Vol. 1, No. 2
Stock Valuation Rundowns, and a Deep Dive on My Best Idea.
Welcome to Valuabl - a fortnightly newsletter for value investors with in-depth research, stock valuation rundowns, and deep dives on my best ideas.
In Today’s Issue:
Stock Valuation Rundowns (7 minutes)
Deep Dive on My Best Idea (11 minutes)
1/ Stock Valuation Rundowns
Today’s newsletter will look at valuations of Playtech Plc, THG Plc, Inseego Corp, Roku Inc, Mitchells & Butlers Plc, The Campbell Soup Company, Ralph Lauren Corp, and Molson Coors Beverage Co.
If you’re a subscriber, you can post your valuation requests here.
Playtech Plc. (LSE: PTEC) - Valuation on 20th October
Previous valuation: 8th February 2021
Earlier this year, I valued Playtech at £6.05-£6.57 per share. The shares traded around £4.80, and I rated them a Buy based on the prevailing price being below the first percentile of my Monte-Carlo simulation.
On 17th October, Bidco (a wholly-owned subsidiary of Aristocrat - an Australian gambling machine manufacturer) agreed to acquire Playtech for £6.80 per share. This deal is a 42% premium to the shares’ February price, a 59% premium to the price the day before the announcement, and a 3.5-12.5% premium to my February valuation.
I seem to have a habit of taking positions in companies that end up getting acquired. This outcome, in and of itself, isn’t bad. Instead, it is frustrating when they get acquired for less than I think they’re worth. However, there is little I can do about it. Playtech was a substantial position of mine, so I’m revisiting my valuation to see if we will be receiving fair value for the shares.
The Story
Playtech Plc. (£2.0 billion market cap) is a leading gambling software development business. The global online gambling market is growing at an 11.7% CAGR. Playtech’s leading technology, barriers to entry, and increased levels of reinvestment into the business will help them expand their share. Over time, the enterprises cost structure will normalise, albeit with higher regulatory costs. Playtech will push through these increased costs on the B2B end, and margins will return to their long-term average (16.9%). However, it’s not all sunshine and daisies as they still have an enormous (£1 billion) debt burden and a poor credit rating (Ba3/BB-) which will hinder their ability to raise capital to plug the FCF deficit.
Intrinsic value per share: £6.36
Price per share: £6.79 (£6.80 acquisition price)
Price-to-value: 106.8%
Rating: Hold
All in all, it seems like we will be receiving about fair value for the shares, so I’m not disappointed by this acquisition.
THG Plc (LSE: THG) - Valuation on 26th October 2021
Previous valuation: 23rd November 2021
When I valued The Hut Group Holdings Plc in November last year, the stock traded around £6.30. I valued it at £4.65 and rated it Reduce. Since then, the stock has fallen more than 60% and is trading around £2.40. I thought I would revisit my valuation and see if there was any value at this price. My story for the business is largely unchanged, however, the baseline numbers are different.
The Story
THG (£3.7 billion market cap) is a small player (0.34% market share) in the already enormous global D2C eCommerce market. By acquiring brands (most recently Dermstore, Bentley Labs, Brighter, and Cult Beauty), developing their products and scaling the Ingenuity platform globally, the business will eventually become Shopify meets Fulfilment-by-Amazon. Their market is growing (5.5% CAGR), and they will more than double their global share of it over the next five years. Moreover, this increased scale will bring operating costs down, and margins will approach the weighted average of the four industries it operates in (12.7%). However, I have forecast eight years of negative FCF, but the business can only fund one at the moment and will need to raise capital soon.
The variance in intrinsic values for this business is considerable. Small changes in assumptions drive large changes in valuation and as a result, the Monte Carlo simulation has a wide distribution. The current price (£2.40), is at the 29th percentile on the distribution. I am not going to buy the stock at this price but have a limit order at £2.01 (the 25th percentile).