Catapult Group International (CAT) is the largest investment in the Forager Australian Shares Fund. Its half-year results justified our optimism.
The sports technology company grew its September half-year revenue 19% and annualised contract value, a measure of recurring revenues, 20% to US$97m after adjusting for currency movements.
Catapult’s journey to consistent profitability continues apace. Of its US$8.1m revenue increase, 75% dropped through to management’s preferred measure of profitability. That is unsustainably high, but the company has guided to 30% overall profit margins when the business hits a point of higher scale (excluding share-based compensation). At about 50% incremental margins, the target looks eminently achievable by the 2028 financial year.
It was a result difficult to fault, and there is no obvious impediment to Catapult’s momentum. Its customers, professional sports teams, are growing in number and size. Catapult continues to take share from its rivals. The best part of the recent result was the accelerating growth in its newer video segment, where Catapult faces more robust competition (the main wearables business is five times larger than its nearest competitor). It is now generating positive free cashflow and has the capacity to invest heavily in product development alongside its margin expansion. We anticipate it growing at about 20% per annum for some time to come.
Our thesis is well and truly on track (you can listen to our podcast with CEO Will Lopes from this time last year). The only question is valuation. Catapult’s share price has tripled over the past 12 months, taking its market capitalisation to a touch over $900m (US$585m). We have been buying all the way up and, after the past week’s share price appreciation, the Forager Australian Shares Fund’s weighting is above 11%. That is a large percentage of the portfolio, even by our concentrated standards.
Firstly, on valuation, we still think it stacks up. On our numbers, the business can generate nearly US$200m of revenue by financial year 2028 and over US$300m by 2031. By then it should be doing 30%+ margins after share-based compensation and, fully taxed, generating something like US$80m in net profit after tax.
It will matter a lot how much growth remains ahead of the business at that point. Even if the growth has slowed, it should still be worth 20 times earnings. If it’s still growing 20% per annum, it could easily be a 40 multiple. This is a global growth stock.
That would give Catapult a $2-4bn+ valuation and could place it inside the ASX 200.
Obviously, the high end of that range is an optimistic scenario, and there is plenty that can go wrong between now and then. But Catapult can still be a good investment on much more modest assumptions. And, in the near term, we are willing to risk a higher weighting than normal while the rest of the market gets its head around this business.
In the five trading days since Catapult’s half-year result, over $80m worth of shares have traded. That’s more than the prior 40 trading days combined. Despite its $900m market cap, this is not a widely held stock among Australia’s larger small-cap managers (most likely due to prior disappointment). They are likely to get on board now that the business is profitable, and the stock liquidity has improved. Bulge-bracket research firms are likely to commence coverage and Catapult should qualify for inclusion in the ASX 300 index next time changes are announced, bringing passive index buying to the market.
In short, the transition from illiquid small cap to widely held growth stock is well and truly underway. We won’t let it become irresponsibly large, but are willing to tolerate returns volatility while we capture as much of the near-term upside as our risk tolerance allows.
While Catapult is a fairly unique global growth story for the ASX, it had plenty of company as an unloved small cap a year ago. There remain many more that the market hasn’t yet latched onto, so register for our monthly and quarterly reports to find out where today’s best bargains lie.