Let me say upfront: writing about shares is a little tougher this week. There’s too much sport ahead. Mouth-watering football grand finals, the Spring Racing Carnival, then test cricket and the booming Big Bash T20 cricket. What’s a sports tragic to do?
Daydreaming about the NRL and AFL finals this weekend and why my teams (Manly and Hawthorn) are not there inevitably turned my mind to sports-related stocks. Some have starred this year and have good prospects because of social and technological change.
There’s more sports-related companies on ASX than realised, depending on how long a bow one draws. Tabcorp Holdings is the largest through its wagering operations on racing and other sports betting – an intensely competitive market as local and offshore betting companies slug it out.
Retailers are another opportunity. Athletic shoe wear retailer, RCG Corporation, a favourite of this column, is superbly positioned as more people walk and run for exercise, needing higher-priced fitness shoes and replacing them sooner.
Super Retail Group, with its Rebel Sports chain and leisure and auto retailing divisions, is another exposed to the trend. Although a broader business than sports, Super Retail benefits from customers wanting a more active lifestyle and revheads who buy car accessories after watching motor sports.
I mentioned Super Retail and RCG Corporation as two retailers to watch in a column for The Bull in May 2014. Super Retail is up 21 per cent over one year and RCG has returned 33 per cent (on a total return basis). RCG looks the pick of the two, given its near-term growth prospects.
XPD Soccer Gear Group, a provider of footwear and sports apparel in Asia, is another option. The Chinese company listed on ASX through a $6 million Initial Public Offering (IPO) in May 2015. Its 20-cent issued shares have fallen to 12 cents.
XPD reported 20 per cent growth in revenue to $56.1 million and underlying profit of $8.9 million in its latest half-year FY16 result. Chinese demand for soccer footwear is an interesting growth market, but I’ve found micro-cap Chinese floats on ASX mostly too speculative over the years. Many have disappointed.
Another IPO, Catapult Group International, has starred. The maker of wearables sport technology for elite athletes raised $12 million and listed on ASX in December 2014. Its 55-cent shares have soared to $3.41, having peaked at $4.29 earlier this year.
Chart 1: CatapultSource: The Bull
There’s a lot of interest in Catapult. It is a genuinely global technology business that sells a high-margin product with recurring revenue. Major sporting codes and clubs use its technology to extract real-time data on their athletes and feed it into their sports-science programs. Catapult’s product range covers a range of high-tech sporting hardware and software.
The skydive companies, Indoor Skydive Australia Group and Skydive The Beach Group also joined ASX through IPOs in the past few years. Indoor Skydive, which has a facility in Penrith and several in development around Australia, has fallen to 41 cents, after strong early gains.
Skydive The Beach Group has rallied from a 25 cent issue price to 58 cents. The provider of tandem skydiving, accelerated freefall courses and adventure tourism, was among the best-performed floats last year.
Rugby league diehards can invest in iconic Queensland football team, the ASX-listed Brisbane Broncos. However, the $34-million company is too illiquid for most investors: its two largest shareholders hold 90 per cent. The stock has provided modest single-digit shareholder returns annually over 10 years – better than most rugby league teams that lose money each year.
It’s a shame that the more sports companies are not listed on ASX. Some of the most interesting providers, such as Lorna Jane in fitness wear, and 2XU, a provider of compression sportswear, remain privately owned. There was speculation last year that the impressive 2XU would list in Australia or the United States through a $600 million IPO.
The best opportunities in sports companies are overseas, notably the apparel companies, Nike Inc and Adidas AG. These multinationals are ideally positioned to capitalise in demand for sporting clothes and shoes in developing companies. Fitbit Inc, the market leader in fitness trackers, is another option. Listed on the New York Stock Exchange, Fitbit has fallen from $US47 in July 2015 to US$16.53.
Chart 2: FitbitSource: Yahoo
I identified an opportunity in Fitbit for The Bull in July 2016, in a broader story about the wearables technology craze. Fitbit has rallied 26 per cent since that story after stronger-than-expected second-quarter sales. Its recently released Charge HR 2 device is a winner.
Fitbit remains a preferred offshore idea for sports-related exposure. RCG Corporation and Catapult look the pick of the local stocks. Catapult has fallen 20 per cent from its 52-week high and further losses would not surprise as more steam comes out of the stock.
Care is needed with the loss-making Catapult, which has a $289-million valuation. But it is a high-quality business with an excellent position in a global growth market. Catapult deserves a premium valuation as it moves to profitability next year and maintains rapid sales growth.
I can see Catapult substantially increasing its global market share in its field (estimated at up to 8 per cent) and lifting prices over the next few years (it should have solid pricing power).
Recent acquisitions will help it cross-sell products to other elite sporting teams and watch for its performance-monitoring wearables technology to trickle to early-adopter consumers, before a larger retail market embraces the concept.
Valuing companies such as Catapult is never easy. Keep an eye on its unit sales, total transaction value and management execution. If Catapult delivers on its potential, it will be worth a lot more in five years than it is today.
Chartists might watch if Catapult hold price support around $3. It would look interesting for long-term fundamental investors below that level.
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. The article has been prepared without taking into account your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness and accuracy of the information, with regard to your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis as at Sept 28, 2016.