Analysis & Model updates OneWater Marine, GOGO. Vysarn CEO interview (VAM) & Dry Bulk industry update
Moreover, our free Week in the Markets edition & Portfolio Management
We are very pleased with the interviews we bring you this week. In addition to detailed updates on two closely watched companies. Also, we launch our first subscription offer!
The Week in the Markets: Recently launched, our briefing about the last week in the markets, macro data and worldwide events
Interview with Mr. James Clement (CEO of Vysarn Ltd) about its recently launched division Vysarn Asset Management & plans for 2024 & onwards
Update from Joel Grau (COO & Partner at Hizone Group, Shanghai, Shipping professor at Deusto, and former Clarksons & JP Morgan) about the current (and attractive) situation of the Dry Bulk industry
Model update & analysis OneWater Marine and GOGO - full of interesting takeaways
Portfolio Management - Details of the portfolio & companies this week and how we are positioned for the remaining weeks of the year (Equities & Other Assets)
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The Week in The Markets
Another week where the trend initiated since early November with the US CPI report and the FED meeting continues.
In equities, small caps once again lead the week, with the Russell 2000 closing the week breaking the resistance at 1820, paving the way for a continuation of the small caps rally in the coming weeks. The notable detail is that mega caps, which have been driving the indices this year, had a negative performance this week. The S&P500 reaches yearly highs. By industries, Real Estate gains another 5% and enters positive YTD territory. The idea that we may have reached the peak of interest rates and that the main option now is to start lowering them as early as March favors companies with higher debt. By countries, the top performers of the year continue to have a very good performance (Poland, Mexico, Spain, Brazil, and Italy), with Chile and New Zealand joining them this week. On the contrary, China is having a tough year, losing another 3%, as official indicators underscore concerns about the country's fragile recovery.
It's a bad week for commodities despite the OPEC+ summit's announcement of additional voluntary cuts to its oil production in 2024. Saudi Arabia will lead with one million barrel cut and Russia will increase 200k (from its 300k now). In fact, the US is already producing more than Saudi and Russia combined. The WTI chart is starting to look concerning. For Natural Gas, European inventories drop to 95% after a few cold days. However, the forecast for the first half of December is not as cold as expected, and fundamentals remain poor.
In other assets, same “FED pivot” trend continues and gold reaches historic highs at Friday’s close, and November marks the best month for bonds in the last 38 years Bitcoin hits new yearly highs and is already approaching $40,000.
US Data: GDP QoQ surprised upside5.2% (4.9% expected), previous 2.1% (June) and US Consumer confidence: 102 (101 expected) previous 99.1
Eurozone CPI: +2.4% in November, down from 2.9% in October and below expectations for 2.7%. Core inflation, which excludes food and energy costs, dropped to 3.6% from 4.2%. Separately, the jobless rate held steady at a record low of 6.5%.
China PMI: 49.4 fell to a below-consensus 49.4 in November from 49.5 in October, marking the second consecutive monthly contraction.
Powell’s comments helped push the yield on the benchmark 10-year Treasury note down to nearly a three-month low of 4.21% in intraday trading on Friday. (Bond prices and yields move in opposite directions). The market now expects 5 rate cuts of 25 basis points each between March 2024 and January 2025.
In addition, a significant data point is that the Fed's Reverse Repo continues to plummet. This decline indicates that fewer players are using the overnight repo to park their cash (as the interest offered by the Fed for this overnight investing is no longer attractive), and this money seems to be flowing into bonds and equities.
GOGO Analysis & Model update
Last May, we presented the full thesis of GOGO, the world’s largest provider of broadband connectivity services for the business aviation market with operations in the US and Canada.
The company is in an investment cycle intending to deploy the newest technology to ensure it keeps its market leadership in the upcoming years in a market still unpenetrated, expected to grow at a high pace as passengers in business aircraft demand connectivity inflight. Gogo is very well-positioned to capitalize on the growing demand for inflight connectivity solutions in the private jet market.This year's results have been below market expectations and together with the delay in one of the two major initiatives and the general downturn in small caps has made the stock go down by around 15%, positioning the share price at 8-9x EBITDA for a tech company expected to increase revenues at a +15% CAGR until 2027 with a strong free cash flow generation and tremendous margins. We believe the long-term perspective is unchanged and that we can take advantage of temporary problems with a company that may be a nice long-term play.
The business model is a good example of a razor-razorblade business model. It starts with an initial sale of equipment to dealers or the final customer with a gross margin of ~25%. Once it is installed, customers construct subscription plans by which Gogo earns recurrent revenue with margins above 75%. With an approximate 0.5% monthly churn rate, Gogo achieves 17 years of equipment life on the aircraft with the corresponding recurrent revenue and earnings.
The investment thesis is highly leveraged on the two initiatives Gogo is investing in. They will reaccelerate growth both in the number of aircraft using their services and for the increase in Average Revenue Per User (APRU).
Gogo 5G is expected to deliver much faster connectivity (from single-digit megabits per second today to 10s and then hundreds of megabits per second over the next few years). In the latest updates, the company is announcing the good development of this initiative in Canada too.
It was originally meant to be launched in 2022, and then at the end of 2023. However, due to the lack of 5G chipset availability and a design error in a non-5G component of the chip, the launch has been delayed to mid-2024. Remarkably, the actual cost invested in the 5G initiative is in line with 2019 expectations.
In the meantime, customers interested in 5G service can equip their aircraft with AVANCE L5 and operate on Gogo’s 4G network. This offer is available for installation today, with a significant discount for the buyers. The only change needed to hardware change will be to replace two antennas with another two with equal size and form.
Gogo Galileo: Gogo has partnered with OneWeb to utilize its global LEO (Low Earth Orbit) satellite network. It is expected to be revenue accretive in 2025. Gogo Galileo is meant to serve all the aviation markets, everywhere in the world and fit any aircraft size. LEO satellites are faster than GEO satellites because they are closer to the aircraft. The largest hardware change needed would be to add an electronically steerable antenna on the top of the aircraft. The rest of the upgrade would be remote software. The business intention with Gogo Galileo is threefold:
Address the 14,000 business aircraft outside of North America in which the penetration rate (the number of aircraft in the BA segment with inflight connectivity) is much lower than in NA.
Pursue larger NA jets that fly with Gogo in the US but use GEO satellites outside NA. Thanks to these two initiatives, Gogo will be able to serve this premium segment with LEO and ATG connectivity at the same time, enhancing connectivity performance.
Enhance the stickiness in medium and small-size aircraft for which they will provide even faster connectivity thanks to the combination of LEO with ATG 5G.
Apart from positioning Gogo in an advanced position compared to the competitors, we do think that these initiatives will be rapidly accretive on the revenue side and also will imply higher margins (due to the increase in ARPU and the lower Opex once the investment is finished).