3 small-caps with Dawn Kanelleas
The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.
Lex Hall: Hi, I'm Lex Hall. I'm on the side lines of the Morningstar Investor Conference at Darling Harbour. I'm joined today by Dawn Kanelleas, who's the Head of Australian Small and Mid-Cap stocks at First Sentier Investors. Welcome Dawn.
Dawn Kanelleas: Thank you.
Hall: I wanted to start with you're up 47% this year, which is a smashing result. You mentioned quite a few companies, one of which is ARB, which is the largest manufacturer of four-by-four accessories. How do you find companies like ARB, I've never heard of it, I've heard of Breville, which you mentioned, but ARB?
Kanelleas: Oh, well, we've owned it for many years now over a decade. But if you look at any of the (youths) going around the city, you'll see the ARB logo on the canopies, you'll also see it on the bull bars. So, they began actually in the early 70s. And they are sort niche in this market, and they've been focused on it. And they've invested in R&D in their facility in Melbourne now and Kilsyth, since the early 70s. And they are the best in the world, mainly innovative products in that space. They're also the most expensive. And, but they're also the equipment and the tools that tradies want to have, because it's the premium brand. And they're prepared to pay for a premium brand that you know actually delivers. But also, they do things like for four-by-fours, for mining vehicles, they'll do all of the under mechanics that is required for a car to be able to go through very rough terrain. And so they're very highly regarded for the equipment that they manufacture and that they deliver.
Hall: Alright. You talked about growth and disruption as well. And you mentioned Breville, in the sort of same paragraph, I wouldn't have sort of associated that with disruption.
Kanelleas: Yeah, so a number of years ago, almost a decade ago, they went down this pathway of premiumization of their products, and it really differentiated themselves from Sunbeam. And then they took some of those premiumized products to the US And they started with juices and introduced them, and they did a lot of innovation around. And so there's an R&D centre here in Sydney that's been there for a long time. The CEO who started that subsequently left, and they hired the current CEO, Jim Clayton, who was responsible for actually premiumizing LG, that brand and they brought him here and he saw the kernels of what could be a brilliant business that could actually control that small domestic appliance space in the same way that Dyson controls bagless vacuum cleaners. And nobody else was really looking at that space and dominating that space.
What he invested in, though, was distribution that hadn't been done before. So they had the R&D. And then he thought I'm going to control that space. So I'm going to have a good, better, best coffee maker. So the Oracle Touch coffee maker that they deliver is up there with the best in the world for coffee makers to make espresso coffee at home, and it retails at over $4,000. And they also have a lower price ones which are also, the best in this space. And so they control coffee globally. And they entered the US They sell through Amazon, they sell through high-end retailers like Williams-Sonoma, hence the premiumization. They don't do the low-end products they do here in Australia. And the revenue in the US is more than two and a half times that of Australia and growing at double digit. Australia is growing at double digit because we all want the most innovative products for our houses.
And they've entered the UK under the Sage brand because they can't use Breville there. It's a lower end brand over there. And also, they've entered Europe, in particular Germany, both of those regions are growing at more than double digit. And we still haven't entered China yet, where clearly, premium products have, a high cache in that market. And we've seen that with other products. We've seen that with luxury goods. So clearly, that is a market that they will enter in the future and the business should continue on its growth profile.
Hall: Okay. Let's finish with a couple of a few more names that you mentioned, and they are sort of grouped in that, they're related to travel. You mentioned IDP, which implies opening up borders. It's an English language testing company. You also mentioned obviously, Corporate Travel Management and Webjet. What are you seeing that we're not seeing about travel?
Kanelleas: Yeah, well, obviously with Corporate Travel we are beginning to travel and remember Corporate Travel's business in the US and the UK is actually, well in the UK is bigger than Australia and in the US it is growing, they've recently made an acquisition there, they're growing scale there. Those markets have been opened up to corporate travel for quite some time, the UK and the US are further ahead. Obviously, they're more immunised than we are. So we are seeing a recovery in that space. In terms of IDP education. They're also exposed to North America and the UK, which actually never shut its borders. I mean, it wasn't as open as it was pre-COVID. But it didn't actually completely shut its borders to international students. Australia is still shut to international students, but the delivery of digital products through English language testing that's gone through the roof with respect to students in India and China with intentions to come into Australia to study. So we can see that sometime in the future as the government you know, as and when the government is going to open up the borders. There's this untapped demand to come to Australia and study, because they're all doing the exams at the moment, but they're doing them digitally in home countries.
This video was recorded before the Sydney-lockdown.