Celanese is the world’s largest producer of acetic acid and its chemical derivatives, including vinyl acetate monomer and emulsions. These products are used in the company’s specialized end products and also sold externally. Celanese produces the chemical in its core acetyl chain segment (roughly 70% of 2021 EBITDA), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. It produces acetic acid from carbon monoxide and methanol, a natural gas derivative. Celanese produces its own methanol at its Clear Lake, Texas, plant, which benefits from access to low-cost U.S. natural gas. The company recently announced that it will expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower average unit production costs
The engineered materials segment (around 25% of 2021 EBITDA) produces specialty polymers for a wide variety of end markets. The automotive industry accounts for the largest portion at around one third of segment revenue; other key end markets include construction and medical devices. This segment uses acetic acid, methanol, and ethylene to produce specialty polymers. Celanese and other specialty polymer producers have benefited in recent years from automakers light weighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also benefit from increasing electric vehicle and hybrid adoption, as the company makes battery separator components.
Financial Strength:
Celanese is currently in excellent financial health. As of Dec. 31, 2021, the company had around $4 billion in debt and $0.5 billion in cash. Celanese is undergoing a portfolio transformation, exiting legacy joint venture deals and acquiring new assets to increase its engineered materials portfolio, such as the Santoprene business from ExxonMobil, which resulted in slightly higher debt. However, it is generally expected that the company’s balance sheet and leverage ratios to remain healthy as Celanese should generate enough free cash flow to meet its financial obligations. The cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year. However, Celanese should still generate positive free cash flow well in excess of dividends.
Bulls Say:
Celanese built out its core acetic acid production facilities at a significantly lower capital cost per ton than its competitors thanks to the scale of its facilities (1.8 million tons versus average 0.5 million tons).
Celanese should benefit from producing an increasing proportion of its acetic acid in the U.S. to take advantage of low-cost natural gas.
The engineered materials auto business should grow more quickly than global auto production because of greater use of these products in each vehicle.
Company Profile:
Celanese is one of the world’s largest producers of acetic acid and its downstream derivative chemicals, which are used in various end markets, including coatings and adhesives. The company also produces specialty polymers used in the automotive, electronics, medical, and consumer end markets as well as cellulose derivatives used in cigarette filters.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Synchrony partners with retailers and medical providers to offer promotional financing as well as private label and co-branded general-purpose credit cards. The company’s promotional financing and instalment loans offered through its Home and Auto segment and its CareCredit program have performed well, and receivables have been relatively resilient in the current cycle. The company’s private-label and cobranded credit cards, co-marketed through partnerships with retailers, have faced more headwinds both before and during the pandemic, and credit card receivables outstanding are well below their 2018 peak.
The company has also had to contend with the loss of Walmart in 2018 and then Gap in 2021. These were significant blows, as the Walmart credit card program was about 13% of Synchrony’s receivables at the time and the Gap credit card program was about 5%. The bank’s partnership base remains highly concentrated, with its top five partnerships accounting for nearly 50% of its revenue. The firm will likely continue to be forced to choose between revenue growth and margins as it is pressured at the negotiating table by its merchant partners.
Synchrony is also facing elevated repayment rates on the company’s cards as consumers have used fiscal stimulus money to pay down debt. This has caused the company’s loan receivables balance to stagnate and pushed down gross interest yields on the company’s credit cards. Repayment rates will likely normalize over time, as the impact of fiscal stimulus and loan forbearance fades, but in the short-term Synchrony’s net interest income will face headwinds.
The future for Synchrony is not completely bleak. New credit card programs with Venmo and Walgreens give avenues for Synchrony to restart loan growth. The company also has several successful digital retailers as partners, such as PayPal and Amazon, which will offset the damage from Synchrony’s partners in the brick-and-mortar retail space. Additionally, high repayment rates on the company’s credit cards have pushed credit costs well below historical levels, and the company has been able to release the reserves it built up during the pandemic and accelerate share repurchases.
Financial Strength
Synchrony’s financial strength allowed it to navigate a difficult economic situation in 2020 without much stress being placed on the firm. The company’s sale of its Walmart portfolio to Capital One in late 2019 came at a fortuitous time, as it removed a credit-challenged account and created an influx of additional liquidity as the company entered 2020. Additionally, during the pandemic, decreased retail sales led to portfolio runoff and lower credit card receivables. While this is undoubtedly a negative for revenue generation, it did reduce the leverage of the bank and the company has been placed in a situation where it is seeking to manage the size of its deposit base to avoid becoming overfunded.
The consequence of these events is clearly negative for the company’s income statement, as seen by Synchrony’s earnings results during 2020 and its low net interest growth since then. However, the balance sheet benefited and low receivable growth as well as low net charge-offs have allowed the firm to easily maintain that strength. The bank’s common equity Tier 1 ratio stands at 15.6%. With the bank’s allowance for bad loans at more than 10.76% of existing receivables, it is not foreseen Synchrony encountering any capital issues and there is likely room for continued shareholder returns. Even if credit conditions deteriorate or the firm sees additional retailer bankruptcies, the company is well positioned to manage it. The bank should have plenty of flexibility to respond to competitive threats and to invest in its business despite the uncertainties of the current economic cycle.
Bulls Say’s
Synchrony enjoys long term contracts with several successful digital retailers such as Amazon and PayPal. These partnerships provide Synchrony with a source of receivable growth in a difficult environment for brick-and-mortar retailers.
Synchrony continues to win new credit card programs, with credit cards for Venmo and Verizon being launched in 2020.
The company’s credit cards present a compelling value for its retail partners. Struggling retailer will continue to be drawn to the incremental sales and revenue Synchrony’s credit cards provide.
Company Profile
Synchrony Financial, originally a spin-off of GE Capital’s retail financing business, is the largest provider of private-label credit cards in the United States by both outstanding receivables and purchasing volume. Synchrony partners with other firms to market its credit products in their physical stores as well as on their websites and mobile applications. Synchrony operates through three segments: retail card (private-label and co-branded general-purpose credit cards), payment solutions (promotional financing for large ticket purchases), and CareCredit (financing for elective healthcare procedures).
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Cerner is a leading healthcare IT-services provider, offering an electronic health record platform to hospitals and health networks. Along with rival Epic, a privately owned peer, the two represent more than half of acute care EHR market share. While the market for acute care EHR is mature and offers little growth, the firm has been able to expand into other areas, such as ambulatory (outpatient) care and secure clients in the federal space, notably with the Department of Defense and Department of Veterans Affairs. Additionally, Cerner has started to cross-sell incremental analytics services to fortify retention rates. Incremental services are largely recurring in nature and include analytics, telehealth, and IT outsourcing.
Beyond EHR, Cerner has been investing in areas of strategic growth, in particular population health management and data-as-a-service, where it can use its domain expertise and intangible assets stemming from provider and patient data in other offerings. Cerner’s HealtheIntent is a cloud-based vendor-agnostic population health management tool that can aggregate and reconcile EHR data from any vendor and other sources (PBMs, insurance companies), for individuals across the continuum of care to create a longitudinal health record that can then score and predict risks to improve outcomes and lower costs for patients. The platform has approximately 200 clients and has been steadily growing in recent years. Cerner is also developing a data business, organically through utilizing the company’s leading market share and depth of EMR data and inorganically through tuck-ins acquisitions. In early 2021, Cerner acquired Kantar Health for $375 million, a life sciences research company providing real world evidence, data, and analytics for life science companies.
Cerner to be Acquired by Oracle in All-Cash Deal; Shares Valued at $95 20
On Dec. 20, Oracle and Cerner jointly announced an agreement for Oracle to acquire Cerner through an all-cash deal, valuing Cerner at $95 per share. The deal is expected to close in 2022, rewarding Cerner shareholders with a 20% premium over the company’s market valuation earlier last week. The deal values Cerner at a 46% premium to our $65 fair value estimate. Morningstar analysts have a very high degree of certainty the transaction will go through without any regulatory pushback, as the combination of the two companies is unlikely to stir antitrust controversy. Morningstar analysts are raising the fair value estimate for Cerner to $92 per share, reflecting the sale price discounted half-a-year at the weighted average cost of capital.
Financial Strength
Cerner has a standard level of financial strength. Revenue is growing steadily as the rollout of Cerner’s EHR platform at the DoD and VA commence, and incremental services to existing customers and international expansion add to the muted growth of the mature domestic EHR market. Non-GAAP margins are already solid, and we believe they are likely to expand further with the active rationalization of services with lower profitability and cost-saving initiatives. As of fiscal 2020, the company had over $1 billion in cash, equivalents, and investments, offset by roughly $1.3 billion in debt, resulting in a net debt position of approximately $300 million. Cerner initiated a quarterly dividend of $0.18 per share in mid-2019, which it subsequently raised to $0.22 per share at the end of 2020.
Bulls Say
Cerner has been able to maintain a leading market share in the acute care EHR market due to high switching costs.
Despite the maturity of the domestic EHR market, Cerner’s federal contracts provide modest revenue growth through 2028.
Cerner’s leading EHR market share gives the company valuable RWE that can be packaged and sold to pharma companies, payers, and providers in a data offering.
Company Profile
Cerner is a leading supplier of healthcare information technology solutions and tech-enabled services. The company is a long-standing market leader in the electronic health record industry, and along with rival Epic Systems corners a majority of the market for acute care EHR within health systems. The company is guided by the mission of the founding partners to provide seamless medical records across all healthcare providers to improve outcomes. Beyond medical records, the company offers a wide range of technology that supports the clinical, financial, and operational needs of healthcare facilities
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Iluka is a leading global mineral sands miner. Major mines are its Jacinth-Ambrosia mine in the Eucla Basin in South Australia, Cataby in Western Australia and Sierra Rutile in Sierra Leone.Iluka’s main focus is on managing volumes and the resulting impact on prices. Efforts to maintain margins and prices means sales volumes can fall in periods of weak demand as Iluka shoulders part of the responsibility for balancing industry supply, but Iluka can also flex production to increase its market share, or liquidate excess inventories, as prices rise. Maintenance capital expenditure is relatively modest, but expansions and reinvestment to prolong life are generally pursued when Iluka sees a need for new demand and potential for reasonable returns on investment. Conversion of resources to reserves is an obvious path to life extensions, but resources are likely lower-grade and higher-cost.
The balance sheet is relatively strong with net cash of around AUD 300 million at end-December 2021. Iluka intends to maintain a conservative balance sheet with no net debt on average through the cycle. This should provide the appropriate capacity to finance inventory build when necessary and invest through the cycle.Management values cash returns to shareholders, primarily through dividends, but will flex depending on investment needs.
Mineral Sands Prices Continue to Rise on Strong Demand, Raising Iluka FVE to AUD 9.70
Iluka Resources continues to benefit from booming mineral sands markets, with both the zircon and titanium dioxide feedstock markets continuing to bounce back after the COVID-19-induced weakness in 2020. Zircon sales of 355kt were up 48% in 2021, reflecting demand strength across all of the company’s markets. High-grade titanium dioxide feedstocks also showed strong demand, supported by production issues at Rio Tinto’s Richards Bay Minerals in South Africa. Rutile sales were up 27.8%, to 207.2kt, while synthetic rutile sales rose 164% to 305.9kt. The company’s synthetic rutile kiln 2 (SR2) at Capel operated at full capacity, producing 60kt during the quarter. Given the strength in global titanium dioxide feedstock markets, restarting synthetic rutile kiln 1, due in the fourth quarter of 2022, seems reasonable. Thus, Morningstar analysts raise the fair value estimate to AUD 9.70 from AUD 9.10 on higher mineral sands prices and a lower AUD/USD exchange rate.
Financial Strength
Iluka’s balance sheet is strong with net cash of around AUD 300 million at December 2021. Modest net cash at end 2015 turned to a relatively small net debt position with the acquisition of Sierra Rutile for AUD 455 million in late 2016. The subsequent improvement in prices meant debt was repaid by the end 2018. Iluka intends to maintain a conservative balance sheet and targets no net debt on average through the cycle. The company’s strategy is to build inventory during periods of weak sales demand. Excess inventories at the end of 2016 were about AUD 400 to 500 million. The excess inventories were largely liquidated through 2017 and 2018 as external conditions improved and sales volumes exceeded production. Iluka is expected to use cash flow for incremental organic growth projects, the potential expansion of Sierra Rutile, debt repayment and cash returns to shareholders (primarily dividends). In the medium to long term, cash flows will either be reinvested or returned to shareholders. Iluka’s total debt facilities stood at AUD 500 million at end-June 2021, maturing in July 2024. The debt profile gives significant financial flexibility to hold inventory or make opportunistic and/or countercyclical investments.
Bulls Say
Iluka is an industry leader with relatively high grade zircon and rutile deposits. Supply can be withheld to defend prices and margins in times of weak demand.
Management has improved company fortunes with a strong focus on returns on capital. Demand for zircon is likely to be bolstered by new applications such as chemicals and digitally printed tiles.
Iluka has some diversification. The revenue mix is approximately half from zircon and half from high grade titanium products. Geographically, revenue is split between North America, Europe, China and the rest of Asia.
Company Profile
Iluka Resources is a leading global mineral sands miner. It is the largest global producer of zircon, and the third-largest producer of titanium dioxide feedstock (rutile, synthetic rutile) behind Rio Tinto and Tronox. Low zircon costs are underpinned by the high-grade Jacinth-Ambrosia mine in South Australia but reserve life is less than 10 years. The Sierra Rutile operations in Sierra Leone lack a cost advantage but expansions could bring some scale economies if they can be effectively executed. A 20% shareholding in Deterra Royalties brings exposure to the high-quality Mining Area C iron ore royalty. Iluka’s nascent rare earths operation at Eneabba is a low-cost source of rare earth oxides neodymium and praseodymium, albeit with a reserve life of only around 10 years.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Boeing is a major aerospace and defense firm that generates revenue primarily from manufacturing commercial aircraft. Boeing’s commercial aircraft segment can be split into two parts: narrow-bodied planes that are ideal for high-frequency short-haul routes, and wide-bodies that are used for transcontinental flights. Sales volumes for narrow-bodies have increased over the past 20 years the worldwide rise of low-cost carriers and an emerging-market middle class.
Boeing’s narrow-body business is bruised after the extended grounding of the 737 MAX, but it is anticipated that the structural tailwinds driving narrow-body demand, particularly the development of emerging-market economies, will continue as the world emerges from the COVID-19 pandemic. As nations grow richer, their citizens tend to demand travel, and almost all aviation demand is served by two firms. It is projected that Boeing will ramp 737 MAX production above previous peak levels to serve global aircraft demand. Critical to our thesis is a normalization of U.S.-China trade relations, as management anticipates China will provide about a quarter of the growth in the aviation market over the next decade.
It is expected that wide-body demand will recover more slowly from the COVID-19 downturn than narrow-body demand because wide-bodies are used for longer haul trips, which are unlikely to recover until a COVID-19 vaccine is distributed globally, which likely will begin happening in 2022. It is held that Boeing’s 787 Dreamliner is a fantastic aircraft for long-haul travel, but it is expected production issues will stop deliveries until 2022. It is alleged Boeing’s commercial deliveries will sustainably return to 2018 levels in 2026.
Boeing has segments dedicated to the production of defense-specific products and aftermarket servicing. These businesses together generate about 38% of our midcycle operating income. It is broadly assumed GDP-like growth in the defense business and expect the services business will regain profitability faster than Boeing as a whole because aftermarket revenue increases directly with flights, but that global retirements will slow the recovery of this segment over the medium term.
Financial Strength
Boeing’s capitalization is looking more uncertain since the COVID-19 outbreak has substantially reduced air travel. EBITDA turned negative in 2020, which renders many traditional leverage metrics meaningless. The company ended 2021 with about $58.1 billion in debt and $16.2 billion in cash. Analysts’ expect EBITDA expansion and debt reduction over our forecast period to lead to gross debt/EBITDA levels at about 8.0 in 2022 and lower levels in subsequent years. Our estimated 2022 EBITDA covers interest expense 2.4 times, and the company has access to additional liquidity if necessary. In subsequent years, free cash flow is positive and EBITDA covers interest expense by about 5 or more times. The firm’s first capital allocation priority is to reduce debt, but will face considerable challenges as it needs to also reinvest in new technology to remain competitive. It is likely the correct balance between debt reduction and reinvestment is the critical question management needs to address.
Bulls Say’s
Boeing has a large backlog that covers several years of production for the most popular aircraft, which gives us confidence in aggregate demand for aerospace products.
Boeing is well-positioned to benefit from emerging market growth in revenue passenger kilometers and a robust developed market replacement cycle over the next two decades.
It is probable that commercial airframe manufacturing will remain a duopoly for most of the world for the foreseeable future. It is anticipated customers will not have many options other than continuing to rely on incumbent aircraft suppliers.
Company Profile
Boeing is a major aerospace and defense firm. With headquarters in Chicago, the firm operates in four segments, commercial airplanes, defense, space & security, global services, and Boeing capital. Boeing’s commercial airplanes segment generally produces about 60% of sales and two-thirds of operating profit, and it competes with Airbus in the production of aircraft ranging from 130 seats upwards. Boeing’s defense, space & security segment competes with Lockheed, Northrop, and several other firms to create military aircraft and weaponry. The defense segment produces about 25% of sales and 13% of operating profit, respectively. Boeing’s global services segment provides aftermarket servicing to commercial and military aircraft and produces about 15% of sales and 21% of operating profit.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Lingering uncertainty about this factor-oriented fund’s potential for sleeve manager and style changes keeps its Process rating at Below Average.
Between March 2013 and the end of 2017, Wellington Management’s investment strategy and risk group altered this fund from a wide-ranging, single-manager offering to its current form. Six managers now run separate sleeves of the portfolio. The sleeves vary in size, but each is concentrated in 50 or fewer stocks and has distinct emphases, whether value or growth, market cap, or domicile. Gregg Thomas, who took over the investment strategy and risk group in late 2018, controls the aggregate portfolio’s characteristics by adjusting the size of Thomas Simon’s sleeve, which uses a multifactor approach to complement the five other sleeves, and by shifting assets among or even swapping managers to match the Russell 3000 Index’s risk profile. The idea is to let the stock-pickers rather than size, sector, or factor bets drive performance.
Although regular line-up changes have made it difficult to assess the strategy, there could be more stability in the future. Thomas now envisions making a manager change every three to five years, on average, down from every two years when he took over in 2018. The current roster has been stable only since late 2019, however, when Thomas changed two managers, including replacing a veteran global manager with a relatively inexperienced mid-cap value manager.
Portfolio:
A rotating cast of six sleeve managers has had collective charge of the portfolio since the late 2017 retirement of long-time sole manager Saul Pannell. His departure concluded a transition that started in March 2013 when Wellington Management’s investment strategy and risk group began apportioning 10% of the fund’s assets to different managers–a total that hit 50% by mid-2014 and stayed there until early 2017, after which the group gradually redirected Pannell’s remaining assets.
The transition to a multimanager offering beginning in 2013 ballooned the portfolio’s number stocks to 350- plus before falling to around 200 since April 2017. The fund’s sector positioning versus the Russell 3000 Index began to moderate in 2013 and has since typically stayed within about 5 percentage points of the benchmarks. Its tech underweighting dipped to nearly 10 percentage points in November 2020 but was back to around 5 percentage points by late 2021.
Industry over- and underweighting’s tend to stay within 4 percentage points. In late 2021, however, the portfolio was 5.6 percentage points light in tech hardware companies, entirely because it did not own Apple AAPL. The fund’s non-U.S. stock exposure neared 30% of assets in 2014 but has been in the single digits since late 2019, when a domestic-oriented mid-cap value sleeve manager replaced a sleeve manager with a global focus.
People:
The fund earns an Above Average People rating because its subadvisor’s multimanager roster includes veterans who have built competitive records elsewhere at sibling strategies where they also invest alongside shareholders. Those managers, however, serve this fund at the behest of Wellington Management’s Gregg Thomas. He took over capital allocation and manager selection duties at year-end 2018, when he became director of the investment strategy and risk group. Between March 2013 and year-end 2017, this group changed the fund from a wide-ranging single-manager offering to a multimanager strategy. Six managers now oversee separate sleeves of the portfolio. Growth investor Stephen Mortimer, dividend-growth stickler Donald Kilbride, and contrarian Gregory Pool each run 15%-25% of assets; mid-cap specialists Philip Ruedi and Gregory Garabedian 10%-20% each; and Thomas Simon uses a multifactor approach on 5%-20% assets to round out the whole portfolio’s characteristics. Thomas monitors those characteristics and redirects assets or even swaps managers to match the Russell 3000 Index’s risk profile, leaving it up to the stock-pickers to drive outperformance. That’s led to considerable manager change here. Of the original seven sleeve managers the investment strategy and risk group installed in March 2013, only Donald Kilbride remains; and the current six-person roster has been in place only since Sept. 30, 2019.
Performance:
This multimanager offering has struggled since Wellington Management’s Gregg Thomas took over capital allocation and manager selection duties at year-end 2018. Through year-end 2021, the A shares’ 22% annualized gain lagged the Russell 3000 Index and large-blend category norm by 3.8 and 0.8 percentage points, respectively, with greater volatility than each. The fund also has not distinguished itself since its current six-person sleeve manager stabilized on Sept. 30, 2019.
The fund was competitive in 2019’s rally and in 2020’s market surge following the brief but severe coronavirus-driven bear market. Of those two calendar years, the fund fared best against peers in 2020, with a top-quartile showing. But in neither year did it beat the index.
Results in 2021 were then relatively poor. The A shares’ 15.2% gain trailed the index by 10.5 percentage points and placed near the peer group’s bottom. It was an off year for the sleeve managers’ stock picking. Especially painful were modest positions in biotechnology stocks Chemocentryx CCXI and Allakos ALLK, whose shares both tumbled after disappointing clinical trial data.
The fund was lacklustre during its four-plus years of transition from a single-manager offering under Saul Pannell to its current format. From March 2013 to Pannell’s 2017 retirement, its 13.1% annualized gain lagged the index by 1.5 percentage points and placed in the peer group’s bottom half.
About Funds:
The firm maintains a long-standing relationship with well-respected subadvisor Wellington Management Company. Wellington has long run the firm’s equity funds–over half of its $116 billion in fund assets–and took the reins of Hartford Fund’s fixed-income platform beginning in 2012. In 2016, Hartford Funds began offering strategic-beta exchange-traded funds with its acquisition of Lattice Strategies and partnered with U.K.-based Schroders to expand its investment platform further. The Schroders alliance added another strong subadvisor to Hartford’s lineup, with expertise in non-U.S. strategies. Hartford Funds mostly leaves day-to-day investment decisions to its well-equipped subadvisors and instead steers product development, risk oversight, and distribution for its strategies. In 2013, the firm reorganized and grew its product-management and distribution effort. Since then, leadership has added resources to its distribution and oversight teams, merged and liquidated subpar offerings, introduced new strategies, evolved its strategic partnerships with MIT AgeLab and AARP, and lowered some fees. That said, fees are still not always best in class but have improved.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
AGL is one of Australia’s largest integrated energy companies. We believe it has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Key attractions for shareholders include relatively defensive earnings, solid dividends, and relatively conservative gearing. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target.
AGL has proposed a structural separation into two businesses; a multi-product energy retailer focusing on carbon neutrality and an electricity generator that will own AGL’s large fleet of coal fired power stations among other assets. It is expected to be completed in mid-2022.
AGL’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market.
AGL’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks is mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market, or NEM.
Financial Strength
AGL Energy is in reasonable financial health though banks are increasingly reluctant to lend to coal power stations. From 1.4 times in 2020, we forecast net debt/EBITDA rises to 2.1 times in fiscal 2022. Funds from operations interest cover was comfortable at 12.8 times in fiscal 2021, comfortably above the 2.5 times covenant limit. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. This should raise more than AUD 500 million in equity. Dividend pay-out ratio is 75% of EPS
Bulls Say’s
As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive.
Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds.
Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.
Key Investment Considerations:
Fiscal 2022 will be tough but high wholesale gas and electricity prices bode well for earnings recovery from 2023.
The proposed separation of AGL’s retail and generation businesses will likely be somewhat value destructive due to potential duplication of resources and loss of scale benefits.
The Australian energy sector is heavily influenced by government energy policy, particularly over emissions and utility bill affordability.
Company Profile
AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
With myriad acquisitions in the past few years, PerkinElmer has been in a constant state of evolution since 2016 when the company transitioned into two new business segments, Diagnostics and Discovery and Analytical Solutions (DAS), with life sciences being the most attractive segment of the DAS business.
The Diagnostics business makes up slightly over half of the company’s total revenue and is led by the immunodiagnostics business, followed by reproductive health, and finally applied genomics. The immunodiagnostics business is characterized by Euroimmun, the global leader in autoimmune testing, allergy testing, and infectious disease. The recent acquisition of Immunodiagnostics (IDS) and Oxford Immunotec has only extended product offering to PerkinElmer’s customer base. Although declining birth rates globally have negatively impacted growth in the reproductive health segment, the firm still holds leading positions in newborn testing worldwide. The U.S. market is characterized by stable profits and pricing power with opportunity to provide additional screenings for rare diseases. The firm should capitalize on the growth opportunities in newborn screening in China and India where there is opportunity to provide additional screening and expand reach. Finally, the applied genomics segment should see continued growth as the cost of sequencing goes down, increasing sequencing by genetic labs and a need for PerkinElmer products.
Financial Strength:
The fair value of the Perkin Elmer has increased to recognize recently generated cash flows, the company’s strong near- and long-term outlook including margin expansion (after a postpandemic reset), successful product mix shifts to diagnostics and life sciences, and recent acquisitions like BioLegend, IDS, and Oxford.
PerkinElmer carries a manageable debt load, but its history of consistent acquisitions tended to keep financial leverage elevated. At the end of September 2021, PerkinElmer held $0.5 billion in cash and $5.1 billion in debt with a leverage at the end of the quarter at 2.2 times net debt-to-EBITDA. Of said debt, $2.8 billion of new debt was added to fund the $5 billion BioLegend acquisition. Acquisitions remain the top capital allocation priority for excess cash flow. PerkinElmer does not tend to engage in significant share buybacks. The company pays a small quarterly dividend, amounting to about $31 million in 2020, and has not provided any recent updates to its payout ratio.
Bulls Say:
PerkinElmer possesses a well-entrenched niche in newborn screening and stands to benefit from growing menu expansion globally and expanding to emerging markets, particularly China and India.
The Biolegend acquisition will accelerate new product growth in the Diagnostics and DAS business segments with high growth areas, including biologics, cell and gene therapy, and single cell analytics.
Euroimmun is positioned to be a strong growth driver, especially since it is the largest player in autoimmune diagnostics and has more product offerings from the recent IDS and Oxford acquisitions.
Company Profile:
PerkinElmer provides instruments, tests, services, and software solutions to the pharmaceutical, biomedical, chemical, environmental, and general industrial markets. The company operates in two segments: diagnostics, which includes immunodiagnostics, reproductive health, and applied genomics, and discovery and analytical solutions, composed of life science, industrial, environmental, and food applications. PerkinElmer offers products and services ranging from genetic screening and environmental analytical tools to informatics and enterprise software.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Hess’ track record for efficiently allocating capital and generating value has been steadily improving for several years. This had been a source of frustration for shareholders in the past. Before 2012, the firm was struggling with persistent budget overruns and costly exploration failures, and the eventual collapse in its share price led to a heated proxy fight with an activist investor (which it lost). Subsequently, the board was reshuffled, and management began streamlining the company, selling midstream and downstream assets and rationalizing its upstream portfolio. The current portfolio is more competitive, but the development cost requirements are heavily front-loaded. Currently, Hess is one of the largest producers in the Bakken Shale, with about 1,700 producing wells and about 530,000 net acres of leasehold. This includes a large portion in the highly productive area near the Mountrail- McKenzie County line in North Dakota. Even with four rigs, it would take more than 10 years to develop this position, and to conserve capital in the wake of the COVID-19 pandemic management is only running two rigs (with a third to be added late 2021). Like peers, Hess has made huge strides with enhanced completions. It is expected 180-day cumulative oil production to average 150 mbbls going forward (consistent with break-evens of about $40/bbl. for West Texas Intermediate). Hess also holds a 30% stake in the Exxon-operated Stabroek block in Guyana, which will be the firm’s core growth engine going forward and is a game-changer for the company, due to its large scale and exceptional economics. The block contains numerous confirmed discoveries already, including Liza, which came online in late 2019. Economically, these projects appear around on par with the Bakken. But the up-front capital demands are onerous–Hess’ share of the first development phase was over $1 billion. Six phases are currently planned, culminating in gross volumes of about 1 mmb/d and management has suggested there is scope for as many as 10 phases in the ultimate development. Total gross recoverable resources are a moving target, but the latest estimate is over 9 billion barrels of oil equivalent.
Financial Strength
Hess’ Guyana assets are capital-intensive (it must pay 30% of the development costs, which run to $1 billion-$2 billion for each sanctioned phase of development; a total of six are currently planned and more than that are likely eventually). And these commitments are heavily front-loaded. As a result, capital spending has significantly exceeded cash flows in the last few years, leaving the firm with leverage ratios that are elevated from the historical norm. At the end of the last reporting period, debt/capital was 57%, while net debt/EBITDA was 1.8 times. The good news is that the firm’s liquidity backstop is very strong, as it prefunded a portion of its Guyana commitment with noncore divestitures. The firm has a $2.4 billion cash war chest, and there is more than $3 billion available on its credit facility as well. In addition, the term structure of the firm’s debt is fairly well spread out, and there are no maturities before 2024 (other than a $1 billion term loan due 2023 and likely to be paid in full with operating cash flows by the end of 2022).The firm does have a covenant requiring it to
Commodities – Energy 28 January 2022
Website: www.lavernefunds.com.au Email: info@laverne.com.au 1300 528 376 (1300LAVERNE) 1 keep debt/capital above 0.65, though it isn’t expected to get close to that level (and if it does a violation would still be unlikely because in the associated debt agreement capital is defined to exclude impairments). Bulls Say’s The Stabroek block (Guyana), in which Hess has a 30% stake, is a huge resource, with at least 9 billion barrels of oil equivalent recoverable. The first phase of the Liza development is profitable at $35/bbl (Brent), making it competitive with the best shale. Management expects similar economics from subsequent projects in Guyana. Hess’ activity in Guyana provides geographic diversification and insulates it from domestic issues (like antifracking regulations).
Company Profile Hess is an independent oil and gas producer with key assets in the Bakken Shale, Guyana, the Gulf of Mexico, and Southeast Asia. At the end of 2020, the company reported net proved reserves of 1.2 billion barrels of oil equivalent. Net production averaged 323 thousand barrels of oil equivalent per day in 2020, at a ratio of 70% oil and natural gas liquids and 30% natural gas. (Source: Morningstar) General Advice Warning Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
PTC operates in the high-end computer-assisted design software market, but Morningstar analyst view this market as mature and don’t foresee significant top-line growth in this area. PTC’s foray into growth areas such as “Internet of Things,” AR, and midmarket CAD, on the other hand, will significantly add growth to the top line, and as per Morningstar analysts view, PTC’s revenue mix to shift significantly to these areas over the next 10 years.
PTC’s Creo software is considered a staple among many large assembly and complex product engineer teams, whether it’s in designing the efficient transportation of fluids or cabling. The small high-end CAD market compared with the mid-market has safeguarded PTC from new entrants to some extent. However, Morningstar analysts think the firm has largely been able to maintain its claim in the CAD industry based on its high switching costs, which as per Morningstar analysts apply not only to its core CAD offering but also its product lifecycle management software and new growth areas–like its Internet of Things and AR platforms. Still, switching costs alone aren’t enough to drive hefty growth in high-end CAD.
While Morningstar analysts expect a mix shift in the future for PTC, a shift to a subscription model from a license-based model is largely in the recent past. PTC has suffered only temporary declines in revenue, margins, and returns on invested capital, as per Morningstar analysts view. As per Morningstar analyst’s perspective, the company will be able to recover well from the transition as its converted subscribers mature.
With this expected recovery, PTC’s growth areas will be able to contribute to a much greater portion of PTC’s business due to strong partnerships. While PTC’s mid-market SaaS CAD software, Onshape, is within the company’s growth segment, and Internet of Things will see better success as entering the mid-market will be a tough task. In contrast, partnering with Microsoft and Rockwell Automation, PTC’s Internet of Things platform, Thingworx, has been able to gain greater traction for its solution that is widely known as among the best of breed.
PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105
Narrow-moat PTC kicked off its fiscal year 2022 by posting results slightly below Morningstar analyst top- and bottom-line expectations. Nonetheless, results weren’t discouraging, as PTC is accelerating its SaaS transition, which brings with it short-term growth headwinds–but worthwhile benefits in the long term. Despite slight earnings misses, Morningstar analysts are raising its fair value estimate to $105 per share from $97, in most part due to rosier long-term corporate tax rates that Morningstar analysts have baked in after updating in-house estimates. Shares remained flat after hours, trading around $113 per share, leaving PTC fairly valued.
Financial Strength
PTC to be in good financial health. As of fiscal 2021, PTC had a balance of cash and cash equivalents of $327 million and long-term debt at $1.4 billion. This leaves PTC with a debt/EBITDA ratio of 2.77 at fiscal year-end 2021. We estimate PTC’s growing base of cash and cash equivalents will be more than enough to support mild acquisition spend going forward, at an average of $50 million per year. Despite the company’s financial health, we do not foresee the company starting to issue dividends given the relatively significant transition PTC will undergo over the next 10 years, as per Morningstar analysts view, and the consequent possibility of additional cash needs as a result.
Bulls Say
PTC’s revenue should be able to grow significantly as its Internet of Things solutions take off.
PTC’s Onshape platform makes headway in the midmarket as Autodesk and Dassault Systèmes are slow to move to a fully SaaS-based model.
PTC should be able to improve gross margins as its low-margin services business comes down as a percentage of total revenue
Company Profile
PTC offers high-end computer-assisted design (Creo) and product lifecycle management (Windchill) software as well as Internet of Things and AR industrial solutions. Founded in 1985, PTC has 28,000 customers, with revenue stemming mostly from North America (45%) and Europe (40%).
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Laverne Securities Pty Ltd, ACN 629 216 477, T/As Investor Desk, is a Corporate Authorised Representative of Laverne Capital Pty Ltd (AFSL 482937). This service is administered by OpenInvest Limited ACN 614 587 183 via the OpenInvest Portfolio Service ARSN 628 156 052. This website provides factual information about the service, and any general advice contained does not take into account your objectives, financial situation or needs. Before making any investment decision, please review the PDS and Target Market Determination available at https://www.investordesk.com.au/key-documents/. Should you require assistance in determining whether an investment in the service is right for you, you may wish to seek personal advice from an appropriately licensed financial adviser.
