Weekly Stocktake

08 September 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Shoprite: Fuel for Thought

Shoprite, the grocery retailer, has seen a consistent rise in market share in recent years. The latest results for 2023 demonstrate the success of their expansion efforts. Sales for the Shoprite group in 2023 increased by 17.1%, reaching a total revenue of R219.5 billion. Despite a high inflationary environment, Shoprite’s gross profit also saw a notable rise, reaching R51.7 billion for the year. However, the overall profit for the year saw a more modest increase of 2.8% to R5.9 billion, mainly attributed to diesel costs incurred during loadshedding and delays in finalising the acquisition from Makro.

Shoprite’s results provide valuable insights into the true state of the economy. Through their Xtra Savings loyalty program, Shoprite gathers extensive data, boasting 10.6 million participants in the Checkers program and 17.2 million in the Shoprite program. This enables Shoprite to gain a thorough understanding of individual buying habits and their evolution over time. Given the challenging economic conditions, consumers have been actively seeking better prices. Shoprite has addressed this by offering cost-effective bundled deals to consumers.

Upon the release of the results, a notable focal point was the diesel cost for Shoprite’s group, amounting to R1.3 billion for the year. This marks a significant increase from the R0.2 billion spent the previous year. Retailers generally operate on narrow profit margins, with Shoprite’s net margin standing at 2.7% for the year. Retailers contend with the dual-edged impact of operational leverage. Efficiency improvements in their operations have an amplified effect on net profit in relative terms. Conversely, factors like the increase in diesel costs have a substantial negative impact. The diesel costs shaved 18% off Shoprite’s potential profits.

During the earnings call, there was limited discussion regarding plans for the implementation of long-term power solutions, such as solar. One possible reason could be that Shoprite leases the properties it utilizes from third parties, like shopping malls. Thus, negotiating lease agreements with property owners may be the stumbling block.

At Lunar Capital, we like Shoprite. We believe that their recent results reflect positively on their ability to engage with customers across various income brackets. Their emphasis on expansion, coupled with their efficient central distribution model, allows them to maintain competitive pricing for consumers.

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1 September 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Lululemon: Stretching Legs Internationally

Last week, Lululemon released their Q2 2023 results. Despite the slowdown in consumer spending due to the tough economic environment worldwide, Lululemon increased their revenue by 18% compared to the same period last year. For the quarter, sales in the US accounted for 64% of total sales. The gross margin and net income margin for Lululemon came in at 58.8% and 15.4%, respectively. Lululemon’s price to earnings ratio closed at 52.5 on Friday. This is still quite a high valuation.

Lululemon is an athleisure retailer and has a more established presence in the US compared to other parts of the world. However, their growth outside the US is much higher at 52% versus 11% in the US. The international sales surge was primarily fuelled by a notable revenue increase in China, which witnessed a 61% growth rate. China currently boasts the second-largest number of Lululemon stores, totalling 126 as of the end of July 2023. These stores in China tend to be smaller, and the company offers its products at lower prices in response to the smaller average wallet size of customers in the region. Consequently, the average revenue per store in China is lower, currently standing at $2.2 million per a store for the quarter, compared to the US, where the average is $3.9 million.

The stores serve as essential platforms for Lululemon to showcase their products and create unique user experiences for customers. Notably their direct-to-consumer segment has become increasingly significant, accounting for 40% of their total sales. Revenue derived from this segment increased by 15% compared to the same quarter last year, while revenue from their physical stores grew by 21%. The operating income margin for the direct-to-consumer segment is higher at 42%, whereas the stores segment has an operating income margin of 30%.

Lululemon operates in a highly competitive landscape, facing rivals such as Nike and other legacy luxury fashion companies such as Louis Vuitton (LVMH). Both Nike and LVMH boast well-established positions and robust balance sheets. Nevertheless, Lululemon’s relatively focused product line-up provides them with the potential to expand into diverse product categories. The barriers to entry in the retail world are comparatively lower than in other industries, meaning new potential competitors are coming into the market every day. Despite these challenges, Lululemon maintains a dedicated and loyal customer base. Customers repeatedly return to purchase their products due to the consistent quality they offer.

Lululemon is held in the Lunar BCI Worldwide Flexible Fund. Lululemon and LVMH are held by Lunar Capital’s Offshore Portfolio Clients.

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25 August 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Nvidia: Where to from Here?

Nvidia released the most anticipated results of the earnings season last week. Since the beginning of the year, Nvidia’s stock price has increased over 220% which resulted in their market capitalisation reaching $1.1 trillion by Friday last week. During the year, the market became ever-more optimistic about Nvidia. For the recent quarter, revenue increased by 101% to $13.5 billion compared to the same quarter last year, with the gross profit margin reaching 70%. Nvidia’s quarterly net profit increased by 843% to $6.18 billion.

The primary cause behind these results largely stemmed from Nvidia’s sales of Graphic Processing Units (GPUs) used in AI (Artificial Intelligence) data centres. The main buyers of these products include Alphabet, Microsoft, and Amazon; all of which already had extensive data centre infrastructures. The most sort after chip for AI infrastructure is Nvidia’s H100 chip, which costs around $40,000. Since ChatGPT’s debut last year, companies have been adjusting their budgets to accommodate AI expenditure. These tech companies have been allocating substantial resources to acquire these chips so that they can try get ahead in the AI race.

Although Nvidia performed strongly this quarter, there are concerns about the sustainability of these results, and the strategies that companies will implement to provide AI services. Microsoft, who owns a stake in OpenAI (the creators of ChatGPT) have recently incorporated Large Language Models (LLMs) in some of their products such as Office365. In terms of hard numbers, the long-term implications of this implementation still remains unclear. Investors will be looking for concrete returns on investment on AI spending. Without adequate returns, AI infrastructure spending will reduce, impacting the share prices of companies like Nvidia.

Nvidia, Microsoft and Amazon are held in the Lunar BCI Worldwide Flexible Fund. They are also held by Lunar Capital’s Offshore Portfolio Clients.

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18 August 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Adyen: Growth at All Costs?

Adyen is a Dutch financial technology platform specialising in helping businesses with payment processing, financial management, and business analytics. They have recently undertaken an expansion initiative. In the first half of the year, they hired 551 full-time employees (FTE), bringing their total workforce to 3,883 FTE. The majority of these new hires were in technical roles aimed at enhancing Adyen’s existing platform and supporting new projects. This expansion does not align with the “cost optimization strategies” observed by Adyen’s competitors and among the businesses they service.

Adyen recently unveiled its H1 2023 financial results. In this period, their net revenue reached €739 million, marking a 21% increase compared to the same period last year. However, due to escalated wage and salary expenses associated with their growth strategy, the operating income for Adyen was €279 million for H1 2023, reflecting a 16% decline compared to the previous year. During the week, Adyen’s stock price experienced a substantial drop of 45%. The company ended the week with a Price to Earnings (P/E) ratio of 48.

The market appears to be displaying apprehension regarding Adyen’s current strategy. Adyen has been significantly expanding their workforce, despite a deceleration in their revenue growth. Several factors may be contributing to this trend.

1) Their clientele seems to be prioritizing cost optimisation and profitability over market expansion, impacting Adyen’s revenue growth.

2) The presence of well-established fintech giants like PayPal and Stripe in the US has intensified competition more than initially anticipated.

3) There might be a lagged effect between their recent hiring initiatives and the actual impact on revenue. It’s possible that Adyen will only fully experience the consequences of their expansion program in a few quarters from now.

Adyen management have been consistent that they are building for the future and that any investments that they make in people and their platform will only yield results in a few year’s time. Pursuing expansion in the current economic climate does carry inherent risks. Nonetheless, if Adyen successfully executes their expansion strategy, they have the potential to emerge from the recession in a notably better position compared to their competitors.

Adyen is held by Lunar Capital’s Offshore Portfolio Clients.

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11 August 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Novo Nordisk: The Hype Around Semaglutide

Novo Nordisk, owned by Lunar Capital and its clients, is a global pharmaceutical company headquartered in Denmark. The company specialises in the treatment of diabetes, obesity, and rare blood diseases. Among their recent advancements, they introduced Semaglutide, a medication catering to type-2 diabetes and obesity. These drugs emulate the actions of the natural hormone glucagon-like-peptide-1 (GLP-1). This emulation aids in the regulation of blood sugar levels by promoting insulin production, curtailing glucagon production, and slowing down the emptying of the stomach. Last week, Novo Nordisk indicated that the recent trial for the Semaglutide 2.4mg treatment demonstrated a 20% reduction in major adverse cardiovascular events in adults suffering from obesity. This announcement pushed their share price up by approximately a 16% on the day.

The recent financial performance of Novo Nordisk can primarily be attributed to the surge in GLP-1 treatment sales. Revenue for Novo Nordisk during the first half of 2023 increased by 29% compared to the same period in the previous year, reaching Danish Kroner (DKK) 107.7 billion. Their gross margin increased from 84.4% last year to 85.1% in the current year. All contributing to a net profit increase of 43%, totalling DKK 39.2 billion for the period. The USA is their largest market, with revenue growing by 44% and contributing just under 60% of Novo Nordisk’s total revenue.

Pharmaceutical companies can enjoy robust profit margins, as seen by Novo Nordisk’s gross margin of 85% and net margin of 36%. Nonetheless, the industry itself is fraught with risks. The stringent (understandably) regulations that govern pharmaceutical companies requires a series of trials often over many years. To sustain their existence, pharmaceutical companies allocate a considerable portion of their revenue towards research and development efforts to counter the treatments in their pipeline that come off patents. For instance, during the first half of 2023, Novo Nordisk spent DKK 13.8 billion on research and development, which amounts to 12.9% of their revenue. In instances where the effectiveness of treatments fails to yield positive outcomes, the potential repercussions could lead to losses and possibly more dire long-term consequences.

Novo Nordisk is held in the Lunar BCI Worldwide Flexible Fund. It is also held by the Lunar Capital Offshore Portfolio Clients.

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04 August 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Amazon: Manic Obsession over the Customer

Many companies profess a commitment to customer-centricity. They seek to develop products adored by customers and use phrases such as “the customer is always right.” However, few can rival Amazon in this regard, who consistently from its inception has an obsession with customer experience. Amazon’s businesses include a global E-commerce enterprise, AWS (their cloud infrastructure division), as well as its media business Prime and MGM Studios, amongst others. They continuously expand their influence across other business domains. At the core of Amazon’s business lies the principle: “customer obsession rather than competitor focus.”

Amazon Prime, a membership program tailored to benefit Amazon customers, stands as an example of Amazon’s dedication to enhancing the customer experience. Amazon Prime members pay $139 annually, entitling them to two-day shipping for eligible items, access to Amazon’s Prime Video streaming service, early access to e-commerce deals, and other perks.

While Amazon diligently seeks to refine its offerings, some investors contend that the company’s intense focus on customer experience may, in some instances, overshadow the pursuit of profitability across its business divisions—particularly evident in Amazon’s ongoing efforts to reduce delivery times. Notably, some investment analysts assert that the cost incurred may not justify the potential gains. Nevertheless, Amazon remain steadfast in their belief that, over the long term (another core principle of Amazon’s), “customer obsession” will build shareholder value. In fact, Amazon has noted an increase in the number of items clients purchase as they deliver faster.

Where has customer obsession taken Amazon. Last week, Amazon released their Q2 2023 results. For the quarter, Amazon reported net sales of $134 billion, marking an 11% increase compared to the same quarter last year. Amazon operates with relatively narrow operating margins. Changes in revenues or costs can lead to notable shifts in their operating margin. Amazon managed to lower the growth rate of their operating costs compared to their revenue. In Q2 2023, Amazon’s operating income reached $7.7 billion, up 133% compared to the same quarter in the previous year.

Amazon is held in the Lunar BCI Worldwide Flexible Fund. It is also held by the Lunar Capital Offshore Portfolio Clients.

28 July 2023

Key Indicators

Source: Iress

Weekly Stocktake with Danyaal

Enphase: New Power on the Block

Enphase Energy, a business held in the Lunar BCI Worldwide Flexible Fund and by Lunar Capital’s Offshore Portfolio clients, is an energy technology company that operates in the Americas, some European countries, and Australia. They specialize in selling solar generation and storage equipment, with all their devices seamlessly connected to the cloud for users to monitor their electricity usage, generation, and storage. Among Enphase’s products is the micro-inverter, which distinguishes itself from central inverters by having each micro-inverter being linked to separate solar panels. This setup ensures optimal panel performance as a whole, even when one panel is inactive or has been shaded by a leaf or something else. In contrast, a centralized inverter would convert energy less effectively if those same panels failed.

Last week, Enphase disclosed their Q2 2023 results. During the quarter, their net revenue amounted to $711 million, indicating a notable 34% growth compared to the same period last year. However, this Q2 revenue was slightly below the revenue of $726m in Q1. Enphase achieved a gross margin of 45.5% for the quarter, an increase of 4.2 percentage points compared to the same quarter last year. The net income for the period stood at $157 million, translating to a net income margin of just under 22%. In contrast, during the same quarter last year, Enphase’s net income margin was just below 15%. This performance not only reflects their ability to reduce product manufacturing costs but also highlights their ability to improve their operational efficiency. Most of Enphase’s manufacturing operations are in India and Mexico, where labour costs are lower than in the USA and Europe.

Historically, Enphase has typically experienced higher Q2 revenues compared to their Q1 revenues. However, this year, it was not the case. They attributed this anomaly primarily to the high interest rates in the US and reduced consumer spending across the economy. This resulted in a 12% decline in revenue for Enphase’s US operations. Despite the challenging global macro-economic conditions, their operations in Europe showed a significant improvement, with a remarkable 25% increase in revenue quarter on quarter. This growth can be attributed to Enphase operating from a lower market-share base in Europe compared to the US. As of last week Friday, Enphase’s market capitalization was just above $21 billion.

Enphase will likely benefit from a move to green and cleaner sources, residential clients reducing their dependencies on energy utility companies, European clients reducing their dependencies on hostile foreign countries (read Russia) for their oil and gas requirements; and also the move to electric vehicles.