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Monthly Report International Fund August 2022


International Fund August Monthly Report

Having rallied strongly in the first few weeks of August, equity indices ended the month slightly lower, with macroeconomic concerns returning with a vengeance.

Federal Reserve Chairman Powell’s Jackson Hole speech dented investors’ confidence that interest rate rises might soon end. Declaring the Fed must “keep at it until the job is done”, Powell drew parallels with the 1970s, suggesting the risks associated with pausing too early were greater than the short-term economic impact of going too far: “the longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched”.

The message was clearly pointed towards financial markets—investor optimism is unfounded. Share prices fell promptly.

Still, it’s a nicer problem to be dealing with than the rampant energy prices hitting Europe. Everything is going wrong, including Russia shutting off gas supplies, drought-afflicted rivers curtailing nuclear energy, and a global shortage of coal. Wholesale gas prices in Europe have risen four-fold over the past year. If recent prices hold, it is a dramatic impost on the economy (Goldman Sachs has forecast a $2 trillion rise in energy bills) that’s likely to send the Eurozone into a recession.

The craziness of recent years is showing no signs of abating.

Amidst the turmoil, portfolio investments Flutter (LSE:FLTR), Zeta Global (NYSE:ZETA), and RumbleOn (NASDAQ:RMBL) announced results that offset market pessimism.

Our chief thesis with Flutter is that its US operation, FanDuel, is being significantly underappreciated. As the US market deregulates state by state, we expect the business to be as profitable as Flutter’s Australian and UK operations and of a scale that dwarfs both.

Prior to August’s 31% jump in the share price of Flutter, the market treated FanDuel and competitor DraftKings (NASDAQ:DKNG) as interchangeable twins. They both have a deep base of legacy fantasy sports customers to market to, but that’s where similarities end.

FanDuel has done a superior job turning customer bets into revenues through higher margin products like parlays. It claimed a 51% share of the sports betting market in the second quarter. And it’s scaling quickest, achieving a profit in Q2 despite huge spending on customer acquisition. FanDuel is now making attractive profits from longer established states like New Jersey—where EBITDA margins hit 17% in Q2—only partially offset by marketing-led losses in newer states.

The division will report a loss in the current half but should be profitable from 2023, funding its continued rapid growth exclusively from retained earnings. Meanwhile, competitors like DraftKings and BetMGM will have increasingly difficult decisions to make about how quickly to grow, considering they’re still bleeding cash. The tail of smaller competitors – including PointsBet Holdings (PBH)—look even more precarious.

Flutter’s leading US position is finally catching attention. We think that recognition has a way to go. An investor day focused on the US operation in mid-November will help highlight the story to an American investor base that hasn’t been paying sufficient attention, we suspect chiefly because Flutter is listed across the pond.

Marketing platform Zeta is showing no ill effects from the marketing slowdown impacting the likes of Meta (NASDAQ:META) and Alphabet (NASDAQ:GOOG). Its second-quarter revenue was 28% higher than the previous year and 8% higher than the first quarter. Management claims its proprietary data is even more valuable in a difficult environment and that both existing and new clients continue to increase their spending.

Zeta’s publicly stated 2025 ambitions of more than $1bn in revenue and adjusted profit margins of more than 20% look eminently achievable. Even after un-adjusting most of the adjustments, that would make today’s share price look very attractive.

RumbleOn doesn’t need growth. If the motorcycle and powersports retailer maintains recent profitability, shareholders will be happy. Its share price was less than $17 prior to reporting $1.20 of earnings for the second quarter alone. The share price has jumped but it’s still less than five times expected earnings. Management suggests the main issue remains sourcing new inventory rather than a lack of consumer demand.

Sales of used bikes have offset the lack of new inventory so far, with RumbleOn’s large retail network and online presence allowing it to outperform a difficult market. By the time supply returns, higher interest rates will likely be impacting demand. If it can navigate those difficulties as well as it has other recent challenges, RumbleOn deserves a much higher multiple of earnings when we reach the other side.