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Global stocks

HALMA Plc: Private Equity with a Purpose

Investment Thesis:

  • High quality company with a history of earnings and dividend growth.
  • Management is looking to double EPS every five years. HLMA’s group earnings growth model is driven by organic and acquired growth. 
  • HLMA earnings are defensive as HLMA is exposed to attractive end markets which are niche and regulated in some shape or form – such as safety, medical and infrastructure.
  • HLMA consists of a strong diversified portfolio of companies (currently 45 companies). 
  • Strong management team with strong corporate culture. 
  • “Private Equity firm with a purpose” – the Company is not limited by a timeframe to exit positions. 
  • HLMA operates a decentralized operating structure with operating companies and management teams left to run their businesses. 
  • Scores well on ESG metrics – targeting a science-based emission target (1.5 degree-aligned 2030 target for Scope 1 & 2 emissions), a net zero target (scope 1 & 2 by 2040) and transitioning towards a circular economy. 

Key Risks:

  • Execution risk – specifically around acquired growth or the inability to source enough deals as the group grows larger.
  • Deterioration in global growth or consumption.
  • Turnover in senior management team. 

Key highlights:

HLMA can be thought of as a private equity company with a purpose, having a highly sustainable financial model, which focuses on maintaining portfolio companies’ growth and returns over the longer term (management aspires to double the size of the Group every 5-6 years), while delivering performance in the shorter term, through a combination of acquisition, venture partnerships and organic growth.

  • Strong top and bottom-line growth – Management prefers to be in markets delivering +3-5% year on year growth and invests in business that are typically one of top 3 players in their respective niches (market share can vary between 10-80% but on average market share across the group is 20%) which leads to strong top line growth, which combined with differentiated products leads to high gross margins (>60%) and strong EBIT margins (>20%). 
  • High return on capital – The Company remains capital light given it’s a final fixed assembler (don’t have huge production facilities with on average a production facility of 100-200 people) thus providing very high return on average capital across the group (70-75% return on average capital across the group and after intangibles and taxes its ~15% return on total capital in group). 
  • Strong cash flows making it self-funded – The Company has a self-funded model (doesn’t go to market for dilutive capital raise) and uses its strong cashflow (targets cash conversion of >90%) to first invest organically, and then to make further acquisitions to expand the addressable market and pay shareholder returns via dividends (+5-7% growth year on year. 

Company Description: 

Halma Plc (HLMA), listed on the London Stock Exchange, looks to acquire, and grow businesses in niche markets with a global reach. The Company focuses on markets such as medical, safety and environment. Management believes the earnings profile of these markets have a high degree of defensibility and long-term growth drivers. The Company is not like a Private Equity firm which looks to acquire businesses, reduce costs (to improve earnings profile) and then sell within a 5-year timeframe. HLMA looks to buy and hold companies over the long-term. They manage the mix of businesses in group portfolio to drive sustainable growth and returns over the long term. HLMA looks to acquire businesses to accelerate penetration of more markets, merge businesses where it markets sense, and exit markets if they become less attractive from a long-term growth and returns perspective.  

(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
IPO Watch

Bootstrapped company Latent View debuts on exchange with 169.04% premium

Latent View Analytics is a pure-play data analytics services company in India that offers consulting services, data engineering, business analytics and digital solutions. Its IPO was open for subscription from November 10 to November12, 2021 with issue price-band ranging from INR 190-197 and lot size of 76 shares.

Latent View has received subscription for 572.18 crore shares worth Rs 1.12 lakh crore against its requirement of INR 600 Crores. It was oversubscribed by 338 times, much higher than the high-profile IPOs that were previously listed. The qualified institutional investors subscribed 145.48 times, Non-institutional buyers subscribed 850.66 times and retail investors subscribed 119.44 times.

The stock was listed on exchange on 23rd November 2021 at INR 530, which was a whopping 169.04% premium above its issue price. At the issue price, the company commanded a market capital of Rs 3,896 crore, which shot up to Rs 10,484.16 crore.

The proceeds from the IPO are expected to be used inorganic growth initiatives (to the tune of Rs 147 crore), investment in the subsidiaries (Rs 130 crore) and funding working capital requirements of a material subsidiary Latent View Analytics Corporation.

The company has never raised external capital and has been completely bootstrapped. It operates as per the age old traditions and finds it suitable for itself. Currently the promoters hold 68% of the total equity, which earlier was 80%. 

The company reported a CAGR of 3 per cent during FY19-21 but saw a 20 per cent growth in EBITDA and 24 percent in growth of PAT. Since the company’s existence, it has witnessed loss in only a single period i.e. in 2010 due to financial crisis.

About the company:

Founded in 2006, Latent View offers data analytics services, consulting, and data engineering solutions to customers across the banking, technology, industrial, and retail verticals, among others. In its 15 years of existence, the company has reported a loss only for one quarter, in early 2010. Viswanathan, an alumnus of IIT Madras and IIM Kolkata, is the founder of Latent View Analytics Ltd.

(Source: economictimes.com, Moneycontrol)

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

Another Extreme Texas Winter could Freeze Vistra’s Buyback Plan

Business Strategy and Outlook 

Vistra Energy’s emergence from the Energy Future Holdings bankruptcy in 2016 has been a success for the most part. Despite Vistra’s sensitivity to volatile commodity prices and legacy fossil fuel generation, it has produced solid returns. The only significant bump in the road has been winter storm Uri that hit Texas in February 2021, causing more than $2 billion of losses.

Vistra’s clean post bankruptcy balance sheet allowed it to acquire Dynegy in 2018 for $2.27 billion, more than tripling the size of its generation fleet and introducing Vistra to power markets outside Texas, notably the Midwest and Northeast. The rock-bottom price Vistra paid and cost synergies have made the deal value-accretive. Vistra produces substantial free cash flow before growth given minimal core investment needs. Management is expanding the retail energy business to hedge its wholesale generation market exposure and is investing in clean energy projects like utility-scale solar and batteries.

Financial Strength

After the setback from the Texas winter storm losses in February 2021, Vistra’s quest to earn investment-grade credit ratings and reach 2.5 net debt/EBITDA stalled. However, it remains in a solid financial position with plenty of liquidity. Management has shifted its focus toward returning capital to shareholders through stock buybacks and dividends rather than earning investment-grade credit ratings immediately. Vistra’s $1 billion preferred issuance in late 2021 with an 8% dividend floor all but ensures it will take several more years to earn investment-grade ratings. 

The board authorized a $2 billion share repurchase plan in late 2021, replacing a largely unused $1.5 billion plan from 2020. The combination of stock buybacks and $300 million annual allocation to the dividend means the dividend could top $1.00 per share by 2025, up from $0.50 when the board initiated the dividend in 2019 and surpassing management’s initial 6%-8% annual growth target. Vistra exited bankruptcy in 2016 with just $4.5 billion of medium-term debt. Consolidated debt grew to $11 billion after the 2018 Dynegy acquisition before Vistra began reducing its leverage.

Bulls Say’s

  • Vistra’s debt reduction in 2019-20 gives it financial flexibility to repurchase stock, raise the dividend, and invest in growth projects in 2022 and beyond. 
  • Vistra’s gas fleet benefits from historically low gas prices in most of the regions where it operates, allowing for higher operating margins. 
  • The retail-wholesale integrated business model reduces risk and market transaction costs, allowing Vistra to be a low-cost provider, especially in its primary Texas market.

Company Profile 

Vistra Energy emerged from the Energy Future Holdings bankruptcy as a stand-alone entity in 2016. Vistra is one of the largest power producers and retail energy providers in the U.S. It owns and operates 38 gigawatts of nuclear, coal, and natural gas generation in its wholesale generation segment after acquiring Dynegy in 2018. Its retail electricity segment serves 5 million customers in 20 states. Vistra’s retail business serves almost one third of all Texas electricity consumers

(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

Orora Ltd. reported solid operating earnings of $369.3m, up by 11.5%

Investment Thesis:

  • Trading on fair value relative to our valuation
  • Exposure to both developed and emerging markets’ growth 
  • Near-term headwinds should be in the price
  • Revised strategy following recent strategic review
  • Bolt-on acquisitions (and associated synergies) provide opportunity to supplement organic growth 
  • Leveraged to a falling AUD/USD 
  • Potential corporate activity
  • Capital management (current on-market share buyback plus potential for additional initiatives)

Key Risks:

  • Competitive pressures leading to margin erosion 
  • Input cost pressures which the company is unable to pass on to customers 
  • Deterioration in economic conditions in US, EM and Australia
  • Emerging markets risk 
  • Adverse movements in AUD/USD
  • Declining OCC prices

Key highlights:

  • ORA delivered a solid FY21 result, which came in ahead of consensus expectations – revenue of $3,538m was up +7.8% YoY
  • Operating earnings (EBITDA) of $369.3m was up +11.5% YoY
  • NPAT of $156.7m was up +34.1% YoY
  • EPS up +29% to 16.9cps (also driven by the on-market share buyback) and full year dividend of 14cps up +16.7% on pcp (representing a payout ratio of ~80% vs target range 60-80%)
  • Strong performance in the North America business, which delivered revenue growth of +8.2% and EBIT growth of +43.0% year-on-year (YoY) in constant currency
  • Leverage increased from 0.9x to 1.5x, driven by the impact of the on-market share buyback
  • With a strong balance sheet, the Company is looking to invest to drive growth
  • Australasia segment revenue was up +6.1% to $834
  • North America segment revenue was up +8.2% to US$2,019.8m and EBIT was up +43.0% to US$73.8m

Company Description: 

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.

(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
Funds Funds

SPDR S&P/ASX 200 Listed Property Fund: Decent option for A-REIT investments in a competitive market

About The Benchmark

A sector sub-index of the S&P/ASX 200, this index tracks the performance of Australian real estate investment trusts (A-REITs) and mortgage REITs.

Fund Objective

The SPDR S&P/ASX 200 Listed Property Fund seeks to closely track, before fees and expenses, the returns of the S&P/ASX 200 A-REIT Index.

Process 

SLF aims to fully replicate the S&P/ASX 200 A-REIT Index. REITs are listed vehicles that own and operate property. REITs are required to pass on the majority of their income to investors to enjoy favourable taxation arrangements, and distributions are not franked. High payout ratios and an absence of franking mean that REITs typically offer a high headline yield relative to other stock market sectors. SLF is by far the longest running, with an FUM of AUD 650 million as at September 2021, which helps it to maintain trading levels far above most rivals. SPDR doesn’t participate in securities lending for Australian ETFs.

Portfolio

With the relatively short list of A-REIT names in the S&P/ASX 200, the portfolio is understandably concentrated. As at September 2021, the index consists of 24 holdings, with the top 10 accounting for over 85% of the total portfolio. The exposure to the largest current holding, Goodman Group, has ballooned significantly over the past five years to 27% from around 11%. Seeing that the index is relatively untouched by any reconstitutions, portfolio turnover is quite low at 5%. However, in case of an eventual entry or exit of the constituents, the concentrated index is susceptible to reconstitution, which may lead to a meaningfully altered portfolio.

Top 10 HoldingsWeight (%)
GOODMAN GROUP27.07
SCENTRE GROUP11.52
DEXUS/AU8.59
MIRVAC GROUP8.17
STOCKLAND7.98
GPT GROUP7.27
CHARTER HALL GROUP5.93
VICINITY CENTRES4.91
SHOPPING CENTRES AUSTRALASIA2.20
CHARTER HALL LONG WALE REIT2.06

Sector Allocation

Sub-Industry BreakdownWeight (%)
Diversified REITs34.79
Industrial REITs28.49
Retail REITs23.96
Office REITs9.46
Specialized REITs1.90
Residential REITs1.41

People

The Global Equity Beta Solution team that is responsible for managing this ETF has undergone a leadership transition recently. Effective September 2021, John Tucker has been appointed as the new chief investment officer, replacing Lynn Blake, who has taken retirement. Tucker is a State Street veteran who has been in multiple senior leadership roles within GEBS for the past 20 years. The ecosystem and structure of the investment team is well-defined, where research and trading functions are centralised and spread out globally; however, portfolio managers are based locally. Australia-domiciled passive products are managed by a core team of Tucker and four portfolio managers: Alexander King, Lillian Poon, Andrew Howson, and Elda Dong.

Performance

The fund has managed its tracking difference well, matching up to the benchmark after accounting for management fees. SLF has recorded a return of 6.54% since its inception in 2002. As at the close of 2019, the annualised five-year returns for the fund stood at an attractive 10.55%, outperforming the category returns of 9.87%. The rally was mainly driven by the strong returns of Goodman Group in the latter half of the five-year period.

Total Return1 Month3 Month6 Month1 Year3 Year p.a5 Year p.aSince Inception  p.a
Fund (%)0.384.2712.0730.259.578.636.54
Index (%)0.424.3812.3430.879.878.966.78

(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

Rio Tinto focus to build a strong balance sheet, tightly control investments and return cash to shareholders

Business Strategy and Outlook

Rio Tinto is one of the world’s biggest miners, along with BHP Billiton, Brazil’s Vale, and U.K.-based Anglo American. Most revenue comes from operations located in the relatively safe havens of Australia, North America, and Europe, though the company has operations spanning six continents.

Rio Tinto has a large portfolio of long-lived assets with low operating costs.The invested capital base was inflated by substantial procyclical investment during the height of the China boom, the rot setting in by overpaying for Alcan, and subsequent iron ore expansion; the combination of these factors means midcycle returns are likely to remain below the cost of capital.

The recent focus has been to run a strong balance sheet, tightly control investments, and return cash to shareholders. The company’s major expansion projects are Amrun bauxite, the Oyu Tolgoi underground mine, and the expansion of the Pilbara iron ore system’s capacity from 330 million tonnes in 2019 to 360 million tonnes. Those projects are expected to complete in the next few years. Otherwise, the focus is on incremental expansions through productivity and debottlenecking initiatives. These will be small but capital-efficient and should modestly improve unit costs.

As a commodity producer, Rio Tinto is a price-taker. The lack of pricing power reflects in cyclical commodity prices. Rio Tinto lacks a moat, given that the bloated invested capital base doesn’t permit returns in excess of the cost of capital. The firm’s assets are large, however, and despite being overcapitalised, generally have low operating costs.

Morningstar analyst have lowered the fair value estimate for Rio Tinto to USD 66.00 per ADR from USD 69.00 per ADR previously. The cut mainly reflects lower near-term iron ore price forecasts, with higher copper and aluminium prices prices a partial offset.

Financial Strength

Rio Tinto’s balance sheet is strong with net debt standing of less than USD 2 billion at end 2020. Net debt/adjusted EBITDA for 2021 is very comfortable at 0.1. The strong balance sheet may allow the company to make targeted investments or acquisitions through the downturn, important flexibility. But it appears management is favouring distributions to shareholders. The progressive dividend policy was canned in 2016, providing important flexibility to increase or reduce dividends as free cash flow allows. 

Bulls Say 

  • Rio Tinto is one of the direct beneficiaries of China’s strong appetite for natural resources. 
  • The company’s operations are generally well run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options. 
  • Capital allocation is has improved following the missteps of the China boom with management generally preferring to return cash to shareholders than to make material expansions or acquisitions.

Company Profile

Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights.

(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 Shares

Cochlear reported solid FY21 results, with earnings up by 54%

Investment Thesis:

  • Attractive market dynamics – growing population requiring hearing aids, improving health in EM providing more access to devices such as hearing aids and relatively underpenetrated market
  • There remains a significant, unmet and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long‐term sustainable growth of COH
  • Market leading positions globally
  • Direct-to-consumer marketing expected to fast track market growth 
  • Best in class R&D program (significant dollar amount) leading to continual development of new products and upgrades to existing suite of products 
  • New product launches driving continued demand in all segments 
  • Attractive exposure to growth in China, India and more recently Japan 
  • Solid balance sheet position
  • Potential benefit from Australian tax incentive 
  • Subject to successful passage of legislation, the patent box tax regime for medical technology and biotechnology should encourage development of innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17%, with the concession applying from income years starting on or after 1 July 2022 

Key Risks:

  • Product recall
  • Sustained coronavirus outbreak which delays recommencement of hospital operations in China
  • R&D program fails to deliver innovative products 
  • Increase in competitive pressures 
  • Change in government reimbursement policy 
  • Adverse movements in AUD/USD
  • Emerging market does not recoup – significant downside to earnings

Key highlights:

  • COH reported strong FY21 results, with earnings (underlying NPAT) up +54% to $237m and within guidance of $225-$245m, despite Covid-19 impacted surgery activity recovering to varied levels across both developed and emerging markets
  • For FY22, it is expected to deliver net profit of $265‐285m, a 12‐20% increase on underlying net profit for FY21, based on a 74 cent AUD/USD
  • Sales revenue is expected to benefit from market growth, with a continuing recovery in surgery rates across many countries more affected by Covid
  • The management will continue their investment in market growth activities
  • Capex is expected to be ~$70‐90m for FY22 and includes around $20m related to a major process transformation and IT systems upgrade, a program that is expected to be a $100‐120m investment over the next four to five years
  • Effective tax rate is expected to decline to ~25% as a result of the introduction of changes to the R&D tax concession by the Australian government, with legislated changes to take effect from 1 July 2021
  • The Board is committed to maintaining the dividend policy which targets a 70% payout of underlying net profit
  • Record sales revenue of $1,493m, was up +10%, or +19% in constant currency (CC), driven by market share gains, market growth and rescheduled surgeries post Covid lockdowns
  • Implant units climbed +15% to 36,456 (developed markets up ~20%; emerging markets up ~10%), compared to FY19, implant units increased +7%
  • The Board declared final dividend of $1.40 which brings full year dividends to $2.55 per share, up +59% and equates payout ratio of 71% of underlying net profit, in line with COH’s 70% target payout
  • COH’s balance sheet position remains strong with net cash of $564.6m at year-end, improving from $457m in FY20

Company Description: 

Cochlear Ltd (COH) researches, develops and markets cochlear implant systems for hearing impaired people. COH’s hearing implant systems include Nucleus and Baha and are sold globally. COH has direct operations in 20 countries and 2,800 employees.

(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
Shares Small Cap

Nufarm’s Fiscal 2022 Cash Conversion and working capital moves favourable

Business Strategy and Outlook

Nufarm is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into all major world markets. The company is leveraged to growing demand for crops for biofuels, and food from rapidly industrialising markets such as China and India. Growth should come from astute brand and offshore business investments and from a customer-service-focused strategy. However, the global crop-protection markets are competitive and earnings are cyclical, given a reliance on seasonal conditions. Sumitomo Chemical’s 16% investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia.

Nufarm has a growing presence in North America and Europe. Sound sales momentum has been evident in North America and Europe. Several Chinese companies have previously expressed interest in acquiring Nufarm, but withdrew either because of too high a price demanded by the board, or because of reduced availability of debt. In 2010, Japanese company Sumitomo Chemical bought 20% of Nufarm, subsequently increasing its stake to 23% before diluting to 16%. The resultant collaboration should boost the performance of both companies, given little product portfolio overlap.

Financial Strength

Nufarm’s balance sheet is in great shape. In early April 2020, the company received AUD 1.2 billion net sale proceeds from major shareholder Sumitomo, for the sale of its South American crop protection and seed treatment operations in Brazil, Argentina, Colombia, and Chile. This significantly bolstered the finances at a very fortuitous time, coming mid coronavirus. Prior to this in January 2020, group net debt had stood at a whopping AUD 1.6 billion. Nufarm’s under-leveraged balance sheet remains a strength. Fiscal 2021 net operating cash flow rebounded strongly from negative AUD 398 million in the pcp to positive AUD 370 million. This reflects a focus on working capital management. It sees net debt down 40% to a modest AUD 173 million, leverage (ND/(ND+E)) of just 8% and net debt/EBITDA very comfortable at 0.5. Net working capital significantly improved post sale of the Latin American business and remains a focus with improved debtor collections, reduced inventory and foreign exchange translation.

Our AUD 7.00 fair value for no-moat crop protection company Nufarm. Underlying fiscal 2021 NPAT improved to positive AUD 61 million against an underlying loss of AUD 67 million in the pcp. NPAT in the fiscal second half was negligible at just AUD 0.7 million. On a full fiscal year basis, APAC revenue enjoyed a sharp turnaround, up 52% to AUD 858 million and segment EBITDA margin nearly doubled to 12.7%. Nufarm shares plunged 8.5% on the day of profit release, a strange response given an all-important strong cash flow performance. The fall may have been in reaction to a decline in salmon demand impacting sales of Omega-3 canola. But there is a long way to run on Omega-3, still in its infancy, and we are unconcerned.

Bulls Say’s

  • Nufarm benefits from potential strength in soft commodities markets. 
  • Nufarm has well-established distribution platforms in most major global agricultural markets. 
  • Product and geographic diversification helps reduce earnings volatility.

Company Profile 

Nufarm Limited is a global crop-protection company that develops, manufactures, and sells a range of crop-protection products, including herbicides, insecticides, and fungicides. Nufarm sells its products in most of the world’s major agricultural regions, and operates primarily in the off-patent segment of the crop-protection market. Nufarm operates along two business lines: crop protection and seed technologies.

(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

Fortescue has grown rapidly; Product discounts remain a competitive disadvantage

Business Strategy and Outlook

Fortescue Metals is the world’s fourth-largest iron ore exporter. Margins are well below industry leaders. Lower margins primarily result from discounts from mining a lower-grade (57%- to 58%-grade) product compared with the benchmark, which is for 62%-grade iron ore. The lower grade is effectively a cost for customers, which results in a lower realised price versus the benchmark. 

Fortescue has grown rapidly due to highly favourable iron ore prices, aggressive management, and historically low corporate interest rates. Fortescue has expanded its capacity unprecedented and built two thirds of its capacity at the peak of the capital cycle baked in a higher capital base than peers. This means returns are likely to lag those of the industry leaders, which benefit from building capacity at times when the capital cost per unit of output was, on average, much lower.

Fortescue has done an admirable job of reducing cash costs materially versus peers. However, product discounts remain a competitive disadvantage. To this end, the company will add about 22 million tonnes a year of iron ore production from the 61%-owned Iron Bridge joint venture. Iron Bridge grades are much higher, around 67%, which should allow Fortescue to meet its goal to have most of its iron ore above 60%, assuming the company chooses to blend it with the existing products.

Morningstar analyst lowered fair value estimate for Fortescue Metals to AUD 13 per share from AUD 15.10 per share previously. The shares have gone ex-entitlement to the final dividend, an unusually large AUD 2.11 per share or 14% of the previous fair value estimate. 

Financial Strength

Fortescue Metals Group’s balance sheet is strong, due to the elevated iron ore price and accelerated debt repayments. Net debt peaked near USD 10 billion in mid-2013, roughly coinciding with the start of expanded production. By the end of 2020, net debt had declined to USD 0.1 billion. Net debt/EBITDA is comfortable and likely to remain so for the foreseeable future. It is expected that given the operating leverage in Fortescue, and the cyclical capital requirements, there is a reasonable argument that Fortescue should run with minimal or no debt on average through the cycle.

Bulls Say 

  • Fortescue provides strong leverage to the Chinese economy. If growth in steel consumption remains strong, it’s also likely iron ore prices and volumes will too. 
  • Fortescue is the largest pure-play iron ore counter in the world and offers strong leverage to emerging world growth. O
  • Fortescue has rapidly cut costs and significantly narrowed the cost disadvantage relative to industry leaders BHP, Vale, and Rio Tinto. If steel industry margins fall in future, it’s likely product discounts will narrow significantly relative to historical averages.

Company Profile

Fortescue Metals Group is an Australia-based iron ore miner. It has grown from obscurity at the start of 2008 to become the world’s fourth-largest producer. Growth was fuelled by debt, now repaid. Expansion from 55 million tonnes in fiscal 2012 to about 180 million tonnes in 2020 means Fortescue supplies nearly 10% of global seaborne iron ore. However, with longer-term demand likely to decline, as China’s economy matures, we expect Fortescue’s future margins to be below historical averages.

(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

Alliant Energy’s Renewable Energy Growth accelerates Advancement

Business Strategy and Outlook

Alliant Energy investing nearly $7 billion in 2021-25 estimates company to achieve the midpoint of management’s 5% -7% target. Management estimates another $7 billion – $9 billion of capital investment opportunities in 2025-29.

Interstate Power and Light continues to build out renewable energy in the state. In addition to its 1,300 megawatts of wind generation in Iowa, for which the company earns a premium return on equity, the subsidiary now aims to install 400 MW of solar generation in the state. We continue to believe Iowa offers ample renewable energy investment opportunities–both wind and solar–to support the subsidiary’s Clean Energy Blueprint, which plans to eliminate all coal generation by 2040 and achieve net-zero carbon dioxide emissions by 2050.

At Wisconsin Power and Light, renewable energy is also a focus as the company begins replacing retiring coal generation. WPL plans nearly 1,100 MW of solar energy investments with battery storage. WPL has similar clean energy goals to Iowa, seeking to reduce carbon emissions by 50% by 2030, eliminate coal from its coal generation fleet by 2040, and achieve net-zero carbon emissions from its generation fleet by 2050. Across both subsidiaries, renewable energy investments account for over 20% of rate base.

Alliant benefits from operating in two of the most constructive regulatory jurisdictions. To maintain earned returns near allowed returns during this period of high investment, management has worked to reduced regulatory lag, received above-average allowed returns across its subsidiaries, and aims to continue to reduce operating costs for the near term.

Financial Strength

It is estimated a capital of $7 billion to be planned spending between 2021 and 2025, Alliant will be a frequent debt issuer. The company will issue equity to maintain its allowed capital ratios. The company has manageable long-term debt maturities, and it is anticipated that it will be able to refinance its debt as it comes due. It is expected that total debt/EBITDA to remain around 5.0 times. Even with its large capital expenditure program, Alliant maintains a strong balance sheet and an investment-grade credit rating. The total debt/capital is projected to remain below 55% through forecast. Interest coverage should remain around 5 times throughout. Alliant has ample liquidity with cash on hand and sufficient borrowing capacity available under its revolving credit facilities. Alliant’s dividend is well covered with its regulated utilities’ earnings and expect the dividend pay-out ratio to remain between 60% and 70%.

Bulls Say’s

  • Alliant’s earnings growth prospects are robust, supported by renewable energy projects that have regulatory support. 
  • Regulators in Iowa and Wisconsin are embracing renewable energy, providing additional growth opportunities with favourable ratemaking. 
  • The company operates in constructive jurisdictions, supporting returns and capital projects.

Company Profile 

Alliant Energy is the parent of two regulated utilities, Interstate Power and Light and Wisconsin Power and Light, serving nearly 1 million electricity and natural gas customers and approximately 400,000 natural gas-only customers. Both subsidiaries engage in the generation and distribution of electricity and the distribution and transportation of natural gas. Alliant also owns a 16% interest in American Transmission Co. 

(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.