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IRE - Iress Limited

Iress Limited (ASX:IRE) is a leading supplier of share market and wealth management systems in Australia, Asia, New Zealand, Canada, South Africa and the United Kingdom.

Iress operate two core products being IRESS and XPLAN which comprise an equity information and trading platform and an extensive suite of financial planning and associated tools.

Iress products manage and monitor industry information which meets the needs of a large range of clients from big corporations through to independent operators.

Iress employs over 600 personnel in 14 offices. Their offices are located in the centre of major financial districts in each of their domiciled countries worldwide.

Does this business have a sustainable competitive advantage?

Iress's competitive advantage comes from the strong relationships it has developed with its clients. Iress provides 'global coverage, local support' which keeps their clients up to date with local developments while maintaining global information flows.

Not so much a competitive advantage but a sustainable business model is in place with Iress enjoying recurring revenue via its supply of information and trading platforms.

Iress has a history of growing in scale by acquiring similar businesses across various parts of the world. I suspect this pattern looks set to continue.

What are the risks facing this business?

The obvious risk is volatility in share markets around the world. Volatility and negative sentiment would reduce the level of recurring revenue from some clients reducing head count and therefore reducing the need for Iress' information subscriptions.

A second risk comes from the possibility of a new entrant competing with Iress. While it wouldn't be an easy task, it is not impossible for a new player to enter their market and try to compete with some new technology or initiatives for instance.

Is it run by able and trustworthy management?

Management has done a wonderful job in growing this business to hold a significant presence in many leading financial districts around the world. With $55 million of cash on the balance sheet, the company appears in a great position to continue this acquisition process in order to grow future earnings. The company also reports cash flow similar to that of net profit levels.

Is it trading at a bargain price?

On an intrinsic value basis, the company is rarely good value which is the case at the moment. Other valuation models suggest it is slightly over-priced. However, the technical case is good with a third cup and handle pattern in the past 12 months making this stock a good 'value trade' or 'quality trade'. I usually don't look for price targets preferring to let the market tell me what to do. However, the pattern suggests a target around the $9.60 mark.

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*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Summary

In summary, Iress is a wonderful business that has grown into a leading provider of share market and financial information in the countries it operates within. The company is leveraged to the performance of share markets around the world. The company has great management who have grown the business by acquisition while maintaining an extremely strong balance sheet. The company has scope for more acquisition and earnings growth as a result. The company is rarely cheap on a valuation basis which reflects the quality of the company.

Disclosure: I am long IRSMF.OB.

TAH - Tabcorp Limited

Tabcorp Limited (ASX:TAH) is Australia's leading wagering, racing media and Keno operator.

Tabcorp manages leading customer brands in Australia, including TAB.com.au, Keno, Luxbet, Tabcorp Gaming Solutions, Sky Racing and Sky Sports Radio. These brands serve millions of customers every year.

Tabcorp's four businesses are:

1. Wagering - totalisator and fixed odd betting

2. Media and International - broadcasting of sporting and horse racing events

3. Gaming - electronic gaming machine operations

4. Keno - operating Keno in clubs and hotels within Victoria, New South Wales and Queensland

In June 2011, Tabcorp completed the demerger of its Casinos Business to form the newly listed Echo Entertainment Group Limited.

Does this business have a sustainable competitive advantage?

Tabcorp has a sustainable competitive advantage across part of their business with a 10 year licence to provide Keno operations in Victoria which began in April 2012. And, they possess a 12-year Victoria Wagering and Betting License which started in commenced in August 2012.

These licenses should ensure that Tabcorp will generate continuing streams of income over the next 12 years from two of its four business divisions.

Tabcorp's other easy-to-see advantage comes from the broad range of distribution channels and brands that it promotes. Their betting products being their brands are distributed at TAB outlets, clubs, pubs, hotels, race tracks and online across your internet connected device of choice.

What are the risks facing this business?

The biggest risk is the growing competition particularly in the digital/online space for their wagering business. With seemingly little barrier to entry to set up an online betting/bookmaking service, providing a profitable point-of-difference in this space will continue to be difficult.

A second risk comes from the debt levels the business carries. The licence wins in Victoria have come at a cost and the company holds 80% of their equity as debt as of December 2012.

Is it run by able and trustworthy management?

Management has done a great job to secure licenses in Victoria in recent years. This bodes well for the longevity of the business.

Is it trading at a bargain price?

On a fundamental balance sheet view of the business and considering the current debt levels, it is expensive. However, I wonder if the share price improvement since November is merely:

1. 1. A function of a rising tide lifting most boats including Tabcorp, or

2. 2. The market pricing in a restructure of online gambling given the negative media coverage afforded this year to arguably Australia's highest profile online gambling provider

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*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Summary

In summary, Tabcorp is a business that will be operating for at least the next 12 years given the licenses it holds. The company has taken on more debt in recent years and while profitable, has not produced cash flow that reflects that profitability. The company will face continuing changes due to the impact of online gambling and I will watch this space with interest.

Job Application Unsuccessful

The Reject Shop Limited (ASX:TRS) operates in the discount variety retail sector in Australia serving a broad range of value-conscious consumers who are attracted to low price points, convenient shopping locations and the opportunity to purchase a bargain.

The Reject Shop offer a wide variety of general consumer merchandise, with particular focus on: everyday needs - such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food; and lifestyle and seasonal merchandise - such as seasonal gifts, cards and wrapping, toys, leisure items and home decorations.

The Reject Shop started with a single store in 1981 in Melbourne Victoria and has since grown to over 250 stores operating in New South Wales, Victoria, South Australia, Queensland, Western Australia and Tasmania. The company's stores are located in shopping centers and standalone sites within shopping precincts in metropolitan areas, major regional centers and smaller country towns.

The Reject Shop listed on the Australian Stock Exchange in June 2004 and currently employ over 5000 people. The number of employees brings me to linking the title of this article with the plagiarism of a joke by Arj Barker, one of my favorite comedians. To paraphrase Arj's joke, "Imagine how bad you would feel about yourself if you couldn't even get a job at The Reject Shop".

Does this business have a sustainable competitive advantage?

1. The Reject Shop has a well-defined target market of consumers who are conscious of value, want to save money and enjoy a bargain. The nature of The Reject Shop's business is that they are relatively immune from periods of lower economic activity as tough times will see more consumers become interested in finding bargains from their stores.
2. The Reject Shop enjoys brand awareness from over 90% of the community. This is helped by the majority of stores being located in convenient shopping locations.
3. The Reject Shop has developed a significant barrier to entry. This can be seen by the difficulties seen by one of their main competitors Go-Lo in recent times. Go-Lo's parent company Retail Adventures went into administration in October 2012. It might seem easy to compete with The Reject Shop by simply opening a shop front and selling similar products cheaply. However, behind the shop front is a 250+ strong store network and what appears to be a very well run distribution centre giving The Reject Shop significant scale and cost advantages over would be competitors.
4. The company presents that it will have 280 stores opened by June and it has a plan in place to have 400 stores nationwide in the longer term.

What are the risks facing this business?

One of the risks with the plans to open more than another 100 stores will be getting the right locations in targeted areas. Location, location, location will prove very important to The Reject Shop.

And, a second risk will be the potential to deviate from the right product mix for their customers.

Is it run by able and trustworthy management?

The Reject Shop's management has run this business very well for a number of years. The company's operations were significantly affected in late 2010 as a result of the Queensland Floods. The floods were extremely disruptive as they forced the closure of the Ipswich Distribution Centre. The floods also damaged about 80% of the stock held in the distribution centre at the time and created a logistical nightmare for the company. This put a big strain on operating cash flow at the time and forced the company to take on debt and to restructure their distribution centre in order to mitigate against the risk of any future floods.

Management has down a remarkable job since the impact of the floods. The strong cash flow the company generates has enabled The Reject Shop to not only pay back the debt quick smart, but they now sit on a significant cash balance in the vicinity of $20 million as of December 2012.

Is it trading at a bargain price?

In 2011, the share price was beaten up once the full extent of the damage of the floods was known. This created a situation where the share price was excellent value due to some very unfortunate and temporary circumstances.

It is about this time of year that I start looking towards 2014 financial year valuations and The Reject Shop still has some legs based on my assessment.

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Below is a 12 month price chart for The Reject Shop showing a jump from what was a temporary setback.

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Summary

In summary, The Reject Shop is an awesome business operating consistently profitably. The company has more growth ahead of it courtesy of new store openings, competitive advantages, astute management and a very strong balance sheet courtesy of the cash the business generates.