Drawing big conclusions about how COVID-19 will reshape society, and basing investment decisions on them, is risky. Consumer habits are hard to budge.
But public transport is one area that will change. I have touched on this theme before with positive stories on toll-road operators Transurban Group and Atlas Arteria. Both will benefit from more commuters using their car and avoiding public transport in the next 12 months.
Collins Food, among my favourite small-cap ideas, is another. The owner of KFC stores will gain as more commuters visit one of its drive-throughs to buy food. Collins this week posted a better-than-expected FY20 result and its price soared.
Collins has rallied from $5.57 when I first wrote about it during COVID-19 in April to $9.55. Another favoured idea, Domino’s Pizza Enterprises, is up from $49 in April to $68.69. Both stocks will go higher in the next 12 months, albeit more slowly from here.
The trend of more people using cars over public transport will not last forever. As traffic congestion grows, and COVID-19 is contained, commuters will inevitably head back to trains, trams, buses and ferries.
That said, expect people to think differently about public transport after COVID-19. Social distancing on trains, trams and buses is the obvious change. Less considered is how people plan trips and how there will be higher demand for integrated multi-model transport that reduces waiting times.
COVID-19 will encourage commuters to become better at planning travel. Who wants to wait on a crowded train platform for 15 minutes and risk catching COVID-19? The less time on public transport, the better.
Transport disruption is another issue. Greater delays and cancellations on public transport are likely given COVID-19 uncertainty. Heaven knows how trains will be scheduled when most people return to their CBD office but carriages accommodate far fewer commuters.
On-demand, multi-modal transport is nothing new. Transport planners have long dreamed of on-demand private car services (for the first and last mile of trips) that seamlessly integrate with buses, trams, trains and ferries, using technology.
With the touch of a smartphone App, we could book a trip across various transport modes. A software algorithm will choose the most efficient combination of services to minimise waiting time, and charge for all transport used in one payment. We might even move one day to a Netflix-style subscription-based model for public transport, rather than paying each time.
Sadly, that future looks a long way off. In my experience, booking public transport across different modes is still clunky. Also, there is limited integration between taxis and other private providers and public transport services – and on a single platform to book all trips.
That’s an opportunity for private providers that can integrate public-transport modes or sell technology that responds to greater transport disruption during and after COVID-19.
Here is one small-cap stock and one micro-cap stock to watch. Like all smaller companies, these ideas suit experienced long-term investors who are comfortable investing in this part of the market and have a longer-term (at least 3-5 years) horizon.
1. SeaLink Travel Group (SLK)
I wrote several positive articles on the ferries group in this report after it listed in 2013, mostly as a play on the upcoming boom in Chinese tourism. SeaLink’s $1.10 shares rose fourfold.
SeaLink is easy to overlook in this market. With international tourism on its knees, buying a company that provides recreational cruises in Sydney Harbour makes little sense.
Although often referred to in tourism-related stories, SeaLink has cleverly developed into a diversified transport and tourism company with a higher proportion of defensive, government-related earnings that are less susceptible to COVID-19 effects.
SeaLink acquired Transit Systems Group in October 2019 for $688 million (including an earn-out fee) in what looks like a company-making deal. Transit Systems is Australia’s largest provider of metropolitan bus services and is established in London and Singapore.
The group operates more than 3,000 buses from 32 depots across Australia on behalf of local and regional governments and other authorities. That means long-term government contracts providing recurring revenue that is usually indexed to the inflation rate.
I am normally wary when small-caps make large acquisitions because they usually disappoint a year or two after the hype fades and company integration suffers. SeaLink’s Transit Systems acquisition is an exception on four fronts.
First, the group has a capital-light business model: when a contract is awarded, the client transfers upfront payment of capital expenditure for the fleet. Contracts normally last for six to 10 years. If not reviewed, the assets (buses and depots) and liabilities pass to the new provider.
Second, there is natural synergy in integrating SeaLink’s marine and land-transport services. Multi-modal solutions that link ferry and bus services appeal to local governments, enhancing SeaLink’s ability to win contracts. Services integration also creates economies of scale.
Third, the bus acquisition diversifies SeaLink’s earnings base and revenue profit. About 85% of revenue now comes from commuter transport, the rest from tourism services. Importantly, 83% of SeaLink’s sales in its latest half-year report was from contracted revenue.
That is not to downplay the impact of COVID-19 on SeaLink or the summer bushfires (its Kangaroo Island lodge was mostly destroyed). However, SeaLink says less than 1% of total group revenue (including the bus operations) depends on Chinese tourism.
Fourth, SeaLink is winning key government tenders. It this week announced that Brisbane City Council awarded RiverCity Ferries (a SeaLink subsidiary) the contract as the operator of several key ferry services. The contract lasts 15 years and is an endorsement of SeaLink’s marine-transport capabilities and presumably its capability to link ferry and bus services.
The market treated SeaLink harshly during the COVID-19 sell-off, perhaps simplistically believing it would be crushed by falling tourist demand. SeaLink fell from a 52-week high of $5.31 to $2.45 and has since recovered to $4.45.
The stock will go higher in the next few years as more government contracts are won and its multi-modal footprint grows.
Chart 1: SeaLink Travel Group
Source: ASX
2. Life360 Inc (360)
The San Francisco-based company listed on ASX in May 2019 at $4.79 per CDI (CHESS Depositary Interest) in a $145 million float. Its stock drifted to $3 within a year of listing and slumped to $1.51 at the height of the COVID-19 market sell-off. It now trades at $2.01.
The company’s core offering is the Life360 App that shows the location of family members via connected smartphones and has extra paid features such as safety and roadside help alerts.
My family has used Life360 for a few years. Initially, it felt like “big brother”, but being able to check that our children were on the train after school and their whereabouts was valuable.
As an aside, I accidentally connected my phone to the family’s Life360 account, which meant my wife and children could track me! Thankfully, I do not have anything to hide and knowing where family members are and how long until they are home is surprisingly useful.
Life360 has underperformed the tech rally in the past few months. There were reports that some users – no doubt, disgruntled young people who do not like their parents tracking them –have waged a campaign to give the App poor user ratings, to limit its use.
However, Life360’s latest cash-flow update said revenue growth for the first quarter was 71% up year on year. There was no material change in premium Life360 cancellation rates during COVID-19 but new registration slowed as the lockdown progressed.
The company’s global user base of 28 million grew 36% year on year. Life360 had US$57 million in cash and no debt.
Life360 clearly suits speculators who understand the risks of microcaps. I follow Initial Public Offerings closely and several US tech companies that have listed on ASX in recent years have disappointed. It is great that ASX is attracting more tech companies too small to list on NASDAQ, but some have been of low quality.
Life360 could be an exception at the current price. Watch more parents register for Life360’s free and paid services during and after COVID-19. Parents will worry more about children using public-transport services that have a higher risk of disruption. Technology that shows when their children have boarded public transport appeals.
The launch of Life360 Membership, (initially expected on June 30) expands the range of services and is the first family-safety membership model of its kind, according to the company. One can imagine more families interested in this technology during and after COVID-19.
Chart 2: Life360
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at June 30, 2020.