Opportunity among the G20 leaders – 4 share ideas

Entain

As a major player in the betting and gaming industry, Entain operates in highly regulated environments. That can present both risks and opportunities.

In more mature markets, like the UK and Ireland, its financial progress over recent periods has been held back by new measures such as enhanced affordability checks and stake limits on slot machines.

There are signs of stabilisation in the domestic market. And for now, its key UK brands Ladbrokes and Coral have been spared a hike in online gaming duty by the chancellor. However, that’s not to say it couldn’t happen in future budgets.

But Entain also has its eye on growth markets overseas.

In the US, where it has a 50% stake in the sports betting and online gaming platform BetMGM, internet gambling is a relatively new phenomenon.

Here it's taking a bit longer than expected to become profitable as it spends heavily on marketing to gain a foothold in this potentially huge market.

Outside the US, Brazil is the world’s fastest-growing market in this space. Entain is already well established here and was an early applicant for a license in a new regulatory framework. This opens up new commercial opportunities and creates a barrier to entry. Nonetheless, competition in Brazil is still likely to intensify.

The recent recovery of Entain’s valuation recognises progress on overcoming domestic challenges as well as exposure to some exciting growth markets. This also means there’s now some extra pressure to deliver.

Unilever

As one of the largest producers of consumer goods, Unilever has a truly global reach. Its brands include Pot Noodles, Dove soaps and whether you love it or hate it, Marmite.

The US remains a crucial territory, yet over half of Unilever’s revenue comes from emerging markets. We think this leaves it well placed to lean into faster-growing markets, without being too exposed to the ups and downs of any one individual economy.

Rising household incomes, increasingly urbanised societies, relatively young and growing populations, as well as lower brand penetration all support Unilever’s focus on developing economies.

Macro factors alone aren’t enough to drive long-term success. But there are signs that a recently refreshed management team is having a positive impact. They’ve now grown volumes for four quarters in a row, after a multi-year period of declines.

Plans to cut costs, while increasing spending on marketing activities, should help to drive profitable growth. We see that as a key lever for retaining and acquiring fans of Unilever’s power brands. But there’s still some work to do with only 37% of its brands winning market share last year.

Its strong financial position means Unilever should have the firepower to invest in customer engagement while supporting a 3.5% dividend yield and ongoing buyback.

We’re impressed with Unilever’s direction of travel, and the valuation isn’t too demanding. But it’s early days in terms of delivering the growth-action plan, which means there’s still execution-risk ahead.

Prudential

Prudential is a provider of life and health insurance across Asia and Africa, with a strong bias towards the former. That’s another angle that could benefit from a young and growing population as the company seeks to exploit low insurance penetration rates and significant gaps in retirement funding.

China and Hong Kong are key markets and both should benefit from recent stimulus measures.

Hong Kong boasts a market-leading position for products aimed at visitors from mainland China. The average number of visitors from China is now ahead of pre-pandemic levels. But last year’s strong performance when borders reopened after the pandemic is acting as a tough comparator.

Looking further ahead, the broader Asian and Indian regions should benefit from long-term economic development.

India offers lots of potential in the health insurance space, with a huge population and around half of all the country’s health expenses being covered from consumers’ pockets.

Management isn’t playing down the scale of the opportunities though.

Growing new business profit by 15-20% per year won't be easy, but it should be achievable over the medium term if conditions remain supportive.

Capital levels are strong, and the group’s committed to increasing the dividend by 7-9% over the next couple of years. But this isn't a high yielder like some of its UK-listed peers.

The key risk comes from China, where economic conditions have an outsized impact on Prudential sales. If stimulus measures fail to reignite growth, then the region could be a long-term headwind to contend with.

Mercado Libre

Mercado Libre is the leading online marketplace in Latin America and one of the top 10 most visited e-commerce websites in the world. As well as tapping into demographic and economic growth drivers, there’s a further structural boost to the outlook.

In common with more developed markets, Latin American e-commerce received an extra boost when the population was locked down during the pandemic. This tailwind hasn’t gone away since mobility restrictions were removed.

However, internet shopping still doesn’t have the same popularity south of the border as it does for its American counterparts.

The opportunity for catch-up is very exciting indeed.

It's also leveraging its customer base of merchants and consumers to disrupt financial services in the region, in both electronic payments and lending. The fintech ecosystem in the region is competitive, but also one where established leaders can prosper.

Several hurdles could potentially derail Mercado Libre’s growth trajectory, including the regulatory environment, the requirement to scale its technology, and the challenges of trading across 18 volatile markets.

For example, Argentina, the company’s third-largest revenue generator, has had a tough few years, but there are some promising signs of a recovery.

All in, it’s hard to knock current growth rates, with the top line more than doubling in the third quarter to $8bn, ignoring currency impacts.

Underlying operating profit is growing at a slower pace, restrained by the significant investment being made to scale the business. But growth of over 50% still isn’t to be sniffed at.

The focus on growth means there’s no dividend on offer. The hopes for future expansion are also reflected in a valuation of around 40x forward earnings.

While we’re excited by Mercado Libre’s prospects, that does leave the valuation vulnerable to disappointments or further economic woes in Latin America.

And, at nearly $2,000 per share, this is something of a wildcard entry.

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