Why we invested in the Cashrewards IPO

Among the plethora of IPOs in the back half of 2020 was one that caught our attention and passed our filters – Cashrewards (ASX:CRW). This is an innovative company with a very attractive business model.  And it’s only just getting going.

Loyalty – a long-term high value asset

Cashrewards is a cashback loyalty platform, connecting brands with consumers and taking a clip of the ticket along the way.  Just as you earn points the more you fly with Qantas or Virgin, or shop with Coles and Woolies, with Cashrewards you earn cash, and you earn at a higher rate. Consumers on average get a bit more than 3 per cent of spend with merchants on the platform back as cash, as opposed to the 0.5 per cent value run rate you typically see in super market loyalty programs (and these are in the form of points) – 3 per cent cashback on spend, who doesn’t like that?

Loyalty is an interesting business, in some cases it represents a material chunk of the value associated with some of Australia’s largest consumer companies, Qantas (Frequent Flyer), and Virgin (Velocity) for example, suggesting with the right consumer proposition that it’s possible to build a long-term valuable business around loyalty attributes. And with the right consumer proposition and ability to distribute that, it’s possible to achieve significant scale.  Woolies has 12 million members and Flybuys (Coles) has 10 million, these members have been amassed on the basis that you shop there anyway and you might as well become a member, even if you only get back 0.5 per cent of your spend as points if you remember to scan your card at every point of sale event.

What if you offered more back, as cash, and built the solution around e-commerce engagement as well as having in-store capability?  That’s Cashrewards.

Cashrewards today

Today the business is early on in its lifecycle with 750,000 members (FY20), 200,000 of which were active in the prior 12 months generating $630 million in sales (including gift cards) for Merchants (some big brand names on there – Apple, Woolies, Dan Murphy’s, Amazon, eBay, Chemist Warehouse, Myer,, and many more) over the CRW platform.  This generated revenue of $17 million and $1 3million or so in cashback for consumers.  And the business is growing fast.  In 1Q21 active users and transaction value grew north of 50 per cent, despite COVID headwinds impacting a business that had 30-35 per cent of its transaction value in the travel sector in the prior period, a sector which should recover quickly in the coming months particularly if we see some confidence re borders not subject to snap closures.

Following its IPO, CRW now has the funding to properly invest in its competitive market position.  It has a history of acquiring subscribers cheaply ($14 per acquired subscriber), but had limited resources with which to commit to scale prolonged marketing campaigns. The $30 million IPO proceeds changes the game, particularly if acquisition cost comes in anywhere near historic levels as it scales.  Investments in acquiring merchants, improving user experience of the mobile app and investing in better cashback programs for consumers (lifting the cashback) are all now likely positive drivers that should lift customer acquisition and conversion to subscribers, and increase the frequency of use.  This all drives more transactions across the platform and scales the business.

The IPO also brought an interesting investor to CRW’s share register – ANZ bank invested alongside other IPO investors. Whilst there has been no news of a link-up between ANZ’s many consumer facing businesses where a loyalty offering could play, it’s worth watching out for how CRW and ANZ look to add value to each other’s businesses over time.

Cashrewards is an early stage emerging business, it has yet to achieve profitability. However, the Montgomery Small Companies Fund looks to invest in innovative businesses like this that we think have attractive medium to long-term growth opportunities. Here we elected to invest early, but in a disciplined way as part of a broader portfolio exposure, with the investment sized so that it can’t have a materially negative impact on the fund should the investment not go as planned, but the fund will benefit if it does and we will be well positioned to commit more capital along the journey to increase our exposure to harness that value creation event from early stage to small to big and beyond if the business model and management team deliver over the medium term.

The Montgomery Small Companies Fund owns shares in Cashrewards. This article was prepared 22 January 201 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.


View all funds