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Dividend Stocks

Coca – Cola cash flow generation improved with ongoing FCF of $661m and cash realisation of 124.7%

Coal is excavated at the Jim Bridger Mine, owned by energy firm PacifiCorp and the Idaho Power Company, outside Point of the Rocks, Wyoming March 14, 2014. West Virginia mined 120 million tons (109 metric tons) of coal in 2012, second to Wyoming, or about 12 percent of total U.S. production. Kentucky was third with about 9 percent of output, according to the National Mining Association. REUTERS/Jim Urquhart (UNITED STATES - Tags: ENERGY BUSINESS) - RTR3H5NY

Investment Thesis 

  • Currently under a takeover target. 
  • Structural challenges – consumers moving away from carbonated soft drinks (CSD). 
  • Increased competitive pressures from other beverage companies or margin pressure/erosion from supermarket chains.
  • Cost pressure eroding margins, including the NSW container deposit scheme. 
  • CCL not being able to push through price increases to clients. 
  • CCL has a strong global brand portfolio with diversified product offering.
  • Strong growth in NZ, Indonesia and PNG. 
  • Management is focused on cost out and reinvestment, growing efficiency and margins as a result.

Key Risks

  • CCL unable to sustain the turnaround especially in International segments. 
  • Company meets or exceeds its full year guidance. 
  • Increased competitive pressures. 
  • Cost pressure eroding margins, including the NSW container deposit scheme. 
  • CCL not being able to push through price increases to clients.
  • International segment unable to deliver growth.

Key Financial Results 

  • Volumes for the year were down -4.2% over pcp and revenue declined -3.5% to $2.94bn with a more pronounced decline in ongoing EBIT (down -14.7% to $362.6m with margin down -170bps to 12.3%) due to changes in channel and pack mix (multi-serve PET and multipack cans increasing and demand for immediate consumption offerings decreasing) as consumer behaviour responded to Covid-19 lockdown measures. Management have seen a recovery in volumes starting 2H20, with strong momentum carried into January 2021 trading. 
  • The Company was able to achieve market share gains in the non-alcohol ready to drink (NARTD) market which grew during the year, delivering NARTD volume share gains of +0.7% with Coca-Cola Trademark increasing its volume share by +0.4%. 

Company Profile 

Coca-Cola Amatil (CCL) manufactures, distributes and sells carbonated soft drinks along with still and mineral waters, fruit drinks, ready-to-drink coffee and tea and flavoured milk drinks. CCL also rents and services commercial refrigeration equipment to food/beverage manufacturers.

(Source: BanyanTree)

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

Johnson Matthey PLC diversified global stock with good financial health

Business Strategy and Outlook

Johnson Matthey is a U.K.-based specialty chemical company with unique expertise in catalysts, chemicals, and manufactured products derived from platinum group metals, or PGMs. Sales are fairly concentrated in developed markets, particularly Europe and North America. China, growing fast, now accounts for 15% of sales. Roughly 60% of sales are targeted at the automobile sector. 

The clean air segment is the company’s largest (51% of EBIT) and is the foundation of narrow moat rating. The segment, a global leader in a highly concentrated market, manufactures auto catalysts for cars and heavy-duty trucks that reduce emissions and improve air quality. Success is primarily dependent on increasingly stringent environmental legislation, which allows the company to develop novel solutions that can be sold at premium prices. While the advent of electric vehicles will ultimately cause auto catalysts to move into secular decline, it is still seen to have more than a decade of high returns for the business.

Other core segments include efficient natural resources and health, which contribute 44% and 5% of EBIT, respectively. Efficient natural resources manufacture industrial catalysts for the chemical and oil and gas sectors, licenses technology for chemical processing, and includes the precious metals refining and manufacturing business. EBIT should fall in the next few years as high PGM prices normalize, but the overall outlook for the segment remains solid. The health segment is a global leader in manufacturing active pharmaceutical ingredients, or APIs, for controlled substances like opiates and amphetamines. Growth will depend on success of the pipeline of new APIs, which is still a few years away. 

The company also offers fuel cells, technology for blue hydrogen production, and components for green hydrogen plants

Financial Strength

Johnson Matthey is in good financial health. The model-driven credit risk assessment is moderate. The company targets a net debt (including post-tax pension deficits) to EBITDA ratio of 1.5-2 times. As of September 2020, the ratio stood at 1.6 times. The company’s debt maturity profile is balanced, with a good portion of borrowings having maturity dates more than five years and no major refinancing due in 2020 or 2021.

Bulls Say’s

  • The pipeline of increasing global environmental legislation targeting vehicle emissions remains full for the foreseeable future. 
  • Johnson Matthey’s expertise in hydrogen and fuel cells should enable the company to be a meaningful player when these markets develop. 
  • Johnson Matthey is positioned to benefit from current megatrends such as increasing environmental concerns and rising wealth in emerging markets.

Company Profile 

Based in the U.K., Johnson Matthey is a global leader in production of emissions catalysts for automobiles and trucks. The company also manufactures industrial catalysts for the chemicals and oil and gas sectors, and a variety of other industrial products derived from platinum-group metals.

(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

Magellan Financial Group Ltd Loses Largest Mandate; FVE reduced to AUD 38

Business Strategy and Outlook

Magellan is an active manager of listed equities and infrastructure. The firm has had considerable success in growing funds under management, or FUM, owing to its superior track record of outperformance, product expansion initiatives, and strong distribution capabilities.

The firm has a fundamental, high-conviction investment approach. Its flagship Global strategy has historically tilted toward IT, e-commerce platforms, and consumer franchises; preferring large, developed market multinationals. FUM have been attracted by consistently achieving excess returns with lower volatility and drawdowns relative to peers.Magellan’s products are well-distributed. Its funds are featured across platforms, included in model portfolios, and are well-rated. 

There is a focus on targeting retail investors, with product expansion an increasingly common driver of growth. As per Morningstar analyst, Magellan has built the foundations for ongoing earnings growth, supported by its economic moat, product variety, and historically strong track record. Regardless, the potential earnings upside from these positive traits will take time to manifest.

Magellan Loses Largest Mandate, but Sell-Off Way Overdone

Morningstar analyst reduced its fair value estimate for Magellan Financial Group by 25% to AUD 38 per share, following client the termination of its mandate with its largest client, St James’s Place, or SJP. As per the viewpoint of Morningstar analyst, most of Magellan’s institutional clients hired the group to deliver returns of about 10% per year and focus on downside protection. It is an investment undertaking Magellan has always communicated to the market, and a hurdle it consistently surpassed, with institutional returns averaging 18% per year over the last five years. As Magellan’s recent underperformance has only begun since November 2020, it was believed that institutional clients would negotiate for lower fees rather than terminate Magellan. Regretfully, this has not transpired in SJP’s case.

Financial Strength

Magellan is in sound financial health.The firm has a conservative balance sheet with no debt, with its financial position also boosted by solid operating cash flows. As of June 30, 2021, Magellan had cash and equivalents of about AUD 212 million and financial investments with a net fair value of around AUD 453 million mainly invested in its own unlisted funds and listed shares. This should provide it with enough liquidity to cope with most market conditions. Its high dividend payout ratio of: (1) 90%-95% of the net profit after tax of its core funds management business before performance fees; and (2) annual performance fee dividend in the range of 90%-95% of net crystallised performance fees aftertax reflects the capital-light nature of asset management.

Bull Says

  • The majority of Magellan’s earnings come from a few large funds, meaning it has a high reliance on key investment personnel and the performance of its main funds. Should key people leave, or its main funds underperform for a sustained period, outflows could be material. 
  • There is increasing competition from other active international equity managers and new international equity funds from incumbents. 
  • The firm faces fee pressure from the increasing popularity of lower-cost alternatives, such as indextype products and ETFs.

Company Profile

Magellan Financial Group is an Australia-based niche funds manager. Established in 2006, the firm specialises in the management of equity and infrastructure funds for domestic retail and institutional investors. Magellan has been particularly successful in winning mandates from global institutional investors. Current FUM is split across global equities, infrastructure and Australian equities

(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
Technology Stocks

Omicron Buoys Sonic Healthcare Coronavirus Testing but Our Long-Term View Stands

Business Strategy and Outlook

Sonic’s “medical leadership” model recognises the importance of the referring doctor as the company seeks to differentiate itself on service levels. Success in the model is evidenced by organic growth consistently tracking ahead of the market, suggesting market share gains. Sonic’s organic volume growth in its core laboratories segment has typically ranged between 3% and 4% and we forecast a similar rate over our 10-year forecast period. The volume growth is underpinned by population growth, aging demographics in developed markets, higher incidence of diseases and wider adoption of preventative diagnostics to manage healthcare costs.

Laboratory medicine, or pathology, has a high fixed cost of operation and thus benefits from volume growth to drive lower cost per test outcomes. Sonic benefits from cost efficiencies by maximising throughput through its network of labs and collection centres. Higher testing volumes result in a lower cost per test as labour, equipment, leases, transportation and overhead costs are all leveraged.

Financial Strength

Sonic is in a strong financial position. Free cash flow conversion of earnings prior to acquisition spend has averaged 98% over the last 10 years and has allowed Sonic to quickly repay the debt funding its acquisitions. At the end of fiscal 2021, Sonic reported AUD 921 million in net debt representing net debt/EBITDA of only 0.4 times, below the 2.0 to 2.7 times range targeted by management, and well below the 3.5 times covenant. Sonic also has a progressive dividend policy which is communicated as a minimum of an equal dividend per share to the prior year.

Our AUD 33 fair value estimate factors in 4% group revenue growth in a typical year and a midcycle operating margin of 14%. It is estimated that the deliver EPS growth of roughly 5% in a typical year. Partly offsetting this was the Australian government cutting the reimbursement rate for private providers to AUD 72.25 per test from AUD 85 prior, which is in place until June 30, 2022. The deal broadens Sonic’s existing U.S. footprint by instantly adding annualised revenue of roughly USD 110 million, or 7% of Sonic’s fiscal 2021 U.S. laboratory revenue.

Bulls Say’s 

  • Sonic boasts leading market positions in most of its geographies and benefits from cost advantage derived from scale. 
  • Pathology and diagnostic imaging are highly defensive industries that influence the majority of treatment decisions. 
  • Free cash flow conversion prior to acquisition spend has averaged 98% of earnings over the preceding 10 years and forecast to remain high, allowing Sonic ample flexibility to reinvest in the business.

Company Profile 

Sonic Healthcare is a global pathology provider. It is the largest private operator in Australia, Germany, Switzerland and the U.K., the second largest in Belgium and New Zealand and the third largest in the U.S. In addition to pathology, which contributes roughly 85% of group revenue, Sonic is the second largest player in diagnostic imaging in Australia and the largest operator of medical centres in Australia. The company typically earns about 40% of group revenue in Australia and New Zealand, 25% in the U.S. and 35% in Europe

(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

Xcel Energy Inc: Aims to deliver 100% carbon-free electricity by 2050.

Business Strategy and Outlook

Xcel Energy’s regulated gas and electric utilities serve customers across eight states and own infrastructure that ranges from nuclear plants to wind farms, making the company a barometer for the entire utilities sector. That barometer is signalling a clean energy future ahead. Xcel took an early lead in renewable energy development, especially wind energy across its central U.S. service territories. The company now plans to invest $26 billion in 2022-26, much of it going to renewable energy projects and electric grid infrastructure to support clean energy.

Xcel could spend more than $1 billion per year on renewable energy and other clean energy initiatives as its focus shifts from wind to solar. Transmission to support renewable energy represents about one third of its investment plan. Politicians and regulators in Colorado, Minnesota, and New Mexico are pushing aggressive environmental targets, which could extend Xcel’s growth potential. Xcel aims to deliver 100% carbon-free electricity by 2050.

Xcel’s investment plan gives investors a transparent runway of 7% annual earnings and dividend growth potential. Xcel has more regulatory risk than its peers because of its large investment plan.

Financial Strength

Xcel Energy has a strong financial profile. Its key challenge is financing $26 billion of capital investment during the next five years with minimal equity dilution. Most of Xcel’s planned investments benefit from favourable rate regulation partially offsetting their financing risk. However, regulatory lag remains a key issue. Xcel’s strong balance sheet has helped it raise capital at attractive rates. 

Xcel’s consolidated debt/capital leverage ratio could creep toward 60% during its heavy spending in 2022-23, it is expected normal levels around 55%, which includes $1.7 billion of long-term parent debt.

Xcel has been issuing large amounts of new debt since 2019 at coupon rates around 100 basis points above U.S. Treasury yields. Xcel took care of its equity needs for at least the next three years with a forward sale that it executed in late 2020 to raise $720.9 million for 11.845 million shares ($61 per share). This followed a $459 million forward sale initiated in late 2018 at $49 per share. We think these were good moves with the stock trading far above our fair value estimate when the deals priced. After five years of $0.08 per share annualized dividend increases, the board raised the dividend by $0.10 in 2019 and in 2020 and by $0.11 to $1.83 for 2021.

Bulls Say’s

  • Xcel has raised its dividend every year since 2003, including a 6% increase for 2021 to $1.83 per share. We expect similar dividend growth going forward. 
  • Renewable energy portfolio standards in Minnesota and Colorado are a key source of support for wind and solar projects.
  • The geography of Xcel’s service territories gives it among the best wind and solar resources in the U.S. and a foundation for growth

Company Profile 

Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with one third of its electricity sales coming from renewable energy.

(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

Adobe’s ARR Slip-Up and Light Guidance for 2022 Leave Shares Attractive; FVE Up to $630

Business Strategy and Outlook

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud, which is now offered via a subscription model. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation The benefits from software as a service are well known in that it offers significantly improved revenue visibility and the elimination of piracy for the company, and a much lower cost hurdle to overcome and a solution that is regularly updated with new features for users.

Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. It is expected that Adobe will continue to focus its M&A efforts on the digital experience segment and other emerging areas. Adobe believes it is attacking an addressable market greater than $205 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media offerings.

Adobe’s ARR Slip-Up and Light Guidance for 2022 Leave Shares Attractive; FVE Up to $630

Adobe reported mixed fourth-quarter results, including revenue upside, messy billings, modest EPS upside, and light guidance. However, Morningstar analyst believe the outlook is better than it appears. After all, the 2022 outlook is just 1% below FactSet consensus, with pressure driven by having one less week than 2021 and foreign exchange combining to add a 300 basis point headwind to growth. After factoring guidance and results along with rolling with DCF forward,  analyst of Morningstar have raised fair value estimate to $630 per share from $610. 

Financial Strength 

Adobe enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenues, and high and expanding margins. As of November 2021, Adobe has $5.8 billion in cash and equivalents, offset by $4.1 billion in debt, resulting in a net cash position of $1.6 billion. Adobe has historically generated strong operating margins. Free cash flow generation was $6.9 billion in fiscal 2021, representing a free cash flow margin of 43.7%.Morningstar analyst believes that margins should continue to grind higher over time as the digital experience segment scales. In terms of capital deployment, Adobe reinvests for growth, repurchases shares, and makes acquisitions. The company does not pay a dividend. Over the last three years Adobe has spent $2.8 billion on acquisitions, $9.6 billion on buy-backs, while share count has decreased by 15 million shares. Morningstar analyst believes that the company will continue to repurchase shares as its primary means of returning cash to shareholders over the medium term and will continue to make opportunistic and strategic tuck-in acquisitions.

Bulls Say 

  • Adobe is the de facto standard in content creation software and PDF file editing, categories the company created and still dominates. 
  • Shift to subscriptions eliminates piracy and makes revenue recurring, while removing the high up-front price for customers. Growth has accelerated and margins are expanding from the initial conversion inflection. 
  • Adobe is extending its empire in the creative world from content creation to marketing services more broadly through the expansion of its digital experience segment. This segment should drive growth in the coming years.

Company Profile

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content multiple operating systems, devices and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of 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
Technology Stocks

Visa Inc. FY21reported solid results driven by diversification of revenue and recovery of global economies

Investment Thesis 

  • Stands to benefit from the increased digitization of money with the global amount of payments made via card or digitally exceeding physical cash for the first time in 2016. 
  • Expansion of new flows and use cases. 
  • Visa stands to benefit from the improving momentum in Europe and India. 
  •  Strong partnerships with first class financial institutions including increased ease in working with fintech partners (as Visa opens up its APIs to fintechs). 
  •  Continued investment in technology and cyber security. 
  •  Strong management team. 
  • Solid fundamentals with recurring revenues, high incremental margins, low capital expenditure and high free cash flow.

Key Risks

  • Cyber security attacks. 
  • Increased regulatory environment and government-imposed restrictions on payment systems. Antitrust remains a hot topic in the market. 
  •  Margin deterioration due to intense competition from alternative payment processing providers. 
  • Higher expenses and incentives. 
  •  Deterioration in global growth or consumption.

FY21 Results Highlights

V’s FY21 results beat consensus estimates with net revenue of $24.1bn (vs $24bn), driven by the continuation of the recovery in many global economies and the increased diversification of revenue with new flows and VAS. Cashflow generation remained strong (FCF up +50% over pcp) and shareholder returns continued with the Board authorizing a +17% increase in the quarterly dividend in addition to conducting $8.7bn in repurchases (has $4.7bn of remaining authorized funds for share repurchase). Maintain Buy – solid top-line growth over the medium term amid buildout of new payment types – BNPL, cryptocurrency and B2B – with recovering credit and crossborder travel and new flows in VAS (amid strong demand for cybersecurity, marketing and data analytics) driving further acceleration. In the near-term, a faster than expected recovery in cross-border travel could represent upside to management (expected to reach 2019 levels by summer 2023) and consensus earnings estimates.

Outlook

Management expects: (1) 1Q22 net revenue growth in the high teens (will moderate through the year), client incentives as a percentage of gross revenue to be 26- 27% (in-line with 4Q21), operating expenses growth in the mid-teens amid sustained investment spending combined with low comparable in pcp, non-operating expense of $120- 130m, and tax rates of 19-19.5%. (2) FY22 value-added services growth of high teens and client incentives as a percent of gross revenues of 26-27% (consistent with 4Q21 levels, gradually reaching pre-Covid growth of +50-100bps each year due to the impact of new deals and renewals), which combined with the expected benefit from revenue mix improvement as cross-border travel continues to recover (cross-border travel is expected to recover steadily through FY22 and reach 2019 levels by the summer of 2023). Partially offset by the lapping of incentive reductions from FY21 due to the Covid impact, resulting in high end or mid-teens net revenue growth (including over 0.5% of exchange rate drag from the strengthening dollar). Operating expenses to grow in the low teens, with expense growth higher in 1H22 and moderate in 2H22 as the Company lap the resumption of investment spending in FY21, non-operating expense to be $120-130m each quarter and tax rate to be 19-19.5%. 

Company Profile

Visa Inc. (NYSE: V) is the world’s leader in digital payments and one of the most recognized brands around the world, with a mission to connect the world through innovative, reliable and secure payment networks, enabling individuals, businesses and economies to thrive. The Company’s advanced global processing network, VisaNet, facilitates authorization, clearing and settlement of payment transactions, providing secure and reliable payments across borders and within countries. The Company operates in party models, which include card issuing financial institutions, acquirers and merchants. The Company’s products/services include core products, processing infrastructure, transaction processing services, digital products, merchant products, and risk products and payment security initiatives. Its relentless focus on innovation is a catalyst for the rapid growth of connected commerce on any device, and a driving force behind the dream of a cashless future for everyone, everywhere.

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
Property

Lennar enters fiscal 2022 with a record construction backlog and strong community pipeline

Business Strategy and Outlook:

Lennar’s investments in ancillary businesses, such as its multifamily business and technology startups, distinguishes the company from many other homebuilders. Management announced plans to spin off its multifamily, single-family for rent, and land businesses, likely during the second or third quarter of fiscal 2022. Whether the market will place a higher multiple on SpinCo as a standalone entity has yet to be seen, but this transaction will result in meaningful value creation for Lennar’s remaining businesses. However, management’s narrowed focus on RemainCo operations could improve its prospects. Furthermore, the separation of these ancillary businesses, which tend to generate lumpier earnings, should also dampen Lennar’s earnings volatility.

In February 2018, Lennar completed its merger with CalAtlantic, the nation’s fourth-largest homebuilder. The deal was valued at $9.3 billion, and the combined entity surpassed D.R. Horton as the largest homebuilder (by revenue) in the United States. Based on our analysis, the Lennar-CalAtlantic has created shareholder value

Financial Strength:

The fair value of this stock has been increased by the analysts on account of optimistic near-term return on invested capital outlook and its significant debt reduction.

At the end of fiscal fourth-quarter 2021, Lennar had approximately $4.7 billion in outstanding homebuilding debt and $2.7 billion in homebuilding cash on hand, which equates to a 8.4% net homebuilding debt/capital ratio. In addition to the $2.7 billion of homebuilding cash on hand, $2.5 billion is available on Lennar’s revolving credit facility. Lennar has a strong balance sheet and plenty of liquidity. Homebuilding debt maturities are staggered through 2027 with approximately $5.1 billion due between 2022 and 2027. Lennar’s operating cash flow has improved substantially over the past three years, from $508 million in 2016 to $3.8 billion in 2020. 

Bulls Say:

  • Current new-home demand is booming, and inventory of existing homes remains tight. The supply/demand imbalance will take years to address and will support pricing power for homebuilders. 
  • Demand for entry-level housing should increase as the large millennial generation forms households. Lennar is well positioned to capitalize on this growing market. 
  • Lennar’s multifamily segment is an underappreciated asset, which could get more market recognition after it is spun off.

Company Profile:

After merging with CalAtlantic in February 2018, Lennar has become the largest public homebuilder (by revenue) in the United States. The company’s homebuilding operations target first-time, move-up, and active adult homebuyers mainly under the Lennar brand name. Lennar’s financial-services segment provides mortgage financing and related services to its homebuyers. Miami-based Lennar is also involved in multifamily construction and has invested in numerous housing-related technology startups.

(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

CSL Ltd. : Pioneering in Global Biotechnology

Business Strategy and Outlook

CSL is one of three tier one plasma therapy companies who benefit from an oligopoly in a highly consolidated market. All the players are vertically integrated as plasma sourcing is a key constraint in production. The plasma sourcing market is currently in short supply, however, CSL is well-positioned having invested significantly in plasma collection centres, owning roughly 30% of collection centres globally. 

One major threat to plasma products is recombinant products. Recombinants are quickly replacing plasma products in haemophilia treatment despite being more expensive. CSL has an excellent R&D track record and has developed recombinant products for haemophilia. However, we expect revenue growth to slow in the haemophilia segment based on competitor Roche’s successful launch of recombinant Hemlibra. Immunoglobulin product sales are key to CSL.

This market is not yet impacted by recombinants although both CSL and competitors are pursuing R&D in Fc receptor-targeting therapy to treat autoimmune diseases. 

However, gene therapy represents the biggest risk to the plasma industry as it aims to cure rather than treat diseases. While the potentially prohibitive cost may result in slow adoption, CSL has strategically expanded its scope via the acquisition of Calimmune in fiscal 2018 and licensing a late-stage Haemophilia B gene therapy, EtranaDez, from UniQure in fiscal 2020. 

CSL is the second largest influenza vaccine manufacturer, behind Sanofi, and is on the forefront of changes in influenza vaccines where manufacturing is shifting from egg-based to cell-based culturing. It’s also conducting preclinical testing of mRNA influenza vaccines. 

The company has demonstrated good sense for R&D and evaluates spend based on the commercial outlook. The strategy for CSL Behring has been to target rare diseases, a typically low volume and high price and margin business. There is little reimbursement risk in this area or in the vaccine business, Seqirus.

Financial Strength

CSL is in good financial health and can fund all its capital and R&D spending, currently a combined 26% of revenue, as well as maintain a dividend payout ratio of 44% without requiring additional debt. Following the acquisition of Vifor Pharma, financial leverage is expected to increase to 2.3 in fiscal 2023. However, it is forecasted that the net debt/EBITDA may fall within CSL’s target range of 1.0-1.5 by fiscal 2026. This leaves CSL flexible to pursue organic or acquisitive growth opportunities as they present in the evolving biotech industry.

Free cash flow conversion has remained depressed over the last five years as working capital investment and capital spending to add manufacturing capacity was elevated above long-term levels, combined with higher R&D spending. We forecast free cash conversion to improve but still average 52% over the next five years as we anticipate CSL to prefer growing organically rather than acquisitively.

Bulls Say’s

  • CSL is investing in both physical capacity and R&D, leaving it well-positioned to take advantage of growth opportunities in the key immunoglobulins market. 
  • The acquisition of Calimmune’s gene therapy platform in fiscal 2018 and UniQure’s late-stage haemophilia B gene therapy candidate in fiscal 2020 will help defend against emerging competition. 
  • CSL has a strong R&D track record, and the ongoing rate of investment is ahead of major competitors.

Company Profile 

CSL is one of the largest global biotech companies and has two main segments. CSL Behring either uses plasma-derived proteins or recombinants to treat conditions including immunodeficiencies, bleeding disorders and neurological indications. Seqirus is now the world’s second largest influenza vaccination business and was acquired in fiscal 2015. CSL has a strong R&D track record, and the product portfolio and pipeline include non-plasma products as the firm continues to broaden its scope. Originally formed in Australia as a government-owned entity, CSL now earns roughly half its revenue in North America and a quarter in Europe

(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
Funds Funds

CFS Index Australian Bond: Simple and reasonably priced choice for diversified Australian bond exposure

Approach

FSI matches the risk factors of the benchmark, including duration, sector exposures, and credit quality by employing a full replication method. The strategy can hold securities that have been or are expected to be included in the index, and it can exclude those likely to drop in or out. On average, the cash holding would be in the vicinity of 0.5% because of the impact of daily flows and liquidity needs. The larger asset base gives the firm the benefit of scale and helps to keep a lid on overall transaction costs. FSI uses the BlackRock Aladdin portfolio management tool to manage the index-tracking process end to end, including trading and risk assessment and monitoring.

Portfolio

CFS Index Australian Bond replicates the Bloomberg AusBond Composite 0+ Year Index fully. As of 30 September 2021, the fund is composed mainly of Treasury (56.6%) and government-related (semigovernment and supranational) debt (36.4%). Corporate credit constitutes most of the remaining portion of the fund. A major portion of the credits in the index are issued by banks, followed by diversified financials and real estate trusts. . The concentrated credit exposure to banks and financials means Australian property fundamentals play a role in the portfolio’s performance in the long run.

People

FSI has a long history of managing passive strategies. FSI’s institutional passive funds under management is substantial. As of August 2021, FSI had around $5.1 billion in active funds and $12.2 billion in passive strategies. The Australian fixed-income team headed by Stephen Cooper within FSI is responsible for the CFS Index Australia Bond Fund. Cooper is an industry veteran. He is supported by four portfolio managers in the team, with Darja Milosevic and Alex Nikolovski dedicated to passive vehicles.

Performance 

As a core bond holding, CFS Index Australia Bond has served investors well over time by bringing broader portfolio volatility down and protecting capital when equity market slides. On the other hand, it has lagged when yields rose and when credit markets have been strong. This was evident in 2013 when the fund’s 1.7% gain trailed over half of its category peers or when yields rose toward the second half of 2020 through the end of the first quarter of 2021 (November 2020–March 2021). Encouragingly, the fund had done well when equity markets were weak. Its relatively long duration and high-quality exposure have been a boon during such occasions. 

CFS Performance.png

About the Fund

CFS Wholesale Indexed Australian Bond Fund is a unit trust incorporated in Australia. The objective of the Fund is to closely track the UBS Warburg Australian Composite Bond Index, All Maturities. The Fund invests in securities issued or guaranteed by governments, statutory authorities, banks, and corporations of a high credit standing, with some cash for liquidity.

(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.