Rome Capital 2024Q3 Company Updates

Cake Box, Samsonite, Gentoo, and GiG Media

Dear Readers,

Thank you for your continued interest in Rome Capital! Building on our in-depth research reports, we will be launching a Company Updates series. This series will provide summaries and analyses following quarterly earnings releases and significant events of selected companies. It is primarily a record and tracking tool for our team, and we hope it would be helpful to you as well.

Disclaimer:
All content in these articles reflects solely the views of Rome Capital and may deviate significantly from the facts. Our opinions are not intended as investment advice. Please do your own research or consult your investment advisor. Rome Capital assumes no responsibility for your investment outcomes.

This time, we will analyze the performance of Cake Box for the H1 FY25 (Apr–Sep 2024), Samsonite, and GiG (both Gentoo and GiG Platform) for Q3 2024.

Cake Box

A. Key Highlights

Performance Highlights

1. Improved Profit Margins with Strong Operating Leverage:

   • Revenue: +4.3%

   • Gross Profit: +11.5%

   • Operating Expenses: +4%

   • Net Profit: +16.4%

2. Increased Dividend:

   • Interim dividend per share of 3.4p, up 17.2% YoY.

3. Notable Operational Efficiency Gains:

   • Website traffic: +40%

   • Online sales: +16.6%

   • Brand awareness: +48%

   • Membership: +40% YTD, reaching 517,000 members.

   • 50 new product designs introduced.

4. Overseas Expansion Materializing:

   • First pilot store in Paris, France, set to open in Spring 2025.

Potential Issues

1. Weak Revenue Growth in H1:

   • Franchise stores raised prices, but the company itself did not, resulting in a 7.6% increase in franchise store revenue but only a 2.3% increase in product sales revenue. This indicates that the company has not fully benefited from same-store sales growth.

   • However, we believe the increased profitability of franchisees lays the foundation for long-term growth. So we agree with the company’s current strategy.

2. Slower Same-Store Sales Growth:

   • Despite a 6% price increase, same-store sales grew by only 2.2% (QoQ: -0.6%), implying a 4% drop in volume.

3. Acquisitions:

   • The company mentioned acquisitions in its presentations multiple times, suggesting that substantive negotiations are underway in our opinion.

   • Acquisitions could be a risk

B. Key Points from Company Management

1. Acceleration in Same-Store Sales Growth (SSSG):

   • October SSSG: +4%, total store sales: +9.9%.

   • Consumer demand is recovering, and volumes are rebounding.

   • H1 volume declines were due to price increases and the timing of Ramadan. The pricing effects are now gradually being accepted by consumers.

2. Faster Store Openings:

   • 7 new stores opened in October alone.

   • 14 new stores opened in the first 7 months (vs. 10 in the same period last year).

   • Full-year target: 25+ new stores, which will also serve as the benchmark for the next three years (previous benchmark: 20 stores annually).

3. Improved Franchisee Profitability:

   • Profitability has rebounded this year, primarily due to lower utility costs.

   • Franchisees are showing greater willingness to open new stores.

4. Capital Allocation Strategy:

   • The primary focus is on business investment and acquisitions, with an emphasis on small-scale deals that align with Cake Box’s synergies and valuation discipline.

   • In the medium term, the company plans to maintain absolute dividend levels while may lower the payout ratio and potentially initiating share buybacks.

5. Paris Store and European Expansion:

   • The Paris store will be developed by an existing franchisee.

   • Other franchisees have expressed interest in opening stores in more European countries.

C. Our View

1. Overall Performance is Very Strong:

   • The company's strong results, operating leverage, and accelerated store openings align with our expectations.

2. Franchisee Profitability and H2 Revenue Acceleration is Promising:

   • The improved profitability of franchisees and the recovery in revenue growth during the H2 are particularly positive developments.

3. Acquisition Brings Uncertainty:

   • Acquisitions could have mixed outcomes, for better or worse.

   • We hope the company maintains a cautious approach, ensures transparent communication with the market, and prioritizes shareholder returns until it demonstrates its capability to execute acquisitions effectively.

4. Valuation and Dividend Yield Remain Attractive:

   • At an fwd FY25 P/E of 15–16x and a dividend yield exceeding 5%, the stock remains highly appealing.

Samsonite

A. Key Highlights

Performance Highlights

1. Strong Cash Flow:

   • Free cash flow increased by $5 million YoY in Q3.

   • Debt reduced by $90 million.

2. Robust Share Buybacks:

   • $72 million repurchased in Q3, accounting for 36% of the announced buyback program.

3. Progress on U.S. Secondary Listing:

   • $5.1 million in preparation expenses for the secondary listing recorded in Q3.

Potential Issues

1. Missed Guidance and Expectations:

   • Reported revenue fell 8.3%, exceeding the company’s guidance of a low single-digit decline at constant currency.

2. Significant Profit Decline:

   • EBITDA dropped 20.3%, and net profit decreased 39%.

   • Even after excluding last year’s favorable low tax rate, the decline still exceeded 20%.

3. Limited clarity on U.S. Secondary Listing Progress:

   • The timeline and details of the listing remain unclear.

B. Key Points from Company Management

1. Revenue Turnaround since Q4:

   • The company expects Q4 revenue to stabilize at constant currency and return to growth in FY25.

   • October saw double-digit growth in China and positive performance for Tumi across major markets globally.

   • However, no improvement in the Indian market in Q4.

2. Limited Impact from U.S. Tariff Policies:

   • 90% of products sold in the U.S. are manufactured outside of China, with an increasing number of components also moved away from China.

   • Potential tariff changes from the Trump administration are expected to have minimal impact.

3. Reduced Marketing Expenses Anticipated in FY25:

   • The company plans to lower marketing expenditures next year.

4. Profitability Outlook:

   • Short-term profitability is expected to remain stable, with room for long-term margin expansion.

C. Our View

1. Q3 Results Fell Well Below Expectations:

   • We had anticipated a revenue decline of 5% and a profit drop of 10%, but actual results were significantly worse.

   • Even we’ve noticed the tax rate, we underestimated the company's operational leverage.

   • However, stock market reaction post the results suggested that it was not a negative surprise to the market, and may have even exceeded its expectations.

2. Q4 Guidance Appears Achievable:

   • The company’s Q4 guidance seems not a far reach, as Q4 FY23 revenue was lower compared to Q3, which deviates from historical patterns.

   • We remain cautious about FY25 growth recovery, as there are still no clear signs of a turnaround in the global consumer demand.

3. Progress on U.S. Secondary Listing:

   • We are encouraged to see substantive progress on the U.S. secondary listing, indicated by the $5.1m fee

   • However, we hope the company will provide more transparent communication with the market regarding its timeline and objectives.

Gentoo (Former GiG Media)

A. Key Highlights

Performance Highlights

• Revenue +35% YOY and 12% organic growth

• EBITDA margin 46%, ex spin-off expenses 48%, compared 45% in 23Q3

• Management claimed they won't do acquisitions for the sake of growth

• Restate 2024 125-135m rev and 45-50% EBITDA margin guidance

• AskGamblers continues to break records and turned around some websites affected by Google update in Mar 2024

Potential Issues

• FTD -2% YOY and -8% QOQ. Yet Publishing +10% and Paid -16%. The company attributed it to reducing efforts in lower-value player intake

• Growth in sportsbook was negatively impacted by lower win rate in Q3, but it rebounded in Q4

• Rev share was 58%, lower than usual (60-65%)

B. Key Points from Company Management

• FTD is not the most relevant KPI, as they want to focus on high-value players. The new KPI is value of deposits, and it's up 36% YOY.

• There is another Google update rolling out right now

• Revenue share usually is 40-50% of the GGR

• Rev growth in Oct is 25-30%, softer than expected (Yeah, he called that SOFT!). Nov and Dec would be stronger.

• M&A is not the priority, rather focus on improving organically by 10-20%

• Gentoo would not invest more in the US until things get better

• The outstanding earnouts would be paid up after Q1 2025. After that, Gentoo would consider capital allocation actions.

• CEO Jonas personally targets for 20% organic growth in 2025.

C. Our View

• Gentoo and GiG Software basically stay flat post the spinoff. In retrospect, we overestimated the spinoff as a catalyst. The action wouldn't solve the liquidity problem.

• What we were right was GiG Media is of higher quality than the peers who rely on US market and acquisitions. Better Collective's stock fell by 40% on the profit warning. Probably GiG suffered collateral damage.

• Overall, Gentoo's fundamentals look very, very strong. The growth was quite good and guidance for Q4 and 2025 is very strong.

• The Polish shareholder started buying stocks right after the release, which is a good sign of attractiveness of the stock and interest alignment of the insiders

• At 6x+ EV/EBITDA and 20% organic growth, the stock remains very attractive

GiG Software (Former GiG Platform)

A. Key Highlights

Performance Highlights

• 80% of GGR generated in regulated markets. Key focus is Europe and LATAM

• Product line looks much more streamlined than before

• Pipeline with 36m in commercial stage (signed) and 60m (in opportunity) in total

• 3 new signed customers, 5 binding heads of terms

• Restate the 44m rev and 10m EBITDA 2025 target

• Net cash 9.5m, gross cash 10m

• Underlying rev (exl. those CEO Richard doesn't like, i.e. 1.8m in Enterprise Solution and 1.8m clients exiting business) +26% and opex flat

• Got 44.6m capital injection from Gentoo YTD to pay down most of the loans

• They cleaned up the balance sheet with 1.8m bad debt write-offs and 50.8m intangibles/goodwill impairment

B. Key Points from Company Management

• 24Q4 guidance: 8.8m rev and 0.2m EBITDA

• Target positive cash inflow in Q3 2025

• The current cost base can support future growth

• 85% of the total revenue is recurring and expect the mix to increase to 90-95% in 2025/26. For the 36m backlog in commercial stage, it's mostly SaaS but has a rev share component

• The balance sheet is strong and no plan for more fundraising. Gentoo still has 2-3m obligation to pay GiG Software in the coming months

• The legacy churn is coming to an end

• The Polish family is buying shares as well but they don't need to report.

C. Our View

• The mgmt has cleaned up the balance sheet, so it's a fresh start

• The pipeline looks exciting, given 80% of the projected 44m rev in 25 is contracted, the target seems achievable

• D&A in Q3 was 6m. Upon the 10m EBITDA in 2025, the company would still have quite a big EBIT loss. Assuming 24m D&A per year and 35% EBITDA margin, they need 72m revenue to break even.

• Assuming they get a 5x EBITDA multiple in 2025, the target price is 4.83 SEK compared with 4.64 SEK at the moment, assuming most of the cash will be burnt in the coming quarters.

The above is our performance summary for the four companies. We welcome your thoughts and discussions.

Disclaimer:

Our views do not constitute investment advice. Please do your own research or consult your financial advisor. Thank you!