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Monthly Report: International Fund May 2020

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International Fund May Monthly Report

Global stocks recovered further in May, with the MSCI World Index rising 3.2% in Australian dollars. As the number of new coronavirus cases continued to decline, governments in most developed economies took steps towards reopening, albeit to varying degrees.

That benefited stocks most exposed to the economic fallout from virus-related restrictions, including travel and retail businesses. While the Fund profited from these general themes, an inch of icing was added to the cake by two idiosyncratic smaller companies. The Fund’s unit price jumped 12.6% over the month.

If its share price is the arbiter, the move by GAN Limited (Nasdaq:GAN) to the Nasdaq stock exchange has been a raging success (see the April 2020 report). On 4 May, its last trade on London’s AIM exchange was at the equivalent of US$11.25 per share. While that was already 56% higher than the end of March, it ended May at US$21.89, an increase of 95% since its US debut. While we share investors’ enthusiasm for this business’s prospects, much of its rosy future is now reflected in the stock price.

Remarkably, GAN was almost pipped as the best performer for the month. Fellow Nasdaq-listed small cap Celsius Holdings (Nasdaq:CELH) saw its share price rise 85% in May. This energy drink company reported a bumper first-quarter result, with revenue increasing 95% compared with the same three months in 2019. While accelerated demand from North American consumers stocking up on non-perishable goods was an extra benefit in March, management is guiding further strong growth throughout the year.

We will write more about Celsius in the June quarterly report (its small size and low trading volumes have meant keeping it quiet until now). But the company has carved out an attractive niche in the hyper-competitive energy drinks market. It should generate more than US$100m of revenue in 2020, there is plenty of potential beyond that and, at the right point, it is going to make an attractive acquisition for any of the global drinks giants.

The Fund’s retailers might not be growing at such lofty rates, but they are showing their strength through this crisis.

New Zealand’s Hallenstein Glassons Holdings (NZSE:HLG) provided investors with a not-too-dismal trading update. The retailer’s sales fell 32% over the first 14 weeks of the new financial year (HLG has a January year end). For more than half of that period, its physical store network in Australia and New Zealand was closed. In New Zealand, its online operation was also limited.

The company has a strong digital offering and has experienced “significant growth” in online orders. Net profit is expected to be a loss of just NZ$2.8m for the period to date. HLG expects to trade profitability from May as stores reopen in both countries. While its conservative management expects that to be at a lower level than last year, staff in our local Bondi Junction store say they have been “slammed” since reopening on 1 May.

Coronavirus-induced losses at Ulta Beauty (Nasdaq:ULTA) have been far worse. It lost US$78.5m in its first quarter of the 2020 financial year. While sales were trending above management’s expectations prior to 10 March, from then until the end of the quarter comparable sales were down 62% on the prior year. As restrictions started to ease in mid-May Ulta reopened some of its stores. The initial wave of 180 reopened stores have been performing well, with the combined sales of those stores (including online) in line with last year. Like many other retailers, Ulta’s online business more than doubled in the quarter. Online performance could have been better though, with management holding back on promotional activity in order to manage demand at its distribution centres.

Ulta ended the quarter with more than $1.1bn in cash, so the business is equipped to manage through a longer period of reduced demand. Many retailers, including long-suffering department stores, are not so lucky. Ulta is well placed to continue taking share.