door-openers to new customers. Tawk.to is not the only provider of such a freemium service, some of the smaller players in the above picture follow the same strategy. At the other end of the spectrum we have:
Zendesk is a US listed company with 10bn USD in Market Cap. They come from a different background, having customer support as their main product and later adding on chat. Another difference is that the company did not organically grow these new product offerings, but bought several companies. For example the Chat functionality was bought from Singapore based Zopim. Later they also acquired BIME Analytics which became their data analytics (BI-tool) platform. Zendesk currently have some 145 000 paying customers for all their products and some 45 000 chat paying customers. The company has expected revenues of some 181m USD the previous quarter, so they clearly charge their customers. Just focusing on the chat side of Zendesk, the pricing levels are very similar to LiveChat.
When you start to look into Zendesk and seeing the changes LiveChat done over the past few years, one realizes that they are playing catch-up on services Zendesk has already launched. In LiveChat’s investor presentation they mention that Helpdesk is to challenge Zendesk and other competitors with an attractive alternative. This product was just launched in May 2019, so it’s to early to tell how it has been received. Also in their presentation they compare number of paying chat customers for Zendesk vs themselves. Zendesk has over the last year lost customers each quarter, whereas LiveChat is (as you have seen) still adds customers.
Here it’s worthwhile to stop for a second, just how much is a Zendesk customer paying? (181million*4)/145000 = 4993 USD per year, per paying customer. Given that a lot of that revenue is not chat related, it still shows the income potential per customer with a wider offering (which LiveChat is building up currently).
Here I have plotted the trend in how much an average LiveChat customer is paying:
Although the slope of the trend is not extremely strong, I’m still happy to see that this is a positive trend. It tells quite a lot, that while the market has been flooded with good freemium options that LiveChat has increased income per customer. This is such an important point and one of the main reasons I see LiveChat as investable. Some observations around this:
LiveChat is now building up their product offering, with cross selling there is potential to reach closer to Zendesk earnings per customer.
LiveChat has been able to historically, at least slightly, up-sell their products to each customer (meaning more agents per customer, or adding chatbot services etc).
LiveChat is still adding paying customers, when Zendesk (with their strong overall offering is losing paying customers).
The company paid out almost 100% of profits during 2018 and during previous years paid out a large portion of profits as dividends. Over the last six years the company has paid out some 200 million PLN or 55m USD to shareholders (current market cap ~220m USD). My guess is that this was partly done because the founders wants to “cash out” without selling their shares and losing the company. So since the company was growing so nicely without massively reinvesting profits, they reasoned that they could shift out profits through dividends. In my view this has been a mistake, looking at how Zendesk has reinvested all of its cash-flow (and then some) they have grown much stronger over these years. If they can reinvest the capital at a higher rate of return than what investors can find elsewhere that should be preferred. At the same time Zendesk runs a totally different model of acquiring companies for growth. Whereas LiveChat grows organically with a strong local Polish team, which is a model I prefer. They have increased number of staff from some 84 to 145 in 1.5 year, so it’s not LiveChat is not investing at all. Many of these people are deployed to work on the chatbot if I have understood things correctly from my communication with the company. They also bought the domains chatbot.com and helpdesk.com last summer. So clearly they are stepping up things and deploying some of that nice cash flow back into growing the business.
But it’s still a fact that the company is paying out a very high dividend, currently at a 6% yield. So here I am complaining that you get a 6% dividend yield owning the company. Well, repeating myself, I think the ROI had been even better if they managed to deploy that capital for further growth. So given that LiveChat do continue to shift out capital to it’s investors and probably will not see the same high growth numbers as Zendesk, is the company worth buying?
Maybe we should deal with this question directly. Zendesk seems to be the market leader, why don’t I just buy that company if I like this niche? Short answer, because it generates losses and is at nosebleed valuation levels. I do think Zendesk is an impressive company, but for an investor like me, who cares about valuation, it’s a no go. A quick comparison table:
So with that out of the way, let’s move over to trying to value LiveChat.
Equity Risk Premium: Being a company listed in Poland I would normally warrant a higher risk premium, but given that all revenue is generated in USD from customers worldwide and the high dividend yield basically putting the accounting fraud risk at zero I’m going to go with my standard rate of 10% discount rate.
Growth: As we have seen, customer acquisition growth has stopped around 10% lately, whereas revenue growth has been somewhat stronger than that. My assumption here is that customer growth rate probably over time will drop to low single digits, but the growth will rather come from up-selling to existing customers.
Revenue Growth Bull: 20% first 5 years, dropping to 10% over the coming 5 years
Revenue Growth Base: 10% for the coming 10 years.
Revenue Growth Bear: Dropping to 5% over the first 5 years and then 0% growth.
Margins: Track-record is fantastic and I see no major reason that this should deteriorate significantly.
Margin Bull: 65% EBITDA margin, increasing to 68% over the next 5 years.
Margin Base: 65% EBITDA margin constant over time.
Margin Bear: 65% EBITDA margin, decreasing to 60% over the next 5 years.
Taxation: Here I have left the tax rate in all scenarios at the current corporate tax rate. But there is a kicker in all scenarios that the tax rate would drop under a new legislation interpretation where intellectual property revenues could be taxed at a much lower rate (IP Box tax)
Valuation Bull: 74 PLN per share – Probability 20%
Valuation Base: 48 PLN per share – Probability 50%
Valuation Bear: 30 PLN per share – Probability 30%
Which gives me a weighted target price of: 47.8 PLN per share, in line with my base case valuation. With the share currently trading at 33 PLN, I see enough upside (45%) with limited downside to enter a position at these levels. I will start with a position which is 4% of my portfolio and see how this develops.
Key Metrics to follow
This will be something I want to introduce for all of my holdings, some very brief key metrics that I will keep up to date, to follow the company over time.
LiveChat Key metrics:
Month over Month Added customers.
Quarterly Revenue per Customer.
Changes in capital allocation strategy.
Excess Cash Adding to Swedish Match and Irisity
The excess cash I have left after buying into LiveChat I distribute equally to my positions in Swedish Match and Irisity. Both companies in my view have a very nice risk/reward profile from here. Swedish Match Zyn product seem to be doing great and I don’t understand why the share is trading so weak when the Swedish Krona is losing even more to the USD lately. Irisity is reporting Q2 results soon and it will be interesting to see how the roll-out of their products to security companies have been going.
After a very tough October, my portfolio has recovered somewhat and is in total down -1.6% on the year. That compares to MSCI World which is down -4.4% on the year. Both have achieved these returns, with the exact same volatility, 15.1% for the year (calculated on weekly returns). My correlation is 79.5% to MSCI World, which is rather high, but also somewhat expected. When markets fall correlation tends to increase between all equities (the correlation during 2017 was 64%). After being down to 0% cash, when I introduced my new three bucket investment approach, I’m now back above 10% cash after divestments in my funeral related companies and Amer Sports, which I will comment further on below.
Amer Sports – The Chinese are buying
When I launched my big portfolio change: GlobalStockPicking 2.0 – Major Portfolio Changes, it just happened that information came out about a non-binding interest from HK listed Anta to make a bid for Finish listed Amer Sports at 40 EUR per share. Having looked into Anta when I invested in XTEP, the other sport shoe producer I thought this really made sense. Mainly because Winter Olympics in China is coming up. So I used my new Opportunistic investment bucket to take a 4% position in Amer Sports at 34.1 EUR per share.
I wrote at the time: “My own expectation is that this should be priced at 85%*40 + 15%*29 = 38.35 EUR”. I think the market has caught up with my analysis now, given that the stock closed at 38.37 on Friday. I still think this will go through, but there are some small tail risks, that for example USA will block the deal. Usually these things also take quite a long time, needing Chinese approvals. So I’m happy to leave the last 1.5 euro on the table and close my position here. This netted my a 10% gain in USD (some currency headwinds) in a market which was down -9% for the period, very happy with that. As always when an investment goes well, you just wished your bet was a bit larger.
This is the second time I got a more short term bet right, where there was Chinese related corporate action around a Nordic company. The first time was the Rezidor/Radisson case (Adding Rezidor Hotel Group – HNA related idea) which also ended with a buyout from another Chinese company.
Swedish Match – Adding 30% to my holding
The producer of Snus and moist snuff which through countless of studies have proven to be much less destructive to your health than smoking. The stock has been on a wild ride lately, first the markets have been very positive on the possibilities for growth of Zyn in USA. Lately the focus seems to be elsewhere, for example that Swedish Match will not be allowed to sell it’s products in the rest of Europe. I think they have a terrific product as good as all the e-cigarette alternatives. The company is very well run and highly cash-generative. This is one of those companies I plan to hold forever, now was a good opportunity to add to my holding. I add about 30% to my holding as of close Friday, bringing this holding to 6.1% of my portfolio.
Defensive feels good in these times
For the frequent reader, you know that I have been skeptical of markets for quite some time. I have expressed this in many ways, but the main theme has been finding defensive long term holdings. Early on in the sell-off my defensive approach did not really work out, because the only thing that held up MSCI World, was the U.S. market and tech stocks in particular. Being underweight both was therefore short term not good for relative returns. Lately it started to work better though when tech “finally” stopped defying gravity. Defensive feels very good right now, but that doesn’t mean I want to miss out on the stocks with higher return potential, or very undervalued cases. I will hold true to my defensive style as long as the valuation difference to growth/value doesn’t become too large. Now I’m actually more excited about stock picking than I have been for quite some time. Today I find much more interesting investment cases than I did a year ago, one example of that being Tonly Electronics – Another Hong Kong value investing case. There are many more I have on my Watchlist and even some not yet mentioned there. The point of my dental series has been an attempt to find 1-2 companies to invest in, which are defensive health care companies I can understand. To summarize my defensive holdings:
Olvi (5.7%) – Finland/Baltic – Produces beer and other alcoholic and soft-drinks, selling mainly in Finland and the Baltic countries.
Gilead Science (5.2%) – Global – Biotech company with market leading products against HIV and hepatitis.
Essity (5.2%) – Global- New Holding Essity – Wood base hygiene products, like tissue paper, diapers, feminine care etc.
Diageo (4.1%) – Global – One of the worlds largest distillers with brands like: Johnnie Walker, Smirnoff, Gordon’s Gin, Captain Morgan and numerous others. Also Guinness is a large portion of revenue as well as its 34% stake in Moet Hennessy drinks division of LVMH.
Inditex (2.8%) – Global – The world famous clothing retailer Zara, so far keeps defying the e-commerce slaughter by producing outstanding clothes at a fantastically low price point.
Total = 53.8% of my portfolio is held in defensive companies or cash.
The above companies are a mix of daily needs, like food, clothes and hygiene and vices, like alcohol and gambling. All of the above holdings I’m confident to hold long-term, especially in a bear market. That doesn’t mean though that none of them will ever leave the portfolio. I try to think long term and get to know my companies well, something I didn’t appreciate enough in the past. Part of being long term is to not rush into the new investments, I will take my time and get to know new companies properly before investing. But if I find a new investment that feels much stronger than what I currently hold, the old will go out.
Currently thinking about
Lately I spent a lot of time trying the understand the Chinese tech scene better. There are a couple excellent podcasters out there who educate anyone willing to listen, on everything related to China tech. One thing that is very clear, is how extremely hot this sector is and how fierce the competition is. It seems to be on a totally other level than outside China. On top of that we have the Chinese government interfering in a lot of different niches. The competition and the intervention has again made me more negative in general. So the three of my holdings I’m currently thinking most about all have strong China and tech ties:
NetEase – Great company, with quality games and co-ops with western gaming companies. Given how much U.S. listed Chinese companies have been punished lately I think investors still really like this company, trading at a trailing P/E of 37 and estimated P/E of 24, is not dirt cheap. Obviously partly this is due to the halt in new game launches in China and everyone is expecting this to be temporary. Still, the government is showing who is boss and they won’t allow especially young people to be gaming addicts. Just as the funeral case, this hampers the upside for NetEase. Although I would argue that it probably very long term is healthy for the company to have more balanced customers and not school drop-out gaming addicts. The other aspect is the competition, which seems to be brutal. In Sweden a number of listed gaming companies have plummeted lately, it’s not that easy to keep delivering one of the few hit games everyone is playing. I have a hard time deciding of this a long term keeper or not, maybe the competition will eat up NetEase future? My Original Post on NetEase: NetEase – Chinese Gaming
JD.com – Here we have a company that is again fighting in fierce competition in the e-commerce space. The moat though and reasons for investing in this company is the fantastic delivery/logistics network they have built up. This is the hidden value in the company and the reason I invested. Some nasty details has been coming out about what the CEO has done in rape allegation case. It doesn’t feel very good to be shareholder alongside someone accused for something like this, but the company as such, I think is valued very low currently. If we disregard from personal feeling around the allegations (which is hard to do), this is in my mind a value investment at these levels.
Coslight – I haven’t written much about this company for a long time, it has been a big disappoint lately. This was an early investment for me on the theme of EVs and back-up power stations. The company has developed poorly due to needs for large investments which has been impossible with the already high debt levels (a misjudgment on my side). The solution became to sell of parts of the factory producing batteries for laptops. I think that was the best they could do out of a bad situation, but I’m not sure if they will be able to succeed to play with the big boys like Panasonic, LG, Samsung and CATL. Already back in 2016 it was clear to me I needed to wait until 2020, before EVs would start to sell in larger scale, now we are almost there. This should perhaps move into the Speculative bucket, but I held it for a long time and I will let this Electric Vehicle hype actually play out before I decide further on Coslight. The same reasoning goes for LG Chem, but there I don’t have doubt about their success, they are and will continue to be one of the market leaders. My original post of Coslight: Coslight Outstanding results