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Global stocks Shares

Wesfarmers’ Bid for API Stands After Woolworths Withdraws

Business Strategy and Outlook

To diversify from regulated PBS revenue, API acquired the Priceline chain of health and beauty stores in 2004.Priceline contributes around one quarter of API’s revenue but over 40% of gross profit. Priceline’s key growth strategies are increasing its contribution from online sales and leveraging its loyalty scheme, the Sister Club. However, Morningstar analyst have concerns regarding these endeavours. Market statistics suggest the Australian health and beauty retail market is growing at a mid-single-digit pace, which provides an attractive opportunity for API at first blush. However, Morningstar analyst believe the market growth opportunity is skewed to the premium end rather than Priceline’s mass-middle positioning and consequently forecast below-market average revenue growth for the retail business. This is despite its loyalty program that differentiates Priceline from key competitors .

Similarly, Priceline’s growing online sales will likely lead to a subdued outlook for in-store sales. Morningstar analyst forecast same-store sales climbing at just 1% per year, less than inflation. Moreover, the shift of sales from physical stores to online places pressure on margins due to challenges in evolving the cost base at the same rate.

Offsetting these challenges, API’s acquisition of the Clear Skincare clinics in fiscal 2018 offers significantly higher profitability. With gross margins above 80%, Morningstar analyst expect the rollout of Clear Skincare clinics to help API’s earnings recover in the short term and permanently reduce its exposure to the PBS.

Woolworths’ Offer for API Has Been Withdrawn but Wesfarmers’ Offer Still Stands

In yet another unexpected turn, Woolworths has withdrawn its non-binding proposal to acquire no-moat Australian Pharmaceutical Industries, or API, for AUD 1.75 per share made on Dec. 2, 2021. Following completion of due diligence, Woolworths was not convinced it could achieve the financial returns it requires. However, the takeover offer from Wesfarmers remains in place and is not subject to due diligence, which completed in October 2021. Accordingly, Morningstar analyst have decreased  API fair value estimate by 13% to AUD 1.53, back in line with  standalone assessment of API and Wesfarmers’ takeover offer.

Financial Strength

API is in a sound financial position with net debt/adjusted EBITDA of 0.6 times at fiscal 2021. We forecast leverage to remain under 1.0 over our forecast period, with API comfortably able to afford a 70% dividend payout ratio and continue to expand its retail footprint. We forecast a total of AUD 250 million in capital expenditures over the next five years, and also factor in the final AUD 32.9 million payment for Clear Skincare still outstanding.Working capital management has improved over a number of years, almost halving the net investment in working capital to 5.6% of sales over the 10 years to fiscal 2021. We forecast investment to be roughly maintained at an average of 6.2% of sales.

Bull Says

  • The Priceline and Clear Skincare offerings are relatively high-margin segments and pitched in the beauty and personal-care market which is growing at a mid-single-digit pace. 
  • API’s corporate Priceline stores offers higher margin and more product opportunity than the purely franchise business model of peers Sigma and EBOS. 
  • Management has demonstrated that it is opportunistic and having deleveraged the balance sheet, is looking to invest for growth. Value-additive acquisitions could present upside to our fair value estimate.

Company Profile

Australian Pharmaceutical Industries, or API, is a major Australian pharmaceutical wholesaler and distributor. In addition, it is the franchisor of the Priceline Pharmacy network and directly owns and operates stand-alone Priceline stores which sell personal care and beauty products. In an effort to diversify away from the highly regulated low growth and low margin pharma distribution business which contributes 74% of revenue, API is actively growing a consumer brands portfolio and also acquired Clear Skincare, a skin treatment chain. These two emerging businesses each contribute approximately 1% of revenue but are higher margin than the core distribution segment.

 (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.

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ETFs ETFs

Goldman Sachs Activebeta U.S Large Cap ETFs: Mild Factor exposure provides an edge

The Goldman Sachs ActiveBeta U.S. Large Cap Index underpinning this fund spins a broad portfolio that pursues four factors: value, quality, momentum, and low volatility. This fund’s mixing approach–which combines four equally weighted distinct sleeves, each focused on a different factor–is simple and transparent.

Approach

While this portfolio’s factor exposure is modest, it is well-diversified and boasts low turnover. This index constructs four separate factor sleeves that start with the Solactive U.S. Large Cap Index, a broad, market-cap-weighted portfolio of large-cap stocks. Each factor sleeve adjusts stocks’ weight based on the strength of their exposure to value, quality (gross profits/total assets), momentum (11-month risk-adjusted return), or low volatility (12-month standard deviation of returns). Stocks with pronounced traits may see their weight materially increase within each sleeve, while those with poor exposure may be eliminated. After the index establishes each sleeve, it weights each of them equally at the portfolio level.

Portfolio

This broad portfolio looks very similar to the S&P 500. The market’s largest stocks receive the most investment, but the fund bends toward those that score well in several of its intended factors. Many stocks carry factor traits that offset, which leaves this fund with mild overall factor exposure. Its quality tilt has been the most defined. In profitability measures like return on invested capital, this fund has outshined the S&P 500. Momentum exposure has been quiet but detectable. The fund’s value tilt has been the weakest of the factors, likely because its quality and momentum sleeves pull it toward more richly valued companies.

Top Holdings

top holdings .png

People

Goldman Sachs ActiveBeta® ETFs are managed by our Quantitative Investment Strategies team, comprised of over 95 Portfolio Management and Research professionals, with an average of over 15 years of experience. Raj Garigipati and Jamie McGregor are the named managers on this fund. Gagrigipati has managed this fund since its inception in September 2015, while McGregor joined in April 2016, replacing Steve Jeneste. Garigipati is the head of ETF portfolio management at Goldman Sachs. McGregor was a portfolio manager at Guggenheim for a year prior to joining Goldman Sachs as a portfolio manager in July 2015.

Performance

The fund has come alive recently, outpacing its category benchmark by more than 2 percentage points from May 2021 through December 2021. Its value-oriented consumer discretionary stocks picked up steam, and highly profitable firms like Visa V and Mastercard MA helped it outperform in the tech arena. Steady portfolio management has kept this fund in line with its benchmark index. Over the trailing five years through December 2021, it trailed its benchmark by 13 basis points annualized, a margin slightly wider than its 0.09% expense ratio.

Performance.png

(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.

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Expert Insights Technology Stocks

Change in elective surgery restrictions have minimal long-term impact for Ramsay

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Business Strategy and Outlook

Ramsay’s strong Australian business enabled its global acquisitions but the market fundamentals offshore are far less attractive. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to data from the Australian Prudential Regulation Authority, 45% of the Australian population have PHI resulting in roughly 80% of Ramsay’s Australian revenue flowing from PHI versus 20% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.

Despite various pandemic pressures weighing on Ramsay, the firm is increasing its capital expenditure to better position itself for long-term growth. The key areas of investment are brownfield and greenfield expansions in Australia, and digital overseas. Ramsay is focusing on increasing its day surgery capacity as the proportion of day surgeries at Australian private hospitals has increased to roughly 65% from 60% in the last 10 years. The firm also sees opportunity for integrated care and higher-margin non-surgical ancillary services such as rehabilitation and mental health.

Financial Strength

Ramsay’s planned acquisition of Spire Healthcare in 2021 didn’t eventuate leaving the company in a stronger financial position as a result with pro forma net debt/EBITDA pre-AASB 16 of 0.7 at July 2021. However, due to the pandemic weighing on earnings, the acquisition of Elysium, and sustained elevated planned capital expenditures, it is forecasted leverage to peak at 3.3 in fiscal 2022 but fall under 2.0 by fiscal 2026. As Ramsay Australia owns most of its properties, the group has extra optionality if ever capital constrained. While free cash flow conversion of earnings averaged 98% over the last five years, it was boosted in fiscal 2020 due to the French government prefunding all outsourced work which contributed to a working capital inflow of AUD 526 million.

The dividend is largely underpinned by the Australian business.The capital structure includes AUD 252 million of Convertible Adjustable Rate Equity Securities, or CARES, on which Ramsay pays a fully franked dividend equivalent to a margin of 4.85% over the 180-day bank bill swap rate after tax which is high in the current funding environment. The CARES funding is not material in terms of the capital structure of the business overall, but it is unclear to us why the securities were allowed to step up to this high rate rather than being refinanced given the availability of cheaper debt. Review of the largest CARES holders doesn’t reveal any material related parties.

Bulls Say’s 

  • Ramsay boasts leading market positions in most of its geographies and benefits from negotiating power with payers and cost advantage derived from scale. 
  • Ramsay is a stable compounder with its healthcare services being highly defensive and underpinned by strong demographic factors. 
  • Its premium Australian business is being diluted by lower-margin and lower-return businesses overseas with higher exposures to publicly outsourced work and associated regulatory risk.

Company Profile 

Ramsay Health Care is one of the largest private healthcare providers in the world, with over 460 facilities across 10 countries. The key markets in which it operates are Australia, France, the U.K., and Sweden. It is the largest private hospital group in each of these markets except for the U.K. where it ranks fifth. Ramsay Sante, which operates the European regions other than the U.K., is a 52.5%-owned subsidiary of Ramsay Health Care. The company typically earns about 60% of consolidated earnings in Australia and 30% in France. Ramsay Health Care undertakes both private and publicly funded healthcare.

(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.

Categories
ETFs ETFs

Goldman Sachs Activebeta U.S Large Cap ETFs: Mild Factor exposure provides an edge

The Goldman Sachs ActiveBeta U.S. Large Cap Index underpinning this fund spins a broad portfolio that pursues four factors: value, quality, momentum, and low volatility. This fund’s mixing approach–which combines four equally weighted distinct sleeves, each focused on a different factor–is simple and transparent.

Approach

While this portfolio’s factor exposure is modest, it is well-diversified and boasts low turnover. This index constructs four separate factor sleeves that start with the Solactive U.S. Large Cap Index, a broad, market-cap-weighted portfolio of large-cap stocks. Each factor sleeve adjusts stocks’ weight based on the strength of their exposure to value, quality (gross profits/total assets), momentum (11-month risk-adjusted return), or low volatility (12-month standard deviation of returns). Stocks with pronounced traits may see their weight materially increase within each sleeve, while those with poor exposure may be eliminated. After the index establishes each sleeve, it weights each of them equally at the portfolio level.

Portfolio

This broad portfolio looks very similar to the S&P 500. The market’s largest stocks receive the most investment, but the fund bends toward those that score well in several of its intended factors. Many stocks carry factor traits that offset, which leaves this fund with mild overall factor exposure. Its quality tilt has been the most defined. In profitability measures like return on invested capital, this fund has outshined the S&P 500. Momentum exposure has been quiet but detectable. The fund’s value tilt has been the weakest of the factors, likely because its quality and momentum sleeves pull it toward more richly valued companies.

Top Holdings

top holdings .png

People

Goldman Sachs ActiveBeta® ETFs are managed by our Quantitative Investment Strategies team, comprised of over 95 Portfolio Management and Research professionals, with an average of over 15 years of experience. Raj Garigipati and Jamie McGregor are the named managers on this fund. Gagrigipati has managed this fund since its inception in September 2015, while McGregor joined in April 2016, replacing Steve Jeneste. Garigipati is the head of ETF portfolio management at Goldman Sachs. McGregor was a portfolio manager at Guggenheim for a year prior to joining Goldman Sachs as a portfolio manager in July 2015.

Performance

The fund has come alive recently, outpacing its category benchmark by more than 2 percentage points from May 2021 through December 2021. Its value-oriented consumer discretionary stocks picked up steam, and highly profitable firms like Visa V and Mastercard MA helped it outperform in the tech arena. Steady portfolio management has kept this fund in line with its benchmark index. Over the trailing five years through December 2021, it trailed its benchmark by 13 basis points annualized, a margin slightly wider than its 0.09% expense ratio.

Performance.png

(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.

Categories
Technology Stocks

Soaring Lithium Price, a Material Fair Wind for Mineral Resources

Business Strategy and Outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine has sustained earnings momentum. 

The financial record to now is impressive and the balance sheet is unleveraged. 

In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining Services and Processing contributed 96% of group EBIT. Step forward to fiscal 2020 and Mineral Resources has materially improved its level of financial disclosure, and the greater depth of clients and number of project sites also reduces risk.

 The business model of the company is demonstrably sustainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness. Mineral Resources’ mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, Mining Services is core. Twelve 5 to 15 million tonne per year crushing and screening plants are owned and operated on 12 sites. 

Clients substantially include the largest mining companies and contract books have been renewed over time leading to volume growth. Power is supplied by mining companies and margins are comparatively stable. Bolstering growth in the core business centred on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights

Financial Strength

Mineral Resources is in strong financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020. From a net debt position of AUD 872 million at end June 2019. Lithium project construction expenditure was at the core of the cash drain. The current circumstance is a return to the usual territory for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. 

Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. A failed investment in Aquila Resources in 2014 attempted to leverage Mineral Resources into Aquila’s West Pilbara Iron Ore Project, and was symptomatic of where Mineral Resources found itself. Booming lithium markets directed the investment decision. Mineral Resources had AUD 595 million in net cash excluding operating leases at end June 2021. 

Bulls Say’s

  •  Mineral Resources grew strongly since listing in 2006.The chairman and managing director have been with the business for over a decade and have meaningful shareholdings.
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth.
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  •  Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile 

Mineral Resources listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western Australia.

(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.

Categories
Dividend Stocks

AstraZeneca’s Continual Focus on Innovative Drug Development Increasingly Sets Up Strong Growth

Business Strategy and Outlook

AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs. The replenishment of new drugs is offsetting the past patent losses on gastrointestinal drug Nexium and cholesterol reducer Crestor, and the company is well positioned for growth.

AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and we think the company is developing several key products that hold blockbuster potential. These drugs should also carry strong pricing power, driving the potential to expand Astra’s margins. In addition to internal development, AstraZeneca has aggressively pursued acquisitions, with mixed results. 

As Astra’s next generation of drugs launch, Morningstar analysts expect operating margins to improve based on the strong pricing power of the new drugs and the operating leverage the firm should attain as the new drugs reach critical mass. Also, as the new drugs launch, Astra is reducing the asset divestiture strategy it employed to help bridge the massive patent losses facing the firm over the past few years until the newer drugs were ready. While the asset sales helped prop up earnings and support the dividend during a challenging time, the strategy is not sustainable. As new drugs gain traction, Astra will likely continue to reduce the asset sales, which is strategically sound but will likely create a headwind to earnings growth.

AstraZeneca’s Continual Focus on Innovative Drug Development Increasingly Sets Up Strong Growth

After a deep dive review of several of AstraZeneca’s current and pipeline products, Morningstar analysts have increased their projections for several drugs leading to a fair value estimate increase to $64 from $60. Analysts have continued to view the company with a wide moat, supported by a strong pipeline and a relatively secure current portfolio with limited near-term patent losses.

In looking at the pipeline, we are increasingly bullish on several next generation drugs. In particular, the recent approval of severe asthma drug Tezspire looks like a potential new blockbuster. Also, breast cancer drug camizestrant holds significant potential despite an increasingly crowded area of competitive SERD drugs in development but so far, the data  for the drug looks increasingly solid. 

Financial Strength

Astra continues to generate robust cash flows, and the firm’s balance sheet is in solid shape, closing 2020 with debt/EBITDA of close to 2.4 times. However, the firm needs to offset lost cash flows from products losing patent protection over the next couple of years to generate enough cash flow to fund the dividend. Morningstar analysts expect the recently announced acquisition of Alexion to add close to $16 billion in debt on the balance sheet, but it is expected that the strong acquired drugs will produce robust cash flows to quickly pay down the acquisition-related debt.

 Bulls Say 

  • The company is expanding its oncology presence with several important pipeline products. In particular, the company’s EGFR drug Tagrisso holds major blockbuster potential in lung cancer. 
  • The management team is focusing the pipeline toward unmet medical need, which should increase the odds of success and being strong pricing power for the new drugs. 
  • AstraZeneca has a large presence in emerging markets and should benefit from these markets’ fast growth prospects, especially in China

Company Profile

A merger between Astra of Sweden and Zeneca Group of the United Kingdom formed AstraZeneca in 1999. The firm sells branded drugs across several major therapeutic classes, including gastrointestinal, diabetes, cardiovascular, respiratory, cancer, and immunology. The majority of sales come from international markets with the United States representing close to one third of its revenue.

 (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.

Categories
Global stocks Shares

Corporate Action: Subscribe to Corporate Travel’s Share Purchase Plan

Morningstar analysts recommend eligible shareholders subscribe to Corporate Travel’s Share Purchase Plan, or SPP. It is the AUD 25 million component of a total AUD 100 million underwritten capital raising to fund the AUD 175 million acquisition of Hello World Travel’s corporate and entertainment travel business in Australia and New Zealand. An institutional placement has already raised AUD 75 million (at AUD 21.00 per share) and the remaining AUD 75 million of the purchase price will be funded by an issue of new shares (also at AUD 21.00) to the vendor when the deal completes in the March quarter of 2022.

Morningstar analysts support the SPP which will be priced at least 11% below our fair value estimate as well as  lifted  fair value estimate on Corporate Travel by 7% to AUD 23.50 per share on Dec. 15, 2021 when the deal was first announced. The SPP offer price will be the lower of AUD 21.00 and the five-day average price of Corporate Travel shares during the five trading days up to the SPP closing date (likely Jan. 20, 2022). As this SPP price will be lower than morningstar intrinsic assessment (and the current stock price), Morningstar analyst see value in subscribing to the offer.

Further, Morningstar analysts see the acquisition as opportunistic, struck amid a pandemic. It is a playbook that was used by no-moat-rated Corporate Travel with the October 2020 AUD 275 million buy of Travel & Transport in North America. The Helloworld unit is bite-size (6% of Corporate Travel’s enterprise value), operates in the group’s home market of Australia and New Zealand (with two thirds of business in domestic travel), and synergies are likely to be easier to extract than from the Travel & Transport purchase. As such, management’s projected AUD 8 million synergy is conservative, at just 36% of Helloworld’s pre pandemic EBITDA. This compares with Travel & Transport where the projected AUD 25 million synergy is 61% of the unit’s prepandemic EBITDA, with its extraction making good progress to-date.

Company Profile

Corporate Travel Management provides travel services mainly for corporate customers across the Americas, Australia and New Zealand, Europe, and Asia. The company has built scale and breadth through both organic growth and acquisitions. As of 2021, Corporate Travel is the world’s fourth-largest corporate travel management company based with pro forma, pre-COVID-19 total transaction volumes of AUD 11 billion, but it remains a relative minnow in the highly fragmented USD 1.5 trillion global market. The company offers expertise and personalized service to corporate clients spanning several industries such as government, healthcare, mining, energy, infrastructure, and construction. Before the pandemic, more than 60% of the group’s client travel was domestic (within the country) in nature.

(Source: Morning Star)

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.

Categories
Dividend Stocks Expert Insights

AbbVie’s Next Generation Drugs Are Poised to Help Mitigate Upcoming Humira Biosimilar Pressures

Business Strategy and Outlook:

While AbbVie holds a strong portfolio of marketed and pipeline drugs, the increasing competition to the company’s key drug Humira should slow the growth for the company. At close to 40% of total sales and a higher portion of earnings (due to higher margin revenue), Humira is a key determinant of AbbVie’s earnings performance over the next three years.

Beyond immunology, cancer drug Imbruvica is the next-biggest sales contributor. Imbruvica’s strong clinical data in several forms of blood cancer should lead to peak sales above $6 billion. Additionally, the recent acquisition of Allergan brings several new products, including Botox for both cosmetic and therapeutic uses. Botox’s strong entrenchment bodes well for the treatment as new competition is emerging. Also, AbbVie holds several mature drugs with patent expirations long past, but with manufacturing or specific dosing complexities, which make generic competition less likely. Looking forward, AbbVie’s pipeline is weighted more toward new cancer and immunology drugs. The company should be able to leverage its solid entrenchment with Humira and Imbruvica to launch the new drugs.

Financial Strength:

AbbVie’s acquisition of Allergan significantly increased its debt level. The firm’s net debt position to peak at close to $70 billion in 2020, but given the strong cash flows of AbbVie’s base business and the acquired cash flows from the Allergan deal, the firm is expected to rapidly pay down debt while still financing the dividend. However, it is not expected that AbbVie will have much room to make any other significant acquisitions for several years while capital is tied up paying down debt and funding the robust dividend.

Bulls Say:

  • AbbVie supports a strong dividend yield, which should act as valuation support, as the cash flows to support the dividend look secure over the next few years. 
  • AbbVie’s increasing entrenchment in blood cancers should bode well for growth as pricing power remains solid in this therapeutic area of the pharmaceutical market. 
  • AbbVie’s next generation immunology drugs targeting the IL23 and JAK pathways should help mitigate the competitive threats facing Humira.

Company Profile:

AbbVie is a pharmaceutical company with a strong exposure to immunology and oncology. The company’s top drug, Humira, represents close to half of the company’s current profits. The company was spun off from Abbott in early 2013. The recent acquisition of Allergan adds several new drugs in aesthetics and women’s health.

(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.

Categories
Global stocks

BioNTech growth is projected following additional COVID-19 contracts and Shingles collaboration

Business Strategy and Outlook:

BioNTech, founded in 2008 in Germany, has become a key player in the development of personalized mRNA cancer treatments. The emerging biotech’s first commercial vaccine, for COVID-19, received its first authorization in December 2020, and its early-stage pipeline and mRNA technology platforms have caught the eye of several large pharmaceutical companies, resulting in collaborations and partnerships.

BioNTech’s internal discovery platform is focused on mRNA, including off-the-shelf and personalized mRNA drugs, but opportunistic acquisitions have brought in targeted antibodies and cell therapies as well. As such, BioNTech is not overly reliant on any one key drug candidate or drug class at this point, and it is poised to tackle cancer via many different mechanisms. Further, the company has a burgeoning vaccine pipeline for infectious diseases. In partnership with the Bill & Melinda Gates Foundation, BioNTech is developing vaccines for HIV and tuberculosis, and the company’s COVID-19 program in partnership with Pfizer and Fosun Pharma was built off an existing partnership with Pfizer for an influenza vaccine.

Financial Strength:

The fair value estimate of the stock is USD 200.00 per ADR from $177, after incorporating Europe’s recent COVID-19 vaccine option exercise for 2022, Pfizer’s latest update on contracted COVID-19 vaccine sales for 2023, and a small placeholder for potential profit share on an mRNA-based shingles vaccine.

Like most of its emerging biotech peers, BioNTech has historically burned through cash to fund research and development of its pipeline. The company has minimal debt on its balance sheet, as it has funded discovery and development with equity issues and collaboration payments from partnerships with large pharmaceutical firms.

The company is expected to continue to rely on these two avenues for cash for the next several years as well as a large inflow of cash from Comirnaty gross profits in 2021 and 2022. Outside of BioNTech’s COVID-19 vaccine candidates, we think the earliest approval could arrive in 2023, which would put the company on a path toward steady profitability. Management has taken advantage of a couple of opportunities to acquire early-stage assets and expand its geographic footprint to establish a U.S. research hub at low prices.

Bulls Say:

  • BioNTech’s pipeline, which relies on expertise in mRNA and bioinformatics, will be difficult to replicate by competitors. 
  • BioNTech will be able to command a premium price with its personalized cancer therapies, if successful. 
  • The rapid development of COVID-19 vaccine Comirnaty bodes well for the rest of BioNTech’s pipeline and the future of its mRNA research platform.

Company Profile:

BioNTech is a Germany-based biotechnology company that focuses on developing cancer therapeutics, including individualized immunotherapy, as well as vaccines for infectious diseases, including COVID-19. The company’s oncology pipeline contains several classes of drugs, including mRNA-based drugs to encode antigens, neoantigens, cytokines, and antibodies; cell therapies; bispecific antibodies; and small-molecule immunomodulators. BioNTech is partnered with several large pharmaceutical companies, including Roche, Eli Lilly, Pfizer, Sanofi, and Genmab. Comirnaty (COVID-19 vaccine) is its first commercialized product.

(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.

Categories
Commodities Shares

PG&E on path to test California wildfire insurance fund Income after Dixie fire report

Business Strategy and Outlook

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors. PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest $8 billion annually for the next five years, leading to 10% annual growth. After suspending its dividend in late 2017, PG&E should be positioned to reinstate it in 2024 based on the bankruptcy exit plan terms.

Financial Strength

PG&E has substantially the same capital structure as it did entering bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 22% and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust plans to sell its stake over time but had not sold any shares as of late 2021.

Bankruptcy settlements with fire victims, insurance companies, and municipalities totaled $25.5 billion, of which about $19 billion was paid in cash upon exit. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. It is estimated that PG&E will invest up to $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should eliminate any equity needs at least through 2023.

Bulls Say’s 

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities

Company Profile 

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.4 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

(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.