This is the tale of a company that brought that philosophy to bear on one of the most heavily defended and inefficient sectors anywhere: Brazil’s banking system. Nu Holdings, better known worldwide as Nu, is a financial technology group that is overturning the traditional, complacent banking model.

By servicing the unbanked and the underappreciated with a level of dignity previously reserved for the wealthy, it has built a financial engine that rivals technology firms in efficiency, but beats them in heart.

It is a story of how a Colombian outsider, a disillusioned insider, and a brilliant coder took on a cartel of five giant banks and changed the lives of millions. It is a wonderful company but is it a Wonder Stock? Read on to find out.

Contents

This article is about a wonderful business and will explain:

• The history of why the Brazilian banking system became so bad for customers.

• How three visionaries built the most popular financial services business in Latin America in just a few years.

• How the company is able to crush the competition with efficiency.

• What fanatical dedication to customer service can yield in an environment where the competitions treats customers badly.

• Why this model of efficiency and customer satisfaction can be exported around the world.

• What this may mean for long-term returns for those with the vision to back it.

This Deep Dive contains financial terms. Definitions can be found in the Wonder Stocks Glossary.

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At this year’s conference, three of the potential investment ideas piqued my interest. As a special December issue of the Deep Dive to close out the first year of Wonder Stocks, here are three mini dives of those companies. I’ve tried to present the information as the presenters themselves did but I do offer my own opinions also. Those ideas were RM presented by the manager of Rockwood Strategic, Saga presented by the owner of Kernow Asset Management and Vanquis Bank, which occurred three times in two different presentations.

The first mini dive is free but the other two are behind the paywall - consider upgrading.

Important Disclaimer:

All “Wonder Stocks Deep Dives” represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

RM – Presented by Richard Staveley of Rockwood Strategic

This stock is the largest holding in the Rockwood Investment Trust. Often, a fund’s biggest position is simply one that has performed well over time, rather than a reflection of strong current conviction. That isn’t the case with RM plc. Staveley has been clear that he believes RM offers some of the best return potential in the trust, and has deliberately built the position as a result.

What is it?

RM plc is an education technology group that provides products and services to schools, colleges, exam boards etc. The company focuses on helping educational organisations operate more effectively, whether through digital infrastructure, learning platforms or specialist services that support the wider education ecosystem. Over the years, RM has evolved from being primarily a hardware supplier to a business centred on software, managed services and education-specific solutions.

The group is organised into three divisions RM Technology, RM Assessment and RM Resource, each addressing a different part of the education system.

• RM Technology provides schools and multi-academy trusts with IT systems, networking solutions and cloud-based services. Its work typically involves managing and maintaining digital infrastructure, enabling teaching and administration to run smoothly while supporting the increasing shift toward online learning environments.

• RM Assessment focuses on digital exam delivery, test creation and associated services for awarding bodies around the world. Its platforms enable the secure creation, marking and management of assessments, helping clients transition from paper-based processes to more efficient, technology-driven models.

• RM Resources (also known as RM Teacher Technology Solutions), supplies teaching materials, curriculum resources and classroom products that support day-to-day learning. Through these divisions, RM plc plays a broad role in education, providing both the digital backbone and the practical tools that schools and exam providers rely on.

  

What is the thesis?

Staveley believes RM Assessment is a far better business than the other two divisions. However, the shares sit at a discount to their intrinsic worth for three reasons; first, it is a conglomerate, and in capital markets that often means it is valued according to its weakest business, not its strongest.. Second, it is a small business but has three different businesses (technically they address similar markets but in reality, have very different requirements). This causes management focus to drift away from the most value-enhancing parts of the business. Third, RM Assessment is just about to start some long-term, very valuable contracts. The profitability of these numbers is not in the forecasts and thus the company is not being ascribed much value for these contracts.

As of the first half of 2025, the secured contracted order book for RM Assessment stood at approximately £100 million. Beyond this secured revenue, the company has visibility of a further approximately £100 million in future revenues from existing customer relationships, often referred to as a soft backlog. The aggregate £200 million in revenue visibility represents approximately five years of revenue based on the division’s 2024 run rate. This level of predictability fundamentally de-risks the core revenue stream and provides a clear justification for applying premium software valuation multiples to the Assessment business if it stood alone.

Additionally, the company currently holds quite a lot of debt for its size. This increases the discount further, because the higher debt level raises the risk to equity holders. Please see the Wonder Stocks glossary to understand the meaning of equity.

Realising the Value

The RM Assessment division is considered very valuable and the jewel in the crown. Consequently, Staveley believes shareholders will benefit from a separation in the business with the other two divisions being sold off. The restructuring process is being proactively driven and supported by Staveley via Rockwood Strategic Plc (RKW) substantial c. 17.5% shareholding in RM. This sizable holding has allowed RKW to appoint a non-executive director on the board of RM, Christopher Humphries.

The strategy is straightforward: divest the two lower-margin, non-core divisions (RM Technology and TTS/Resources) to achieve a debt reduction (and possibly debt elimination) and transform the listed entity into a low-debt/debt-free, pure-play education tech software firm.

RKW has publicly articulated an intrinsic equity value target for RM plc between £150 million and £170 million, which was more than double the company’s approximate £80 million market capitalisation at the time of the announcement. This sum of the parts valuation is built on the premise that the core Assessment asset, with its high margin and secure pipeline, will be re-rated by the market once it is unburdened by the conglomerate structure and debt load.

The following analysis examining this sum of its parts scenario demonstrates a potential future example. Applying a premium software multiple (e.g., 12.0x) to the Assessment division’s contribution, and lower multiples (e.g., 4.0x) to the divestment candidates, results in an implied equity value of approximately £195 million. This model confirms the substantial valuation gap and shows there is meaningful upside if the disposals go well. The fact that the RM board has completed a £13.5 million placing seemingly to fund the divisional separation work demonstrates an alignment between management and Staveley’s plan, significantly reducing the execution risk often associated with restructurings.

Wonder Stocks View

This is a classic case of activist shareholder engagement in order to extract latent value. It is what Staveley does well. He has identified a business that is cheap but, and this is the crucial point, one that he himself can have an influence on extracting the value. If we take at face value the sum of the parts valuation we have seen (which may differ quite substantially from the value achieved), then there is a good amount of upside.

At time of writing the market capitalisation of RM is £107m against a potential valuation of £195m. This would imply an upside of 82%. Prudence dictates a margin of safety in this though. The divestment of the Technology and Resource businesses is unlikely to be completely costless, paying down the debt may result in a modest early redemption penalty (i.e., money paid to end a debt agreement), the amounts these businesses are sold for might be slightly lower than Staveley’s assessment (although his valuations look conservative) and the market may take a considerable amount of time to rerate the resultant business to the level required to generate these returns.

Offsetting these risks is Staveley’s considerable experience in this type of investment. His assessments of value tend to be conservative, suggesting that our sum-of-the-parts discount may be overly harsh. Moreover, this is not a speculative or newly emerging scenario; it is one that Staveley and the RM board have been working towards for some time. As a result, we may be approaching the point at which this investment thesis crystallises.

Ordinarily, the challenge for a value investor is that even if the thesis is correct, the market may take many years to recognise it. What makes Staveley’s strategy so good is an agent of chang, which can speed up the move to fair value.

Side Note: A Personal Story about Value Investing

As a fund manager, I first bought Barclays in 2016 at around 140p. The investment case was sound and I was convinced the shares were worth at least 325p. What actually followed, however, was eight years of frustration. The share price drifted steadily lower, briefly touching 79p during the pandemic, before finally surging over the past eighteen months. Today, Barclays trades at around 440p.

In hindsight, the original thesis was correct. The shares were indeed cheap at 140p in 2016 and, over the past nine and a half years, the investment has delivered a total return of roughly 300% including dividends, equivalent to around 16% per annum. On paper, that is a very good result. In practice, for eight long years, it did not feel like one.

The lesson is that in pure value investing, it is not enough to be right, you also need to be right within a reasonable timeframe. This is ultimately why a pure value stock is unlikely to qualify as a Wonder Stock. A value stock can remain cheap for many years, and that time could instead be invested in businesses where returns are more likely to compound sooner. That foregone return is the opportunity cost.

Overall, it is often a good idea to pay attention to what Richard Staveley is doing and RM Group seems like a clever speculative investment. It doesn’t qualify as a Wonder Stock because it doesn’t hit the minimum criteria where we can foresee a 20% return per annum for at least five years. Ideally, we want to invest at even higher rates and for even longer time periods.

Saga plc presented by Alyx Wood of Kernow Asset Management

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Despite this record, the shares sell at a discount. Tight household budgets worry investors. This pressure is temporary because people value holidays. This resilience has been proven often. Jet2 management focuses on quality of service and operations. This approach helps the company strengthen its market position; it takes advantage as rivals fail during economic downturns.

This company is built for growth. It is run by people who understand the package holiday business. The current price suggests that strong performance is over; this is not true. Jet2 shows the necessary traits of a Wonder Stock.

Important Disclaimer:

All “Wonder Stocks Deep Dives” represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

Contents

This article is about a tremendous investment opportunity and will explain:

• The Package Deal: Discover why Jet2’s model has been a triumph for investors.

• From Air Freight to Holiday King: Understand the history of discipline and entrepreneurial spirit that has driven this business.

• Built for Take-off: Find out why there remains a clear path to future growth.

• The Airbus Advantage: Learn about how an upgraded and expanded fleet of aircraft sets the business for gains in efficiency and capacity for the next decade and beyond.

• A Bargain in the Sky: This is a very cheap growth stock, which under our most bullish scenario could generate as much as 1000% by 2035.

This Deep Dive contains financial terms. Definitions can be found in the Wonder Stocks Glossary.

Reading note: Jet2 refers to the group that is listed on the stock market, Jet2.com refers to the passenger airline that was launched in 2003 and Jet2Holidays refers to the package holiday business that was launched in 2007.

Fantastic Business Trading at a Bargain

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Today, Melrose has dropped that high-return model. But the team responsible for that success has launched a new venture: Rosebank Industries.

With Rosebank, this proven management is starting again. They are smaller and far more nimble than the company Melrose became.

If you invest in Rosebank today, you get to back a team uniquely skilled at delivering shareholder wealth.

They are committed to the same profitable strategy as the old Melrose and are poised to make shareholders a significant amount of money in the process.

Important Disclaimer:

All “Wonder Stocks Deep Dives” represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

The author of this Wonder Stocks Deep Dive owns shares in Rosebank.

Contents

This article is about a tremendous investment opportunity and will explain:

• Immense success: Find out how one team generated some of the highest returns on the stock market for over a decade.

• Fixing businesses: Understand the success Melrose enjoyed buying good businesses with problems and fixing them.

• Copying what worked: Discover why Rosebank’s acquisition of ECI is just like the best acquisitions made by Melrose.

• Aligned management: Learn about the, sometimes controversial, way that management are paid well only when shareholders get rich.

• Very high returns: This is a business that aims to make a lot of money fast.

This Deep Dive contains financial terms. Definitions can be found in the Wonder Stocks Glossary.

Same Strategy, New Opportunity

To understand the exceptional investment opportunity in Rosebank, consider upgrading.

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Vistry group is leaving its old business model. This old way is what a lot of UK housebuilders do, but it’s risky because they have to own a lot of land.

Their new plan is partnering with companies that own large numbers of houses like local councils. This new way of working is more efficient and frees up cash.

This new plan has similarities with a successful homebuilder company in America called NVR, Inc., which has a long record of making high returns.

For investors who can see past the old way of thinking, this change may present a rare opportunity. This new plan can make Vistry group stand out compared to others in the UK and lead to great returns.

Important Disclaimer:

All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

The author of this Wonder Stocks Deep Dive owns shares in Vistry.

Contents

This article is about a tremendous investment opportunity and will explain:

• A business transforming: Discover why one UK house builder is changing for the better.

• A unique proposition: Understand why Vistry is singularly placed to capitalise on a hugely new profitable chapter in British house building.

• A thirty year playbook: Learn about the US company that has done it before. A company that is amongst the very best performing stocks in the world over three decades.

• Very cheap: This transformation suffered a minor set back bt that has opened up an opportunity to buy this tremendous opportunity for a bargain price.

• Exceptional projected returns: Find out how this stock could multiply your money in a few short years.

This Deep Dive contains financial terms. Definitions can be found in the Wonder Stocks Glossary.

A Revolution at Vistry

There are two main ways of building houses in the UK. One is traditional house building, where the house builder sells houses to individuals. The other is partnership house building where the house builder sells entire housing developments to big investors, who either rent them or sell them.

Vistry Group was formed in 2020. It was a merger between Bovis Homes and Galliford Try’s home building division. Bovis was a traditional house builder that, in later years suffered from quality control issues. Galliford Try’s division was a well-respected partnership business that built houses for partners like local councils. In 2022, Vistry became the main partnerships house builder in the UK when it bought the other large partnership business, Countryside Properties.

For the last few years, it has been both a traditional house builder and operated a partnership business. While both play a role in delivering new homes, they differ in key ways. Vistry’s traditional building model left it exposed to land price ups and downs. In 2023, it began transitioning to a 100% partnership model.

Why is Vistry Moving Away from Tradition?

To understand the exceptional investment opportunity in Vistry, consider upgrading.

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Mercado Libre (or MELI for short) is a US-listed company that operates an e-commerce and financial technology platform in Latin America. It was created an online marketplace that had similarities to Amazon, Etsy and eBay. But the demand for secure online payments drove it into becoming one of the most innovative financial services businesses in the world. It operates in a region with varied challenges, including low financial services penetration and physical barriers. MELI's business philosophy focuses on removing these obstacles and making its services cheap and easy to use. The company has relentlessly expanded into new business lines to further optimise its services and overcome these challenges. Each new business line strengthening the core business and exploiting inherent value.

This Wonder Stocks Deep Dive explain why it will one day become synonymous with the Latin American economy and why patient shareholders might be richly rewarded.

Important Disclaimer:

All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

Contents

• The Emerging Latin American Colossus: The business redefing commerce for 650m people.

• Relentless Improvement: The mission and principles that laid the foundation for an entire ecosystem.

• Not Just One Business: Profiles of the major business units.

• How the Ecosystem Works: How MELI becomes an importaqnt part of a consumer’s life and how it becomes crucial to small businesses.

• The Opportunity Set: Latin America is a still emerging gold mine for the first mover.

• Financial Record: A quarter centruy of excellence in the making.

• The Future: The best is yet to come.

• The Investment Case: It’s already made people rich but the real value is in the future.

• Compeition and Risk: The three main obstacles and how MELI is overcoming.

History of MELI

MELI was founded in 1999 by Marcos Galperín with a mission to ‘democratize commerce and financial services in Latin America’. The initial focus was on establishing the MarketPlace across key regional markets, including Argentina, Brazil, and Mexico. This period included MELI swapping eBay’s Brazilian operation iBazar for a 19.5% stake in MELI; eBay sold its stake in 2016 for $1.4b. Today, eBay uses MELI’s platform to host its own store. The group's ecosystem began to take shape with the launch of the Mercado Pago payment platform in 2003, a move that addressed the need for secure online transactions and laid the foundation for MELI's future fintech business.

It listed on NASDAQ in 2007. The money raised provided the funds the 2008 acquisition of competitor DeRemate, an online auction business in Argentina, Chile, Colombia and Mexico. MELI then began building out the services that today make up its ecosystem. The Mercado Envíos logistics service was launched in 2009, followed by the Mercado Libre Publicidad (renamed Mercado Ads in 2020) advertising service in 2013. The company's platform was also enhanced by its 2011 transition to open-source technology, which allowed third parties to create direct API’s into the platform and further entrenched its position.

In recent years, MELI has focused on consolidating its market leadership through continued investment in technological excellence. The company's logistics network was significantly expanded with the opening of distribution centres in its primary markets to enable more efficient delivery.

MELI’s Business Units

MarketPlace

MarketPlace is an automated commerce platform, enabling MELI itself, third-party merchants, and individual sellers to list and conduct online sales across Latin America. Since its inception, this platform has been the central hub of the entire business and reaches millions of buyers and sellers across 18 countries. It offers both fixed price and auction sales. It also allows real estate agents and automotive dealers to list for a monthly subscription. For cross-border trade, it enables sellers to manage operations from a single account and communicate with buyers via an automated translation tool (English, Spanish and Portuguese). It has a seller reputation system alongside comprehensive buyer and seller protection programs to ensure secure transactions and build trust. Its sub-divisions include:

• Mercado Envios is the logistics arm, which it created to overcome the lack of a fast and reliable third-party delivery network in Latin America. The company's own network now delivers around 95% of packages, with roughly three-quarters arriving within 48 hours. The service offers multiple options, including next-day delivery, pick-up points, and a service where the company stores and dispatches stock for third-party sellers. Other models, such as Drop-off, Coleta, Flex, and Extra, utilise mail points, seller collections, an app for last-mile deliveries, and independent drivers. MELI invests heavily in MercadoEnvios, using artificial intelligence and machine learning to optimise routes and improve efficiency. This extensive network gives MELI an important competitive advantage by offering delivery speeds and costs that rivals cannot match. More importantly, MELI lets third parties use the service by integrating it into its ecosystem. This makes MELI an attractive partner for would-be competitors and removes a major competitive threat. Instead of trying to build a best-in-class logistics business like Mercado Envios, competitors become customers of MELI.

• Mercado Ads helps sellers and brands target the right buyers. Businesses can promote products and services directly on MarketPlace and within the Mercado Pago app, using the company’s user and transaction data. Sellers can run campaigns automatically or customise them, with a bidding system that considers ad quality and cost of sales to decide placement. Sellers set their budgets, choose goals such as profit, growth or visibility, and pay only when someone clicks on their ad. Analytics track clicks, impressions, costs, cost-per-click and sales, both direct and indirect.

• Mercado Shops works like Shopify, letting users create independent online stores while staying connected to the MELI ecosystem. It targets small and medium-sized businesses that want their own online presence but still benefit from services like Mercado Pago for payments, Mercado Envios for logistics, and Mercado Ads for promotion. Sellers can manage orders, payments and shipments from one dashboard with integrated stock management. The platform offers customisation options and uses fraud detection technology to protect customers and ensure smooth returns.

Mercado Pago

Mercado Pago began as a digital payments solution and has since evolved into a comprehensive digital bank (in all but name). It serves both consumers and merchants with a range of financial services.

• For merchants, it provides a wide array of payment solutions, including mobile point-of-sale devices and various merchant services like payment processing. It allows for diverse payment methods such as cards, bank transfers, and in-store QR codes.

• It offers a free Wallet that functions as a virtual account where users can securely store funds, make purchases, and transfer money. Funds can be loaded via bank transfers, card payments, or cash deposits. The platform also provides free virtual and physical prepaid cards for online and in-store purchases. Increasingly users can use the wallet like a bank account with the ability to manage day to day expenses like paying bills.

• It also offers savings and investments via Mercado Fondo, which enables users to generate daily returns on their digital account balance. For the customer this is like earning interest on a bank account.

• The platform also provides insurance products for consumers and businesses supported by partnerships with third party insurers like Prudential.

• Mercado Crédito is the credit business, offering loans to consumers and businesses within the ecosystem. It serves individuals who want to pay for purchases or services in instalments without a credit card, and merchants or small & medium sized businesses that need working capital. Mercado Crédito uses the company’s data and platform reach to assess risk and distribute funds efficiently.

The Unified Ecosystem

Mercado Libre's true power lies not in the individual business units, but in their integration. It's an ecosystem where each component amplifies the value and efficiency of the others, creating a self-reinforcing cycle – (the flywheel – click to see a description of the flywheel of another Wonder Stock). The MarketPlace acts as the hub, drawing millions of users into the ecosystem with its vast array of products and sellers. Once engaged, Mercado Pago handles all financial transactions, evolving into a comprehensive digital fintech that deeply embeds itself in the users' financial lives.

Mercado Envios provides the physical backbone, ensuring that goods move swiftly and reliably across a vast and often challenging geography. This is a world-class logistics network that has transformed a regional pain point into a competitive advantage. Mercado Ads leverages the immense proprietary data to offer highly targeted advertising solutions that lets sellers reach buyers and further driving sales. Mercado Shops offers sellers the best of both worlds: an independent online storefront with the full backing of MELI’s integrated payments, logistics, and marketing tools, ensuring they remain deeply rooted within the ecosystem. Mercado Crédito provides financial liquidity thereby stimulating further transactions. This comprehensive, interconnected approach creates a near unbreachable competitive moat, making it incredibly difficult for any single competitor to replicate the full spectrum of value and convenience offered by MELI.

To sum up this section, MELI is a business that is creating multiple, self-reinforcing business units. Each one designed the to integrate consumers and businesses into the its eco-system. By doing so it generates a powerful network effect whereby it becomes advantageous to be a customer of MELI.

The following gives a sense for how both a consumer and a business might interact with MELI:

An Individual's Daily Interaction

An individual needs a new item, so they open the Mercado Libre App. After a quick search, they find the product at a good price from a highly-rated seller. At checkout, they pay using their Mercado Pago digital account. They opt for next day delivery via Mercado Envios. Later that afternoon, they remember they need to pay a utility bill. They open their Mercado Pago App, scan the bill's QR code, and pay it instantly from their digital wallet. The daily returns feature on their Mercado Pago balance is activated, allowing their money to grow passively. Later they browse MarketPlace for another item. They see a sponsored listing for a brand they like, powered by Mercado Ads, and add it to their cart.

A Business's Daily Interaction

A small business that makes handmade goods decides to expand their business online. They set up a personalised online store using Mercado Shops, which integrates their product listings with the main MarketPlace, giving them access to millions of potential customers. When an order comes in, the payment is processed through Mercado Pago. It offers customers various options, including instalment plans, which Mercado Pago manages, removing the small business’s credit risk. Fulfilment is through Mercado Envios Full. Goods are sent to a MELI warehouse, and the company handles the storage, packaging, and express delivery directly to buyers. The business uses Mercado Ads to create targeted campaigns, ensuring products appear prominently in search results for relevant buyers. When they need to purchase more raw materials for a large order, they apply for a business loan through Mercado Crédito. They receive the funds instantly in their Mercado Pago account, allowing them to scale production without traditional bank delays.

Operating in Latin America

The growth runway for e-commerce and financial services in Latin America is vast and largely untapped. E-commerce penetration in the region sits in the mid-teens percentage. This significantly lags behind more mature markets. In the UK for example, digital commerce accounts for almost 40%. In China it is over 60%. This substantial gap stimulates above GDP growth in the sector for many years to come.

A significant portion of the region’s population is ‘unbanked’ driving demand for accessible and efficient financial solutions. Mercado Pago is ideally positioned. It is already the leading fintech in terms of monthly active users (MAUs) in Mexico, Argentina, and Chile, and holds the second position in Brazil behind NuBank. This growth is driven by rising digital banking adoption, increased smartphone penetration, and supportive regulatory environments that promote financial inclusion. MELI is expanding its revenue streams whilst deepening its relationship with users, creating a sticky ecosystem that fosters long-term loyalty.

Latin America is the perfect location for MELI. It has first-mover advantage in a region with a rising population that is becoming richer every year. Increasingly people use MELI as the default place for consumer activity.

Financial Record

You’ve learned how MELI came to dominate Latin American. Upgrade to find out what that means for the future.

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This is more than just another business launch. It's a tantalising prospect, as he and his team are masters of a proven formula that consistently delivers phenomenal shareholder returns. Their approach involves identifying undervalued assets in fragmented markets, integrating them with strategic brilliance, and igniting exponential growth through technological innovation and operational supremacy. This venture, QXO, is still early in its life, making this latest undertaking a compelling prospect for astute investors.

QXO stands poised to redefine a colossal industry in need of a technological revolution. The team's expertise in acquisitions, efficiency, and technology gives them a clear competitive advantage. In a market that keenly rewards bold vision and flawless execution, this presents a rare chance to invest in a winning CEO at the inception of a new business. This deep dive will explain why this emerging opportunity could be a game-changer for investors with the foresight to join the journey early.

Read on to learn more about this entrepreneur and understand his ultimate venture with QXO.

Important Disclaimer:

All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

Contents

This article is about a tremendous investment opportunity and will explain:

• Invest with a proven legend: Discover the story of the entrepreneur with a track record of delivering 300x returns, now launching his "final masterpiece."

• Mastering the 'buy-and-build' playbook: See how a proven strategy of acquiring undervalued assets and igniting growth through technology consistently creates phenomenal shareholder value.

• Revolutionising a huge, outdated industry: Learn how QXO aims to disrupt the fragmented $800 billion building products distribution sector using cutting-edge AI and operational excellence.

• A rare early-stage opportunity: This new venture, backed by a $900 million personal investment from the founder, offers a compelling chance to invest early in a world-class team.

• Exceptional projected returns: Get a glimpse of ambitious forecasts suggesting potential CAGR of 20-30%.

Rubbish and Rentals to a New Realm

The visionary orchestrating this ambitious new venture is Brad Jacobs. He is a serial entrepreneur whose extraordinary talent for building companies has cemented his legendary status amongst investors. During his career he has built up five multibillion-dollar enterprises, including industry leaders like United Waste Systems, United Rentals, and the global logistics giant XPO Logistics. XPO in turn later spun off GXO and RXO. Each success story was a testament to his ability to generate immense shareholder value through astute acquisitions and transformative operational turnarounds.

Now, at 68 years old, Jacobs has taken the helm as Chairman and CEO of QXO. It was launched in 2023 through the strategic acquisition of SilverSun Technologies, a small software business repurposed as a launchpad. QXO is his chosen vehicle to consolidate and revolutionise the sprawling building products distribution sector. His personal commitment is underscored by a $900 million investment from Jacobs himself.

QXO is on a mission to reshape the $800b building products distribution industry across the United States and Western Europe. This vast yet fragmented market is ripe for the kind of consolidation and technological infusion that is Jacobs' hallmark. The strategy involves acquiring businesses and then deploying advanced technology like AI-driven tools to drive higher returns. This includes dynamic pricing models that respond to real-time market shifts, or predictive inventory management systems that slash waste and ensure materials are exactly where they need to be. This tech-forward approach is aimed squarely at boosting margins and streamlining operations. The goal is to achieve $50b in annual revenue within a decade by deploying Jacobs’ refined buy-and-build playbook. It’s first acquisition was of Beacon Roofing but will enter other markets in the future as it acquires different businesses. This positions QXO to create a dynamic, technology-first platform in an industry with a challenging supply chain waiting for a modern solution.

Jacobs' first major triumph with the buy-and-build model was United Waste Systems, established in 1989. He targeted the fragmented waste management industry by acquiring and integrating smaller operators. This allowed him to scale the business with remarkable speed. United Waste Systems was sold to Waste Management in 1997 for $1.9b. By which time it had delivered returns of 55% per annum for five years. He didn't rest on his laurels. United Rentals was launched in 1997 and taken public within months. He built the world's largest equipment rental company by completing more than 250 acquisitions over the next ten years. Just ten years after its launch, it had been transformed into a streamlined and efficient giant.

In 2011 he founded XPO Logistics. It began with $150 million and was a fraction of its future self. He meticulously built it into a global logistics leader. Under his stewardship, XPO continued to compound wealth at an impressive rate. This was further amplified by the strategic spin-offs of GXO Logistics, a contract logistics business and RXO, tech-enabled transportation broker. Both of these spin offs are now mid-sized publicly traded companies in their own right. For those in the UK, the large amount of XPO, GXO, and RXO lorries on the motorways is a daily visual reminder of this success. Spotting all three distinct liveries within minutes of me leaving home is a common experience. Now with QXO, Jacobs and his team are applying this meticulously honed playbook to a new frontier. For investors with an appetite for bold, visionary ventures, QXO is undoubtedly a stock to watch closely.

See the Appendix 1 for a history of Jacobs.

XPO was a company that didn’t exist fifteen years ago and is now the largest haulier in the UK alongside its sister companies RXO and GXO. It is amongst the top ten largest companies in the sector globally.

A Vast Industry Ripe for Modernisation

The building products distribution industry is the critical system of the construction world. It’s the bridge that connects manufacturers of essential materials to the builders and contractors. Despite its vital role and immense scale, much of this sector remains technologically backwards. It's not uncommon to find distributors still using systems dating back forty years with paper-based order logs incapable of providing real-time inventory tracking or sophisticated demand forecasting.

A 2023 industry report spotlighted a US Midwest distributor still using 1980s-era punch-card systems for stock management. Whilst an extreme example of technological backwardness, this gives a snapshot of an industry that has chronically underinvested in technology. Inevitably poor tech leads to frequent order inaccuracies, frustrating delays and missed sales opportunities. This lag creates a landscape riddled with inefficiencies and is a prime opportunity for a well-capitalised business like QXO to step in and modernise the sector.

Its not just technology investment that presents an opportunity, it is also a fragmented industry. There are tens of thousands of distributors, ranging from family-owned regional businesses to larger, multi-site firms but with no single entity commanding dominant market share. This fragmentation along with the aforementioned outdated technology severely limits overall efficiency. Smaller firms typically lack the capital and expertise to invest in transformative system upgrades. Even some larger players can struggle with inconsistent processes and a patchwork of incompatible technologies across their different locations. The mission is to simplify and modernise operations. Jacobs has done this before in other industries. He used digital inventory systems and routing technology to turn old-fashioned businesses into tech-driven market leaders.

Brad Jacobs and his team chose this industry for three main reasons; its large size, its lack of technology investment and fragmented structure. This makes the building materials industry ideal for his proven methods. They plan to invest heavily in AI tools. These include dynamic pricing engines to boost profits on each sale and predictive analytics that will help manage inventory. This will cut holding costs and prevent stockouts and customers will be able to use simple digital platforms. Construction demand makes the sector resilient, which gives QXO a solid base for its buy-and-build strategy.

The QXO vision: To become the most technologically advanced and efficient building products distributor. First in the US but then expanding its innovative model to Western Europe.

The Playbook for Building Empires

Read more

Last Updated: July 19, 2025

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Truly great companies are incredibly rare. Businesses like Amazon, Costco, or Home Depot. They changed their industries and created enormous wealth for investors.

What did they have in common? A fanatical dedication to their customers. An unwavering drive to be the best, the cheapest, and the most innovative. They were led by visionary founders who built a culture of excellence from the top down.

This article is about a company that shares this same DNA. It is using these timeless principles to disrupt a global industry of immense scale, creating an extraordinary opportunity for those who see its potential. This British-born company has the potential to become the continent's first trillion-dollar enterprise. This could provide visionary investors with an amazing investment opportunity and truly transformative returns.

Important Disclaimer:

All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

A Modern Playbook for Global Disruption

The company poised to embark on this remarkable journey is Wise PLC. Its birth, like many great disruptive ventures, was not in a boardroom strategising market capture, but from the personal frustration of its founders. Kristo Käärmann and Taavet Hinrikus, two Estonians working and living internationally, experienced firsthand the opaque fees and infuriating delays that characterised traditional international money transfers. This shared grievance prompted them to ask: what if sending money across borders could be as simple, cheap, and transparent as sending an email? This fundamental questioning of the status quo, and the subsequent drive to build a solution from the ground up, echoes the customer-first principles championed by legendary business builders like Costco's Jim Sinegal, who relentlessly focused on delivering value, or Amazon's Jeff Bezos, who prioritised long term growth and customer experience over short term profits.

Bezos, in Amazon's early days, famously sketched out a virtuous cycle, a growth flywheel. It began with lower prices leading to increased customer visits. More customers attracted more third-party sellers, which expanded the selection and convenience. This, in turn, fuelled a larger, more efficient operation, allowing Amazon to lower prices further, spinning the flywheel faster and faster, creating an ever-widening competitive moat.

Amazon Flywheel

Wise operates on an uncannily similar dynamic. By relentlessly driving down the cost of transfers, improving speed, and offering radical transparency, they attract more customers. This growing volume allows Wise to negotiate better terms with banking partners and achieve greater operational efficiencies through its infrastructure. Crucially, these savings are then passed back to the customer in the form of even lower fees and an improved service. This creates a powerful, self-reinforcing loop: lower prices attract more users, more users create more volume, more volume allows for even lower prices and a better service, which in turn attracts yet more users. It is a playbook that systematically dismantles the high-margin, low-innovation model of incumbent banks, building not just a company, but a new standard for how money should move around the world.

This commitment to the customer and the relentless pursuit of efficiency is not merely a marketing slogan for Wise; it is the core of their strategy, deeply embedded in their operational DNA by founders who, like Bezos, understood that true competitive advantage is built by consistently delivering superior value.

The Wise Flywheel

Fund My Work

A New Global Standard

In the following section, each paragraph will end with a recent quote from CEO, Kristo Käärmann that gives a sense of scale and opportunity that Wise is addressing.

The story of Wise begins, as many innovative solutions do, with profound dissatisfaction. In the late 2000s, Estonians Taavet Hinrikus (Skype’s first employee) and Kristo Käärmann found themselves on opposite sides of a common currency conundrum. Taavet, paid in euros from Estonia but needed pounds in London. While Kristo, working in London and paying in pounds, needed to send money back to Estonia to cover a mortgage. They incurred hefty bank charges on both sides. They realised the absurdity: their needs were complementary, yet traditional banking channels forced them both through expensive, opaque processes. Their elegant, personal solution bypassed the banks entirely and saved them a considerable sum. It involved checking the mid-market rate, Hinrikus putting euros into Käärmann's Estonian account, and Käärmann putting an equivalent amount of pounds into Hinrikus's UK account. This peer-to-peer insight was the seed from which Wise grew, with a mission to make international money transfers cheap, fair, and simple for everyone.

To truly appreciate the revolutionary nature of Wise's approach, one must first understand the archaic system it seeks to replace: the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. Established in the 1970s, SWIFT itself does not move money. Instead, it is a messaging system that provides standardised codes for financial institutions to communicate securely about fund transfers. When you send money internationally via your bank, your bank sends a SWIFT message to the recipient's bank. However, if your bank and the recipient's bank do not have a direct relationship, the payment must hopscotch through a series of intermediary banks. Each bank in this chain can add its own fees and can take its own time to process the transaction. The result? Transfers that can take anywhere from two to five working days, sometimes longer. They are accompanied by costs that are often unpredictable, and bloated by hidden charges within the exchange rate mark ups and multiple handling fees. It is a system designed in a pre-internet era, clunky, inefficient, and demonstrably not fit for the fast paced, interconnected modern world.

Wise, by contrast, built an entirely new infrastructure from the ground up, designed for the digital age. The conceptual brilliance lies in its simplicity and elegance. Instead of routing money through the labyrinthine SWIFT network, Wise has established its own network of local bank accounts in countries around the world. When a customer in the UK wants to send pounds to someone in the United States to receive dollars, they pay their pounds into Wise’s UK bank account. Wise then instructs its US bank account to pay out the equivalent amount in dollars (calculated at the real, mid-market exchange rate) to the recipient’s US bank account. No money actually needs to cross a border in that specific transaction; it is a sophisticated system of internal reconciliations and local payments. This model circumvents correspondent banks and dramatically cuts processing times with a significant and growing percentage of transfers now arriving instantly or within the hour. It allows Wise to offer transparent and significantly lower fees that are often up to one tenth the cost of traditional banks for many currency routes.

But Wise's ambition extends far beyond simply being a cheaper way to send money. Kristo Käärmann, now CEO, envisions Wise becoming "the international bank account for people and businesses". This is not mere hyperbole. The company has been methodically expanding its product suite to serve a wider range of financial needs. The Wise Account allows users to hold and convert money in dozens of currencies, complete with local bank details for receiving payments and a debit card for spending globally. Wise Business caters to the needs of companies, from sole traders to larger enterprises, offering batch payments, expense cards, and API integrations. Furthermore, Wise Platform allows other businesses, including banks and financial technology firms, to leverage Wise's infrastructure, effectively offering "Wise as a service". This platform approach is critical: it embeds Wise deeper into the financial ecosystem, creating network effects and high switching costs, thereby entrenching its competitive advantage. Each new user, whether personal or business, and each new platform partner, adds value to the entire network, making it more efficient and attractive.

The scale of the market Wise is addressing is almost difficult to comprehend. The total value of cross border payments runs into many tens of trillions of pounds annually and encompasses everything from individual remittances to large corporate transactions. Wise has already achieved impressive scale, processing over £145 billion in cross border volume in the last financial year for its 15.6 million active customers. Yet, its share of this colossal market remains in the low single digits. This signifies an enormous runway for growth. Wise is not just capturing market share from slow moving incumbents, but instead through its transparent and low-cost offering, it is arguably expanding the market itself by making previously prohibitive transactions viable. Its lead is not just in price and speed, but also in technology, brand trust built on transparency, and a singular focus that larger, diversified financial institutions struggle to replicate. This is not a company content with incremental gains; it is methodically building the global infrastructure for a new era of international finance, with decades of potential high growth ahead.

At its core, as I discussed on a recent podcast, this entire strategy hinges on a fundamental business philosophy that separates the truly great from the merely good. There are, I believe, two types of company in the world. The most common, by far, are those that constantly seek to maximise the amount they can charge their customers. They focus on margin expansion and optimising prices upwards. Intuitively, this sounds appealing to an investor, but these businesses live in a state of perpetual vulnerability, always at risk of being undercut by a leaner, more aggressive competitor. The much rarer, and ultimately superior, type of company is the one that relentlessly tries to minimise what it charges. By focusing on volume, efficiency, and giving value back to the customer, they build a model of trust and scale that high-margin incumbents simply cannot compete against without destroying their own profit models. Wise is the epitome of this second approach. This philosophical commitment to customer value is not just a moral stance; it is a strategic weapon, and it is the foundational principle that powers the company's growth engine.

The Wise Platform

The ultimate expression of this strategy, and the key to its near-absolute competitive advantage, is the Wise Platform. This is the part of the business that answers the crucial question: why can't other banks or financial technology firms simply replicate the Wise model? The answer is that Wise is now actively helping them to not have to. With the Wise Platform, other businesses can integrate Wise’s best-in-class payment infrastructure directly into their own services via an API. This means a traditional high-street bank or a modern neobank, rather than spending hundreds of millions and many years attempting to build its own global payment network, can simply 'plug in' to Wise and offer its customers instant, low-cost international transfers under its own brand.

This move is strategically brilliant. As I explored in a previous MoneyWeek article, it is analogous to the difference between train companies and the owner of the train tracks. Wise is not just running a train service; it is building and owning the essential tracks, signals, and stations of a new global financial railway. Now imagine a new set of tracks that allows a train operator to offer its customers a journey from London to Manchester that is not only instantaneous, instead of taking over two hours, but also costs just £25 instead of £250. Furthermore, imagine that £25 fee is set to decrease over time, not increase. For the train operator (the bank), the choice is simple: continue using the old, slow, expensive tracks, or switch to the new infrastructure to offer its customers a radically superior service. By allowing these other 'train operators' to run their services on its rails for a fee, Wise embeds itself as the fundamental infrastructure, gaining volume from its would-be competitors and making its network the undeniable industry standard.

No one can compete with super fast and free - so they won’t

The Anatomy of Future Returns

When analysing a business of Wise's calibre and ambition, conventional valuation metrics can be misleading. The real value does not lie in the impressive profits reported today, but decades into the future, when the seeds of relentless investment and compounding growth truly begin to bear fruit. While the company's recent financial results are robust, they represent merely the early output of an engine still being built. Wise is channelling its resources back into the business at a formidable rate, committing to invest around £2 billion over the next two years to broaden its scale, enhance its infrastructure, and perfect the customer experience. This is not speculative spending; historically, the company's investments in its core platform have yielded exceptional returns, creating a more efficient, faster, and lower-cost service that fuels the flywheel.

Paradoxically, Wise is actually earning 'too much' money at the moment. A significant portion of its recent reported profit comes from interest earned on customer deposits, a windfall from higher global interest rates. Because of regulations, the company cannot yet pass all of this benefit back to its customers. Management is transparent about this, guiding the market to focus on its sustainable, long-term underlying pre-tax profit margin target of 13% to 16%. This demonstrates a laudable and rare discipline: a focus on building a permanent, structurally sound business model rather than maximising fleeting, cyclical profits. The core earnings power, driven by transaction fees, is what truly matters for the long-term thesis.

The potential for revenue expansion from this core business over the next two decades is immense. While the company guides for a strong 15% to 20% compound annual growth rate in the medium term, the increasing dominance of the Wise Platform suggests that even this may prove conservative. As the 'train tracks' of global finance become more entrenched, there is an argument that growth could even accelerate. This is no longer a theoretical concept. Major global financial institutions are now choosing to build on Wise's infrastructure rather than compete with it. Recent partnership wins with giants like Morgan Stanley, Standard Chartered, and Brazil's Itaú are testament to this. These banks are not just customers; they are a powerful endorsement that Wise is becoming the default network for modern international payments.

So, how does one value such a prospect? While we can never know what the next twenty years will bring, we can look for historical parallels. Consider that two decades ago, Amazon was viewed by many as little more than an online bookseller, yet it possessed the same foundational DNA: a visionary, customer-obsessed founder relentlessly building a platform for seemingly limitless growth. Wise, today, is in a similar position – already highly profitable and growing rapidly, yet only scratching the surface of its ultimate potential to become the global infrastructure for banking. For shareholders with the vision and patience to stay the course, the trajectory could be similar. Over the last twenty years, Amazon's stock has delivered a 11,500% return to its shareholders. It requires patience, but for those who understand the scale of the mission, Wise could deliver a truly life-changing level of investment return.

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Big Returns Might Come Soon

Wise’s current share structure creates a rare opportunity. Because of how it is set up, it is temporarily ineligible for major indices. That means many passive funds, which make up around 45% of the market, cannot buy it. This is a huge pool of capital that has yet to be tapped.

We believe a clear catalyst is coming in July 2026, when the current structure expires. At that point, Wise should become eligible for index inclusion. This would trigger large forced buying from tracker funds, alongside new demand from active managers who have so far been kept out. We see this as a major driver of returns.

That alone could be a strong tailwind. But there is more. In June 2025, Wise announced it would move its primary listing to the US, keeping a secondary one in the UK. This shift could open the door to US growth and tech investors who are more familiar with companies like Wise. UK investors often overlook potentially transformative businesses like this, but in the US they are better understood.

These changes could unlock a great deal of value in the near term.

Details of the share structure and the proposed changed to a US listing are in the Appendix.

Update Section 1:

Wise recently released an update detailing both an objection and a rebuttal concerning its proposed reorganisation, which can be found here.

Understanding the Developments:

Wise PLC is proposing a reorganisation to establish Wise Group plc as its new parent entity, with a primary stock exchange listing in the US and a secondary listing in London. A significant shareholder, Skaala Investments OÜ (affiliated with co-founder Taavet Hinrikus), has publicly voiced concerns regarding this proposal. Skaala's primary objection is that the resolution "bundles" the approval for the US primary listing with a substantial extension of special voting rights for Class B shares (held by co-founders) by an additional 10 years, totalling 15 years from the reorganisation. Skaala contends that this "all-or-nothing" vote lacks transparency and is inconsistent with strong corporate governance principles. They advocate for shareholders to demand that Wise separates these proposals into individual votes and provides a more comprehensive rationale for the extended Class B share rights.

In response, Wise PLC's Board has robustly defended the combined proposal. They assert that the reorganisation, including the extended dual-class share structure, offers crucial strategic advantages and improved access to US capital markets, which they believe will ultimately benefit the company and all its shareholders. The Board also states that the proposal has been clearly communicated to shareholders, and they have garnered support from other shareholders and independent advisors.

Wonder Stocks View:

We at Wonder Stocks acknowledge the validity of Skaala's call for greater transparency and distinct votes on separate resolutions. However, our conviction in Wise's long-term vision remains unwavering, and we continue to strongly support the overall resolution. We firmly believe that maintaining the long-term strategic vision, as outlined in the proposal, is unequivocally in the best interests of value creation for all shareholders.

Should the resolution pass as currently presented, extending Class B share expiry to 2036, it will indeed impact the short-term investment case, particularly regarding some index inclusions. We now anticipate the company will still meet NASDAQ inclusion criteria, but likely not the S&P 500 or FTSE indices in the immediate future. This will naturally lessen the short-term impact from passive buying and temper some of the near-term bullish arguments. T.

In summary, while we acknowledge Skaala's valid criticisms regarding process, our bullish outlook on Wise's long-term trajectory and the strategic rationale behind the US listing remains firm. We will be voting in favour of the resolution, confident in the enduring value this move will unlock. We, like Skaala, would also prefer to see greater transparency and the unbundling of disparate resolutions should similar situations arise in the future.

Finally, it is crucial to note that despite its misgivings, Skaala Investments, representing the second-largest shareholder, explicitly stated:

This statement underscores that despite process-related objections, a key shareholder remains fundamentally committed to Wise's business, strategy, and leadership.

End of Update.

A Foundation for the Future

Wise is an incredibly special business. It is not just another promising growth stock, but a genuine contender to join the pantheon of truly great, category-defining enterprises. Its power lies in a simple yet profoundly effective flywheel: by relentlessly driving down costs and improving service for its customers, it builds a scale and a trust that becomes almost impossible for high-margin incumbents to challenge. Operating within a global market measured in the tens of trillions, its runway for growth is not just long; it is generational. This is a company methodically building the indispensable infrastructure for the future of global finance, and it has a very real possibility of one day becoming the first trillion-dollar company born in Europe. For shareholders with the foresight to recognise the scale of this mission, the rewards could be immense.

The blueprints for a trillion-dollar company are on the table; is it time to take a stake in the foundation?

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Disclaimer: The author of this Wonder Stocks Deep Dive owns shares in Wise.

Appendix

1. Capital Structure: The Founder's Share and Index Exclusion

When Wise listed on the London Stock Exchange in July 2021, it did so with a dual-class share structure. This structure is common among founder-led technology companies, designed to protect the long-term vision of the business from short-term market pressures.

Specifically, while the publicly traded shares are Class A shares with one vote per share, a special Class B share was issued to its co-founder and CEO, Kristo Käärmann. This single "golden share" gives him significant voting power, far in excess of his direct economic interest, ensuring he retains control over the company's strategic direction.

However, this structure came with a significant trade-off in the UK market. The rules for inclusion in the FTSE UK Index Series (including the FTSE 100 and FTSE 250) require that companies on a premium listing adhere to a "one share, one vote" principle. Wise's dual-class structure automatically disqualified it from inclusion.

The consequence is that Wise has been excluded from the enormous and growing pool of capital allocated to passive investment funds. These funds, such as index trackers and ETFs, automatically buy shares in companies that are constituents of the indices they follow. By being ineligible for the FTSE indices, Wise misses out on this significant, non-discretionary source of demand for its shares, which can act as a structural headwind on its valuation relative to peers who are included.

Crucially, this founder control mechanism is not permanent. The enhanced voting rights attached to the Class B share are set to expire on the fifth anniversary of the company's listing, which will be in July 2026. At that point, the dual-class structure will collapse, and the company will revert to a standard one-share, one-vote system.

Update Section 2:

Should the resolutions pass, the B class shares will no longer expire until July 2036. This means that the shares will only likely qualify for NASDAQ indicies not S&P or FTSE.

2. The Strategic Shift: US Listing and Pathway to Inclusion

In early June 2025, Wise announced a significant strategic pivot: a plan to transfer its primary stock market listing to a US exchange, while maintaining a secondary listing in London. The company's stated rationale is compelling. The move is designed to:

• Increase the company's profile and brand awareness in the United States, which it identifies as its single largest and most important growth market.

• Gain access to the world's deepest and most liquid capital market, attracting a broader and more diverse pool of global investors, particularly those with a focus on high-growth technology firms.

• Achieve a stock valuation more in line with US-listed technology peers, which historically trade at higher multiples than their European counterparts.

This decision must be viewed in conjunction with the impending expiration of the founder's share in July 2026. The timing is critical. Once the dual-class share structure expires, the primary barrier to major index inclusion will be removed.

By moving its primary listing to the United States, Wise is positioning itself to become eligible for inclusion in the major US indices, most notably the S&P 500. A key requirement for S&P 500 inclusion is that a company must have its primary listing on a US exchange. Therefore, the move is a necessary precondition.

Upon the expiration of the golden share in mid-2026, assuming Wise meets the other S&P 500 criteria for profitability, market capitalisation, and liquidity, the company will be in a prime position for consideration. Inclusion in the S&P 500 would be a transformative event, instantly creating massive structural demand for its shares from the trillions of dollars in passive funds that track the index. This strategic repositioning, therefore, creates a clear and powerful potential catalyst for a significantly higher share price.

Update Section 3:

As with Update Section 2, this will only be partially true if the B shares are indeed extended to July 2036.

Below you’ll find every Wonder Stocks Deep Dive, listed in reverse chronological order – newest first. Each one is a high-conviction idea on a company with serious multibagger potential. Start anywhere, or read them all.

A FTSE100 Company with medium-term multibagger potential?

A big business that could generate big returns.

January 2025

DCC (DCC.L) is a quiet FTSE 100 compounder that’s delivered a 6,500% return since listing, and it might just be gearing up for another run. Its disciplined buy-and-build model, historically strong returns, and a new energy-focused strategy position it for substantial profit growth and re-rating. With the shares trading at multi-year lows and management projecting a doubling in profits, the stock could deliver a 250% return over the next five years.

Multibagger potential

February 2026

DCC (DCC.L) was reconfirmed as a Wonder Stock with the investment case updated.

DCC Update - Feb 2026

An Unloved Gem

Cheap Growth that is Ready to Rebound

February 2025

Focusrite (TUNE.L) is a UK audio tech company known for its high-quality recording equipment, with a loyal customer base and global reach. After a post-COVID slump and industry-wide destocking, the business now trades at rock-bottom valuation levels despite a significantly stronger underlying position. If profitability and sentiment normalise, the upside could be huge.

An Unloved Gem

Growth Priced Like Deep Value

What if a tiny UK stock could turn a modest stake into a fortune?

March 2025

Brave Bison (BBSN.L), a UK micro-cap in digital advertising, blends rapid growth with a deeply undervalued stock, driven by a savvy buy-and-build strategy. Its strong management and solid balance sheet position it for exceptional returns. Uncover why this hidden gem could multiply your investment in the full analysis.

Growth Priced Like Deep Value

March 2026

Brave Bison (BBSN.L) was reconfirmed as a Wonder Stock with an investment case update including new long-term return profjections.

Brave Bison Update - Mar 2026

Note: Kitwave was removed as a Wonder Stock on January 24th 2026 following a takeover approach. The original deep dive text is stored here.

This Could 10x

A Hidden Engine of Growth

April 2025

Kitwave (KITW.L) is aggressively consolidating a fragmented industry with a smart buy-and-build approach, setting the stage for explosive growth. This under-the-radar stock offers massive return potential for bold investors. Dive into the full analysis to uncover why it could transform your portfolio.

This Could 10x

The following is a brief explanation for the cancellation of its Wonder Stocks status.

Cessation of Kitwave

Invest in a Maverick

Quietly Building Rare Value

May 2025

This Deep Dive uncovers Frasers Group (FRAS.L), a company thriving under the unconventional leadership of a true maverick, quietly building extraordinary and often overlooked value in the retail sector. By defying conventional wisdom and executing a bold strategy, Frasers presents a unique investment case that the market may be underappreciating. Discover why this maverick's approach could lead to significant returns and how it's strategically positioned for future growth.

Invest in a Maverick

The Greatest Investment of the Next Decade?

The next Amazon is here

June 2025

Wise (WISE.L) isn't just a currency exchange business, it's building a new financial infrastructure for both consumers and companies. It has the hallmarks of some of the greatest businesses ever created, with a competitive advantage that borders on unassailable. If it succeeds in its long-term vision, it has the potential to become one of the defining companies of the 21st century, rewarding investors on a scale few businesses ever achieve.

The Greatest Investment Decade?

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This founder retains more than two-thirds of the shares, a clear testament to his unshakeable faith in his vision. Despite ESG missteps that have drawn scrutiny, the company’s knack for reinvention keeps it poised for growth, and it is currently repurchasing shares at attractive prices while channelling funds into transformative initiatives. With a valuation that appears undervalued yet ripe with opportunity, this stock beckons to those who can see beyond the noise. In this Deep Dive, we will explore why this stock is underappreciated for its maverick strategy for compounding shareholder value and, why it could prove an astute choice for patient investors seeking substantial returns.

In this Wonder Stocks Deep Dive, there are two documents. This is the short version, it includes the basic information to help investors gain an informed opinion on the opportunity. It is deliberately short and to the point. For those looking for more information, each section has a link to the Supplemental Article, which contains much more detail for those wishing to get into the nitty gritty. Any feedback, good or bad, about this style of article is greatly appreciated.

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Important Legal Disclaimer:

All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

In 1982, 18‑year‑old Mike Ashley borrowed £10,000 from his family and opened Mike’s Sports in Maidenhead, undercutting established rivals with rock‑bottom prices. Running the business as a sole trader until 1999, he refused corporate convention. When Sports Direct PLC listed in 2007, Ashley retained nearly two‑thirds of the shares. Over the next 18 years, the group made various acquisitions including Dunlop, Slazenger, House of Fraser, and Jack Wills which fuelled a book‑value that has risen by c. 16% per annum. Along the way, high‑profile missteps (the Shirebrook warehousing scandal) and boardroom skirmishes reinforced Ashley’s reputation as the City’s favourite pariah.

Yet these controversies mask a fundamental truth: underneath the combative headlines, Frasers has built operational excellence rivalled only by Next, with cutting‑edge warehouse automation and a scaled omnichannel platform. This friction between perception and reality is precisely what creates potential for outsized returns. Frasers Group has evolved far beyond its Sports Direct roots, emerging as a retail colossus with hundreds of stores across the UK, Europe and elsewhere, complemented by numerous e-commerce platforms.

For more information, click here.

Elevation

The Elevation Strategy has sought to reposition the company as a leading player in premium and luxury retail, moving beyond its discount sportswear roots. The strategy aims to enhance brand perception by forging deeper partnerships with high-profile names like Nike, Adidas, and The North Face, while expanding its premium lifestyle offerings through Flannels and acquisitions like Matches. It also prioritises an omnichannel approach, blending upgraded physical stores with robust digital platforms, and introduces innovative services like Frasers Plus to boost customer loyalty and drive sales. The overarching goal is to establish Frasers as the top sports and lifestyle retailer in Europe, the Middle East, and Africa, catering to a broader, more affluent customer base across diverse price points.

Frasers now operates over 750 stores across Europe, the Middle East, and Africa, plus multiple e‑commerce platforms. Its divisions include:

• UK Sports Retail (Sports Direct): The original cash cow. It went through a period of difficulty around the exit of Dave Forsey but is now amongst the UK’s most profitable major retailer on operating margins challenging even Next’s.

• Premium Retail (Flannels, Matches, Gieves & Hawkes): This is a core component of the strategy to target a wider range of price points and demographics. It is smaller than UK Sports Retail but is still a significant part of the business generating roughly 40% of the revenues of UK Sports Retail. It has grown largely through the acquisition of distressed assets trading at bargain prices.

• International Retail: A growing footprint via stakes in Accent Group (Australia), Donnay (Belgium), and USC (Spain). As with the UK, international markets don’t have some grand strategy of empire building. Rather, it depends upon buying up assets as they become available at bargain prices and then integrating them into the Frasers platform. The international expansion strategy is similar to that of Premium retail.

• Financial Services (Frasers Plus): Launched in 2023, offering buy‑now‑pay‑later and interest‑free credit, already servicing 377,000 active users and integrated with THG’s (formerly the The Hut Group) Ingenuity platform. Much like Next’s long-standing credit scheme, which has bolstered its customer retention by offering seamless payment flexibility tied to its retail and online platforms, Frasers Plus seeks to embed itself as a core component of the shopping experience, fostering stickiness and boosting basket sizes for a diverse consumer base. Like Next’s similar offering, it generates very high operating margins.

Complementing these is ELEVATE, Frasers’ retail‑media network (2025 launch), leveraging data from 30 million customers to monetise in‑store and digital ad placements. Together, these divisions form a diversified ecosystem few mainstream peers can replicate.

For more information, click here.

Credit Where it’s Due

Despite its track record, professional investors largely shun Frasers. Key objections include:

1. Volatile Earnings: Year‑to‑year profits have been inconsistent. Much of this occurred around the Shirebrook scandal and subsequent exit of Dave Forsey from the CEO role. That was nine years ago at time of writing and the company is on a much surer footing today.

2. ESG Shortcomings: Poor social and governance scores deter fiduciaries. The Environmental side comes about through the sale and third-party production of ‘fast fashion’ from abroad. Measures can and are being taken to address this. The Society part of ESG is largely a thing of the past. Whilst the reputational damage of Shirebrook remains, the group is in a much better position in 2025 than what it was in 2016. On the Governance side, it is inextricably linked to an investment in Frasers given the c. 73% ownership holding of Mike Ashley. ESG can sometimes be a rather blunt tool and individual investors have to make a decision as to whether they are comfortable with Ashley’s influence.

3. Combative Style: Public feuds with MPs, journalists, and former CEOs reinforce a negative image. The analyst community, most (all?) of which haven’t built any businesses let alone one employing more than 30,000 people, are quick to be dismissive of such achievements and can be rather flippant about questioning the company. This has led to times of fraying nerves from the management of Frasers. Combative communication is often the result.

Snobbery: There will always be a degree of snobbishness amongst UK professional investors on account of the predominance of pinky ring wearers. Ultimately, some of these people will never understand why Sports Direct and Frasers endures and prospers. They prefer steady-eddy well-spoken chief executives quietly, slowly but consistently going nowhere, to the cut and thrust of raw entrepreneurialism.

A pinky ring wearer who doesn’t work in the City

Yet every objection carries its counterpoint:

• Volatility vs. Optionality: Frasers trades short‑term earnings consistency for reinvestment in asset acquisitions that compound capital. As Jeff Bezos wrote in 1997:

  “When forced to choose between optimising GAAP and maximising future cash flows, we’ll take cash flows.”

  Frasers follows a similar mantra.

• ESG Evolution: Ongoing improvements in working conditions and governance, plus data‑driven retail media, indicate a gradual positive shift.

• Combative Communications: Ashley’s forthrightness can be an asset as it deters complacency and signals alignment with shareholders through share buybacks.

• Snobbery: Fund managers who embrace mavericks, who are often mavericks themselves, have quietly amassed outsized returns by backing Frasers.

For more information, click here.

Why It’s Cheap

At a market cap of c. £3.1 billion and whilst investments and net debt total to approximtely £500million, Frasers’ enterprise value sits at c. £2.6 billion using Wonder Stocks analysis, which adjusts for investments. Based on 2025 management guidance of £550-600 million Adjusted Profit Before Tax (APBT) and our estimate of £668 million underlying EBIT (see appendix), the business trades on c. 4x normalised EV/EBIT. For context:

• Marks & Spencer: >10x EV/EBIT (two and half times as expensive as Frasers)

• Next: >15x EV/EBIT (almost four times as expensive as Frasers)

Even if Frasers deserved only a Marks & Spencer multiple (10.7x), enterprise value would need to rise 175%, implying a market‑cap uplift of 147%. Given Frasers’ unique mix of deep value assets, superior margins, and shareholder‑friendly buybacks, a re‑rating seems overdue.

For more information, click here.

Management & Strategy: From Ashley to Murray

Ashley served as CEO until 2008, then stepped back to executive director. In May 2022, Michael Murray (his son‑in‑law) took the helm at 32, after modernising store formats and digital platforms in his previous role as Head of Elevation. Critics decry nepotism; supporters point to Murray’s rapid execution on Elevation initiatives. With Ashley retaining 73% of equity (as of October 2024, which is the most recent set of accounts) and ongoing consultancy, strategic continuity is assured. It should be remembered that a similar dynamic played out at Next, where Simon Wolfson faced nepotism claims upon becoming CEO in 2001 at age 33 while his father was chairman, only to prove his worth by elevating Next into a retail leader.

Under Murray, the Elevation Strategy has focused on:

1. Premiumisation: Deep partnerships with Nike, Adidas, and The North Face; targeted acquisitions of luxury labels.

2. Omnichannel Excellence: Upgraded flagship stores, a robust e‑commerce engine, and launch of Frasers Plus.

3. Retail Media: Monetising customer data via ELEVATE to boost third‑party ad revenue.

4. Operational Automation: Continued investment in warehouses and Customer Relationship Management (CRM) systems.

Early results are promising: footfall and online sales growth in elevated stores, pilot launches of ELEVATE generating incremental revenue, and Frasers Plus buy‑now‑pay‑later adoption are outpacing internal targets.

For more information, click here.

The Investment Case: Value + Growth = Upside

Value Proposition

• Deeply Undervalued: c. 4x EV/EBIT vs. 10–15x peers.

• Share Buybacks: Cancelling c. 5% of equity annually at cheap prices.

• Asset Optionality: Property portfolio (Coventry Arena acquisition at £18 million vs. £113 million replacement cost) and stakes in listed companies enhancing hidden net asset value (NAV).

• Value: Frasers looks very cheap.

Growth Proposition

• Book‑Value Compounding: 16% compound average growth rate (CAGR) since 2007, which has tempered down to c. 10% in recent years. Even 10% CAGR over the next decade increases the book value by 160%, while 15% yields 305% growth.

• Margin Expansion: As acquired businesses integrate, group margins should normalise upwards. This is hidden by additional acquisitions, which when value-accretive should continue to be made.

• Retail Media & Financial Services: High-margin lines set to scale to £1 billion+ revenue (Frasers Plus) in the long term and multi‑million ad sales (ELEVATE).

• Growth: Frasers is growing.

Combined Returns

Even the conservative case yields >20% p.a. over a decade; a profile rarely found in UK equities.

For more information, click here.

Risks & Mitigants

• Share Consolidation Under Ashley: At current buyback rates, Ashley could approach 100% ownership in less than 10 years, which would mean that equity shareholders will be squeezed out. However, meaningful liquidity remains today, and board oversight continues.

• Integration Overhang: One‑off costs distort short‑term profits; our EBIT‑based valuation strips these out. As long as the company is making regular acquisitions, which have been a rich source of value creation, then one-off costs will appear. Contrary to popular belief one-off costs associated with acquisitions should occur as it is evidence that a business is being properly integrated, with the elimination of duplicate processes.

For more information, click here.

Conclusion

Frasers Group is a textbook contrarian opportunity: a maverick founder, loathed by the establishment, operating a diversified retail‑finance ecosystem at a fraction of peer valuations. Share buybacks are boosting compounding, the Elevation initiatives are gaining traction, and the company’s assets offer real optionality. This is a stock for patient investors willing to embrace some controversy in pursuit of potentially transformational returns.

At its most bullish, an investment in Frasers over the next ten years could be truly outstanding, delivering over 1,000%. It may seem fanciful but Frasers is arguably extremely cheap with a long runway of double-digit growth. Truly exceptional returns, require truly exceptional vision.

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Would you back a maverick with vision?

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Disclaimer: the author of this Wonder Stocks article is Jamie Ward. At time of publishing he owns shares in Frasers Group

Appendix

The chart below shows the four-to-five-year, starting in 2016, temporary decline in profit margins following the issues with the Shirebrook warehouse. The COVID-19 pandemic has obscured the picture somewhat, but the profit margin is now between 10% and 12% and closer to 15% at the UK Sports Retail business.

The chart below shows the path of free cash flow. Once again, the problems (starting in 2016) of the Shirebrook warehouse scandal are clear. In the years following, free cash flow was depressed as the group invested considerably more in improvements. Since 2020, free cash flow has returned to more normal levels given the profitability of the business.

The chart below shows that the share count has begun declining as the group capitalises on its very low share price to boost per share value.

The chart below shows both earnings per share (green line) and adjusted earnings per share (yellow line) as well as consensus estimates from analysts.

Fund my Insights

Sportswear to Savile Row

In the formative years of his enterprise, Mike Ashley, trading as Mike’s Sports, aggressively undercut rivals to gain a foothold in the market. Following a rebrand to Sports Direct and a successful public listing, Ashley’s astute deal-making fuelled rapid expansion. While some ventures, like Evans Cycles, thrived, others, including investments in Debenhams, met with disappointment.

Frasers Group, as it is now known, boasts a diverse portfolio encompassing budget sportswear through Sports Direct, luxury fashion via Flannels, and department stores under the House of Fraser banner. The company has also ventured into the fitness sector with Everlast Fitness Clubs, alongside maintaining ownership of various brands.

A mid-2010s exposé laid bare poor working conditions at Sports Direct’s Shirebrook warehouse, triggering widespread public outrage and precipitating the resignation of the then-CEO. Compounding these challenges, related-party transactions involving Ashley’s brother’s logistics firm and his son-in-law’s property ventures have provoked shareholder discontent. Tensions with the City, driven by disputes over executive remuneration and boardroom governance, have further strained relations. Ongoing environmental, social, and governance (ESG) deficiencies continue to repel certain investors, while Ashley’s confrontational approach, characterised by public disputes with MPs and journalists, only heightens scrutiny of his leadership.

Frasers Group’s financial journey has been marked by turbulence. While revenue has followed a broadly upward trajectory, profits remain susceptible to fluctuations. Despite carrying debt, the company generates sufficient cash flow to fund share buybacks and acquisitions. Eschewing dividend payments, Ashley channels profits back into growth, pursuing a strategy of acquiring distressed assets, revitalising them, and scaling operations. Initiatives such as expanding Flannels and launching fitness clubs target higher-margin markets, even as short-term earnings exhibit inconsistency.

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Elevation

The company has strategically invested in opening new flagship stores designed to deliver a premium retail experience, enhancing its market presence. A notable acquisition, the £52m purchase of luxury retailer Matches in December 2023, has bolstered its position in high-end fashion. Partnerships with premium sportswear brands such as On and Columbia have further strengthened its credentials in this segment, while the acquisition of Gieves & Hawkes marks a deliberate move into luxury, bridging the gap from sportswear to Savile Row.

The ELEVATE Retail Media Network, supported by a partnership with Zitcha, plays a pivotal role in enhancing brand visibility and customer engagement through data-driven campaigns. This initiative complements the Sports Direct Membership programme, which offers loyal customers exclusive benefits, fostering deeper connections with the brand. On the international front, Frasers has pursued growth by acquiring a stake in Australia’s Accent Group and exploring further merger and acquisition opportunities to expand its global footprint. Investments in warehouse automation and digital infrastructure are streamlining operations, positioning the company for scalability and efficiency.

Fraser Plus is a cornerstone of the Elevation strategy and the group’s financial services arm. They originated from the 2022 acquisition of Studio Retail’s financial services division for £26.8m. It was a distressed asset acquired following Studio’s collapse. This provided Frasers with an FCA-regulated credit platform, forming the foundation for Frasers Plus. By October 2024, Frasers Plus had grown to 377,000 active customers, with 272,000 new users added in the first half of Full Year 2025, driving a significant portion of UK online sales. The economics of Frasers Plus rely on generating high-margin revenue through credit uptake, leveraging customer data to refine targeting strategies. The initiative has expanded through third-party partnerships, notably integrating with THG’s Ingenuity platform in July 2024 and securing a deal with Hornby plc post-period to access niche hobbyist markets. These partnerships echo Next’s strategy of extending credit to external retailers, amplifying scale and diversifying revenue streams. However, early overhead costs and the planned reduction of Studio Retail’s legacy book have constrained short-term profits, reflecting a long-term focus on scalable growth. According to Frasers Group’s Half Year 2025 Results Announcement, Frasers Plus aspires to achieve over £1bn in annual sales, £600m in credit balances, and a yield exceeding 15%, with ambitions to surpass 2 million active customers, excluding third-party partnerships. This vision positions Frasers Plus as a transformative force within the Elevation strategy, redefining Frasers’ ecosystem as a retail-finance powerhouse spanning sportswear to Savile Row.

Overall, the Elevation strategy is forging a promising trajectory, driven by flagship stores, premium brand partnerships, and innovative services like Frasers Plus. These efforts underscore Frasers’ bold pivot towards upscale markets. While integrating acquisitions like Matches and navigating the complexities of retail’s evolving landscape present challenges, early successes from elevated stores and loyalty programmes indicate steady progress towards the group’s ambitious goals.

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Credit Where it’s Due

As a rather arrogant 30-year-old retail analyst in the City many years ago, I replied thus to the question of why don’t I cover Sports Direct?

What I was trying to convey was that, he had clearly been incredibly successful however as the business seemed mired in controversy, one of these days something bad might happen. Therefore, my blunt prediction was that the outcome for shareholders would have followed either of those two scenarios. It’s roughly thirteen years since I said that, I no longer believe that there is any possibility he will be in prison, but the richest man in the UK remains a possibility. A striking contrast persists between perceptions of the business and its founder and the underlying reality. Over the past twelve years, Frasers Group has significantly improved, yet public and investor perceptions appear to have deteriorated.

Several factors contribute to investors’ reluctance to engage with Frasers such as unconventional asset allocation. However, snobbery also plays a role. I once heard the private remarks of a (well spoken) fund manager’s reason for not investing that were so crass, that Wonder Stocks deems them too offensive to repeat. However, exceptional fund managers who hold significant weightings in Frasers share traits with Ashley, notably their maverick tendencies. Like Ashley, these investors have built enviable track records despite being overlooked by the mainstream. In today’s investment landscape, where cost pressures, fee constraints, and the rise of AI threaten professional investors, mavericks are increasingly shunned in favour of safe, mediocre choices. Yet, it is in these mavericks that true excellence often resides.

Frasers’ approach challenges City of London conventions, which prioritise short-term consistency over long-term value. This philosophy echoes Jeff Bezos’s 1997 stance of prioritising future cash flows over polished GAAP accounting.

Since its listing, Frasers’ profits have followed a volatile but upward trajectory, with growth and cash generation now multiples of their earlier levels. The company pursues long-term value, often at the expense of short-term losses, as evidenced by its acquisitions and rescues of struggling businesses such as House of Fraser, Gieves & Hawkes, and Matches. Its financial strength and operational flexibility enable it to capitalise on bargains, exemplified by the £18m purchase of the Coventry Arena in 2022, a venue originally built and expanded for £113m. This acquisition followed the bankruptcy of Wasps Rugby Club and was facilitated by Frasers’ agile business model, which supports rapid decision-making.

Mike Ashley, who retains majority ownership, and his son-in-law (Michael Murray), both exhibit deep passion for the business. However, the analyst community, largely composed of individuals who have never built a business, let alone one employing over 30,000 people, often dismisses these achievements with flippant critiques. This has occasionally led to strained relations and combative communications from Frasers’ management. In its early days as Sports Direct, the company faced tensions with major suppliers like Nike, who were sceptical of its no-frills model and restricted access to premium products. By 2025, however, Frasers has transformed its sports retail offering, forging strategic partnerships with brands such as Nike, Adidas, and The North Face. Nike now ranks Frasers among its top three global retail partners, a testament to the group’s evolution from pariah to valued partner.

The reality of Frasers Group’s strengths is compelling. The company has increased its book value per share by 16% annually for 18 years, achieving a total growth of 1,350%. Its managers are dedicated to maximising long-term value, evidenced by the buyback and cancellation of one in every six shares over the past three years, capitalising on the undervaluation of its stock. Frasers invests heavily in technology, automating warehouses and integrating systems with an efficiency comparable to Next, its closest UK peer in technological and operational excellence. The company strategically maximises asset write-downs and expenses investments to minimise tax liabilities, enhancing long-term value. Most notably, the UK sports division of Frasers stands as amongst the most profitable major retailers in the UK, challenging even Next in margins. While other parts of the business generate lower returns, the high profitability of the sports segment underscores the group’s operational excellence.

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Why It’s Cheap

Frasers Group’s acquisitive strategy has significantly shaped its financial profile, often masking the underlying earnings potential because of substantial integration costs, such as those incurred from eliminating duplicate systems. Looking ahead, the company has cautioned that rising employment costs are expected to affect its finances next year. These increases are being driven by higher national insurance contributions and a rise in the minimum wage. The company estimates that this will add approximately £50 million to operating expenses, though measures are in place to mitigate the impact.. Over the longer term, Frasers possesses the capacity and capability to enhance margins as duplicate costs are streamlined and acquired businesses become fully integrated into the Frasers platform.

A detailed breakdown of the estimated underlying EBIT, totalling approximately £668m, reveals the strength across its divisions.

• The UK Sports Retail segment is projected to generate around £3b in revenue with a 12.5% operating profit margin, contributing £375m to EBIT.

• Premium Retail is expected to deliver £1.2b in revenue with a 9% margin, yielding £108m in EBIT.

• International Retail, with £1.3b in revenue and a prudent 10% margin assumption, positioned between UK Sports and Premium Retail, adds £130m to EBIT.

• The Property Division’s profitability is not interpolated here; instead, its value is accounted for through balance sheet adjustments.

• Financial Services, through Frasers Plus, currently generates revenue in the range of £100m to £110m, achieving a 50% margin and contributing approximately £55m to EBIT. This estimated £668m underlying EBIT is roughly 15% higher than current-year guidance, with the difference attributed to one-off costs tied to acquisition integration.

Balance sheet adjustments further inform the enterprise value. Strategic investments, including stakes in listed and non-listed businesses, are valued at approximately £1b, with a breakdown provided in the appendix of the main article. Additionally, property investments worth around £500m are not reflected in the operating results outlined above. Net debt, including lease liabilities total approximately £1b.

In a valuation context, Frasers’ trading multiples present a compelling case when compared to peers. Marks & Spencer, despite a more chequered history, trades at over 10x EV/EBIT, while Next, the standout UK retail stock, commands a 15x multiple. A shift in Frasers’s valuation to align with Marks & Spencer’s would result in a 175% increase in enterprise value and a 147% rise in market capitalisation. Management recognises this value proposition, leveraging a portion of its free cash flow to repurchase and cancel approximately 5% of equity annually, underscoring confidence in the company’s undervaluation and long-term potential.

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Management & Strategy: From Ashley to Murray

From founding the company in 1982, Mike Ashley served as CEO until 2008, when Dave Forsey assumed the role, guiding Sports Direct through a period of significant expansion. Forsey’s tenure ended in 2016 when he resigned amid controversies, notably intense scrutiny over working conditions, prompting Ashley to resume the CEO position to navigate Frasers through a turbulent phase. This period was marked by major acquisitions, such as House of Fraser, and the retail disruptions caused by the pandemic. In 2021, Ashley transitioned to an executive director role while retaining his position as majority shareholder, allowing him to maintain strategic influence through board decisions and consultancy as he prepared to hand over operational leadership to a successor.

Michael Murray, appointed as CEO, brought experience from his prior role as 'head of elevation', where he spearheaded store modernisations and forged key brand partnerships. His appointment, however, sparked accusations of nepotism, with critics questioning whether his marriage to Ashley’s daughter, Anna, overshadowed his qualifications, particularly given his limited boardroom experience. Murray maintains that he holds decision-making authority, yet Ashley’s substantial shareholding and ongoing consultancy role continue to fuel perceptions of his enduring influence, shaping Frasers as it embarks on its next chapter.

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The Investment Case: Value + Growth = Upside

Frasers Group’s value proposition is underpinned by strategic initiatives that enhance its financial and operational flexibility. The company has actively pursued share buybacks, repurchasing and cancelling one in every six shares outstanding three years ago, capitalising on the undervaluation of its stock. Asset optionality further bolsters this proposition, exemplified by the acquisition of the Coventry Arena, originally built in 2005 and expanded in 2010 at a total cost of £113million. Previously owned by Wasps Rugby Club, which declared bankruptcy in 2022, the arena was acquired by Frasers for approximately £18million, a fraction of both its initial and replacement costs. Beyond this, the balance sheet reflects approximately £1billion in strategic investments, including stakes in listed and non-listed businesses, alongside roughly £500million in property investments, further enhancing the group’s asset portfolio.

The growth proposition is equally compelling, driven by consistent book-value compounding and the potential for margin expansion. Since its listing in 2007, Frasers has increased its book value per share by approximately 16% annually, resulting in a remarkable 1,350% growth over 18 years. However, £800m has been written off since the onset of COVID as the company repositions for future growth. This trajectory remains feasible, particularly as the company reduces its share count by 5% per annum while shares remain undervalued. Longer-term, Frasers is well-positioned to expand margins by eliminating duplicate costs and more fully integrating acquired businesses into its platform. The high margins achieved in the UK sports business, as detailed under the ‘Credit Where It’s Due’ section, underscore the group’s operational excellence and signal potential for other divisions to follow suit.

The combined returns potential is supported by detailed valuation scenarios outlined in the main article, which argues that Frasers is a superior business to Marks & Spencer, suggesting that the 10.7x EV/EBIT multiple is likely conservative. A valuation midpoint between Marks & Spencer and Next, at 12.9x EV/EBIT, is undemanding yet realistic. Applying Marks & Spencer’s 10.7x EV/EBIT multiple with a 15% growth rate yields a 900% total return, equating to a 26% compound annual growth rate

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Risks & Mitigants

Under Mike Ashley’s leadership, Frasers Group has pursued an aggressive share consolidation strategy, which presents a significant risk that shareholders may not fully benefit from the company’s potential. Over the past three years, 15% of outstanding shares have been repurchased and cancelled, increasing Ashley’s ownership to 73% as of October 2024. At this rate, Ashley could potentially own all equity well before a decade elapses, consolidating control and limiting shareholder participation in future gains. This is particularly important as his holding approaches 75% and crucial should it breach 90%.

In the UK, under the Companies Act 2006, reaching 75% ownership of a public company gives a shareholder the power to pass special resolutions, enabling actions like changing the company's articles or approving a delisting. At 90% ownership, if achieved through a formal takeover offer, the majority shareholder can trigger a squeeze-out process to compulsorily acquire the remaining shares, effectively taking the company private. Minority shareholders also gain a reciprocal sell-out right. UK Listing Rules (specifically LR 5.2.5) require a 75% vote to approve a delisting of a premium-listed company, but once 90% is reached and a squeeze-out is completed, delisting can occur without further shareholder consent.

The company’s acquisitive strategy brings additional challenges. When a business grows by buying others, there’s always a risk that the new parts won’t fit well together. This risk is even higher when the acquisitions involve distressed companies, i.e., those bought out of administration or bankruptcy. These types of deals can be complex and difficult to integrate, and they don’t always deliver the expected results. Frasers prioritises long-term value creation over short-term profitability, a strategy evident in its rescue of distressed businesses such as House of Fraser, Gieves & Hawkes, and Matches. These examples highlight why significant integration costs are incurred, forming an integral part of the company’s value creation strategy. The gap between guided adjusted profit before tax (APBT) and underlying EBIT is largely attributable to these one-off costs associated with integrating acquisitions, reflecting the trade-off between immediate losses and the pursuit of sustainable, long-term growth.

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Conclusion

Frasers Group presents a compelling contrarian investment opportunity, uniquely undervalued despite its clear delivery of strong performance. The company’s long-term success and quality are evidenced by its remarkable track record, having increased book value per share by 16% annually for 18 years, resulting in a total growth of 1,350%. This achievement is underpinned by a management team deeply committed to maximising long-term value. Operationally, Frasers demonstrates significant strength, investing heavily in technology to achieve efficiencies comparable to Next, its closest peer in terms of technological and operational excellence in the UK retail sector. The company’s financial strategy further enhances its value, as it strategically maximises write-downs and expenses investments to minimise tax liabilities, thereby bolstering long-term value creation. Far from being a challenging partner, Frasers has forged strategic alliances with many of the world’s leading brands, transforming its reputation and strengthening its market position. Notably, the UK sports division stands as amongst the most profitable major retailer in the UK, surpassing even Next in profitability. Frasers is cheap – very cheap.

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Disclaimer: the author of this Wonder Stocks article is Jamie Ward. At time of publishing he owns shares in Frasers Group

On January 24th 2026, Kitwave was removed as a Wonder Stock, but the original text is kept here fore those interested in the business.

Imagine a business quietly stitching together a patchwork of smaller players in a fragmented industry, turning modest operations into a powerhouse of scale and efficiency. It’s not a difficult thing to imagine because many have done it successfully before. It’s not a flashy tech unicorn or a household name, but a disciplined operator with a knack for spotting undervalued gems, snapping them up, and weaving them into a cohesive, profit-churning machine. The beauty lies in its simplicity: a proven playbook, a vast playing field of opportunities, and a team that knows how to execute. This isn’t a speculative bet on a distant future – it’s a compounding story unfolding right now, with a valuation that seems to have missed the memo on its potential.

What makes this tantalising is the runway ahead. The sector it operates in is ripe for consolidation, with scores of small, family-run businesses waiting for the right suitor. The management isn’t just dreaming big – they’ve already delivered, time and again, with a process so robust it feels like a conveyor belt of value creation. A stock that could deliver well over 600% in shareholder returns on an initial investment over the next decade and if things go really well, it could be a 10 bagger.

Note: Wonder Stocks seeks to provide a narrative argument for its investment case. Nevertheless, supporting figures and charts can be found in the Appendix and section How Much Can Shareholders Make.

This article was updated on July 2nd 2025 following the release of the interim results for the year ending October 2025. This update can be found at the bottom of the piece after the Appendix.

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All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

That business is Kitwave, a UK-based wholesaler that’s mastering the art of buy-and-build. Based in North Shields, this isn’t a newcomer – it’s a proven player that has delivered real value, yet still trades at a fraction of what its trajectory suggests. The opportunity is clear: Kitwave has a formula that works, a sector with endless targets, and a leadership team that’s young, seasoned, and relentlessly focused. Like Brad Jacobs – the serial dealmaker behind logistics giants XPO, GXO, and now QXO – Kitwave’s story is about turning fragmented markets into streamlined profit engines. The difference? Kitwave is earlier in its journey, with a valuation that leaves room for outsized returns.

The numbers whisper potential. With a market cap still modest relative to its ambitions, Kitwave could follow a Jacobs-esque path where disciplined acquisitions and operational excellence drive multiples of growth. Recent results show revenue climbing and a pipeline of deals already boosting earnings, yet the stock lingers at a price that feels like a gift for those paying attention. This is a chance to back a management team that’s not just talking about consolidation – they’re doing it, with a track record that rivals the early days of Jacobs’ empire-building. Details of Jacob’s successes as well as other UK buy-and-builders can be found in the Appendix.

From Cash-and-Carry to Consolidation King

Kitwave started as a humble cash-and-carry operation on Tyneside, serving corner shops and small retailers with everyday essential; snacks, drinks, and frozen goods. It’s not glamorous, but it’s the backbone of the UK’s independent retail ecosystem, a £13.3 billion market for impulse items alone. Over the years, it’s morphed from a single depot into a network of nearly 40, employing over 2,000 people. The secret? A relentless focus on buying up regional wholesalers – names like Wilds of Oldham, Total Foodservice, and Creed Catering Supplies – and integrating them into a lean, efficient whole.

This isn’t haphazard growth. Kitwave’s process is methodical: scout targets with strong local roots, assess their fit, pay the right price, and then streamline operations to unlock synergies. Kitwave’s scale is still small, but its discipline is similar to some of the very best to have done it before.

From Foundations to Consolidator

The history of the company can be split into three:

1. Excellent Underpinnings – 1987 to 2011

Kitwave was launched in 1987 when Paul Young established the business in North Shields, Tyne and Wear, as a modest confectionery wholesaler. It carved out a solid niche, rooted in the cash-and-carry model where customers visited the depot to stock up. The early years demanded grit and groundwork – a slow burn, with Young guiding a steady course. By the early 2000s, Kitwave had solidified its status as a regional stalwart, though it remained a relatively small operation. It was a well-run but modest business compared to its scale today. By the late 2000s, it was generating around £100 million annually in revenue and around £1.7 million a year in pre-tax profits.

2. New Equity – 2011 to 2021

It’s unclear how the connection came about, but in 2011, NVM Private Equity acquired a stake in Kitwave and injected substantial capital backing Paul Young. This enabled him to acquire smaller competitors and instil his signature operational excellence. Supporting him was David Brind, the current CFO, who joined the business from NVM providing him with financial expertise. The first acquisition was Automatic Retailing in September, and along with it the finance director, Ben Maxted. Over the next decade, Kitwave completed ten acquisitions. The revenue and operating profits through this period expanded more than five-fold from a mixture of organic and acquired growth. As is common with private equity, the NVM investment had a fixed term. In this case, it was ten years, which allowed NVM to exit its stake in the expanded group when Kitwave listed on the AIM market in May 2021.

3. A Public Company – 2021 to Present

When Kitwave listed, it secured a valuation of just over £100 million. By then, Paul Young, in his mid-60s, seized the moment to step back from the business. He and his family retain an approximate 10% stake, signalling confidence in the current leadership. Indeed, David Brind, who served as Young’s CFO for several years, remains in the role. Ben Maxted, who had been with the company 14 years by this time, was elevated to CEO in 2024. The buy-and-build strategy that defined its private equity-backed decade persists, with five additional acquisitions completed since the initial public offering (IPO). In late 2024, it made its largest acquisition yet – Creed Catering Supplies – partly funded through an equity issuance that raised £31.5 million and increased the share count by 14%. Since listing nearly four years ago, Kitwave has grown by roughly 80%.

A Fragmented Feast

The wholesale sector Kitwave operates in has a great deal of opportunities. Unlike consolidated industries dominated by a few giants, this is a landscape of small, family-owned players lacking the scale or capital to compete with larger networks. Kitwave steps in as the consolidator, offering cash to owners ready to retire or scale to those needing a partner. Competitors such as Booker (owned by Tesco) and Bestway target larger customers who order in lorry-loads, leaving Kitwave to dominate a niche of smaller businesses with its van-based, small-quantity deliveries. The foodservice division, boosted by deals like Creed, taps into a growing demand from cafés, pubs, and caterers.

As with many buy-and-build opportunities, success hinges on several key factors. The market must be highly fragmented, offering ample room for expansion. Valuations must be approached with strict discipline to avoid overpaying. Most crucially, management must have a proven integration strategy to ensure that acquisitions form a cohesive, efficient business rather than a patchwork of smaller entities.

Kitwave meets all these criteria, creating the perfect conditions to continue its acquisition spree with each deal a step toward greater scale and profitability. More importantly, this strategy serves as a powerful engine for value creation and shareholder returns.

The Road Ahead

Kitwave’s future relies on maintaining its proven formula: smart acquisitions, operational efficiency, and steady organic growth. The company’s success will depend on its ability to effectively execute the four core capital allocation priorities outlined by management in the order presented below:

1. Value-accretive acquisitions – acquisitions have been a key driver of Kitwave’s expansion, and management plans to continue pursuing deals that enhance shareholder value.

2. Targeted capital expenditure – Investment in infrastructure, such as the recently opened Southwest delivery hub, is aimed at strengthening distribution capabilities in terms of both scale and efficiency.

3. Progressive dividend policy – Kitwave is committed to steadily increasing shareholder returns through a sustainable and growing dividend.

4. Conservative balance sheet management – The company aims to keep net debt-to-EBITDA below 2.5x, ensuring financial stability and flexibility.

It’s unclear whether Kitwave’s decision to list Value-accretive acquisitions first in its presentations reflects a deliberate prioritisation of its buy-and-build model. Nevertheless, the management talk a lot about having well-defined processes for acquiring and carefully integrating new businesses and so it is clearly important. As such, expanding through well-priced and carefully integrated acquisitions remains a cornerstone of the company’s strategy. Consolidating its sector through disciplined acquisitions is central to driving long-term growth and enhancing shareholder value. By sticking to this disciplined strategy, Kitwave aims to continue delivering consistent growth and value for its shareholders.

Kitwave should be thought of in a similar vein to other consolidators like Bunzl or Diploma: buy cheap, improve, scale big. For those who are interested, Wonder Stocks highly recommends Brad Jacobs’ book, How to make a few Billion Dollars, which details his highly successful strategy for operating a buy-and-build business. Arguably, no one has done it better than Mr Jacobs, and Kitwave is following his playbook.

How Much Can Shareholders Make?

This section presents a bullish outlook for Kitwave. It will be split into analyses of the Value proposition and the Growth proposition. In completing analysis, certain alterations had to be made to the accounts pre-IPO; details of which can be found in the Appendix 1.

The Value Proposition

Following the acquisition of Creed and the resulting share issuance, Kitwave is projected to generate approximately £45 million in operating profits and £27 million in net income this year. The company is expected to achieve organic growth of around 3% per annum. As of April 2025, its enterprise value (EV) stands at £320 million, with a market capitalisation of £205 million. These figures translate to valuation metrics of EV/EBIT at 7x and a price-to-earnings (P/E) ratio of 7.6x – both notably undemanding. However, modest growth prospects and the broader context of a deeply discounted UK small-cap market temper this apparent cheapness. While the low valuation offers a margin of safety, it alone does not distinguish Kitwave as a superior opportunity among many other undervalued small UK companies.

Several factors, however, bolster Kitwave’s appeal. First, the company is highly cash-generative and operates with relatively low capital intensity. This enables management to sustain a robust and growing dividend, currently yielding over 4.5%. Shareholders thus enjoy a solid return even without share price appreciation. Second, Kitwave benefits from a proven, high-quality management team, recognised as shrewd operators both before and after its stock market listing. Third, the company has significant potential to expand through acquisitions of smaller rivals. Many of these targets are founder-led businesses in the sector, often seeking buyers as their owners near retirement. With limited competition for these deals, Kitwave is well-positioned to secure attractive prices. Fourth, many small companies are as cheap as Kitwave, but bigger, similar companies are worth much more. This makes Kitwave look like a bargain.

Kitwave’s growth model echoes the trajectories of Bunzl and Diploma, who both evolved from a size comparable to Kitwave’s into FTSE 100 constituents (see Appendix 2 for details). Though operating in different sectors, these companies share similar fundamental strategies. Yet, their valuations far exceed Kitwave’s. Bunzl is a dependable but unexciting business, trading at double Kitwave’s valuation with half the dividend yield. Diploma is past its peak growth years, less disciplined in recent acquisition pricing and commands triple the valuation with a negligible yield. Kitwave, by contrast, arguably has a longer runway to consolidate its market, enhancing its growth potential.

This section, including that written on Bunzl was written prior to the April 16th profits warning.

Taken together, Kitwave appears anomalously undervalued. Its small size means the dividend yield is the most reliable short-term return for investors, but its true value lies in its capacity for long-term growth through strategic expansion.

Growth Projections

As with all buy-and-build strategies, there are significant unknowns. The most successful operators are both opportunistic and disciplined. In his book, Brad Jacobs recounts that in the first four years of XPO’s existence, he and his team conducted due diligence on approximately 2,000 companies but acquired only 17. This rigorous process allowed them to build a comprehensive understanding of XPO’s market, enabling informed decisions on which businesses to buy and at what price when opportunities arose.

Kitwave’s opportunity set is less vast than that of XPO or QXO, but its management team employs a similar approach. They have identified businesses likely to become available in the future, completed due diligence, and determined fair acquisition prices in advance. This preparation suggests that Kitwave’s management possesses the expertise and foresight to drive acquisitive growth, securing targets at attractive valuations and integrating them effectively.

Despite the difficulty in projecting growth, Wonder Stocks offers a credible projection of Kitwave’s future trajectory, based on its historical performance and financial outlook:

• Kitwave has completed over a dozen acquisitions since adopting its current strategy, paying an average multiple of 5.1x EBITDA – approximately 6.5x EBIT.

• Based on 2025 projected earnings, the group is expected to generate £32 million in free cash flow to the firm (excluding debt interest payments but after maintenance capital expenditure).

• After covering the dividend and debt interest, the company should retain around £16 million annually.

• Kitwave targets a debt level of no more than 2.5x EBITDA; it currently stands at approximately 2.0x.

• At present, the company can allocate up to £16 million per year to acquisitions from internally generated cash flow, with an additional £20 million in unused resources available for a larger deal.

• Assuming Kitwave relies solely on internal cash (without additional debt financing) and maintains its historical acquisition multiple, it could add approximately £3.1 million in EBITDA and £2.5 million in EBIT annually.

• This translates to an acquisitive growth rate of 5.5%.

Conclusion

The following outlines a bullish yet realistic ten-year outlook for Kitwave:

• It achieves 3% per annum organic growth. Historically, Kitwave has recorded 6.7% organic growth, partly driven by sales synergies from larger acquisitions. While actual growth could exceed 3%, it’s unlikely to reach 6.7% again. A prudent assumption of 3% is adopted here.

• Acquisition growth averages 5.5% per annum, as the company allocates all resources to acquisitions without exceeding this limit. This is excluding interest and dividend payments.

• The dividend increases in line with earnings growth, maintaining a yield of 4.6% at the current valuation.

• As Kitwave grows, it attracts greater institutional ownership, mirroring the paths of Bunzl and Diploma. This drives its valuation to align with Bunzl’s over time.

If these assumptions hold, net debt would remain stable at £91 million. With earnings rising, debt ratios would decline to a net debt to EBITDA of <1x. By year ten, projections include: EBIT of £76 million, net debt of £91 million, and an EV/EBIT multiple of 13.5x. This implies an enterprise value of £1,020 million and a market capitalisation of £930 million. Compared to the current market capitalisation of £205 million, this delivers a capital return of 350%, or a compound annual growth rate (CAGR) of 16%. Factoring in the 4.6% dividend yield, the total CAGR rises to 21.7%, yielding a total return of 610%.

Several factors could alter this outlook. A valuation closer to Diploma’s could boost the total return by an additional 50%, pushing the return to 10x. Organic growth, likely to exceed 3% modestly, would increase year-ten earnings, though not dramatically. Similarly, greater use of debt could enhance returns. This scenario assumes fixed debt at current levels, but maintaining a 2.0x net debt/EBITDA ratio would unlock an extra £100 million for acquisitions, potentially lifting year-ten earnings by 20% and the total return to around 750%.

Ultimately, this projection is bullish in assuming management sustains its historical skill without setbacks. Yet, it remains realistic – and arguments suggest Kitwave could outperform these estimates. If so, the company could multiply investors’ capital by more than tenfold over the next decade.

Fund my insights

Final Point

The author of this Wonder Stocks piece is Jamie Ward. As at time of publishing, he does not own any shares in KItwave. He is a fundamental analyst by training and presents the fundamental reasoning behind why he believes the shares offer good value. However, his purchases are made with the aid of technical analysis. He believes that the time to buy is very close.

Appendix

Appendix 1

To provide a comprehensive analysis of Kitwave, Wonder Stocks evaluated its financial performance during its periods as both a private and public company. This process presented certain challenges and necessitated specific assumptions:

• In 2020, Kitwave shifted its financial year-end from 30 April to 31 October, resulting in misaligned reporting periods during the transition. Thus, the figures used in the analysis represent an interpolation of two different accounting periods to provide a consistent picture.

• Private companies are subject to less stringent disclosure requirements than public companies. Notably, many private entities, including Kitwave (when still privately owned), adopt FRS 102 rather than IFRS 16 for lease accounting. Under FRS 102, operating leases are not capitalised, whereas IFRS 16 mandates their inclusion on the balance sheet. Given Kitwave’s significant reliance on operating leases, Wonder Stocks estimated their impact during its private phase to enable consistent comparisons with its public company financials. In other words, the pre-IPO accounts were modified by the author to how they would have looked had the company been listed the entire time.

Appendix 2

Bunzl has a long history as a listed company. It first began to pivot towards buy-and-build in the 1980s but became more focused in the 1990s. Its greatest success came whilst Michael Roney (now chairman of Next) ran the business from 2005 to 2016. It supplies a wide range of everyday essentials – like packaging, cleaning supplies, and safety equipment – to businesses across industries such as retail, healthcare, and food service. It operates in over 30 countries, sourcing products globally and delivering tailored solutions to help companies manage their supply chains efficiently.

This section on Bunzl was written prior to the April 16th profits warning.

Diploma shifted its strategy towards a "buy and build" model in 1996, when Bruce Thompson was appointed chief executive. He led the business for 21 years, delivering an exceptional track record during his tenure. Since his retirement, the company has experienced occasional boardroom turbulence, but the share price has continued to climb. Notably, Thompson’s immediate successor stepped down after just four months, before Jonny Thomson took the reins in 2020.

Today, Diploma supplies specialised technical products and services - including seals, controls, and medical equipment - to industries such as aerospace, automotive, and healthcare. Operating on a global scale, it sources and distributes niche components that help businesses maintain, improve, and optimise their operations

Appendix 3

Brad Jacobs is a renowned American businessman and serial entrepreneur with a 44-year career, creating billions in shareholder value through mergers, acquisitions, and technology-driven innovation. In 1989, he founded United Waste Systems, consolidating small waste collection firms, taking it public in 1992, and selling it in 1997 for £1.4 billion, delivering strong returns. That year, he launched United Rentals, growing it into the world’s largest equipment rental firm through acquisitions and tech optimisation – shareholders saw significant gains.

In 2011, Jacobs invested £120 million in Express-1, renaming it XPO Logistics, and via over 500 deals built it into a £16 billion-revenue logistics giant by 2021 – its stock rose over 32 times, ranking it among the Fortune 500’s top performers. He spun off GXO Logistics (£5.6 billion valuation) in 2021 and RXO (£4 billion) in 2022, boosting shareholder value further. In 2024, he founded QXO, targeting the £640 billion building products sector, raising £4 billion and acquiring Beacon Roofing for £8.8 billion in 2025, aiming for £800 million in revenue in year one.

Jacobs has led three IPOs, and completed about 500 acquisitions. His firms – United Waste Systems, United Rentals, XPO, GXO, RXO, and QXO – have generated over £44 billion in shareholder value, leveraging fragmented industries, efficient integration, and top talent.

Below is the total return chart of XPO, which he took on in 2011.

Much like Kitwave, none of Bunzl, Diploma or any of Brad Jacobs’s businesses operate in high growth, flashy industries. Rather they execute acquisitions well and work very hard on operational excellence.

Update July 2nd, 2025

A Reminder of the Bull Case

The engine for Kitwave's value creation lies in its disciplined approach to acquiring and integrating businesses within its sector, coupled with a relentless focus on operational excellence, achieving economies of scale, and extracting synergies. This strategy has consistently driven growth and shareholder value. We firmly believe this growth engine remains intact, poised to deliver long-term returns.

However, the recent release of Kitwave's Interim Results for the period to October 31st 2025 saw the shares fall by more than 20%. This sharp reaction can be attributed to a confluence of factors, primarily: higher National Insurance costs impacting both Kitwave directly and, in turn, some of its customers who are subsequently spending less; and increased investment costs associated with ramping up their new South West distribution hub.

A Deeper Look at the Interims: Strengths Amidst Challenges

While the market's reaction was swift and negative, a closer look at the interim results reveals considerable underlying strength and progress. Kitwave reported continued top-line growth, with like-for-like revenues showing progress (3.1%). The business demonstrated its ability to enhance profitability, showing an improved gross margin and strong growth in adjusted operating profit. This highlights their successful integration efforts, particularly with Creed Foodservice, which is ahead of schedule.

Furthermore, Kitwave displayed robust financial health through significant cash generation from operating activities, underpinning a healthy pre-tax operational cash conversion. Their commitment to financial prudence is evident in a reducing debt profile, with leverage now sitting at a comfortable level on a bank covenant basis. Reflecting confidence in the business, the Board also declared an increased interim dividend. Operationally, the seamless integration of Total Foodservice with Miller Foodservice is also progressing well, reinforcing their ambition to build a national, integrated delivery network.

Acknowledging the Short-Term Headwinds

The headwinds that prompted the share price adjustment are indeed noteworthy. Kitwave proactively incurred additional operational investment in the new South West distribution centre. These costs, higher than initially anticipated because the complexities of transitioning multiple operations into a single, expansive hub, are expected to continue into the second half of the financial year.

The broader macroeconomic environment has also played a role. We've seen a more pronounced fragility in consumer confidence adversely affecting volumes in certain sectors, particularly in destination leisure. While overall footfall has increased, consumption has softened in some of their higher-margin, tourism-based depots. Additionally, the increase in employer National Insurance contributions represents a non-recoverable rise in the Group’s cost base. The combination of these factors has led the Directors to adjust their expectations for the Group's near-term adjusted operating profit.

Understanding Margins and Operational Gearing

A common concern among investors, particularly with businesses in the wholesale sector, often revolves around seemingly "low margins." There's a misconception that low margins equate to inherent vulnerability. However, it's crucial to understand that true vulnerability often stems from operational gearing.

Operational gearing refers to the proportion of fixed costs to variable costs within a business. A business with high operational gearing has a large proportion of fixed costs. This means that while profits can soar with increased sales, a slight dip in revenue can lead to a disproportionately large fall in profits, as those fixed costs remain regardless of sales volume.

Kitwave, despite its gross margins appearing modest, operates with a substantial proportion of variable costs, which are directly tied to the volume of goods sold. This means that if sales decline, a large chunk of Kitwave's costs also decrease, providing a natural buffer against revenue fluctuations. In contrast, a business with lower gross costs but higher fixed overheads would find a revenue downturn far more painful, as those fixed costs would eat into rapidly diminishing profits. This operational structure makes Kitwave less vulnerable to market shifts than many might initially assume, as its cost base has a higher degree of flexibility, offering resilience in challenging times.

To illustrate this point further, consider a globally successful retailer like Costco. Costco also operates on incredibly thin product margins, often just a few percentage points above their cost. Yet, it is an immensely profitable and resilient business. Both Kitwave and Costco, despite their distinct business models, demonstrate that seemingly low product margins, when combined with intelligently structured cost bases or complementary revenue models, do not equate to inherent vulnerability.

The Long-Term Story Remains Compelling

Despite these near-term challenges, Kitwave's management remains confident in its long-term outlook. The company has built an excellent platform for growth within the UK wholesale market. Its focused growth strategy, encompassing both organic expansion and strategic acquisitions, positions it well to continue delivering value for shareholders. The fundamentals of the business are strong, the strategy is clear, and management continues to execute with discipline and ambition.

The "buy and build" model is proven, with a robust track record of successful acquisitions. The high levels of cash generation and the developing national footprint, particularly in foodservice, provide an excellent platform for further complementary acquisitions. Geographic capability and scale are expected to yield further synergies and grow operating margins over the long term. Kitwave is also continuing to invest in technology, systems, and infrastructure to support organic growth, including voice-picking technology and an expanded trading platform.

Wonder Stocks Portfolio Position

It is important for our readers to note that at the time of the original bullish note in April, the Wonder Stocks portfolio did not contain any Kitwave shares. Whilst the long-term investment case was, and remains, compelling, the technical and short-term picture for the stock was uncertain. As of this update, the Wonder Stocks portfolio still does not hold Kitwave shares. We will look to incorporate Kitwave into the portfolio once the short-term and technical indicators show clearer signs of improvement, and our premium subscribers will be promptly informed when this occurs.

In conclusion, while the recent interim results highlighted some immediate challenges, they also underscored Kitwave's continued growth, improving margins, strong cash generation, and a robust balance sheet. The short-term pain from increased costs and a softer trading environment is acknowledged, but the core "buy and build" engine is healthy and continues to lay the groundwork for significant long-term value creation. For the patient investor, the ten-fold potential remains very much on the table.

Disclaimer:

The author of this Wonder Stocks piece is Jamie Ward. As at time of writing, he does not own shares in Kitwave. Unless stated otherwise, all sources of information come from Kitwave Report and Accounts, Kitwave presentations and Wonder Stocks’ analysis.

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Wonder Stocks seeks to provide a narrative argument for its investment case. Nevertheless, supporting figures and charts can be found in the Appendix.

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All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

As a stock, Brave Bison offers the full package. It is a compelling turnaround story, providing investors with exposure to a business that is delivering improved profitability. At the same time, it operates in a high-growth market, benefiting from strong industry tailwinds. Its strategy is built on a “buy and build” approach, accelerating expansion and adding further momentum. Despite these strengths, the stock remains remarkably undervalued. Adding to its appeal, Brave Bison boasts a rock-solid balance sheet and a leadership team with significant skin in the game. Combined, these factors create the potential for exceptional shareholder returns.

Brave Bison's client list includes UK retailers like Currys and Holland & Barrett, global brands such as New Balance and Asus, and high-profile sports organisations like Real Madrid and the International Cricket Council.

The company specialises in performance marketing, e-commerce solutions, social media content creation, and digital publishing. These services are delivered through four main business segments:

Brave Bison Performance

Focuses on data-driven marketing solutions, leveraging advanced digital advertising techniques such as paid media, search engine marketing, and performance-driven creative strategies to optimise campaigns for brands. This segment helps clients maximise return on ad spend across multiple digital platforms.

Brave Bison Commerce

Delivers end-to-end e-commerce solutions, including web development, digital transformation, and conversion rate optimisation, alongside integrated digital marketing to help brands stay competitive in online retail.

Brave Bison Media Network

The company’s in-house digital media business, operating a portfolio of owned and operated content channels across YouTube, Facebook, and other social platforms, reaching millions of viewers worldwide. It generates advertising revenue and branded content partnerships by leveraging audience insights and platform expertise.

Social Chain

Acquired by Brave Bison in 2023, Social Chain is a social media marketing agency specialising in influencer partnerships, viral content, and community-driven brand campaigns. It helps brands engage younger audiences through culture-driven storytelling on platforms like TikTok, Instagram, and X/Twitter. The company was founded in 2014 by Steven Bartlett, well known as a Dragon’s Den investor and host of The Diary of a CEO podcast.

On The Up

The marketing industry is full of small, poorly run businesses. Many of the most creative minds can secure big clients but struggle with business management. For Brave Bison’s directors, this presents a major opportunity. The company’s history is divided into two eras: before 2020 and since 2020 (although this may seem like it is COVID related, it is not). Before 2020, Brave Bison was mismanaged, racking up nearly £125m in losses over eight years. That changed when brothers Oliver (Oli) and Theodore (Theo) Green acquired a major stake and took control in 2020. Their leadership marks the beginning of what can be called the Green era. Oli, then 27, became Executive Chairman, focusing on driving the strategy and overseeing senior management to ensure operational excellence. Theo, then 25, took on Chief Growth Officer, driving growth through management of the sales function as well as pursuing the acquisition strategy.

Oli and Theo are sons of Michael P. Green, a very successful entrepreneur who built up, listed, and eventually sold Carlton Communications, the remnants of which exist to this day in ITV, though the name is no longer used. Through Michael’s first marriage, the Green family is linked to the Wolfson family, another set of very prominent British entrepreneurs. Together, these families form a major part of British business and contain some very talented and well-connected businesspeople. It was with his then father-in-law, Leonard Wolfson, that Michael set up the first business in 1967, Tangent Industries. Tangent are a series of businesses covering different areas of media and seemingly entirely run by his children (he has six) or other close family. Oli ran the Tangent Marketing Services business, where Theo also worked, alongside a stint in private equity. So, whilst Oli and Theo were clearly very young and bold to be muscling their way into running a business, they are well-connected and grew up surrounded by entrepreneurialism, giving them a unique network of businesspeople to help hone their business acumen.

Truly Remarkable Returns

Brave Bison appears highly undervalued. Based on management’s adjusted profitability figures (see Appendix I), the shares trade at a mid-single-digit earnings multiple when factoring in the company’s substantial cash reserves. Its position in a fast-growing sector only makes this valuation seem even more attractive. Purely as a value play with strong growth potential, Brave Bison offers the prospect of solid returns. To achieve truly exceptional gains, though, investors must take a long-term view - one that hinges on identifying and backing outstanding management teams. For this Wonder Stocks assesses six principles of excellent management across all companies:

Six Prinicples of Excellent Management

Alignment with Shareholders: The Greens took control after acquiring a fifth of the voting stock, driven by a belief that they could run the business more effectively. Above all, they are shareholders first. Their salaries are modest, significantly lower than those of the previous management six years ago. Crucially, their only variable compensation is directly linked to the share price, unlike most listed companies where incentives are often tied to financial metrics that can be manipulated.

Track Record and Experience: As directors in their early 30s, their professional experience is naturally limited by time. However, they have been immersed in media business and entrepreneurship from a young age, making them exceptionally well-connected. In the five years since taking charge, they have led multiple acquisitions and transformed the company from loss-making to profitable, despite the challenging digital media landscape of the past few years.

Operational Excellence: This is a common weakness among media companies. Creative talent in marketing and advertising often lacks strong business management skills, which can lead to poor execution and shareholder losses. While it is difficult to assess fully from the outside, Oli and Theo have emphasised the careful integration of acquisitions and the development of a tech-enabled business capable of managing increasing complexity. Such clarity in communication is often lacking in the sector.

Corporate Governance: This is one area where Brave Bison falls short, and Wonder Stocks has raised it with the company. The main concern is that Oli Green serves as both chairman and director, whereas best practice usually separates these roles. However, two key factors help offset this. First, Oli and Theo’s 20% ownership stake aligns their interests with shareholders. Second, the company’s restrained executive pay structure suggests conflicts of interest are being avoided. Additionally, Brave Bison has two strong non-executive directors with relevant expertise. Crucially, the Greens have assured Wonder Stocks that they plan to appoint a non-executive chairman and expand the board with additional independent directors, focusing on securing high-calibre appointments rather than placeholders who join boards purely for fees.

Capital Allocation: Many digital marketing businesses are not managed with value creation in mind. This presents significant opportunities for Brave Bison’s leadership to acquire companies burdened by excessive costs or structured more as “lifestyle businesses” (see Appendix II). Once integrated, these businesses can be streamlined, eliminating inefficiencies and refocusing on shareholder returns. Over the past five years, Brave Bison has completed six acquisitions and unsuccessfully pursued one transformational merger (see Appendix III). So far, these acquisitions appear well-judged and accretive to shareholder value, judging by the progression of revenue, profitability, and balance sheet strength.

Honesty and Transparency: Brave Bison excels in this area. Its accounts are clear and easy to understand, while its presentations provide a balanced view of both challenges and opportunities. Follow-up presentations maintain a consistent message, allowing investors to track progress against stated goals. Crucially, the board has shown a tendency to under-promise and overdeliver, reinforcing confidence in its execution (for additional comments, see Appendix IV).

It’s never possible to be certain that a management team has the “it factor”, but Brave Bison exhibits many of the right qualities. In the short term, its share price performance will likely be influenced by positive earnings surprises - common for a business that tends to under-promise - and an upward re-rating. Over the longer term, returns will depend on growth and management’s ability to execute, with industry tailwinds and plentiful acquisition targets tilting the odds in its favour.

Financials

With a relatively short history - much of which was spent fixing the problems of the pre-Green era - there are limited conclusions to be drawn about Brave Bison’s long-term trajectory. However, several key observations stand out:

• Since the Greens took over, Brave Bison has transitioned from a loss-making business with revenue of less than £4m to generating nearly £4m in net income on revenue of £20.8m (see Appendix V for details).

• Operating as a publicly listed company costs approximately £400k per year. This figure remains stable as a company grows, meaning that at current earnings, PLC costs account for around 10% of profits and 2% of revenue. As revenue grows, this proportion naturally declines, leading to improved operating margins.

• Accounting rules can distort a company’s true underlying earnings. Brave Bison’s acquisitions provide a key example; in one case, it acquired a customer relationship that is now its largest client. Accounting standards require that the amount paid above asset value be recorded as “Customer Relationships” on the balance sheet (Note 13, 2023 accounts) and amortised annually as a non-cash expense. However, since the acquisition, Brave Bison has expanded services to this client, generating greater revenue and profit. While the customer relationship has increased in value, accounting rules force Brave Bison to report an annual, non-cash cost - an expense that is best ignored when assessing true profitability.

• Brave Bison is arguably still subscale. Businesses of this type typically achieve operating margins of around 30%, while Brave Bison has guided that 25% is a more realistic target. Both figures are well above current levels, but given the management team’s track record of under-promising, a 25% margin should be viewed as highly achievable.

How Much Can Shareholders Make?

Value

Brave Bison isn’t just a digital advertising agency - it’s more like a platform run by two entrepreneurs to create value for shareholders. As of now, it has about £6 million in cash and makes around £4 million in operating profit each year. Thanks to tax losses from before the Green era, it pays less tax right now, but it’s wise to expect normal taxes to kick in later.

Public market valuations don’t align with private markets, where similar companies often trade at much higher multiples. Comparing Brave Bison to other publicly listed businesses isn’t very useful, as many of them seem undervalued compared to historical norms. In a more typical market, a company like Brave Bison would likely be valued at an EV/EBIT multiple (see the link for details on EV/EBIT) of 10x to 15x.

If Brave Bison boosts its operating margins to 25%, as management predicts, its EBIT (earnings before interest and taxes) could hit £5.2 million. If margins climb to 30%, a common industry standard, EBIT could reach £6.2 million. Plus, if the company were bought out, the acquirer could cut public company costs (around £400k annually), boosting profitability further. Depending on the margin scenario, an acquirer might value Brave Bison’s EBIT between £4.4 million and £6.6 million.

The chart below illustrates this earnings bridge, showing how these factors could lift profitability.

This points to significant growth potential from its February 2025 valuation. Even if profits stay at 2023 levels, a return to normal market multiples could mean a 35% increase in value. But if margins improve and the company trades at a higher multiple, returns could range from 100% to 200%.

Growth

Brave Bison works in a growing industry, though it’s one that goes through ups and downs. Recent years have been tough, but the company should still grow naturally. On top of that, buying or merging with other businesses should boost growth even more. These moves let Brave Bison cut costs, streamline operations, and sell services to more clients. The Greens, who run the company, have already proven they’re good at spotting and pulling off deals that add value.

They tried to merge with Mission Group, a struggling company with big revenue but weak profits. Mission Group had signs of a “lifestyle business” - fancy offices but thin margins. If the deal had worked, the Greens could have saved a lot of money and made both companies’ shareholders better off. Sadly, Mission Group sold its best piece since then, so a future deal seems unlikely. Still, that attempt shows Brave Bison’s potential to get much bigger.

Instead of seeing it as a fixed business, think of Brave Bison as a launchpad for creating big shareholder value through smart deals and expansion. It’s hard to predict exactly what Oli and Theo will achieve, but a solid long-term plan could multiply the company’s worth over time. Right now, Brave Bison is valued at about £35 million. It’s easy to imagine it hitting £1 billion one day - and, whilst some of that will doubtless occur with issued equity, it will make shareholders a lot of money along the way.

Brave Bison is Very Compelling

Investments are often classified as either “value” or “growth,” but Brave Bison embodies both. It is undeniably cheap, particularly given the strong growth achieved during the Green era and the broader expansion of its industry. More importantly, the business is led by two highly astute, well-connected, and properly aligned directors. While patience will be required to realise the full potential of this investment, Wonder Stocks expects that patience to be richly rewarded.

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Appendix

Appendix I: Brave Bison Adjustments to Profitability

The chart below provides a breakdown of Brave Bison’s adjustments to profitability, reflecting the impact of its turnaround strategy and multiple acquisitions.

• Green bars indicate adjustments that are clearly justified.

• Orange bars represent adjustments that are probably appropriate.

• Red bars highlight items that should not be adjusted.

Impairments and acquired asset amortisation are accounting entries, not economic realities. These are non-cash charges, and in some cases - such as the amortisation related to Brave Bison’s largest client - they may even give the opposite view of the true earnings picture.

The equity-settled charge relates to the assumed cost of fulfilling the company’s long-term incentive plan (LTIP), which only vests if the share price exceeds 3p. Wonder Stocks’ analysis already assumes full vesting of these incentives, incorporating them into calculations via a diluted share count. Including the LTIP charge in profitability calculations would therefore result in double counting.

Acquisition costs are deal-specific. As a serial acquirer, Brave Bison incurs these, but each is a one-off. If the company were to stop acquiring businesses, these costs would disappear while the existing business continues to operate profitably.

Restructuring costs should be evaluated carefully. While one-off restructuring charges are generally non-recurring, Brave Bison’s acquisition-led strategy means some level of restructuring will always occur as it integrates new businesses and removes inefficiencies. However, a significant and unknowable portion of these costs relates directly to acquisitions rather than the underlying business.

Depreciation is a standard expense and should always be included in costs. However, it’s worth noting that Brave Bison operates with a very asset-light business model.

Appendix II: Lifestyle Businesses

Many marketing firms operate as lifestyle businesses, benefiting owner-directors over shareholders. A lifestyle business prioritises steady income and personal freedom over aggressive scaling, often resulting in lower reinvestment, slower growth, and misaligned incentives for external shareholders. While excellent for founders seeking financial independence, these businesses can be poor investments if they lack reinvestment, innovation, or shareholder alignment.

Appendix III: History of Acquisitions

Greenlight Digital: Acquired in 2021, Greenlight Digital is a digital marketing agency specialising in search engine optimisation and e-commerce solutions. This acquisition bolstered Brave Bison's performance marketing services, enabling the company to offer a more comprehensive suite of digital solutions to its clients.

Greenlight Commerce: Acquired alongside Greenlight Digital in 2021, Greenlight Commerce specialises in e-commerce platform development. This acquisition complemented Brave Bison's existing services, providing clients with robust e-commerce solutions.

Best Response Media: Also acquired in 2021, Best Response Media is an e-commerce agency focused on Magento platform solutions. This addition strengthened Brave Bison's e-commerce capabilities, allowing the company to deliver enhanced online retail experiences for its clients.

Southpaw: Acquired in 2022, Southpaw is a creative agency known for its work in brand strategy and content creation. This acquisition expanded Brave Bison's creative services, enabling the company to offer end-to-end marketing solutions from strategy to execution.

Social Chain: Acquired in early 2023, Social Chain is a social media advertising agency co-founded by entrepreneur Steven Bartlett. This acquisition enhanced Brave Bison's capabilities in social media marketing and broadened its client base to include prominent brands such as TikTok and Amazon Prime Video.

Engage Digital Partners: In December 2024, Brave Bison announced the acquisition of Engage Digital Partners, a sports marketing agency.

In addition to these acquisitions, Brave Bison attempted a merger with The Mission Group in mid-2024. The rationale behind this move was to create a more substantial entity capable of competing more effectively in the digital marketing and advertising industry. Brave Bison raised its all-share offer for The Mission Group from £27m to £32.3m - a 55% premium. The Mission Group appears to operate more like a lifestyle business, with high costs and generously compensated directors. Brave Bison believed it could make the business more efficient to the benefit of shareholders. However, The Mission Group's board unanimously rejected both proposals, describing them as "opportunistic" and asserting that they undervalued the company's prospects. Following these rejections and a lack of constructive engagement, Brave Bison decided to abandon its takeover efforts in June 2024.

Appendix IV: Governance and Related-Party Transactions

One potential governance concern with Brave Bison is the Greens’ continued involvement with Tangent Marketing Services and The Printed Group. While full disclosures are available in Note 27 of the Brave Bison accounts, a key summary is that the company actually benefits financially from these relationships rather than the other way around.

The majority of these transactions consist of Brave Bison billing Tangent and The Printed Group for shared central expenses, such as office space. In 2023, Brave Bison received £330k from these entities while incurring £67k in charges, resulting in a net gain of £263k. All expenses are independently reviewed, ensuring transparency and mitigating conflicts.

Oli and Theo Green have also made it clear that their reputation is their priority. Owning 100% of Tangent and 20% of Brave Bison, they argue it’s illogical to jeopardise credibility for small sums.

Appendix V: Notes on Financials

The income statement lists Revenue and Gross Profit, with the difference being Cost of Sales. However, it's more insightful to view Gross Profit as Brave Bison’s true revenue.

The reason? Media buying services. Brave Bison acts as an intermediary for media buying, handling client spending without charging a direct fee. This artificially inflates Revenue and Cost of Sales, without generating profit. This means a significant portion of reported revenue isn’t actually profit-generating - it’s just an accounting technicality.

For example, in 2023, Brave Bison reported:

• Revenue: £35.7m

• Cost of Sales: £14.8m

• Gross Profit: £20.9m

That £14.8m in Cost of Sales was purely a pass-through amount. Because of this, Wonder Stocks focuses on Gross Profit as the company’s true revenue figure, ignoring the inflated Revenue line.

Disclaimer:

The author of this Wonder Stocks piece is Jamie Ward. As at time of writing, he owns shares in Brave Bison. Unless stated otherwise, all sources of information come from Brave Bison Report and Accounts, Brave Bison presentations, meetings with Brave Bison and Wonder Stocks’ analysis.

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With a strong brand, loyal customer base, and improving market conditions, this stock has the potential to re-rate significantly as growth returns. Management has taken proactive steps to navigate the post-COVID challenges, ensuring that operational efficiencies and margins are set to improve. As revenue recovers and sentiment shifts, the stock could deliver between 350% and 500% in capital return alone. With limited analyst coverage and the stock still under the radar, now may be an opportune moment to get in before the market fully recognizes its turnaround potential.

Note: Wonder Stocks seeks to provide a narrative argument for its investment case. Nevertheless, supporting figures and charts can be found in the appendix.

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Important Legal Disclaimer:

All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

A Diamond in the Rough

Focusrite is a UK-based leader in audio technology company that was founded in 1985. It is a global business known for its high-quality audio interfaces and professional music equipment. Initially focused on high-end studio gear, the company broadened its reach over the years, catering to home recording enthusiasts, podcasters, and musicians at all levels. The company listed on the AIM market of the London Stock Exchange in 2014, providing it with the capital and strategic flexibility to accelerate its growth. Since then, Focusrite has pursued an expansion strategy, combining organic growth with a series of acquisitions to strengthen its market position and diversify its product offerings.

It operates several brands that cover a wide range of products but can be simplified into two broad categories; Production and Reproduction. Production is roughly three quarters of the business and refers to the process of creating, recording and manipulating sounds e.g., a musician in a music studio recording a new song. Reproduction, the final quarter of the business means the playback and delivery of sound to an audience, e.g., that same musician playing a concert at a venue.

Through a combination of internal development and acquisition, Focusrite has built up a suite of products that cater to the enthusiast market all the way to professionals. There is a considerable number of alternative products but Focusrite has a good and long reputation for producing well made, competitively-priced products and has generated considerable brand value.

A key pillar of Focusrite’s strategy as a listed company has been acquisitions, which have helped it diversify its revenue streams and strengthen its market position. It made its first acquisition in 2019 of ADAM Audio, a German manufacturer of professional studio monitors. The company followed this up with the acquisition of Martin Audio, a well-established name in live sound systems, further diversifying its business into the live music and events sector. Each of its acquisitions were made to help broaden the product offerings. In total, the company has spent c. £85m on six acquisitions in the last six years.

During the COVID-19 pandemic, Focusrite experienced an unprecedented surge in demand as lockdowns drove a boom in home recording, podcasting, and content creation. With musicians unable to perform live and many people exploring new creative hobbies, sales of audio interfaces, microphones, and studio monitors skyrocketed. This led to record revenues and profitability, as the company struggled to keep up with the surge in orders. The pandemic created a perfect storm of demand for Focusrite’s products, pushing its stock price significantly higher. However, as the world reopened, the demand spike inevitably faded. Many customers who had purchased recording equipment during the pandemic no longer needed to upgrade, leading to a post-COVID destocking period across the industry. Retailers and distributors, having overstocked during the boom, cut back on new orders, which hit Focusrite’s sales and led to a sharp correction in its share price.

An IPO Gem – 2014 to 2019

In the five years from its stock market listing to the beginning of the COVID-19 pandemic, Focusrite performed exceptionally well. Revenue, gross profit, net income, shareholders’ equity, dividends, and even net cash all rose significantly. The company rewarded its shareholders handsomely, with the stock price quadrupling over this period. All of this growth was achieved organically, but in 2019, the company made its first acquisition aimed at diversifying its business across the audio production and reproduction markets.

The acquisition of ADAM Audio was expensive, with Focusrite paying 18x earnings. However, at the time, Focusrite itself was trading on a PE of around 25x, making ADAM relatively cheaper by comparison. Shortly after, Focusrite acquired Martin Audio, a private equity-backed business making high-performance loudspeakers used in concerts. The timing was unfortunate, as Martin Audio is almost entirely reliant on live music and theatre. The acquisition was completed just three months before the first lockdown. Having paid around £35m for the business in December 2019, Focusrite wrote down its investment by more than £10m within nine months as demand collapsed.

A Share Price Rock Star – 2019 to 2021

Despite the initial struggles with Martin Audio, Focusrite’s core business saw enormous growth during the pandemic. With live music and theatre at a standstill, a surge in content creation drove unprecedented demand for audio production products. In the first year of the pandemic, Focusrite’s revenue rose 23% organically—a massive jump for a business accustomed to mid-single-digit growth. As lockdowns continued, this growth extended into 2021, with another year of 20%+ organic growth. Organic growth along with the acquisitions meant that revenues more than doubled, and net income nearly tripled. The share price surged, rising 200% in just 18 months to an all-time high of 1800p; a near 1200% return in less than eight years.

A Tarnished Gem – 2021 to Present

It’s easy to criticize the board for over-ordering during the demand surge, as excess inventory is a key issue today. However, during the pandemic, semiconductor shortages forced companies to secure as much supply as possible whenever it became available. Looking back from 2025, it’s clear the demand spike was temporary, but at the time, the board was navigating uncharted territory, making decisions based more on necessity than long-term strategy.

As is often the case, investors had extrapolated unsustainable trends into the future. The pandemic-fuelled surge in demand was unlikely to last and thus the very high share price was unsustainable. By the end of 2021, Focusrite had stocked up to meet demand, only to find that demand had sharply declined.

The result was a collapse in sales, shrinking operating margins, and a weakened balance sheet. Revenue declines led to fixed costs eating into profitability, while the shift from remote work back to normal business operations meant increased travel and trade show expenses. Inventory levels remained high, tying up capital in stock that customers were no longer clamouring to buy. As returns on capital declined sharply, Focusrite’s share price plummeted nearly 90% from its peak, wiping out all its pandemic-era gains—and then some.

Polishing the Gem – the Future

The company’s turnaround strategy is now well underway. Focusrite is in a destocking cycle, working to normalise inventory levels while positioning itself for future growth. Since the last pre-pandemic year in 2019, the company has completed six acquisitions, spending nearly £85m. It has invested £62m in internal development, largely for new product R&D, while also seeing working capital rise by £28m—a 150% increase from 2019 levels. Despite going through challenges, Focusrite has remained focused on innovation. The number of staff employed in product development has risen by 50% since the start of the pandemic. In the last twelve months alone, 35 new products have been launched. Even though it is going through difficulties, the company’s board is clearly still focused on the future.

During the pandemic, investors overestimated the long-term impact of a temporary surge. Now, they are making the opposite mistake, assuming the current struggles are permanent. History suggests otherwise. The last time business conditions were ‘normal’ in 2019, Focusrite shares traded around 600p. Today, despite it being a larger and more diversified company, the stock trades at a fraction of that value. If the company successfully normalises operations, an investment in Focusrite could be enormously profitable.

How Much Can Shareholders Make?

A return of 350% is suggested as the bullish case though one that doesn’t include outlandish assumptions. The timing of the return is uncertain and likely to be measured in several years therefore neither a return from dividends nor a compound average growth rate are provided. For reference however, at the time of writing, the dividend generates 3.5% and is forecast to rise c. 5% per annum hereon.

In order to generate the return, the following is assumed:

• Working capital returns to its old levels for the size of the business. This would imply a reduction of £9m, which would lead to a similar sized increase in the net cash position.

• Return on capital employed, taken as net operating profit after tax over capital employed (NOPAT ROCE), returns to the low end of its historic, pre-pandemic range. Historically, this measure ranged from 42% to 48.5%. A conservative 40% is assumed.

• Using the most recent trailing adjusted EBIT, the shares trade on an EV/EBIT of approximately 8x. During the pre-pandemic era, the shares traded in a range of 12.5x EV/EBIT to 23x EV/EBIT. Wonder Stocks conservatively estimates a return to the low valuation of 12.5x.

If working capital normalises, return on capital employed recovers to pre-pandemic levels, and the company returns to a low-end valuation of 12.5x EV/EBIT, a share price of 828p is achievable. This is still well below the all-time high but represents a significant upside. If returns and valuation move toward mid-range levels, the share price could exceed 1180p, delivering a 530% return before dividends. The market misjudged Focusrite at 1800p in 2021, and Wonder Stocks estimates it is misjudging it again today at 10% of that level.

In February 2025, the shares of Focusrite are valued on all time low levels of profitability combined with all time low valuation multiples. Should these normalise then big returns are on offer.

The main area that the company could disappoint is returning to old levels of return on capital employed. At time of writing, NOPAT ROCE (see Appendix) sits at around 17%; less than half of the average for the pre-pandemic years. It is feasible that the old levels of profitability are unattainable. Prior to 2024, the lowest recorded NOPAT ROCE was in 2018 at 42%. If we assume a conservative halving of this as a sustainable level together with a 12.5x EV/EBIT, the fair value drops to 432p, representing a capital return of 132%.

Final Point

The author of this Wonder Stocks piece is Jamie Ward. As at time of publishing, he does not own any shares in Focusrite. He is a fundamental analyst by training and presents the fundamental reasoning behind why he believes the shares offer good value. However, his purchases are made with the aid of technical analysis. He believes that the time to buy is very close.

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Appendix

Sales Growth

In the ‘normal’ period before the pandemic, the sales rose by an average of 16% per annum. In the two years of the pandemic (2020 and 2021), the growth ballooned, averaging 44% per annum. Since then, the sales have declined with average growth rate for the most recent three years being -8%.

The Violent Swings in Working Capital

Having been relatively steady in the pre-pandemic era, the working capital collapsed as the company grappled with an unprecedented surge in demand. Since then, demand has fallen sharply but pandemic-era investments have now appeared on the balance sheet leading to extraordinarily high levels of working capital.

Return on Capital Employed

Having been fairly steady before the pandemic, return on capital exploded higher in 2020 and 2021. It has since declined to all-time lows. Investors were wrong to assume 2020 and 2021 were sustainable and paid a heavy price. Wonder Stocks believes that they are wrong too in 2025 to assume that the historically low levels are normal also.

Historic Valuation

The EV/EBIT valuation for Focusrite is below (source ShareScope). For most of its existence, it has traded at a level between 12.5x and 23x. The valuation moved higher during the pandemic and currently shows as high because of heavy, one-off losses last year. Should the earnings and share price persist, the shares would trade on an EV/EBIT of around 7x by 2027.

Disclaimer:

The author of this Wonder Stocks piece is Jamie Ward. As at time of writing, he didnot own shares in Focusrite - bought bought on June 3rd of 2025. Unless stated otherwise, all sources of information come from Focusrite Report and Accounts, Focusrite presentations and Wonder Stocks’ analysis.

Note: Wonder Stocks seeks to provide a narrative argument for its investment case. Nevertheless, figures and charts can be found in the appendix.

A Super Cheap Growth Story

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Important Legal Disclaimer:

All "Wonder Stocks Deep Dives" represent the personal opinion of the author at the time of publication. These opinions may change over time without prior notice.

The author may or may not hold positions in the securities mentioned within these deep dives.

Please be aware that Wonder Stocks is not regulated by any UK authority. We make no guarantees regarding investment performance, and Wonder Stocks accepts no liability for any losses incurred as a result of acting on information presented here.

This blog is intended for sophisticated investors only. Wonder Stocks strongly recommends speaking to a qualified financial advisor before making any investment decisions.

For a full disclaimer, click here.

DCC has made investors a lot of money over the years. There is no reason to suspect that it can’t do in the future. Considering its historically high rate of value-creation, the shares have never looked particularly expensive. Since 2018 however, a combination of a refocused strategy and a COVID-induced temporarily reduced growth rate, has left the shares downright cheap. In 2022 the management unveiled a new strategy that amongst other things implied a more than doubling of profits by the end of the decade. Since then, updates to this strategy have been better than earlier guidance. In early 2025, with the shares around 5400p, an argument can be made that the shares could deliver 250% over the next five years. Moreover, most probably the good times would continue beyond there. This gives DCC, the prospect of delivering a multi-bagger for shareholders.

The business has been listed since 1994. In its first 25 years, it delivered c. 6,500% for those investors patient enough to hold on. It did so through a repeatable and logical investment process. Wonder Stocks believes that DCC can continue to make very attractive returns. But better still, with the shares trading at an historically cheap level, these attractive returns could be supercharged. By taking DCC’s own, probably conservative, forecasts for the year 2030 and making a few modest assumptions one can generate a return of c. 250% over the next five years. These assumptions include; similar rate of acquisitions to its history, a return to a more normal valuation, the sale of the Technology and Healthcare businesses at a modest multiple, and the continuation of the dividend.

What Is It?

DCC is a buy and build business. It makes money by buying small businesses and investing in them for growth. The key to this strategy is that it pays a low price for the businesses that it acquires and integrates them with care. There are many success stories in buy and build and they can operate in numerous different sectors (Wonder Stocks highly recommends reading Brad Jacobs new book on this topic – How to Make a Few Billion Dollars). The attraction for investors is that they are simple to understand although execution requires a sound process and discipline. DCC has comprehensively demonstrated the soundness of its process and its commitment to discipline over the years. It has completed nearly 300 acquisitions in the last thirty years.

DCC was founded as the Development Capital Corporation by Jim Flavin in Ireland in 1976 and was Ireland’s first venture capital business. The mission was to provide capital to unlisted growing companies and provide them business with development expertise to help fuel growth. It operated as a private business for 18 years before listing in the UK in 1994. In 1990 the company transitioned from its venture capital type investing to become a business operator. It was at that point that it officially became known as DCC.

In 1990, the company began to dispose of its investments where it was a mere shareholder rather than an operator. Over the next four years, the company was rationalised down to four core areas, Energy, Technology, Environmental and Food. Energy was the largest and was mainly involved in domestic fuel distribution and the operation of petrol stations.

1994 to 2018: Gigantic Returns

This section can be skipped for those wanting to understand the investment case without knowledge of the history. Ultimately however the returns were driven during this period.

By 1994 the company was fully an operator rather than a mere investor. Still, it retained the strategy to acquire smaller businesses with the potential for growth. In that sense it morphed into a buy and build business. A key benefit is that being a listed company would lower its cost of capital. That is to say that as a listed company, DCC could raise additional capital more cheaply. This created a larger gulf between DCC’s cost of capital and acquiree businesses, which improves DCC’s negotiating position and gives an easier route to value creation.

The four business units at the time of listing expanded to five in 1998 with the entry into the Healthcare market. The common theme across the divisions is that DCC was providing a service to third parties in production and/or distribution of products. For the next ten years, the company continued to acquire businesses for attractive valuations and integrate them into the one of the five divisions. However, much of the capital investment was going towards the Energy business.

In 2008, the founder and CEO, Jim Flavin, retired. He had a successful 32-year tenure at the business, although not one without controversy (see Fyffes Controversy in the Appendix below). During the previous fourteen years, the net asset value per share had increased by 1,000%, whilst paying a modest but progressive dividend. His successor was Tommy Breen, who had been with the company for 23 years at the time, with the previous eight years as a board member as Chief Operating Officer.

Mr Breen then changed to CEO for nine years before retiring at 62 years old in 2017. He was replaced by Donal Murphy, who remains CEO. He started working for the company in 1998 at the age of 33 and had spent the eleven years prior to his current appointment as managing director of DCC Energy; the largest part of the group. He will be 60 years old in May 2025. Overall, in its near 50-year history, DCC has had only three CEOs, all of which could be described as DCC-lifers.

During Mr Breen’s tenure, the company focused on a smaller number of sectors where the group had a strategic advantage. This led to the disposal of the Food business unit in 2014 and the Environmental business unit in 2017. Mr Murphy came from the Energy business unit and so has focused on this during his tenure. In the eyes of many investors, and possibly the market given the current valuation, this is where the business began to hit problems.

2018 to 2022: Why is DCC Cheap?

This section shouldn’t be skipped because it explains why it is cheap.

In 2017, the group entered the large US LPG (Liquefied Petroleum Gas) delivery market with the acquisition of Retail West (since renamed DCC Propane). This was supposed to be the start of a new investment in consolidating a large market. It coincided with a step change in acquisition spend with more than £900m spent in the previous twelve months.

At the time, management stated that the company needed more capital to exploit the tremendous opportunity they believed was in US LPG. In Q4 of 2018 there was an equity placing of 10% of the share capital. This raised over £400m in additional funds. What followed was a period of disappointment. Instead of making several acquisitions in US LPG, the company found it difficult to close transactions as valuations demanded by sellers were consistently too high. This meant far less was invested in new businesses in the following 18 months than had been hoped. By the end of that 18-month period it was March 2020 and the COVID-19 pandemic radically altered priorities.

Whilst it had proved tricky to close acquisitions in 2019, by 2020 it had become very difficult indeed. Although, there were acquisitions completed through the pandemic, these were mainly ones where the process had been started before the pandemic. The result was that organic growth had slowed because of COVID-19, acquisition growth had also slowed because of fewer deals being closed and margins were under-pressure from COVID induced challenges. Having reached a share price in 2019 of 7500p, the shares have consistently declined since. The company is bigger and more profitable than in 2019 yet the shares are much lower. Even conservative assumptions about the future imply that earnings could increase substantially.

2022 to Present: Will It Stay Cheap?

In 2022, the management held a capital markets day where it presented a change in strategy. The day was titled ‘Leading With Energy’. The company stated that its focus on gas and recent investments in renewable energies was providing a solution to the decarbonisation problem faced by its customers. As a strategy, it had aims for what the company will look like in 2030 as well as 2050 and the likely pathway to those years. Essentially, it was a demonstration of how DCC Energy would exploit the opportunities that are coming about through the Net Zero agenda.

Leading With Energy

DCC Energy operates in the lower carbon areas of the energy market like natural gas. Historically the business has used this position to help customers transition towards lower carbon energy as they grapple with tightening environmental regulation. In 2022 management made explicit their goal to alter DCC Energy into a business with the aim of exploiting the trend towards Net Zero.

To that end, recent acquisitions and internal investments have been towards providing multi-energy solutions that emphasise installation and maintenance of renewal energy. The division is internally separated into two sub-divisions, Energy Solutions and Mobility. Energy Solutions leverages the existing customer relationships to reduce the complexity of transitioning to lower carbon energy. This service is offered to both commercial and domestic customers. Mobility provides energy to vehicles via its fuel stations. This includes EV charging but also fuel services to hauliers, which remain reliant on carbon fuels.

In practice this doesn’t represent a particularly big shift in the business but rather alters the course slightly. Below is a summary of how the service offering is changing compared to pre-2022.

As is always the case for buy and build businesses, the key to value creation is buying businesses that trade on a lower multiple to the acquirer (DCC) and improving them. This is what DCC has achieved masterfully over the decades. Despite the challenges, in the five years prior to the 2022 strategy change, the Energy business had increased operating profits by 45% with returns on capital improving from 16.5% to 18.5%.

DCC has a track record of presenting a very conservative outlook to the market and regularly beating it. This is something seen in the very best managed business like Next PLC, which is well known for the practice. It is with this knowledge that the 2030 projections and subsequent updates should be considered. Using just the existing businesses (i.e., not including any further acquisitions), management imply that the operating profit will double between 2022 and 2030. This would represent a compound average growth rate (CAGR) of 9%. Wonder Stocks believes this is a very credible target growth rate given a. the historic rate of growth and b. Wonder Stocks’ opinion that DCC is currently generating unusually low returns. Adding the likely dividend, which at time of writing is yielding 3.6% then there would be a 12.6% CAGR return on offer. However, in a typical year, the amount spent on acquisitions is roughly double that of the amount returned via dividends.

Should the company cease acquisitions, then net debt would be wiped out in c. three years. In this unlikely scenario, by 2030, the company would be able to return approximately one third of the market capitalisation in capital. Most probably however, this excess capital will be invested in new acquisitions, which should further boost 2030 profitability. Assuming c. £1.5b in acquisition by 2030 (in line with the run rate) and historic returns on invested capital, operating profits would be c. 20% to 25% higher than without acquisitions.

Actions in 2024

In 2024, DCC updated the market on its 2022 plan. The main takeaway was that operating profits would be approximately 4% higher than previously guided. This is a clear example where DCC has proved to be conservative because the group beat its projections.

During its history as a listed business, DCC has traded on an EV/EBIT of around 14x. Considering the rate of value-creation this is very modest. As a result of the aforementioned issues in the period 2018 to 2022, this valuation had reduced to 11x by the time of the Leading With Energy update. One assumes that internally there was hope the strategy would reinvigorate the valuation. Yet instead, the valuation continued to drift ever lower so that by the time of the 2024 strategy update, it was trading around 9x, having briefly gone as low as 8x during 2023.

This valuation is far too low. Buy and build business’ primary sources of value-generation are buying companies that are cheaper than their own stock and improving them. DCC is adept at improving acquired businesses but its valuation is too low for the first part. Late in 2024, management has begun to take even greater actions to address this problem. In November, it was announced that the Healthcare business unit is being sold in 2025 and the Technology business unit will be sold thereafter. Both of these businesses will be very probably sold for more than DCC’s current valuation and therefore, their effect would be to make DCC Energy even cheaper. I.e., selling two businesses worth 25% of profits for more than the group valuation, will lead the remaining 75% to be cheaper all else equal.

Finally, with this announcement, the market reacted positively. On the day, the shares leapt 20%, though have since drifted back to trade around 12% higher than before the announcement. The intention is to return the capital from the business disposals to shareholders. The tacit statement therefore is that the company is cash generative enough to fund the energy investments without recourse to further cash. Logically, given the low valuation, this capital return will be enacted via a share buyback rather than special dividends.

How Much Can Shareholders Make?

It is stated at the start that 250% is available over the next five years, which represents 29% CAGR. For those not numerically inclined, this should be considered the bullish case. However, it should be noted that value creation should continue well beyond 2030 implying 250% would merely be the start. For the more numerically inclined, the assumptions are set out below.

In order to generate a 250% total return the following is assumed:

• Valuation as measured by EV/EBIT returns to the long run average of 14x from c. 9x today.

• The business generates 9% growth per annum organically in line with company announcements.

• The business generates 4% growth per annum from acquisitions in line with historic rates of growth.

• Acquisitions cost the entirety of free cash flow after dividends but no more leaving net debt static. I.e., no more debt is issued nor repaid in pursuit of acquisitions. This is not necessarily accurate, but its accuracy is immaterial to the end outcome. As an assumption it exists to aid in generating a return profile.

• The business generates a 3.6% dividend yield, which is reinvested.

• The company completes share buybacks totalling c. 22% of the market capitalisation through the disposal of Healthcare and Technology businesses. This may prove to be a low number and therefore there is further upside should it prove conservative.

Using these assumptions, the terminal market capitalisation would be c. £12.5b compared to £5.4b at time of writing. The share count would lower 22%, increasing the per share value by 28%. Together, this would represent a total return of 200% or 24.5% CAGR. An assumed dividend rate commensurate with current rate reinvested, increases the CAGR to c. 29%. This totals to 257%.

As stated, this should be considered a bull case but should be also considered feasible. The most likely of the assumptions to miss would be the valuation returning to its long run average. Assuming the valuation returned to a more conservative 11x then the five-year total return drops to 170% or a CAGR of 22%.

Overall, DCC represents a rare investment. That is one that is cheap and has a credible strategy to growth. The difficulties the business went through were partly self-inflicted and partly because of the COVID-19 pandemic. The management are adept at generating good value for shareholders having done so for decades. With the shares so lowly valued there is tremendous margin of safety in an investment in DCC, which could also provide a bumper return.

Fund my insights

Appendix

Financial Information

Note about DCC Rerport and Accounts; DCC switched from reporting in euros to pounds in 2014.

Record of Valuation Creation

In total, DCC grew its per share net asset value by 461% between 2006 and 2024. This is equivalent to 10% compound average growth rate.

Profitable Growth

NOPAT ROIC (Net Operating Profit after Tax return over Invested Capital) is a proxy for free cash flow return on capital. It is a good indication of the profitbaility of the acquisitions that the company. Hstorically it has been in the range of 12% to 14%. However during the the period from 2018 it has been in decline. One bullish case for the stock is that the pre-2018 period was more normal and the period since 2018 is an aberation. In order to hit the 2030 targets, the NOPAT ROIC would have to return to c. 12%, in line with the historic levels.

The Importance of Acquisitions

The three main uses of cash are dividends, capital expenditure and acquisitions. Dividends represents returns to shareholders, capital expenditure represents maintenance of existing operations as well as organic growth, and acquisitions represent acquired growth. Acquisitions averages c. 50% of the use of cash, dividends are c. 30% and capital expenditure is c. 20%. Of the 20% on capital expenditure, Wonder Stocks estimates c. 1/3 is for expansion and generates growth and 2/3 is for maintenance of the existing business. DCC is very cash generative.

Earnings and Dividends

Over the last eighteen years the company has grown earnings per share by 189%, which represents a compound average growth rate of 6%. Dividends have grown over the same period by 440%, which represents a compound average growth rate of 10%. This disparity in growth has caused the dividend cover to have fallen from 3.5x to 1.8x over the period. However as can be observed in the NOPAT ROIC chart above, the company has seen its returns on capital decline since the problems of 2018 to 2022. Should profitability return to old levels as implied by the company itself, then earnings would be c. 35% higher and total earnings growth over the period would be c. 290%.

Historic Valuation

The EV/EBIT valuation for DCC is below (source ShareScope). For most of its existence, it has traded at a level between 11x and 18x. The two exceptions are during and immediately after the Global Financial Crisis (GFC) around 2008, and today. The chart includes analyst forecasts for these years and up to March 2027. At which time, the EV/EBIT will be c. 8x. Using DCC guidance and Wonder Stocks internal analysis, the EV/EBIT will drop to around 5.5x by 2030.

The Fyffes Controversy

Fyffes is a fresh fruit produce company in Ireland. In the 1990s until early 2000, DCC owned just over 10% of Fyffes and Jim Flavin, the then CEO and chairman of DCC sat on the board of Fyffes. Allegedly, Mr Flavin was made aware of poor profits at Fyffes in early 2000 ahead of it becoming public information and arranged for DCC to dispose of its stake in Fyffes. The allegation was that Mr Flavin directed DCC to act on material non-public information (commonly known as insider trading).

Fyffes took a case against DCC in the Irish High Court but lost the action. In 2005, Fyffes challenged the High Court’s decision in the Irish Supreme Court. It too was found against Fyffes. Nevertheless, there remains controversy with many Irish newspapers casting doubt Mr Flavin’s actions in 2000. Ultimately, in 2008, Mr Flavin resigned/retired. It is difficult to know what would have happened had the court exonerated Mr Flavin entirely but his departure was fairly sudden. It must be noted however, that he was 66 at the time of his retirement so was at retirement age.

DCC’s report on the Fyffes controversy can be found on page 65 of the 2010 report and accounts.

Here is a negative opinion piece published in the Irish Independent from 2010 for those interested in learning more.

Disclaimer:

The author of this Wonder Stocks piece is Jamie Ward. As at time of writing, he owns shares in DCC. Unless stated otherwise, all sources of information come from DCC Report and Accounts, DCC presentations and Wonder Stocks’ analysis.

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