Equity Analysis / Global

Why Unilever and Nestle are better prospects than Zoom right now

  • Zoom is an unquestioned beneficiary of the lockdown with its user base rising 30-fold.
  • But instead of chasing Zoom proxies, investors in EM/FM are better served to look at the tried and tested FMCG players
  • These have underperformed in the crisis and are good value

When the history of Covid-19 is written, it may be recorded as the Zoom era. The videoconference provider has spread as rapidly as the virus. It’s users have risen 30 fold from just 10 million in December 2019 to almost 300 million in April 2020. Like Google and Xerox, Zoom is a now used as verb.

Investors are clamouring for exposure to Zoom and its videoconferencing peers, such as Cisco Webex, Google Hangout, and Houseparty. Some are seeking proxies in the EM and FM world.  Though they are technology companies, these players are positioning themselves as consumer stocks rather than tech platforms. They have the hallmarks of trendy restaurant stocks such as Chipotle with high operating expenses. It is also similar to disruptive food delivery companies such as GrubHub.

Zoom's vulnerabilities

However, a discerning investor in the EM/FM space would be well-served to look beyond the crisis. Investors should look for the tried and tested, rather than a company that owes its success to the lockdown. The lockdown cannot last indefinitely and Zoom's nosebleed valuation may become hard to defend. 

Though Zoom is at 2110x FY20 PE, Buy recommendations vastly outnumber the Sells. Bloomberg consensus expects its net earnings to reach US$1 billion by 2024. This would imply that its users would need to triple to 750mn, assuming ARPU remains stagnant.

The surging usage numbers do not accurately reflect the prospects. The surge in users mostly comes from the free tier, where users can host calls of up to 40 minutes. The customer growth from paid users is not as robust. The user experience has suffered with increasing numbers of free users, as higher usage increases the bandwidth requirements. The churn rates have risen recently, while its margins are faltering. Costs are escalating without a commensurate rise in average revenue per user. There are also security concerns, which may lead to Zoom aversion. 

Investors are betting that Zoom's usage will expand due to an indefinite lockdown, and changing work and education habits after lockdowns ease. This is a dangerous assumption. Zoom's moat is not that strong, and switching platforms is free and relatively painless. People may switch to rival video platforms like Facebook Messenger, Hangout and Houseparty, while new businesses could spring up specialising in particular niches, be it work, informal meetups or education.  

FMCG in FM are on a sound footing

By the sharpest of contrasts, the Fast-Moving Consumer Goods (FMCG) companies that form the bedrock of consumption in developing markets are on a sounder footing. These stocks have borne the brunt of the sell-off despite the resilient sales that have prospered during lockdown. The sell-off could be rooted in the fear of currency weakness in Nigeria, Indonesia, Pakistan and Sri Lanka. The basket of these four currencies have fallen by an average of % YTD. 

However, these businesses are of immense value, with or without Covid-19.

Firstly, they have strong brands that are unlikely to be dislodged by capricious customers. Unilever's Lux is the leading soap brand in Nigeria. It is ubiquitous and has been a dominant brand for generations. In Pakistan, Unilever's Cornetto ice creams have weathered currency crises, terrorism and consumer collapses. 

Second, the FMCG majors have mastered the strategy of selling to the bottom of the pyramid. They sell in small unit sizes and to the mass market. Unilever sells Lux shampoo in Nigeria, Pakistan and Indonesia. These are markets where the average wage is barely US$4 per day. By pricing these products at 20 US cents a pack, they can reach the relatively untapped fortune that resides at the bottom of the pyramid.

Third, FMCG have higher ROE than almost any other industry. High ROE companies enjoy a margin of safety to continue generating ROE even in the event of high interest rates and/or inflation. If we see an inflationary spiral in frontier markets, the FMCG cohorts would be a better investment than FD or local bonds.

FMCG have solid balance sheets

In a time of crisis, the robustness of the balance sheets of the FMCG companies stand out. There are twin issues facing FMCG companies in developing countries – the threat of currency depreciation and debt escalation.

We test 42 consumer companies to assess their ability to withstand a potential interest rate hike and currency depreciation. We use six metrics including net debt ratio, ratio of foreign debt to total debt and proportion of COGS in foreign currency. We call this the Teflon index.

FMCG companies such as Nestle Nigeria, Unilever Indonesia and Nestle Lanka are in the top half of the table. They fare well on this metric due to their highly branded product mix, low leverage and ability to pass on input price increases.


Total shareholder returns shows the power of compounding

The total shareholder return (TSR) of the frontier FMCGs in the past decade is a testament to this factor. The five FMCGs have all generated TSR in excess of 102%, with the exception of the Unilever Nigeria. The returns are robust due to the high ROEs and the consistent high dividend payouts. This leads to the FMCG's acting as compounding investments. Zoom has only been listed since April 2019 and while its return so far has been very strong, the entirety of it has been due to share price appreciation. 

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Macro Analysis / Global

How could COVID-19 transform digital ID?

Refinitiv Perspectives
4 June 2020

COVID-19 has placed digital ID back under the spotlight. Experts on a Refinitiv webinar discussed how the rapid shift towards non face-to-face and digital financial services, and COVID-19 guidance from the Financial Action Task Force (FATF) have the potential to act as a catalyst for an effective digital framework for the financial services sector. 

  1. Senior figures in anti-money laundering and banking believe that the COVID-19 pandemic has changed the financial sector environment so there is now an increased need for an effective digital ID framework.
  2. On the Refinitiv webinar ‘Fighting the new financial crime risks of COVID-19 with technology’, experts discussed the advantages a new digital ID system for the financial sector could bring, as well as analyzing the fresh challenges on the horizon.
  3. Digital ID can provide customers with additional levels of protection that, if done correctly, can make it far more secure than its paper-based counterparts. However, customers can still be distrustful of technology and so they need to be in the driver’s seat when making the decision about any such move.

Senior anti-money laundering (AML), legal and banking figures have predicted that the turmoil created by COVID-19 could help usher in the development of an effective digital ID framework for the financial sector.

The rapid pivot towards non-face-to-face and digital financial services has triggered a new wave of interest in digital ID solutions. Regulators are also focusing on this issue in the wake of the Financial Action Task Force’s (FATF) recent guidance on COVID-19, money laundering and terrorism financing risks.

The international standard setter said it encouraged the use of digital ID and “other responsible innovative solutions” for identifying customers during onboarding and while conducting transactions.

Listen to ‘Fighting the new financial crime risks of COVID-19 with technology’

The FATF said: “Non-face-to-face onboarding and transactions conducted using trustworthy digital ID are not necessarily high-risk and can be standard or even lower-risk.”

The guidance said digital ID offered a number of security benefits to customers, while also mitigating money laundering (ML) and terrorism financing (TF) risks.

It added: “The FATF calls on countries to explore using digital identity, as appropriate, to aid financial transactions while managing ML/TF risks during this crisis.”

COVID-19 and changing regulations

At the Refinitiv Webinar ‘Fighting the new financial crime risks of COVID-19 with technology’, experts discussed whether indeed COVID-19 could act as the “tipping point” for such fundamental change in financial sector regulation.

Urszula McCormack, partner at King & Wood Mallesons in Hong Kong, noted the heightened interest in digital ID due to the COVID-19 lockdown, adding that some effective digital ID frameworks were already in circulation, such as the World Bank’s ID4D guidelines.

“It’s been a very long process, moving towards this point. What we’ve seen is that COVID-19 has accelerated that process for many organizations,” she said.

Anti-money laundering (AML) and counter-terrorism financing (CTF) experts say there is a common misconception that traditional ID is safer than digital ID.

James Mirfin quote. How could COVID-19 transform digital ID?

James Mirfin, Global Head of Financial Crime Propositions at Refinitiv said that many organizations were waiting for encouragement from regulators and bodies such as the FATF to push ahead with new approaches to ID verification.

He added: “As with any technology, particularly in regulated institutions, there are clearly challenges with pushing ahead. If you get digital ID right, there can be a huge efficiency play, so you can imagine some of the tensions that it creates within organizations.

“For a lot of established financial services players, they start to look at how they might deploy digital ID and how that integrates with legacy platforms and risk systems — and that’s not always straightforward.”

Move to digital ID “inevitable”

Milan Gigovic, Head of Financial Crime Intelligence at ANZ Bank in Melbourne said there was “no doubt” that the financial sector is moving towards a more digital landscape, and that this would create new “ID takeover threats” that can only be managed with an effective framework for digital ID.

He said: “We want to give customers the best experience, and we’re pushing them to online, and online verification, and to use the apps that are available and internet banking. So, there’s no doubt that we’re going down that path, as is everyone.

“It’s a real balancing act because you’ve got to think about customer friction. You want to enable them to have a seamless experience but also, on the back end, you want to ensure that you’ve got the right monitoring going on to pick up earlier on the escalating ID takeover threats.”

Gigovic added that the digital ID policy debate was being monitoring closely from an industry perspective.

Regulatory support, tech neutrality

There is a strong willingness among regulators to explore new approaches to technology.

Nathan Newman, National Manager for Regulatory Operations at the Australian Transaction Reports and Analysis Centre (AUSTRAC), said that regulators in risk-based jurisdictions were careful to avoid dictating the types of solutions that reporting entities use, adding that regulators should at the same time facilitate and support digital innovation.

“It’s not the role of the AML regulator to determine what you should or shouldn’t be doing in terms of investment in technology and digital versus paper-based verification. I don’t want anyone to think that AUSTRAC’s going to come out and mandate that,” Newman said.

“But, certainly for us, the way things are going, digital will overtake paper. We know that’s going to be the case, and this pandemic has hurried that along, perhaps more than would otherwise have been the case.”

The roll-out of digital ID would require a careful assessment of organizations’ privacy and data protection obligations, McCormack said. The development of digital ID banks may be creating a “honeypot” for bad actors.

“The more [data] you have, the more you need to protect, and the more of a honeypot you’re creating for other people to come and compromise,” she said.

How secure is digital ID?

At the same time, McCormack stressed that digital ID can be far more secure than legacy paper-based physical ID solutions. Often this involves the addition of a second layer of verification, such as voice ID, fingerprint recognition or other biometrics.

Refinitiv Qual-ID- How could COVID-19 transform digital ID?

“We’re also seeing the ‘layering’ of additional security and functionality, such as checking for device IDs, and even things like location data. But when we look at this from a data protection standpoint, what we’re really doing is increasing the amount of data that is being stored and held by the institution and therefore the protective measures that need to go around that,” McCormack said.

In many markets, banks are waiting for a solution to be led by the government, Mirfin said, adding that it was likely that industry and consumers would need to lead the charge, based on the additional security and other consumer benefits that digital ID offers.

“I think in many markets, people have been waiting for that for some time. The good news is that the regulatory environment is receptive to the idea of firms using digital ID,” Mirfin said.

“Digital ID, if you get it right, uses a lot of data to protect individuals, institutions and accounts. You can do that in a privacy respecting way and a privacy-centric way. So, there are obstacles, but we’re moving in a very favorable direction.”

Banks, regulators and governments needed to make sure that customers are in the driver’s seat with these changes, McCormack said.

“There is still a degree of mistrust around those technologies and a need for disclosure and optionality,” she said. “There really needs to be an element of choice there for customers.”

Listen to 'Fighting the new financial crime risks of COVID-19 with technology' How could COVID-19 transform digital ID?The original article was first published in Thomson Reuters Regulatory Intelligence on 7 May 2020.

The post How could COVID-19 transform digital ID? appeared first on Refinitiv Perspectives.

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Macro Analysis / Global

Enjoy it while it lasts

ING Think
3 July 2020

Asia day ahead

Most of the world will be releasing service sector PMI data today if it has not already done so. Australia has already released its CBA services PMI, which at 53.1 indicates that despite the Covid-19 problems in Victoria, the reopening in the rest of the country continues to allow recovery, even if at a fractionally slower pace than last month (previous PMI was 53.2). 

Prakash Sakpal picks up some of the releases from the ASEAN region: 

Singapore: June’s manufacturing PMI and May retail sales are today’s data line-up. The reopening of the economy from the Covid-19 circuit-breaker should nudge the PMI higher. However, as in most Asian economies, we don’t see it crossing the 50 threshold for expansion just yet. The PMI loosely tracks year-on-year GDP growth, which we forecast slumping to a record -9.2% YoY in 2Q. 

Private consumption will be the main expenditure-side drag on GDP, as the retail sales data should stress. We are looking for a 52% YoY fall in sales, steeper than the 40.5% fall in April. Supermarket sales should continue to outperform non-essential consumer spending of all sorts, while big-ticket items like cars should remain a dominant pull on the downside, as also evident from the more than 90% YoY plunge in new registrations in May.

Thailand: June CPI inflation is due today. Relaxation of Covid-19 restrictions and return of pent-up demand underpins the consensus of slightly less negative inflation (-3.1% YoY vs. -3.4% in May). The risk is tilted on the downside though, with high base effects likely pushing food inflation into negative territory. Housing and transport prices have been the other sources of falling inflation recently and they remained in play in June. We expect inflation in the rest of the year to stay around -3%. There isn’t any easing space left for the Bank of Thailand though.

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Flash Report / Brazil

WhatsApp Brazil's payments roll-out hits a regulatory roadblock

  • Central bank, competition authority cite monopoly and pricing concerns, particularly given Cielo’s dominant position
  • WhatsApp taken by surprise. Stresses the open nature of its payments platform but may need to re-work its local strategy
  • We think the forthcoming launch of the central bank’s PIX instant payments system could have influenced its decision
Rahul Shah @
Tellimer Research
25 June 2020

With parent Facebook facing a growing advertiser backlash, Whatsapp’s own business plans have also been dealt a severe setback. After experiencing protracted delays to its Indian payments plans (where it has c400mn customers), WhatsApp last week debuted its payments platform in its second-largest market, Brazil. However, the Banco Central do Brasil has suspended this initiative and asked Visa and Mastercard to halt payments through the WhatsApp platform. The central bank indicated that its ‘motivation for the decision is to preserve an adequate competitive environment, which ensures the functioning of an interoperable, fast, secure, transparent, open and inexpensive payment system’. It also cited concerns regarding data privacy.

In addition, CADE, the competition authority, has suspended WhatsApp’s payments partnership with Cielo, due to the latter’s high market share of the card payments business in Brazil, and WhatsApp’s huge (120mn+) customer base in the country. The authority noted that such a partnership ‘would be difficult to create or replicate by Cielo's competitors, especially if the agreement under investigation involves exclusivity between them. In any case, it is evident that the WhatsApp user base provides a very large potential for transactions that Cielo could explore in isolation, depending on the way the operation was designed'.

To ease regulators' concerns, we think WhatsApp will stress the open nature of the payments platform (perhaps by making adjustments to the business model) and the broader economic benefits, particularly to lower-income/ financially excluded individuals and businesses. ‘Our goal is to provide digital payments to all WhatsApp users in Brazil using an open model and we will continue to work with local partners and the Central Bank to make this possible,’ WhatsApp said.

Alternatively, the firm may take the same route it has taken in Indonesia, and partner with a local entity that has already achieved regulatory clearance. Brazil already has a vibrant payments fintech scene from which it could choose; we estimate that c30% of all fintechs in the country have a payments focus.

We think at least part of the reason for the regulators' reticence is that the central bank’s PIX digital payments system is due to launch in November. PIX has two notable features: it will allow transactions to clear directly within around 10 seconds; and transactions will not need to go through an intermediary (such as a bank) but will instead clear directly using the central bank’s immediate payments system (SPI). This environment could provide a significant growth kicker to the local fintech scene, as it should lower transaction costs and be more accessible to financially-excluded segments of the population.

The Brazilian central bank's instant payments system

Source: Central Bank

If a dominant payments platform were to emerge before PIX is launched then its development could prove redundant. Again, WhatsApp has already sought to assuage the central bank’s concerns in this area: ‘We support the Central Bank’s PIX project on digital payments and together with our partners are committed to work with the Central Bank to integrate our systems when PIX becomes available’.

Ultimately, we think WhatsApp will find a way to operate its payments platform in Brazil, and its other target markets such as India, Indonesia and Mexico. But its launch delays, particularly relative to that of Facebook Pay (November 2019 in the USA), highlight the additional challenges companies face when operating in emerging markets.

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Macro Analysis / Global

US: The wrong direction

ING Think
2 July 2020

Consumer sector offers encouragement

After hitting rock bottom in April, economic activity in the US bounced as the re-opening process gathered momentum in May and June.

Google Covid-19 mobility data focusing on movement around retail and recreation venues suggests states like Montana and Idaho are experiencing above “normal” activity. However, in more populous states, such as Illinois and Michigan, activity remains about 15-20% down while in California and New York the mobility data suggests activity is still around 30% lower versus pre-Covid-19 levels.

Is the US is experiencing self-sustaining growth or is this merely pent-up demand fuelled by the novelty of being able to visit a shop or a restaurant?

Overall though, consumer activity has performed well with the housing market and car sales obvious areas of strength. Mortgage borrowing costs are at record lows while auto manufacturers are offering interest-free financing for up to five years, making it an attractive time to buy. Moreover, the typical home and car buyer is around late forties to early fifties and will have been less exposed to the job losses in retail and hospitality (which are usually filled by younger workers) and is more financially secure with better credit rating.

Broader retail activity has also rebounded, albeit to a lesser extent, with aggressive Federal government action deserving of credit. Extended unemployment benefits have broadened the number of recipients to include the self-employed and independent contractors while the extra $600 per week payment means many claimants are receiving higher incomes than they did when they were actually working[1].

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