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Property

Hotel Property Investments’ yield attracts but concerns about the main tenant remain

Minature houses resting on pound coin stacks concept for property ladder, mortgage and real estate investment

Business Strategy and Outlook:

Hotel Property Investments generates predictable and growing revenue, with long-term leases and contracted rental increases getting a boost from the recent uptick in inflation. But the no-moat REIT also faces material risks. The main tenant is highly geared and faces threats from COVID-19 lockdowns and social distancing rules. Overall, the stock is considered to be fairly valued, with fair value estimate of AUD 3.10 per unit. Hotel Property Investments offers a forecast fiscal 2022 yield of 6% with modest growth potential. It has a long weighted average lease term of over 10 years and mostly triple-net leases that see the tenant pay for most property costs, including maintenance capital expenditure. Lease expiries are relatively well spread, with just 13% expiring in the five years to 2026 and a further 40% in the five years thereafter. In fiscal 2021, occupancy was 100%.

Another key positive is that contracted rental growth is high relative to most REIT peers. Two thirds of leases have annual rent uplifts of the lesser of 4% or twice the average of the last five years’ CPI inflation. However, rents reset to fair market rates when leases expire so actual rent growth over the long term is unlikely to be as strong as contracted rental uplifts suggest.

Financial Strength:

Hotel Property Investments’ credit metrics are relatively aggressive, with debt/assets of about 38%. This is significantly higher than peers, such as BWP at less than 20%.

Despite being mostly exposed to Queensland, which has so far experienced only minor impacts from COVID-19, Hotel Property Investments agreed to defer AUD 7.5 million of rent —equivalent to 12% of annual net rental income—for the main tenant for the period from April 2020 to September 2020. In addition, smaller tenants forced to close during lockdowns had rents abated, but this amounted to a negligible AUD 0.1 million in fiscal 2021. Further deferrals and abatements can’t be ruled out as lockdowns are a likely tool to control the spread of new variants. With interest rates currently low, the trust has been actively acquiring properties, including nine in fiscal 2021. The combination of acquisitions and rising property valuations have doubled the value of Hotel Property Investments’ property portfolio in the past eight years. Capitalisation rates are likely to ease lower in the near term to reflect recent market evidence, pushing book values up a little further.

Company Profile:

Hotel Property Investments is an Australian REIT with a portfolio of freehold pub properties primarily in Queensland. Its portfolio is almost exclusively leased to Queensland Venue Company on triple-net long-term leases where the tenant is responsible for outgoings (except land tax in Queensland), resulting in relatively low maintenance expenses. Most leases also provide for annual rental increases typically at the lower of 4% or two times the average of the last five years consumer price index.

(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

Smucker Continues to Benefit From At-Home Food Consumption but Struggles to Stabilize Market Shares

Business Strategy and Outlook

Despite having leading positions in many categories (fruit spreads, peanut butter, dog treats, coffee, and cat food) Morningstar analysts believe that Smucker lacks an economic moat, either via its brand intangible assets or entrenched retail relationships. Morningstar analysis shows that for most of its sales base, Smucker does not possess pricing power and its market shares are slipping. This dilemma cannot be attributed to a lack of support, as Smucker’s brand investments exceed that of its peers and suspected that these expenditures are not as productive as its competitor.

Morningstar analysts expect that Smucker’s organic sales growth will average 2% annually over the long term, and it is also expected that market share in coffee and dog food will persist as Smucker struggles to compete with strong brands such as Starbucks  and BLUE. As per Morningstar analyst perspective, Smucker will be one of the few packaged food companies to realize lasting benefits from the pandemic, given the high-single-digit increase in pets adopted during the crisis and the likelihood that more flexible work arrangements should result in higher consumption of at-home coffee. This impact will not be immaterial, as collectively, pet food and coffee compose nearly 70% of Smucker’s sales. Further, Smucker’s sales trajectory should improve as Uncrustables (5% of fiscal 2021 sales) becomes a greater portion of the mix, as the brand has grown double-digits in each of the past several years. In addition, recent and pending divestitures of slower-growing brands (Crisco, Natural Balance, private label dry pet food, juices, and grains) should further improve Smucker’s ability to accelerate its top-line growth.

Financial Strength

After years of a conservatively leveraged balance sheet, with net debt/adjusted EBITDA consistently below 2 times, the Big Heart Pet Brands acquisition in 2015 increased the ratio to above 6. Net debt to adjusted EBITDA was 2.4 times in fiscal 2021. Smucker’s free cash flow as a percentage of revenue has averaged high single digits to low double digits historically and similar results are expected forward also. Smucker seeks to invest half of its capital in growth initiatives (capital expenditures and acquisitions) and return half to stakeholders via dividends, share repurchase, and debt reduction. Morningstar analysts expect that Smucker will invest 3.5% of annual sales in capital expenditures over the long term. Analysts also expect that Smucker will continue to reshape its portfolio through acquisitions and divestitures. The estimated dividend payout ratio will range between 40% and 50%, in line with management’s long-term targets, with forecasts anticipating 2%-6% annual dividend increases. Morningstar analysts also expect Smucker to repurchase 0%-5% of shares annually, which we view as a prudent use of capital if the share price remains below our fair value estimate.

Bulls Say

  • Smucker’s sales trajectory should improve over time due to the divestiture of slow-growing brands and the increasing mix of Uncrustables, which grows at a double-digit pace. 
  • During the pandemic, consumers adopted 11 million pets and purchased 3 million coffee machines, which should provide a lasting benefit for categories representing nearly 70% of Smucker’s fiscal 2021 sales. 
  • Executive leadership changes (newly created chief operating officer role, leadership changes for the U.S. sales organization and the pet food segment) should improve execution and enhance accountability.

Company Profile

J.M. Smucker is a packaged food company that primarily operates in the U.S. retail channel (88% of fiscal 2021 revenue), but also in U.S. food-service (5%), and international (7%). Its largest segment is pet food and treats (36% of 2021 revenue), with popular brands such as Milk-Bone, Meow Mix, 9Lives, Kibbles ‘n Bits, Nature’s Recipe, and Rachael Ray Nutrish. Its second-largest category is coffee (33% across channels) with the number-two brand Folgers and number-six Dunkin’. Other large categories are peanut butter (10%), with number-one Jif, fruit spreads (5%) with number-one Smucker’s, and frozen hand-held foods (5%) with number-one Uncrustables.

 (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

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

Business Strategy and Outlook

Tesla is the largest battery electric vehicle automaker in the world. In less than a decade, the company went from a startup to a globally recognized luxury .Tesla also plans to sell multiple new vehicles over the next several years. These include a platform that will be used to make an affordable sedan and SUV, a light truck, a semi truck, and a sports car.

Tesla’s strategy is to maintain its market leader status as EVs grow from a niche auto market to reaching mass consumer adoption. To do so, the company is undergoing a massive capacity expansion to increase the number of vehicles it can produce. Tesla also invests around 5% of its sales in research and development, focusing on improving its market-leading technology and reducing its manufacturing costs. For EVs to see mass adoption, they need to reach cost and function parity with internal combustion engines. To reduce costs, Tesla focuses on automation and efficiency in its manufacturing process.To reach functional parity, EV will need to have adequate range, reduced charging times, and availability of charging infrastructure.Tesla continues to grow its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. The company is attempting to take a larger share of its customers’ auto-related spending, which includes selling insurance and offering paid services such as autonomous driving functions.

Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow.

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

On Jan. 2, Tesla reported strong fourth-quarter and full-year vehicle delivery numbers. On the year, Tesla reported 936,172 vehicles delivered, which is up over 87% year on year versus 2020. Morningstar analyst have updated our model to incorporate higher 2021 sales volumes and have raised our outlook for 2022 as well as forecasted that Telsa will deliver a little over 1.5 million vehicles in 2022, which represents over 60% year-on-year growth. Separately, Morningstar analyst have decreased  2022 gross margin forecast for Tesla as they increased production costs associated with the opening of the two new production plants in Austin, Texas, (U.S.) and in Berlin, Germany. Our long-term outlook is largely unchanged as we continue to expect Tesla’s sales growth will slow. Having updated model to reflect these changes, Morningstar analyst have increased Tesla fair value estimate to $700 per share from $680.

Financial Strength

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of Sept. 30. Total debt was roughly $8.2 billion; however, total debt excluding vehicle and energy product financing (nonrecourse debt) was around $2.1 billion. Cash and cash equivalents stood at $16.1 billion as of Sept. 30.To fund its growth plans, Tesla has used credit lines, convertible debt financing, and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. Morningstar analyst thinks this makes sense as funding massive growth solely through debt adds near-term risk in a cyclical industry.Management has stated a preference to pay down all debt over time and continues to make progress on this goal. Regardless, with positive free cash flow generation and a clean balance sheet, we think Tesla could maintain its current levels

Bull Says

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems. 
  • Tesla will see higher profit margins as it achieves its plan to reduce battery costs by 56% over the next several years. 
  • Through the combination of its industry-leading technology and unique supercharger network, Tesla offers the best function of any EV on the market, which should result in its maintaining its market leader status as EV adoption increases.

Company Profile

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and midsize sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light truck, a semi truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

 (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
Shares Technology Stocks

Reinitiating Coverage of Ceridian HCM With Narrow Moat, Stable Trend Rating and $80 FVE

Ceridian offers payroll and human capital management solutions via its flagship Dayforce platform, secondary platform Powerpay targeting small businesses in Canada, and remaining legacy Bureau products such as tax services. The company benefits from high customer switching costs, allowing it to retain clients, upsell add-on modules, and earn a steady stream of recurring revenue at a low marginal cost, underpinning our narrow moat rating. Morningstar analysts expect Ceridian’s growing record of performance should help to attract new business, increase market share, and expand into new global markets. The shares currently screen as overvalued, trading at a 30% premium to our fair value estimate.

Ceridian has disrupted incumbent providers and taken share of the expansive and growing HCM market through the appeal of its agile, cloud-based solutions that offer an alternative to legacy on-premises solutions or solutions cobbled together using multiple databases or platforms. The company derives most of its revenue from Dayforce, which is geared to larger enterprises wishing to streamline complex human resources operations across multiple jurisdictions on a unified platform and leverage the platform’s scalable infrastructure. Dayforce offers real-time continuous payroll calculation and, as a natural extension, on-demand pay. Leveraging this functionality, Ceridian introduced Dayforce Wallet in 2020, which allows clients’ employees to load their net earned wages to a prepaid Mastercard, generating interchange fee revenue for Ceridian when purchases are made. While this innovation is being replicated by competitors, we expect it will create a promising new high-margin revenue stream for Ceridian that leverages the firm’s exposure to millions of employees and their earned wages.

Morningstar analysts estimate revenue to grow at an 18% compound annual rate over the five years to fiscal 2025, driven by mid-single digit industry growth, market share gains, and mid-single digit group revenue per client growth. As per Morningstar analyst perspective, 12% average annual growth in Dayforce recurring revenue per client due to an increasing skew to larger businesses and greater module uptake. This growth will be offset by low single-digit revenue growth per Powerpay client due to minimal price increases and modest module uptake. Across both platforms, Morningstar expects fierce competitive pressures to limit like-for-like pricing growth to low single digits. Over the same period,  expect operating margins to increase to about 14% from less than 1% in a COVID-19-affected 2020 and 9% in a pre-COVID 2019. We anticipate this uplift will be driven by operating leverage from increased scale and higher interest on client funds.

Ceridian has made a tactical shift to target larger businesses and move further upmarket into the large enterprise and global space. While this drives higher revenue per client and exposes the company to a larger pool of client funds, we expect fierce competitive pressures and powerful clients will lead to increased pricing pressure, limiting margin upside potential over the long run. Morningstar analysts assume Ceridian will achieve midcycle operating margins around 31% in 2030, which is comparable with our forecast for wide-moat Workday, which also targets large enterprises with its cloud-based HCM software. By comparison, morningstar analyst forecast wide-moat Paychex, which targets small and midsize clients with significantly lower bargaining power, will achieve mid cycle operating margins of 43%. Ceridian operates in a highly competitive market, and  expect it will need to maintain high levels of investment to ensure that the functionality of its product suite is comparable with peers’ and meets clients’ needs.

Company profile

Ceridian HCM provides payroll and human capital management solutions targeting clients with 100-100,000 employees. Following the 2012 acquisition of Dayforce, Ceridian pivoted away from its legacy on-premises Bureau business to become a cloud HCM provider. As of fiscal 2020, nearly 80% of group revenue was derived from the flagship Dayforce platform geared toward enterprise clients. The remaining revenue is about evenly split between cloud platform Powerpay, targeting small businesses in Canada, and legacy Bureau products.

(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 Trading Ideas & Charts

NiSource Kicks Off 2022 Regulatory Year With Constructive Rulings in Kentucky, Pennsylvania

Business Strategy and Outlook

After decades of deriving most of its income from natural gas distribution and midstream businesses, NiSource has transitioned to a more diversified earnings mix. About 60% of NiSource’s operating income comes from its six natural gas distribution utilities and 40% from its electric utility in Indiana following the 2015 separation from Columbia Pipeline Group. NiSource’s utilities have constructive regulatory frameworks that allow it to collect a cash return of and a cash return on the bulk of its capital investments within 18 months. 

In October 2020, NiSource sold its Columbia Gas of Massachusetts utility and received $1.1 billion of proceeds that it used to strengthen the balance sheet and prepare for its planned infrastructure investments. The sale came nearly two years after a natural gas explosion on NiSource’s Massachusetts system killed one person north of Boston. Insurance covered roughly half of the almost $2 billion of claims, penalties, and other expenses. Earnings are set to rebound quickly from their low in 2020 when COVID-19 pandemic costs, lower energy use, the Massachusetts utility sale, and a large equity issuance weighed on earnings. We expect modest customer growth combined with NiSource’s infrastructure growth investments to support 8% annual earnings growth and 6% annual dividend growth from 2021 to 2025.

Financial Strength

NiSource has issued a substantial amount of equity in the past few years in part to fund its large infrastructure growth projects and in part to cover liabilities arising from the Massachusetts gas explosion. This dilution and the sale of Columbia Gas of Massachusetts has kept earnings mostly flat since 2018.NiSource’s debt/capital topped 67% at year-end 2017, but huge equity infusions have brought that down to more sustainable levels in the mid-50% range. NiSource issued over $1 billion of common stock and $880 million of preferred stock in 2018 and 2019. The Massachusetts utility sale in 2020 raised $1.1 billion, and NiSource issued $862.5 million of convertible preferred equity units in early 2021. 

NiSource has grown its dividend nearly 40% since the 2015 Columbia Pipeline Group spin-off, but the growth has not been consistent. The company increased its dividend in mid-2016 by 6.5% and again by 6.1% in the first quarter of 2017, then by 11.4% in 2018. But the 2019 dividend increase was only 2.6% following the Boston gas explosion. NiSource is past the peak of its five-year capital spending plan and its equity needs shrink. 

Bulls Say’s 

  • The dividend to grow near 5% annually during the next few years before accelerating to keep pace with earnings in 2024 and beyond. 
  • NiSource should benefit from Indiana policymakers’ desire to cut the state’s carbon emissions by replacing coal generation with renewable energy, energy storage, and possibly hydrogen. 
  • New legislation has improved the regulatory framework in Indiana for NiSource’s electric and natural gas distribution utilities.

Company Profile 

NiSource is one of the nation’s largest natural gas distribution companies with approximately 3.5 million customers in Indiana, Kentucky, Maryland, Ohio, Pennsylvania, and Virginia. NiSource’s electric utility transmits and distributes electricity in northern Indiana to about 500,000 customers. The regulated electric utility also owns more than 3,000 megawatts of generation capacity, most of which is now coal-fired but is being replaced by natural gas and renewables.

(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

Erkan resigns as co-CEO of First Republic Bank; however, future is projected to be strong

Business Strategy and Outlook:

First Republic Bank is one of the more unusual banks. It has a uniquely focused business model, with a high service offering aimed at wealthy clients concentrated in costal urban areas. The bank is still led by its founder, Jim Herbert, and has been able to churn out remarkably high organic growth year after year, resulting in compounded asset growth of roughly 20% over the past 10 years compared with an industry growth rate of closer to 5%.

The great strength of First Republic Bank’s approach is the strict adherence to its strategy of retaining and attracting high-net-worth clients through uniquely personal service. This strategy requires retaining talent, which the bank accomplishes through its culture and compensation structure. As such, the bank’s efficiency levels tend to be middling compared with peers. However, this model has worked, and the bank is able to generate substantially lower client attrition rates and higher client satisfaction levels as measured through Net Promoter Score. The bank is also a conservative underwriter, with losses consistently coming in below peers through the cycle.

Financial Strength:

The fair value of this stock is $195 per share, which equates to 2.9 times tangible book value as of September.

First Republic Bank is in sound financial health. The bank reported a common equity Tier 1 capital ratio of 9.8% as of September 2021 and given its low appetite for risk and excellent underwriting record. The bank has consistently delivered superior performance in past recessions with very low credit costs and has also performed admirably through the pandemic-driven downturn. The banks loan book is conservatively positioned with more than 50% of mortgages and approximately 80% of loans collateralized by real estate. The bank has a favorable liability mix with total deposits making up approximately 90% of total liabilities with the remainder of liabilities made up of FHLB advances and long-term debt. The bank also had roughly $2.1 billion in preferred stock outstanding. The capital-allocation plan for First Republic Bank is quite atypical in our banking coverage as it regularly raises additional capital through share issuances to fund its aggressive growth. The bank does not engage in share buybacks and maintains a relatively low dividend pay-out ratio.

Bulls Say:

  • First Republic is a rare, high-growth bank in a mature industry that tends to see GDP-like asset growth levels. The bank is also a conservative underwriter. This is a valuable and powerful combination that should drive peer-beating earnings growth for years. 
  • First Republic’s wealth management business is growing assets at a solid double-digit percentage rate, further cementing switching costs and revenue growth. 
  • First Republic’s culture and structure are difficult to replicate, meaning, its business model should continue to take share and see success for years to come.

Company Profile:

First Republic offers private banking and wealth management services to high-net-worth clients. Services are primarily offered in the San Francisco, New York City, and Los Angeles markets. The bank was founded in 1985.

(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

Nordson Crop Is Poised to Deliver Strong Organic Growth Fueled by Advanced Technology Solutions

Business Strategy and Outlook

Nordson is a leading manufacturer of equipment used for dispensing adhesives, coatings, sealants, and other materials. The company enjoys strong market share across its business lines, and its products are often used in niche applications where competition is limited. Nordson differentiates itself by offering highly engineered and customizable solutions which perform a mission-critical role in a customer’s manufacturing process. Nordson thrives in times of change, as innovation in its end markets drives demand for new and improved solutions. In the long run, Nordson is poised to capitalize on favorable secular trends such as increasing adoption of 5G and autonomous vehicles, which we expect to create new opportunities for its dispensing business.

Financial Strength

Nordson’s financial health is satisfactory, which should help the firm navigate uncertainty due to the coronavirus outbreak. As of Oct. 31, 2021, the company owed $782 million in long-term debt while holding $300 million in cash and equivalents. Additionally, Nordson can tap into its $850 million revolving credit facility, which remains undrawn. It is estimated that Nordson will have a debt/adjusted EBITDA ratio of roughly 1.0 times in fiscal 2022, which is roughly in line with many of its industrial peers. Its generate that average annual cash flow of around $750 million over the next five years, sufficient to meet its debt obligations and maintain its dividend. After updating our model following Nordson’s 10-K release, its increase fair value estimate to $231 from $224. 

Bulls Say’s 

  • Nordson is poised to benefit from innovation in its end markets, including autonomous vehicles, 5G, and 3D wafer stacking, as new technologies drive demand for the firm’s dispensing solutions. 
  • Over half of Nordson’s revenue is recurring, which helps mitigate the firm’s exposure to cyclical end markets. 
  • Nordson has a large installed base of equipment and strong market share across a number of niche end markets.

Company Profile 

Nordson is a manufacturer of equipment (including pumps, valves, dispensers, applicators, filters, and pelletizers, among other equipment) used for dispensing adhesives, coatings, sealants, and other materials. The firm serves a diverse range of end markets including packaging, medical, electronics, and industrial. Nordson’s business is organized into two segments: industrial precision solutions (53% of sales in fiscal 2021) and advanced technology solutions (47% of sales in fiscal 2021). The company generated approximately $2.4 billion in revenue and $615 million in operating income in its fiscal 2021.

(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
Shares Technology Stocks

Gentex’s Balance Sheet Gives the Firm Strength to Handle the Unexpected

Business Strategy and Outlook

Gentex manufactures auto-dimming rear- and side-view mirrors that use electrochromic technology. These mirrors automatically darken to eliminate headlight glare for drivers and have many other applications. With over 1,700 patents worldwide, some valid through 2044, and a dominant 94% market share, up from 77% in 2003, Gentex has a narrow economic moat it should be able to protect for a long time, in our opinion. 

The growth prospects for auto-dimming mirrors look strong. Gentex estimates that in 2018, about 31% of all cars had interior auto-dimming mirrors, and about 13% had at least one exterior auto-dimming mirror. Demand remains healthy with annual revenue growth often exceeding industry vehicle production growth. Growth will come from increased vehicle penetration as more original-equipment manufacturers make the safety benefit of auto-dimming technology available and as Gentex’s research leads to new, advanced-feature mirrors that ultimately become standard products.

Financial Strength

Gentex is in excellent financial shape, with no debt and $270 million of cash on its balance sheet at the end of third-quarter 2021. Cash and investments were about 28% of total assets at that time. The company has ample cash on hand to fund more R&D or a higher dividend if the board chooses. Total cash and investments was $481.6 million, or $2.03 per diluted share. Gentex has been paying a dividend since 2003. Gentex took on $275 million of debt for the HomeLink acquisition which it finished paying off in 2018. In October 2018, Gentex obtained a new $150 million unsecured credit facility that expires in October 2023. 

Gentex can request an additional $100 million on the credit limit under certain conditions. The investments mostly consist of short-term government obligations, blue-chip stocks, and mutual funds. As of March 2018, the company targets cash and investments of $525 million, down from its previous target of $700 million. Management will often just speak in loose terms and say it targets around $500 million.

Bulls Say’s 

  • Auto-dimming technology has applications to other parts of the car like headlights, as well as outside autos such as airplane windows. Although small now, markets outside the auto industry could prove to be very large businesses down the road. 
  • The company’s financial health is so strong that we think Gentex can survive any downturn in the U.S. easier than other auto suppliers can. 
  • Biometrics, surgical room utlraviolet lighting, and electronic toll payments could open up new revenue streams for the company.

Company Profile 

Gentex was founded in 1974 to produce smoke-detection equipment. The company sold its first glare-control interior mirror in 1982 and its first model using electrochromic technology in 1987. Automotive revenue is about 98% of total revenue, and the company is constantly developing new applications for the technology to remain on top. Sales from 2020 totaled about $1.7 billion with 38.2 million mirrors shipped. The company is based in Zeeland, Michigan. 

(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

Unpredictability strikes Flight Centre Shares keeping Intrinsic Value secure

Business Strategy and Outlook

A wave of COVID-19-induced damages has been inflicted on Flight Centre since late March 2020. Government restrictions on travel and border control (international, domestic), grounding of airline capacity and strict lockdown measures on consumers have created a 

unique squeeze on the group. It is considered that the measures to execute a severe reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the malaise.

Flight Centre is one of the world’s largest travel agents, but it still generates significant earnings in Australia and New Zealand. Unparalleled scale and brand strength in the domestic travel market has provided buying power and pricing flexibility that resulted in high returns on capital. Flight Centre has a strong network of services that has driven solid end-user traffic and bookings over the past 20 years, but it is rarely assumed that this is sufficient to protect the company against online competitors over the next 10 years.

Because of the discretionary nature of travel and high levels of operating leverage, earnings can be very volatile. During the financial crisis, net profit after tax fell to AUD 38 million in fiscal 2009 from AUD 143 million in fiscal 2008. The company is heavily loss-making during the current 2020 pandemic also. This inherent volatility means fair value uncertainty is high.

Flight Centre’s considerable scale and extensive store network have made the firm a key distribution channel for travel suppliers and generated cost advantages that enable it to offer competitive prices. However, with the warning from online competitors increasing, we believe physical stores are likely to increasingly lose relevance longer term.

From about 2005, facing a maturing domestic market, the company increased its focus on offshore markets, particularly the United Kingdom and United States. The group made several offshore acquisitions during this period. The company is also increasingly focused on corporate travel, which is more structurally resilient than leisure.

Financial Strength

As at the end of September 2021, there was AUD 969 million of available liquidity, thanks to the AUD 700 million injected by shareholders in April/May 2020 and two convertible bond issues totalling AUD 800 million. It is believed, this is sufficient liquidity for Flight Centre to see through until mid-2023, even if total transaction volume remains at around 30% of pre-COVID-19 TTV levels.

Bulls Say’s

  • A strong balance sheet allows Flight Centre to take benefit of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to address specific market segments more effectively. 
  • Brand strength provides a powerful foundation for the blended online/physical store offering. 
  • Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favourable deals with travel providers.

Company Profile 

Flight Centre Travel is one of the largest travel agencies in the world. It operates an extensive network of shops globally, most of them located in Australia, the United States, and Europe. The group participates across the whole spectrum of the travel services market, including leisure travel retailing, in-destination experiences, corporate travel arrangement, and youth travel retailing. The services are facilitated via some 40 brands, with Flight Centre being the flagship brand in the leisure segment and FCM Travel the key brand in the corporate.

(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 Trading Ideas & Charts

Total Energies Does Not Plan Quick Retreat From Oil and Gas Despite Planned Renewables Growth

Business Strategy and Outlook

Total Energies’ strategic plan aims to achieve net zero emissions by 2050 while delivering near-term financial performance in the event of a lower-oil-price environment. 

 Total has already started to move away from oil products with the conversion of its La Mede refinery to a renewable diesel producer. Conversion of the Grandpuits refinery to produce renewable diesel and bioplastics is set to follow. Together with coprocessing facilities at other refineries in Europe, the U.S., and Asia, Total expects to produce 100 thousand barrels a day of renewable diesel by 2030. Gross renewable generation capacity is expected to grow from about 10 gigawatts today to 35 GW by 2025 as Total invests a minimum of $3 billion per year or just over 20% of total spending from 2021. Current and planned capacity is primarily in solar, but Total is pushing further into floating offshore wind comprising 40% of planned growth, which should drive growth beyond 2025 and where it can leverage offshore capabilities from its oil and gas operations.

Financial Strength

Total remains one of the least leveraged global integrated firms with net debt to capital of 17.7% at the end of third-quarter 2021. Management aims to keep gearing below 20% and maintain an A credit rating. In 2021, Total expects net investments, including acquisitions and divestitures, close to $13 billion. Total committed to increasing the dividend by 5%-6% per year and repurchasing an incremental $5 billion worth of shares, but after suspending repurchases in 2020, abandoned any specific capital return targets. Instead, management has committed to supporting the dividend with oil prices as low as $40/bbl and will repurchase shares at higher oil prices when gearing is below 20%. As it is at that level now, management has resumed share repurchases starting in the fourth quarter of 2021. Going forward, Total plans to return up to 40% of additional cash flow if prices are above $60/bbl.

Bull Says

  • Despite reducing capital spending, Total expects to increase production 2% per year on average through 2025, led by growth in LNG projects. 
  • Already about 50% of Total’s production in 2020 and expected to grow, long-plateau production projects like LNG reduce decline rates and reinvestment necessary to maintain production levels.
  • Management has committed to supporting the dividend at $40/bbl. Combined with relatively low leverage, Total’s payout is one of the safer in the sector despite one of the highest yields.

Company Profile

TotalEnergies is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2020, it produced 1.5 million barrels of liquids and 7.2 billion cubic feet of natural gas per day. At year-end 2020, reserves stood at 12.3 billion barrels of oil equivalent, 43% of which are liquids. The company operates refineries with capacity of nearly 2.0 million barrels a day, primarily in Europe, distributes refined products in 65 countries, and manufactures commodity and specialty chemicals. It also holds a 19% interest in Russian oil company Novatek.

 (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.