A point someone made about childcare, but extends well to more industries than you might think. Genuine operating leverage is pretty rare, and then, when it comes along, people tend to overpay for it, because it looks so amazing when it’s in action.
Here, RHC have surprisingly little operating leverage, although what leverage there is, is on full display with weak capacity utilisation thanks to COVID.
More broadly, when you do have something akin to constant or increasing returns to scale, someone else usually competes hard to get a piece of the pie (platform centric business, for example) which in end-state are “winner take all”, resulting in enormous ad spend in the now, eating returns.
A case in point. Pathology is truly scalable. Funds management is truly scalable. Hence people overpay to acquire the volumes (blood, or money, sometimes both!). But anyway, the main point was the graph about RHC, given KKR gave up.
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.
Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.