[00:02:42] Kyle Grieve: Me and Dede had a great conversation in the summer and I still had so many questions left for him, so I brought him back on to continue the conversation on Global Outperformers, as well as to discuss some of the business that Jenga IP has invested in.

[00:02:54] Kyle Grieve: To start off, I wanted to ask some questions specific to some interesting geographies. China showed some very interesting differences from some of the other countries you researched in terms of shareholder returns and earnings growth dislocations. When comparing China to the us, Japan, and India, it had a much lower shareholder return as a percentage of businesses that were compounding earnings greater than 20%.

[00:03:13] Kyle Grieve: You mentioned three potential causes for this problem. One state-owned enterprises and mixed-owned enterprises make up 40% of China’s market cap. Two Chinese companies rank relatively poorly on reporting standards and three. The Chinese government can quickly alter regulatory environments on a whim, which can adversely affect profits in entire industries.

[00:03:31] Kyle Grieve: So my question is, do you see the China discount closing anytime soon? Or do you think that this is something that investors will need to accept when they get exposure to Chinese businesses? 

[00:03:39] Dede Eyesan: Okay, thanks for the question. I think as an investor it’s just, it’s safer to expect the discount to always be there.

[00:03:47] Dede Eyesan: And what that leaves a stock picker from an action view is rather than projecting 20 times earnings, you project 10 times earnings and you just make sure the margin of safety is. Much bigger in the investments you make in China. So the three areas that we try to explore, so one of them being the fact that there are a lot more state-owned enterprises.

[00:04:04] Dede Eyesan: If you look at the top 10 largest companies in China, six out of 10 of them are state-owned. And if you compare that to India, it’s foreign US is much less. So you have a lot more state-owned businesses and. Most of them grow much slower. They grow much slower from an earnings view. Their profit margins are not necessarily as high as the private businesses outside.

[00:04:24] Dede Eyesan: So for example and they grow much slower and the quality can sometimes be less. That’s one of the big factors when you look at the banks in China, you look at Pinggan and the other big firms. The potential for upside is much less, and that isn’t just with China. It’s pretty much throughout Asia because if you look at each country major, apart from India, majority of the largest companies tend to be the banks, utility businesses, energy businesses, and they just have a much lower growth profile.

[00:04:51] Dede Eyesan: So from a compounding lens, they’re much tougher from a reporting governance view. There’s been a lot of improvements in China. One thing we have to put into perspective is that the US market has had more than a hundred years of existence, whereas with China, most of the businesses only went public in the nineties, so they really only had 20 years.

[00:05:12] Dede Eyesan: And investing is something that requires all parties involved. The investors have to have the knowledge base. The shareholders have to. They also have to have the knowledge base that’s required. So it needs all parties involved and China’s only been 20, 30 years in this in terms of the development of stock exchange.

[00:05:32] Dede Eyesan: So there’s been a lot of progress for the future. One thing I do see is that IFRS has made investing from a global lens much easier. So you think about recent changes like IFRS 16 and how the Chinese accountants standards have also incorporated that. Their own reporting, it becomes much easier to compare companies in different geographies.

[00:05:52] Dede Eyesan: So that’s also been one of the big factors with China. And I think it’s from an investor, it’s one of reasons. Reasons to be, I guess more, a bit more optimistic going forward. 

[00:06:02] Kyle Grieve: So Asia clearly has a good runway for growth. You mentioned that Asia’s share of Global GDP has grown from twenty-six percent, 20 years ago to thirty-four percent, 10 years ago to around 40% today.

[00:06:12] Kyle Grieve: In the meantime, US and European shares of GDP have fallen over the last decade from 36 to 28% and 31% to 23% respectively. So for investors who are uninterested in China, due to geopolitical risks and what you just discussed, what are some other countries that you see in Asia that are likely to produce outperformers in the coming decade?

[00:06:30] Dede Eyesan: So there’s a strong correlation with our performance. When you look at the innovation, you look at the market size or the consumer market, there’s quite a bit of a strong correlation there. So in Europe, one of the most, pretty much the innovative countries like Germany, Sweden produced a lot more performance than the ones that are less innovative.

[00:06:48] Dede Eyesan: And the ones that had. Big markets also did quite well. The UK has a big market. It did quite well. Sweden doesn’t have a big market, but then they have a very strong competence in exporting to big markets, so they did really well. So when I take that perspective in Europe and I applied in Asia, again, focus on the big markets.

[00:07:03] Dede Eyesan: So beyond China, the other big two big markets you have India, you have Japan, you have South Korea. Now one thing that not many people. What I didn’t realize until I did this study is that there are a lot more companies listed in Asia than anywhere else. So while US companies are much larger, and you have trillion dollar businesses in, in the US in Asia, they’re much, there are a lot more companies taiwan has a population of 26 million, and if you compare that with the uk, it’s 67 million. But then again, Taiwan has over 2000 businesses listed, and it’s way more than that. I think it’s twice as much. Almost twice as much companies are listed in Taiwan than listed in the us. If you compare South Korea and in Germany, the two really innovative countries, but then South Korea has four times as many listed businesses in Germany.

[00:07:51] Dede Eyesan: And Germany’s GDP is four years is more than double that of South Korea. So you can see that there’s just so many businesses listed in South Korea. So while these countries would produce a lot of outperformance, remember we have to look at the sample size. The sample size is just so big. So I think it’s gonna be very hard to go through all the companies in South Korea, for example, or trying to find the outperformance.

[00:08:13] Dede Eyesan: One of the areas that we looked at was the turnover to outperformance. Listed businesses that become out performers. I think those are an area that a lot of Asian companies didn’t do really well in. Now, the follow-up point is where I think they’re gonna be a high turnover to our performers.

[00:08:30] Dede Eyesan: And I think India, although the market is quite expensive now, I think India will be somewhere I would focus on one. There’s less. The private sector has a, plays a much stronger role in terms of business activity there. Two, there’s a track record of our performers there. There’s lots of growth potential they’re benefiting from.

[00:08:48] Dede Eyesan: Current geopolitics with you. Think about the amount of capital that’s shifted from China to other parts. India’s been one of the beneficiaries there. You have a lot of public, strong businesses that are looking to set up operations in India and look into the Indian market. So you think about.

[00:09:03] Dede Eyesan: Apple now trying to have some of its manufacturing operations in India that’s gonna benefit some local players. You think about the impact Amazon’s having and it’s driving innovation in retail segment in India, I think that’s gonna have a bit more impact. Then there’s gonna be a sum up performance there.

[00:09:17] Dede Eyesan: So I’ll spend quite a bit of time on India. The drawback for with India is that as a foreigner, it’s, you can’t really invest in India, so you have to be an Indian national or you, if you’re a phone manager, you have to get the license to be able to invest in India. So that’s the drawback with investing there.

[00:09:33] Dede Eyesan: And Japan, just to conclude, Japan is also quite good, but with Japan I think it’s much better to focus on areas where the Japanese economy has some competitiveness in. So one of the big facts with Japan is that it’s an aging population. And if you look at the out-performers there, you’ll see quite a bit of.

[00:09:48] Dede Eyesan: Businesses that are more skewed towards demand of an aging population. So you think about technology using healthcare to make processes much simpler. You think about care homes, you think about services for care homes, those are the things that we’re outperforming in Japan. So I’ll focus on those areas where I think the Japanese economy has some form of global competitiveness and.

[00:10:06] Kyle Grieve: So India is a country that I find very interesting for some of the reasons that you just outlined. And as your study shows, there are many outperformers that are coming out of India and given the continued growth of the country in terms of GDP, I think there’s a good chance it’ll probably be at the top of your study if you did it again in 2032.

[00:10:20] Kyle Grieve: However, India does have certain drawbacks and I wanted to discuss them in a little more detail. Let’s first start with the governance issues in India. What do foreign investors need to think about? If they’re able to actually invest there about governance in order to improve their competence in investing in India.

[00:10:35] Dede Eyesan: I think one of the byproducts of having so much success so quickly is that it attracts so many potentially bad players. So when I think about this relative to in the stock market, I mean if you look through 1990. To when, you know the stock market was really formed and organized well to today. There’s just been so many success stories.

[00:10:54] Dede Eyesan: Success stories mean cases of companies going from one rupee per share to 10 rupee per share, and then a hundred rupee per share. Now, what that happens is that you’re gonna attract people who want to take advantage of the system. So they list bad companies or they just want to benefit from that.

[00:11:10] Dede Eyesan: Super fast growth in stock exchange and as a result you’ve had certain frauds, you’ve had so many frauds in the stock market. From my personal experience in terms of looking at companies, there was a recent one with a company called Brightcom Group, and they’re still listed, but there was just so much inconsistency going on, fake bank accounts being created by managers and.

[00:11:32] Dede Eyesan: The accounting was just not real. So many issues, and this is a, this is not just India. This is emerging markets and companies that are trying to grow really quickly. This is what happens. The one thing I would say is in India and emerging markets, you have to place a lot more focus on quality and what I mean by quality, not just quality from a business lens.

[00:11:53] Dede Eyesan: Also quality from the terms of. When you assess management, assess the employees, and you assess its customers and the real relationship you have, the business has with its customers. You have to assess all those factors, and if you’re investing in the U.S and quality growth valuation, if quality was just 50% of your your investment process.

[00:12:12] Dede Eyesan: In India, I know the emerging markets are make quality maybe 75%. So you really need to place a lot more focus on that quality factor and you really need to think about the business case. And if you have a business that produces coal and has software margins and is growing 50% HA, you really want to question where, how that adds up.

[00:12:32] Dede Eyesan: And it’s really just asking those really basic questions and I guess spending a bit more time on ground trying to. Familiarize yourself with other shareholders and also with management and just really asking those questions, understanding the culture. I think that’s the way to overcome the governance issues in India.

[00:12:50] Kyle Grieve: And do you think that regulators in India are trying to solve some of these governance issues through improved regulation? What do you seeing there? 

[00:12:57] Dede Eyesan: I don’t have a strong expertise on the regulatory view. In India. But one thing I would say is that there’s definitely been a lot more progress in terms of, as a shareholder in terms of the information companies need to put into their prospector.

[00:13:10] Dede Eyesan: So I was looking at a few Indian companies earlier this year and I was actually quite amazed by how much information they had shared about the business, the stores, the economics in their prospectors. And I’m guessing there was a bit of encouragement from a regulatory view there as well. And also when you have the mutual fund industry in India growing.

[00:13:29] Dede Eyesan: Mutual funds in general have quite a bit of sophistication in terms of the question they’re gonna ask management. I think that also plays a regulatory view where your potential shareholders are of higher quality and gonna ask you much more tougher questions. I think that’s also gonna play a big role when you think about the level of reporting.

[00:13:48] Dede Eyesan: In India, but I’m guessing there’s definitely been quite a bit of effort in India’s place and also when you look at the penalties for fake and false accounting or for reporting late or not reporting at all. I think India’s definitely doing some work there. 

[00:14:03] Kyle Grieve: So what are some of the specific value chains in India that you’ve been spending time researching, and why do you think they offer upside in the future?

[00:14:10] Dede Eyesan: So before zooming into the value chain, I think it’s really important to put where India is in perspective. So India’s a country that has GDP per capita of about 2,500. 2,500 is really low. And if you look at S&P and p Moody’s and all the estimates out there, there’s a lot of estimates on India being able to grow about six, 7% this year and for many years for the future.

[00:14:34] Dede Eyesan: There’s a big chance that in India will be the third largest economy by the end of this decade. So you really need to put that into perspective. And when you think about that, I. Imagine myself, if I was in India, what would really be benefiting from that growth? And one of those big areas I think are necessities really.

[00:14:51] Dede Eyesan: So you have a lot of households that don’t have ACs, don’t have refrigerators, you know the basic amenities. And you look at. I guess mainly of the rural parts. So you think about areas like the Hindi heartland, like Bihar states, like Bihar, or Jharkhand, or Uttar, Pradesh. Those are cities where they’re really gonna benefit from this exponential growth with India and India’s economy.

[00:15:13] Dede Eyesan: And again, the value chain there for me is consumer electronics. Now zooming more into consumer electronics, there’s the manufacturers, producers, and then also the retailers. I’m a bit more. Interested in the retailers because with the manufacturers there’s a lot more competition as an Indian player.

[00:15:28] Dede Eyesan: There are few Indian manufacturers there, but I think there’s a lot more competition in the retail side that requires a lot more on-ground expertise. And it’s much more harder for Amazon’s already in India. But when you think about expanding to the rural bits, it’s a lot harder there just ’cause of the logistics and the standard of living there.

[00:15:44] Dede Eyesan: So I think that’s a value chain that’s over the next years. The main player, which is unlisted is. Reliance Digital, which is one of the, it’s owned by one of the conglomerates in India, but there are few smaller players there that are more regional in focus. And another thing about consumer electronics, if I, if outside India, I would never invest in electronics retail because it’s failed for many years.

[00:16:07] Dede Eyesan: I think it’s gonna keep failing for many years. When India, you have a state that has 200 million people. And it’s just one state in Bihar. There’s 130 million people in Uttar. Pradesh. I think there’s about 200 million people, if I’m not mistaken. But you have so many people in one state and 5% of them in Bja, for example, don’t have an ac.

[00:16:28] Dede Eyesan: This is a hot climate. They don’t have an AC maybe, I think about 16% don’t have refrigerators. I don’t see why this couldn’t grow up to 60%. So if that grows to 60% in 10 years time these regional players are where people in these states are gonna buy ACs from. Yes. It’s it’s a one-off purchase.

[00:16:44] Dede Eyesan: But when you think about the she number of households, I think it’s it’s somewhere that has a room for growth. Beyond electronics, retail. I’m also looking at healthcare. So one of the learnings I learned in when I did this research is really the hospital of the world. I, when you think about the amount of APIs, active pharmaceutical integrants that are made in India is just so big.

[00:17:04] Dede Eyesan: So I think I. Beyond just the generic drugs, you’re gonna move more into services. So quality hospitals quality diagnostic centers, technology services. Not many of them are listed, but I wouldn’t be surprised if in the few years you see a lot more listed companies. One of the listed companies that I’ve been studying, Krishna, Diagnostics, and they’re one of the players in this area, so I’m also studying that.

[00:17:25] Dede Eyesan: Value chain and really trying to understand where exactly the potential for our performance for the future there and to conclude their chemicals. And chemical divisions or chemical businesses have done really well in India because they’ve benefited from the increased outsourcing or I don’t know, like cosmetic products for example.

[00:17:42] Dede Eyesan: So India’s done quite well there. I haven’t really looked into the chemicals from a value chain lens, but it’s one of the projects I have for next year. 

[00:17:51] Kyle Grieve: So in our previous interview you mentioned that we could open the discussion on types of outperformers that you think are easiest to identify. So seeing as myself and many listeners in the audience are always on the lookout for potential multi-beggars, I thought we’d pick up where we left off during our last chat.

[00:18:04] Kyle Grieve: Which type of outperformers do you think are the easiest to identify? 

[00:18:08] Dede Eyesan: I think a better way to frame you is the least hard if outperformers are easy. Oh my God. I’ll have all the outperformers I could possibly think of, but it’s a very hard game. One of the reasons why our performance is hard, it’s not finding it, it’s actually holding onto them.

[00:18:22] Dede Eyesan: So if you’re gonna hold onto a company for 10 years, like just think about the amount of times that stock is gonna drop, twenty-five percent, 30%, are you gonna have the stomach to actually go through all that volatility? Some of these companies are out performers, they were short reports written about them, and now if a short report is written about a company on Twitter, everyone’s gonna say stomach.

[00:18:44] Dede Eyesan: Go through that volatility and do the research, understand the comments so deeply that if someone tells you, yeah, they’re doing fraud, you’re gonna say, no, I’ve done the research. I don’t think they’re doing fraud. I think it makes so much sense. I think it’s management, are you gonna have that stomach and that level of research.

[00:18:58] Dede Eyesan: I think that’s really the difficult part of. Investing in our performers, there’s finding out performers, and then there’s investing in our performers, and there’s no real reward for finding them. There’s a real reward for investing them. So I think when I really ask myself where exactly would I find the least difficult in terms of.

[00:19:17] Dede Eyesan: Investing and holding on to our performance. I would say one, these are areas that are within my circle of competence and for me, I like consumer businesses because I find it easier to understand when a cosmetic brand is failing rather compared to a chemical business. I don’t know, in India is struck.

[00:19:33] Dede Eyesan: I have. I have no idea if a chemical company is struggling, professor cosmetic business. I can speak to the consumers. They tell me I prefer this brand of another brand. My thing, the Shure brand is doing much better. So I like consumer businesses and I find them easier to track their product relative to the competitors.

[00:19:51] Dede Eyesan: The other types of outperformers are areas where I think it’s either a deeply oligopolistic market or they might even be natural monopolies. So a very good example of an outperformer from the book that we did a case study on that I think I would’ve, if I knew about them 10 years ago, I should have invested in was Airports of Thailand.

[00:20:10] Dede Eyesan: So Thailand. They have about forty-four airports, all owned by, or I think almost all owned by Airports of Thailand. It’s a listed company. Went public, I think just after the financial crisis, and it was an output from between twenty-twelve and twenty-two thousand 20 twenty-two. And if you think about the Thailand economy, it’s done really well in medical tourism, number one.

[00:20:29] Dede Eyesan: Number two, it’s done really well in tourism, also done really well in tourism. Overall, it’s. and also as an airport, as a business model is just a fantastic business model. When you think about the aeronautical revenue, like the airlines have to pay the airport money every year for every trip they do. And then also there’s the growing non aeronautical revenue.

[00:20:50] Dede Eyesan: So you think about the retail stores in the airport, that’s something they really expanded on. They benefit from duty-free revenues. That’s a business that I think has little to no competition. He has no competition from the aeronautical side, but then he has very little competition on the non-aeronautical side.

[00:21:05] Dede Eyesan: So I think that’s something all of I wish I knew about in twenty-twelve as a business model. Another example in the U.S was a company called Texas Pacific Land Corporation. If you speak to the shareholders, they’ll tell you they’ve had the worst management of all time, but it’s been an outperformer.

[00:21:21] Dede Eyesan: The reason why it’s been an outperformer is that they own literally 880,000 acres of land in Texas and all the big old companies pay them revenue each year, and that’s growing year on year. Because Texas has become a lot more important market in the oil when you think about what has happened with fracking and shale oil.

[00:21:39] Dede Eyesan: So that’s a business that it has no competitor on. It owns. For the energy sector in Texas and it’s done really well. It’s had bad management, but still don’t quite roll. And when Warren Buffett says, I wanna own businesses that even are bad management, can’t bring this down. And then that’s a really good example.

[00:21:58] Dede Eyesan: And I think that’s a business that it has a 90%, roughly 90% EBIT margin because there’s zero on Caprex. So that’s the type of business that I think I would love to have owned as an outperformer. But yeah, just to conclude yes, that it’s really having the stomach and having the level of research to hold a company during those volatile times, during the pandemic or during short reports, those sort of things I think that’s a real difficult bit with Outperformers.

[00:22:24] Kyle Grieve: And you bring a really good point there with finding monopolies. So when you looked back in time, say at that 2012 period, did a lot of these businesses that you just talked about, were they already monopolies or did they have to establish themselves as time went on to becoming monopolies? 

[00:22:38] Dede Eyesan: I. So the two airports of Thailand, Texas, they’ve always been monopolies.

[00:22:42] Dede Eyesan: Texas isn’t really, Texas Pacific isn’t really a monopoly because you could do business in other areas of Texas, but where they’re on the line is just so integral for oil and gas operations that you have to pay them some form of rent. And they also make money from using the water on the land.

[00:22:58] Dede Eyesan: So that was something that they were able to also grow as an additional source of revenue over time. And then they can also sell some of the land and make money off that as well. So that was a monopoly in. I would say, but not again, not many of the of the outperformers were monopolies. Some of them had technical bias to entry and they were able to build on that that competitive advantage over time.

[00:23:19] Dede Eyesan: But they’re quite difficult to really size up, especially when you look back in 2012. A very good example in the U.S Nvidia, that was an outperformer, but in 2012 they unprofitable and there wasn’t really clear signs that now you would say yes, there are clear signs. It’s an amazing AI company.

[00:23:35] Dede Eyesan: I, of course I knew it was gonna take over the world, but then they were. Unprofitable. There was actually proper risk of bankruptcy and it wasn’t really clear that they were gonna have then, they were mainly gaming. This was before they expanded into auto and data centers. They were mainly gaming and chips.

[00:23:51] Dede Eyesan: So it wasn’t really clear that they were really going to get that more tailwinds over time. That is too tough for me. I wouldn’t try and look for those type of businesses. I like things a lot more easier. 

[00:24:02] Kyle Grieve: Now that I’ve learned more about your investing philosophy and read your study multiple times, I have a much better understanding of the types of businesses that you are looking for.

[00:24:09] Kyle Grieve: Additionally, I’ve had a chance to look at many of the names in your portfolio. So for those in the audience who haven’t gone down the rabbit hole as much as I have, can you let them know what the primary attributes are that you are looking for in potential investments? 

[00:24:20] Dede Eyesan: So when I think about businesses, I bring them down into quality, growth, value.

[00:24:26] Dede Eyesan: And really you’re looking for businesses, same thing. You’re looking for businesses with good economics, that this is their growing profitable return on capital you’re looking for. Second thing, you’re looking for businesses with a competitive advantage, so it might be high balance to entry. The management might just have a very deep level of execution, high switching costs.

[00:24:42] Dede Eyesan: Third, you’re looking for things with unoriented management teams. Not necessarily founded LED businesses where the management are really aligned with shareholders and they have a deep level of unorientation. And then lastly, you are looking for businesses that have marginal safety in terms of evaluation viewpoint.

[00:24:57] Dede Eyesan: So I don’t think that’s rocket science. I think we’re all looking for that. But it’s really having one, it’s having. The level of energy to go through so many businesses and go really deeply in terms of the research to understand these things. That’s really what I’m trying to spend my time doing as an investor.

[00:25:14] Kyle Grieve: There are two names that I find interesting that are no longer in your portfolio. Prosis and Karoo. Can you tell me a little bit about what your original thesis was on these names and what your reasoning was for exiting these positions? 

[00:25:25] Dede Eyesan: So when we had Karoo, then it was called Kartrack. The core product is called Kartrack.

[00:25:30] Dede Eyesan: The Karoo name is very strange ’cause it has five O’s, but I think it has its place in South Africa that the founder had some affinity towards. So that’s why he called it Karoo with five O’s. But when we invested in those companies, we were running a South African-only strategy. So for the listeners, I grew up in Nigeria.

[00:25:47] Dede Eyesan: And I wanted to invest in Africa. I wanted to invest in somewhere in Africa. ’cause I thought this would be something out that would be fun. But when I thought about the currency risk, there were really only two countries I felt had a bit of a stable currency, which was Egypt and South Africa and Egypt being an Arabic speaking country, I thought culturally it would just been too difficult for me.

[00:26:06] Dede Eyesan: So we focus on just South Africa. So when I decided to focus on South Africa, 

[00:26:11] Dede Eyesan: and NASPAS, we actually invested in NASPAS, which is the parent company of Prozos who own shares in Tencent. Complicated. But we initially stood out, so Karoo car Track. Then it’s a fleet telematics business. So basically they build a hardware that you put in your car or your trucks, and there’s also the subscription element or software element of it where they, you’re able to track your vehicles, your cars over time.

[00:26:42] Dede Eyesan: There are lots of players in that field. So there’s also MIX Telematics and there’s some foreign businesses as well where, but what CarTrack did was that they looked across the whole value chain. So when you think about a vehicle, if it’s stolen, you can track the car, but then it doesn’t stop it from being stolen and when it’s stolen wasn’t happened.

[00:26:59] Dede Eyesan: So what CarTrack did was that they added an another division, which was the recovery division. So basically when your truck is stolen, CarTrack had a team of people that would actually go into the field to actually try and recover it. And that division was very successful. So he had a ninety-seven percent recovery rate.

[00:27:14] Dede Eyesan: So when one of the customer’s vehicle was actually stolen, it’s if Catrax sent someone, there was nine in 10 chance, almost a hundred percent chance that was gonna be recovered at some point. And again, you have to zoom out again with South Africa three. So if you look at the top. Turn cities with the highest crime rates.

[00:27:31] Dede Eyesan: South Africa has three cities in there, so the crime rates in South Africa is quite high relative to Africa and also relative to the world. So it made sense why the business that was trying to address something with crime rates was based in South Africa. The other thing I like about. Catrack was that they were expanding outside South Africa, so I think they’re the largest players in West Africa as well.

[00:27:50] Dede Eyesan: And a bit of the founding team were based in Singapore. So from a technology lens, they were quite globally minded in terms of they were trying to expand beyond just South Africa. So if the South African currency depreciated the revenue that they were making that were in foreign currency would also do quite well.

[00:28:06] Dede Eyesan: So overall, it was a big, was a good business. Earned a margin of thirty-one thirty-two percent each year. It had debt on its balance sheet. It. 15% each year, and when we bought our shares there, it was trading at about 17, 18 times P-ratio. So you had a 15% grower, 30% EB margin, 30% return on capital that was priced at 15 times, and I thought that was good value.

[00:28:30] Dede Eyesan: And what happened was that the management got really fed up of the low valuations of South Africa. So they said they were gonna delist in South Africa and then list in the US as Karo, which they have done. But when that happened, the share price just skyrocketed. ’cause everyone’s realized was gonna have a much higher valuation in the us.

[00:28:48] Dede Eyesan: So it tripled in like a few weeks, and for me, I felt the value was a bit too high. So you went up from 15 to. 33 times. So we sold a stock, I think then it was about 60 rands per share, and we had bought it for about 23 Rands per share. So we sold that and the valuation stayed a bit elevated, so we never really bought back in.

[00:29:08] Dede Eyesan: But I think it’s a good business and it’s one of the very few success stories of software coming from an African country doing well globally. They’re not the market leader globally, but they’ve done quite well expanding to all the areas beyond South Africa. And the other company was Naspers.

[00:29:24] Dede Eyesan: So Naspers the Naspers is the largest African company out there for them. It’s not the largest because of its operations in Africa, it’s the largest because of its investment in Tencent. So why I’m a global investor today was actually because of Naspers. Because when I was looking at Naspers and I was seeing them making investments in iFoods, in Brazil, in Milro, in Russia, in Tencent, in China, this was a team that was based in South Africa, but then they had a mindset of.

[00:29:52] Dede Eyesan: Technology in emerging markets are like South Africa. Because one, Silicon Valley has their own mindset of how technology should look like because they’re based in us, but they’re in the emerging market because of the geography, because of the consumer population, because of the GDP, it’s gonna be look a lot more different.

[00:30:10] Dede Eyesan: So they literally went across. All the BRICS countries and invested in e-commerce and technology-based businesses there. So the really successful one was Tencent and they owned about a third of Tencent and I started learning about gaming sector and, as well. And then twenty-nineteen, if you looked at Tencent, there was literally a flawless business.

[00:30:34] Dede Eyesan: And we bought a stake in NASPERS and we held that up until we closed the fund. So focus on the global strategy in twenty-twenty-one. So that was the thesis for NASPERS. 

[00:30:44] Kyle Grieve: So Evolution AB is a high quality business that is doing very well, growing top and bottom lines, but being in a subset of the iGaming market scares a lot of potential investors away due to seemingly low barriers to entry.

[00:30:55] Kyle Grieve: I’d be interested in knowing your thoughts on Evolution’s Moat and how sustainable that you think it is. 

[00:31:00] Dede Eyesan: So we’ve held evolution since twenty-nineteen, and it’s been I’ve had the opportunity to learn a bit more about the iGaming industry. But one thing I would say I differ from most shareholders is that five years ago, evolution was a company in the iGaming industry.

[00:31:20] Dede Eyesan: Now today, given the size it’s at, it’s no longer just iGaming. It’s really on certainty Entertainment. That’s what I call it. It’s about the business that entertains its customers with a fact of uncertainty. Now, as a customer, I’ve never used anything evolution. I found it about iGaming when I looked at the stock, but when you think about as a customer, as a consumer, where exactly can I be entertained?

[00:31:42] Dede Eyesan: By risk, reward or uncertainty. There’s a stock exchange. There’s a stock market Robinhood, and that’s what people did in 2020 where they were literally just gambling on the stock market. There’s crypto as well. So same thing happened there. There’s sports betting. You think about DraftKings and you think, I think ESPN is now expanding in there as well.

[00:32:02] Dede Eyesan: And then also there’s land-based casinos. So when you think about evolution gaming from uncertainty. Entertainment. You realize the market is actually really big. So does evolution have a moat in iGaming? Yes, it does. Does it have a moat in uncertainty entertainment? No, it doesn’t. It’s still far from a moat, so there’s still a long way for evolution to come in.

[00:32:23] Dede Eyesan: It’s a 20, I don’t know, roughly billion-dollar business in the U.S. It still has a long way to go to really build a moat in its business. It’s doing well. As a business with, I don’t know, 60 plus percent AP margins still growing 20%, although that growth rate has dropped from 50% four, five years ago, it’s still doing quite well.

[00:32:43] Dede Eyesan: Still has strong, solid market share in iGaming. The acquisition of NetEnt when you try to expand into RNG has not done as well, but I still think there’s room for. Improvements there. And of course the valuations has show up quite drastically over time, and now they’ve announced their buyback. So it’ll be interesting to see how they keep executing further.

[00:33:01] Dede Eyesan: And the one thing I’ll say about evolution among all the portfolio companies we own, when I look at execution from management, I’ll probably rate evolution probably the highest among them. If you go back to the prospectus and you look at the things within the prospectus of what they were trying to achieve and what they’ve achieved today is just amazing.

[00:33:19] Dede Eyesan: They’ve consistently created new games, fine-tuned new games, built studios all over the world in India and in so many different areas. They’ve expanded really well into the US as well, which not many people thought they were going to do. Then initially when they went public, they were just in EU.

[00:33:34] Dede Eyesan: They’ve done really well there, so it’s been phenomenal just seeing the level of execution the team have done at Evolution. 

[00:33:42] Kyle Grieve: So I’ve heard many reasons why the market seems to dislike AB, which you brought up here. So there’s obviously been some issues with capital allocation that people don’t like, and then the decrease in growth rates, which you mentioned.

[00:33:53] Kyle Grieve: But I’d love to get a sense of why you think the market has been so stubborn with keeping the business’s valuation so low, considering the. Quite obvious quality of the business. 

[00:34:02] Dede Eyesan: So I, I think evolution has a good quality, but I don’t think it has a strong mood. And because it doesn’t have a strong mood, I don’t think the valuation should be trading at, I don’t know, 30 times or 40 times, I think 28 times, 27 times for me.

[00:34:17] Dede Eyesan: I think that’s something that’s a. Bit more optimistic. I think that’s something that makes sense for evolution gaming. Now, the problem is that three years ago it was at 60 times ends. And if you’re expecting it to get back to 60 times ends or 50 times ends, I don’t think that’s gonna happen. I don’t think it should happen.

[00:34:31] Dede Eyesan: And if it does happen again, I’ll probably be a seller of the stock. So I think it’ll be overvalued there. So I don’t think it’s trading from a multiples lens too far. I think now it’s about 20 times, 21 times for SI don’t think it’s too far from where it should be. In trading, so you have a little multiple revaluation from 21 to 27, and then hopefully we’re able to get 20% earnings growth over the next three to four years.

[00:34:55] Dede Eyesan: I think to me, that’s a good risk reward. I think it’s of good value if the multiples drop to. 13 or 14 times. Then I think the market’s really being stubborn and really on the value in where evolution should be trading. And management are, I think they’re starting to be, they’re quite aware of the valuation gap and they’ve announced share buyback about hundred million dollars worth of shares.

[00:35:18] Dede Eyesan: There’s still the dividends there, but whenever a company goes from high growth to just growth. The investors who want high growth leave the business. And then it takes time for those who want stable growth to learn about the business. And I think that’s where evolution is right now, where it’s been growing 50% for the last, I dunno, 10, 20, 10 years.

[00:35:38] Dede Eyesan: And then now it’s in a place where it’s no longer gonna be growing 50 or 40 or even 30% more. Probably gonna be growing 20 to twenty-five percent. So those investors interested in high ultra-fast growth companies, evolution. More unstable predictable and I guess undervalued economies will start getting a bit more interested.

[00:35:59] Dede Eyesan: So I think that’s happening with Evolution Gaming or Evolution AB. And the last thing is the fact that Evolution has quite a bit of revenue from unregulated markets. So China and coal, and its. While now it’s still revenue. You don’t know how long that’s gonna last as revenue. And it’s still a lot of uncertainty on what happens in those divisions for the future.

[00:36:19] Dede Eyesan: I can say with a high degree, a ninety-five percent degree of confidence that the revenue they’re making from unregulated markets are gonna be there in five years time. So it’s another area that I guess investors have to be aware of as a shareholder. So I also think that’s why the. Slightly lower multiples.

[00:36:37] Kyle Grieve: So I noted a new addition to the Jenga IP portfolio, a finished company called GoFor. I’d love to ask you a few questions about this business. To start off, can you give a brief overview of what they do and who are their customers? 

[00:36:50] Dede Eyesan: Yeah, so before we got to GoFor, I did a deep dive on the IT services industry, mainly because of global performance, because I was looked at consulting as a name commodity, wacky kind of business. But then when I did the study on global out-performers and I saw how many IT consulting were not just doing well, but then they were actually profitable businesses. They were growing each year and actually benefiting from things like cloud computing and the big shifts happening in the world in technology.

[00:37:17] Dede Eyesan: It made me realize that there might be some IT consulting businesses that will be quite well in slightly in a predictable, recurring way. So deep dive and I looked globally for. Businesses that might be able to achieve that going forward. And one of the ones I concluded on was GoFor. So GoFor, they’re an IT consultant based in in Finland and they started in 2004 originally by four co-founders, who I believe still own about 30% of the business.

[00:37:47] Dede Eyesan: So they initially wanted to build software, but then the software business, I don’t think you actually ever took off. But then you realize if you can’t build a software business after the. Financial, sorry, after the tech bubble in 2001. So they realized if we can’t build a successful software business, would help other businesses with their software.

[00:38:05] Dede Eyesan: So they cover a range of IT consultants with things like quality assurance, things like installation, management restructuring of software of. Web design, web arrangements, all sorts of things in IT. Consulting, they do quite a bit, a broad range, and they’re originally focused on the public sector.

[00:38:23] Dede Eyesan: So Finland is one of the most innovative countries in the world, and I think on some indexes is actually the most innovative country in the world. From my thinking was that this is a country that if there’s a new technology, the public sector are more likely to want to be enabled by that technology.

[00:38:41] Dede Eyesan: And if they don’t have the people to do it, they’re gonna look at it, consultants like GoFo to do it. And that’s pretty much what they’ve been doing for some time. So initially started off with a public sector focus, but then after they got listed they started expanding more into private space and having clients like.

[00:38:58] Dede Eyesan: Private clients and customers, and the business model is really by per hour basis. So they charge the customers on a time-based lens. And then with the public sector, it’s sometimes the contracts. So they’ll bid for a tender and if their offering is attractive for their customers. So it might be, for example, ministry of Transport in Finland, if they find their.

[00:39:21] Dede Eyesan: Offering more attractive than the other competitors. They’ll pick GoFo, which they did in earlier this year. And it’s, those contracts tend to be more long term and more recurring in nature. So that’s GoFo’s model. And yeah, I have to talk more about the financials and why it’s or we thought was attractive.

[00:39:38] Dede Eyesan: So with GoFo when I looked at them, they had compounded between 2012, I think that’s when the finances start, 2012 and 2020. They had compounded both revenue and profits by above 30% each year, and two thirds of that was organic growth. A third of that was inorganic growth. So they started making acquisitions 2017 and 2020.

[00:40:02] Dede Eyesan: And this was mainly to expand their expertise beyond Finland, so into Germany. And then also build expertise in private clients. So that’s where they were mainly acquiring, and it’s quite common for IT consultants to acquire smaller IT consulting businesses. It’s part of the strategy. That’s what the big guys do, like Accenture and Tata Consulting.

[00:40:18] Dede Eyesan: So GoFo had a track record of.

[00:40:24] Dede Eyesan: Do they have such a good growth track record? And how long could that last for? So while I was learning about the business, I learned quite a bit about the culture of the team at the management level and also at the employee level. So one of the things I like about GoForce is that there’s just so much insight into the business.

[00:40:40] Dede Eyesan: So one, they report their revenues monthly. So literally every month that you can see the revenue data. So before the Q3. Result comes out you know what’s happening already. You can have an idea about that. Then there’s a GoFor blog where employees from GoFor write about things they’re experiencing in the business.

[00:40:57] Dede Eyesan: So one of the cool things I learned about GoFor was that this was before Gen ai. So in 2017, they created their own internal chatbot. To eliminate the need of middle management within GoFo. So GoFo have a very lean mid office very lean. I think it’s like maybe 10, 20 people. And this is a business that has about 1,400 people.

[00:41:20] Dede Eyesan: And that says a lot about the culture ’cause they wanted to eliminate as. They wanted to free up as much time as possible that they could just focus doing productive things rather than billing. So it’s common for IT consultants to spend so much time coding how many hours they spend on projects so they can bump up the revenue they’re gonna collect from the customers.

[00:41:38] Dede Eyesan: But they wanted to eliminate. As much time as that was one of the things I liked about them. And then also I looked, you could also see the customer feedback reviews that public sectors had. And I also, you would also notice that I think about 82% of its customers come back each year. So there’s quite a high level of recurringness and stickiness from a customer base and the.

[00:42:01] Dede Eyesan: Both in terms awards from a culture lens. If you look at the NPS scores much higher than their local competitors and also awards from the quality of the work they’ve done for the Finnish government is also done quite well. And lastly, management set an internal target of growing revenues and profits.

[00:42:19] Dede Eyesan: twenty-five percent each year, 15 to twenty-five percent each year, so 15% organic revenue, and then another 10% from inorganic revenue. This year they’ve grown twenty-seven percent organically alone. So they’ve outperformed that twenty-five percent each year since they set that target in twenty-eighteen.

[00:42:35] Dede Eyesan: So they’ve done quite well. And when I look at the culture, I look at the customer feedback, I think there’s an encouraging sign that things could still last quite a bit. The founders are still involved in the business, but they’ve scaled back a bit. So the Kirk, who was the CEO, he is now the chairman of the board.

[00:42:51] Dede Eyesan: And then the current CEO, he was, he started, he joined the business in 2010 and then became the CEO in 2019. Some of the other co-founders, they still own about 30% entirely of the business, but they’re still in the business in general. And lastly, on the valuation lens it trades at about 17 times an inch, and this a each.

[00:43:14] Dede Eyesan: 12% return capital 14%, that’s at earnings. That’s quite low relative to the international peers. So one of business in profitability, revenue, profit growth rate, but then it is twice as expensive on a valuation lens at thirty-three times four. So if I can either buy one and Tata Consulting is also quite good. Tata is even more profitable than GoFo, but then it’s slightly more expensive and it’s growing more slower than GoFo.

[00:43:45] Dede Eyesan: So when you put that into perspective I thought. When I, when we made the investment that go for would be a better pick than the alternatives there. 

[00:43:54] Kyle Grieve: So I noticed in your study that you talked about it consulting and like you said, I find it very boring as well and didn’t seem like it would be a big value creator, but clearly it is.

[00:44:03] Kyle Grieve: So in, obviously you’ve done a lot of research on IT companies, what are there. Competitive advantages over their competitors, like how are they able to maintain these high margins and grow at such high rates? 

[00:44:14] Dede Eyesan: I’ve learned to tie what is exciting to where I see the opportunities. So now I find it consulting quite exciting because I think the opportunities there are okay. They went quite high from a valuation lens when the pandemic happened, and quite a few of them have come down from a valuation lens, but I think it’s still gonna be attractive going forward. Now with IoT Consulting. I think one thing you have to, we have to realize as investors is that technology is changing and the impact technology has is actually getting bigger.

[00:44:45] Dede Eyesan: So while, some people would argue that the pace of technology has slowed down. New technology has on business has increased. So just think about how many businesses I’ve tried to get Gen AI on board within the space of, I don’t know, six, seven months. It’s much faster than how people bought TVs.

[00:45:05] Dede Eyesan: I don’t know when TV was created. So the impact at which people want to add new technology to their business, to their livelihood is so much quicker. Now, what that means is that if you don’t have the brightest people in your company. It’s gonna be very hard to keep up with technology. If you’re a healthcare business where majority of your employees are healthcare practitioners, it’s gonna be very hard to know which cloud computing provider should use Pfizer, Joshua, use AWS, how do I do quality testing and all these things.

[00:45:35] Dede Eyesan: Because there’s just so many options out there. So I could use any cloud provider the level of testing I to do it just so much more quicker. So much higher. That’s where consulting comes into play because rather than trying to build your own IT team, which can be very expensive, it’s something you can partner up with a company like Go For or data consulting and you have.

[00:45:56] Dede Eyesan: A company that’s solely dedicated to learning about technology and using their expertise as people to bring it into your business. And they’re willing to be with you for many years. So even if an employee leaves in Tata, there’ll be someone else that comes in tomorrow. They’ll be able to continue from where they stop.

[00:46:14] Dede Eyesan: I think that value proposition makes a. Businesses are not really exposed towards recruiting technology savvy people. So you think about construction and you just think about industries where it might be more public sector facing or there’s less innovation in general. I think it consulting does a really good job there.

[00:46:34] Dede Eyesan: So from a competitive advantage lens. So there are lots of areas to look at it from a competitive advantage. So one of the biggest ones is the people. So how quickly can you attract people? And that the Indian companies, they have global domination there. So when you look at Tata Consulting, the universities in India, they’re just incredible in terms of the number of talents they bring and the companies there, Tata, Infosys, Wipro, they have an advantage of being able to recruit those people into their business much quicker than anyone else.

[00:47:01] Dede Eyesan: The Polish businesses also. Building some expertise there in terms of value for money in terms of being able to recruit, but that’s one area. In terms of competitive advantage, another big area is really I guess the relationship with the client, the ratings, the feedback, the ease of working with them.

[00:47:20] Dede Eyesan: That’s much harder to gauge, but it’s something that you can gain by speaking to their customers. Quite a few businesses would outsource their whole division to a IT consulting businesses and it’s public knowledge that they’ve outsourced that to IT consulting and they just reach out to one or two people and ask them how’s that relationship going?

[00:47:37] Dede Eyesan: How do you think Tata is responding working with them? How do you think Go for is implementing those projects? So I think those are the two big areas that it consulting. The other thing is that it’s a, just to conclude, it’s a low barrier to entry industry, but it’s quite high barrier to success in the sense that being able to attract hundreds and thousands of people to work for your business, it’s actually very hard as a founder.

[00:48:01] Dede Eyesan: You don’t really see many IT consulting businesses created by just one founder is usually like a team of four, five people who left another IT consultant set up there. So that’s what happened with. That’s what happened to a lot of these businesses. So it’s actually quite a high barrier of success industry, and I think it’s one that we’re probably gonna see a bit more outperformers going forward.

[00:48:18] Dede Eyesan: But at the same time, there are a lot of losers out there. So it’s a, I would say it’s a stock pickers market where you really have to differentiate between the really good consulting businesses who actually produce value for money for the clients and the ones. Just rely on their brand name and they just focus on their brand name to grow the business.

[00:48:35] Dede Eyesan: Those ones will be caught out. And there’s been quite a few bad examples of those type of businesses. 

[00:48:42] Kyle Grieve: So one of the standout points for this business that you already pointed out was that they have about 4% of the public a market in Finland and then 1% or so of the private market. This means they have a ton of market share, obviously left to go, and that excludes international expansion, which you said they’re already also working on.

[00:48:59] Kyle Grieve: What’s your forecast for their growth into the future? 

[00:49:02] Dede Eyesan: Yep. So my focus, I think they’re gonna be able to achieve the twenty-five percent for the next three to four years. So that’s in both revenue and EBIT and profit. There isn’t really room for margin expansion with consulting because. Your cost are mainly people.

[00:49:17] Dede Eyesan: You can’t reduce, you shouldn’t reduce the salary of people, so you can’t really expand by reducing salary or you don’t have that much fixed cost. So the margins in it consulting tend to be quite stable and it policy. Yeah. Yeah. I think they’re one of the first companies to create a collective agreement within IT consulting in Finland, and they try to increase the salaries about 4% each year.

[00:49:38] Dede Eyesan: I think they increase about 4.5% last year, so that they try to keep that consistent and you need to have a good culture to attract really talented people. So there isn’t gonna be margin of expansion. But in terms of growth from a qualitative aspect, we, one now say is that GoFo have made about 86.

[00:49:58] Dede Eyesan: IT consulting market is 5 billion, and you have a lot of foreign players, and one of the big things, especially with the amount of de-globalization that we’re seeing now is that public sectors don’t work more with local players. So that’s one trend. And then also the big four consulting firms, we think about EY, Deloitte, PwC, they have problems between audit and consulting, so a lot of.

[00:50:21] Dede Eyesan: Clients are scaling back, using them for their consulting work and focusing on them for their audit work. So that’s created an opportunity for companies like GoFo, which are independent, they focus on in consulting, and they’re also domestic where they can expand into the Finland public sector space.

[00:50:37] Dede Eyesan: So that’s one big tailwind. They have also. Some of the competitive struggle in the past few years. So there’s Vinciate, there’s some other local players in Finland. They’ve struggled a bit in terms of growth from a cultural perspective. They’ve lost some employees. That’s something GoFundMe has done quite well, so they have that tailwind as well.

[00:50:54] Dede Eyesan: And then finally, in terms of growth, I don’t think they’ll ever have maybe 10% or 20% of the Finland. 500 million euros, which I think they might get that maybe in five, six years. I think we’re gonna see growth really slow down. Then you need another layer of growth, and that’s what they’ve done with their expansion into Germany and the rest of the dark region, Dutch regions, German-speaking countries, and.

[00:51:19] Dede Eyesan: Austrian Co. So then right now, 12% of their revenue come from that German speaking countries, and it’s something that I think they’re doing a really good job in. It’s growing, it’s doubling every two years in size and they’ve acquired some really great businesses locally in Germany. So one is Imando. I think they acquired that last year, and that’s done really well.

[00:51:39] Dede Eyesan: They’ve made some previous acquisitions. Finnish businesses that have actually done a good job expanding into Germany from a services lens. So I think that’s another room. Also, the German market is 10 times bigger than Finland, so it’s about a $50 billion market IT consulting market. So it, there’s a much, much larger term there.

[00:51:58] Dede Eyesan: So if they can keep up what they’re doing from recruiting culture, winning new clients, both in private and public space, I think they’ll be able to continue growing for the next three to four years. I think the German region is gonna be about 20% of total revenues by the end of next year, so that will be interesting to see over the near term.

[00:52:17] Kyle Grieve: Dede, thank you so much for joining me today. Before we close out the episode, where can the audience connect with you and learn more about Jenga IP and your research? I. 

[00:52:26] Dede Eyesan: Yeah, so our website is Jenga J-E-N-G-A-I-P dot com. We share our research there. We try to keep our research open. I love the feedback that I get from readers.

[00:52:36] Dede Eyesan: So yeah, always feel free to reach out to me if you read one of our research and you have some questions. And I’m also on Twitter. My handle is Delake D-E-D-E underscore E-Y-E-S-A-N. So I’m on Twitter and also LinkedIn as well. And I always happy to talk about our research and what we’re doing from a stock picking view.

[00:52:55] Kyle Grieve: Folks, that’s it for today’s episode. I hope you enjoyed the show, and I’ll see you back here very soon.

[00:53:01] Outro: Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.