Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Forager Funds Management portfolio manager Alex Shevelev evaluates three ASX shares going for cheap right now.
Cut or keep?
The Motley Fool: Let's take a look at three ASX shares that have plunged this year, to see if you think each of those fallen stars are now a bargain or if you'd keep away.
The first one is online marketplace Redbubble Ltd (ASX: RBL), which has fallen a horrendous 85% in 2022.
Alex Shevelev: There's a lot of fallen stars out there, but that's been one of the most significant of those fallen stars.
It sells products to consumers with designs by independent artists. It's been a very volatile ride for long-term Redbubble shareholders — $1 pre-COVID, to 50 cents in the early stages of the COVID market panic, to $7 during the online COVID buying boom, and now back to 50 cents.
It's really very uncertain as to whether this business is actually going to be able to earn the required margins in what is actually a very competitive space. And the recent first quarter update didn't do the business many favours. There was $17 million worth of losses at the EBIT line and lower year-on-year revenue, which is quite problematic.
MF: Some investors might see that it has annual revenue of half a billion dollars but the market cap's now down to $135 million, and consider it a very cheap valuation. But you reckon it might be a bit of a value trap?
AS: Well, I think it is very important that whatever the level of revenue is that the business can structurally achieve free cash flows from that revenue. And in Redbubble's case, that is not something that they have been able to successfully do outside of some very buoyant COVID periods.
MF: Next one is Viva Leisure Ltd (ASX: VVA), which has halved this year. What do you reckon about that one?
AS: That's right. So, this is a gym group and it's hardly had a break during its listed life, given the closures during COVID over the last couple of years.
During that period, though, they've been opening new locations, they've been acquiring other locations. It now has 150 locations, gyms around the country. It's moving closer to 190 by financial year end as well, to make it a significant gym group.
We've seen a lot of inflation over the last six to nine months. The business has been able to pass that inflation onto its members by increasing membership prices, which in the context of its business is actually [a] very, very good achievement.
The company's given guidance for this current financial year, the margins in that guidance are actually holding up quite well. So, 21-odd per cent is a good outcome for the business and that margin should grow from that point.
As it improves its margins, as it continues to get growth on locations and revenue, they will actually garner more investor attention.
MF: Fantastic. The third one is sports tech provider Catapult Group International Ltd (ASX: CAT), which has also almost halved in share price year to date.
AS: This is a business that provides wearables and video analytics to professional sports teams. It's also very sticky, very low-churn revenue, and it's a pretty small relative cost for a very useful product for teams.
The wearables part of the business, it's been growing 30-odd per cent for years. Last year, Catapult made an acquisition in advanced video analytics, the business was called SBG. And that's really going to help drive the video side of the business that had been lagging previously.
It's been free cash flow generative before, but spent money over the last couple of years integrating those two products together into something that combines the wearables and the video analytics and actually looks to be a first for that market, which is very exciting.
From next year, the company has said that it's going to be free cash flow positive, if only slightly. But that will put it on good footing because from that point, we'd still be expecting their preferred metric of revenue to be growing 20%-plus over the next couple of years with some good operating leverage.
So that's another one where a value should flow through and be more clear over the next few years.
MF: Your fund holds both Catapult and Viva at the moment?
AS: We hold both of those, yes.
