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Property

James Hardie adjusted EBIT was up by 26% to US$205.07

Above view of chef engineer in shirt and tie explaining sketch to manual workers in industry

Investment Thesis

  • Largest producer of non-asbestos fibre cement 
  • Ongoing momentum in the U.S. housing market and global markets. 
  • Fibre cement taking market share from vinyl and other siding products. 
  • Strong R&D program to stay ahead of competition. 
  • Leveraged to a falling AUD/USD. 
  • New CEO may bring a fresh perspective on existing strategy. 
  • Productivity gains. 
  • Investment plan over the next 3 years should deliver solid earnings growth.

Key Risks

  • Competitive pressures leading to margin decline. 
  • Input cost pressures which the company is unable to pass on to customers. 
  • Deterioration in housing starts (U.S., Australia). 
  • Unable to achieve its growth and market share target, which likely see a derating of the stock. 
  • Adverse movements in asbestos claims. 
  • Disappointing primary demand growth (PDG) relative to market expectations. 
  • Manufacturing / operational issues impacting earnings.

2Q22 Results Summary

  • Net sales increased +23% over pcp to US$903.2m, driven by volume growth (up +14%) and price/mix improvement (up +9%).
  • Group adjusted operating earnings (EBIT) were up +26% to US$205.7m, delivering an EBIT margin of 22.8%. Earnings were driven by top line growth and ongoing operational improvement.
  • Segment revenue was up +23% to US$635.3m, driven by exteriors volume growth of +16%. Broadly, top line growth consisted of volume up +14% and price/mix up +9%. EBIT of US$182.5m was up in line with revenue at +23%, with margin softer by -20bps at 28.7% due to higher production and distribution costs.
  • Segment revenue was up +18% to US$144.4m, driven by strong performance in Australia. Price/mix growth in Australia and New Zealand contributed +9% to top line growth, whilst segment volume growth contributed +11%. EBIT was up +15% to US$44.5m, with margin softer -90bps at 30.8% due to higher production & distribution costs and higher SG&A expenses.
  • Segment revenue was up +24% to US$123.5m, driven by fibre cement and fibre gypsum net sales growth of +40% and +20%, respectively. Price/mix contributed +8% to top line growth due to the shift to higher value mix. Adjusted EBIT of US$16.7m was up +50% on pcp with EBIT margin up +250bps to 13.6%. Margin was assisted by lower SG&A expenses.

Company Profile 

James Hardie Industries Plc (JHX) manufactures building products for new home construction and remodeling. JHX’s products include fibre cement siding, backer board, and pipe. The company operates in the US, Australia and New Zealand.

(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.

Investment Thesis

  • Largest producer of non-asbestos fibre cement 
  • Ongoing momentum in the U.S. housing market and global markets. 
  • Fibre cement taking market share from vinyl and other siding products. 
  • Strong R&D program to stay ahead of competition. 
  • Leveraged to a falling AUD/USD. 
  • New CEO may bring a fresh perspective on existing strategy. 
  • Productivity gains. 
  • Investment plan over the next 3 years should deliver solid earnings growth.

Key Risks

  • Competitive pressures leading to margin decline. 
  • Input cost pressures which the company is unable to pass on to customers. 
  • Deterioration in housing starts (U.S., Australia). 
  • Unable to achieve its growth and market share target, which likely see a derating of the stock. 
  • Adverse movements in asbestos claims. 
  • Disappointing primary demand growth (PDG) relative to market expectations. 
  • Manufacturing / operational issues impacting earnings.

2Q22 Results Summary

  • Net sales increased +23% over pcp to US$903.2m, driven by volume growth (up +14%) and price/mix improvement (up +9%).
  • Group adjusted operating earnings (EBIT) were up +26% to US$205.7m, delivering an EBIT margin of 22.8%. Earnings were driven by top line growth and ongoing operational improvement.
  • Segment revenue was up +23% to US$635.3m, driven by exteriors volume growth of +16%. Broadly, top line growth consisted of volume up +14% and price/mix up +9%. EBIT of US$182.5m was up in line with revenue at +23%, with margin softer by -20bps at 28.7% due to higher production and distribution costs.
  • Segment revenue was up +18% to US$144.4m, driven by strong performance in Australia. Price/mix growth in Australia and New Zealand contributed +9% to top line growth, whilst segment volume growth contributed +11%. EBIT was up +15% to US$44.5m, with margin softer -90bps at 30.8% due to higher production & distribution costs and higher SG&A expenses.
  • Segment revenue was up +24% to US$123.5m, driven by fibre cement and fibre gypsum net sales growth of +40% and +20%, respectively. Price/mix contributed +8% to top line growth due to the shift to higher value mix. Adjusted EBIT of US$16.7m was up +50% on pcp with EBIT margin up +250bps to 13.6%. Margin was assisted by lower SG&A expenses.

Company Profile 

James Hardie Industries Plc (JHX) manufactures building products for new home construction and remodeling. JHX’s products include fibre cement siding, backer board, and pipe. The company operates in the US, Australia and New Zealand.

(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
Technology Stocks

Synaptics well-positioned to capitalize on the secular trends toward smart devices and experience-centric

Business Strategy and Outlook:

Synaptics is an emerging provider of audio, video, automotive, docking, and wireless products for the consumer Internet of Things market, and to a decreasing extent, a developer of touch, display, and fingerprint solutions for the mobile device and PC markets. As the mobile and PC markets mature and growth opportunities diminish, Synaptics has focused investment efforts and resources on consumer Internet of Things, particularly on automotive, smart homes, and low power edge artificial intelligence, which we view favourably.

Within mobile, legacy solutions include discrete touch circuits that enable touch-based device interaction and user authentication, and display drivers to control LCD, and increasingly OLED, displays. As the mobile industry matures, component suppliers face heightening competitive pressures from industry consolidation, supplier price wars, and fast design refresh cycles. Over recent years Synaptics has worked to abate its mobile business’ decline by building combined products, like touch and display driver integrated chips, or TDDI chips, which, while industry-unique, failed to gain traction in the saturated competitive landscape. Accordingly, the transition to an Internet of Things-focused portfolio is viewed as a smart, necessary move.

Financial Strength:

As Synaptics made the strategic decision to divest its low margin LCD TDDI business in 2020 and transition investment focuses to higher-margin Internet of Things products, the company experienced a return to growth in its top line in fiscal 2021. 

Synaptics is in decent financial condition. At the end of fiscal 2021, the firm had $836.3 million in cash and equivalents, compared with $881.5 million of debt on its balance sheet. While the majority of the debt matures in the next year, analysts believe the cash cushion is strong and expect little material impact to future liquidity. Overall, the company generates adequate cash flow to meet its interest expense obligations. The company is anticipated to maintain a cash position that allows it to withstand the cyclical troughs to which semiconductor firms are prone while also maintaining a healthy research and development budget to remain competitive in the cutthroat consumer electronics market. Capital allocation priorities include organic growth investments, strategic acquisitions, debt level management, and opportunistic share repurchases.

Bulls Say:

  • An emerging leader in the Internet of Things space with its broad portfolio of audio, video, and wireless solutions winning designs in multiple Internet of Things end markets. 
  • The acquired Conexant, Marvell’s multimedia solutions business, DisplayLink, and Broadcom’s Internet of Things business have significantly diversified Synaptics’ product portfolio and opened it up to new high growth areas.
  • As the automotive industry experiences secular trends toward the digitalization of cars, Synaptics’ rapidly growing TDDI product for infotainment systems is likely to continue fueling success.

Company Profile:

Synaptics is a global producer of semiconductor solutions for the mobile, PC, and Internet of Things markets. The company develops human interface solutions that enable touch, display, fingerprint, video, audio, voice, AI, and connectivity functions for smartphones, PCs, Internet of Things products, and other electronic devices.

 (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

Clean Energy and Safety Investments Support NiSource’s Growth Plans

Business Strategy and Outlook

After NiSource’s separation from Columbia Pipeline Group in 2015, it now derives all of its operating revenue from its regulated electric and natural gas distribution utilities. About 60% of operating income comes from its six natural gas distribution utilities. The remaining 40% comes from its electric utility business in Indiana. NiSource to invest more than $10 billion over the next four years, including what could be nearly $3 billion of renewable energy projects in Indiana, where NiSource enjoys favorable regulation.

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, but the event was a public relations nightmare.

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. It is Expected that dividend growth might pick up in 2024 once NiSource is past the peak of its five-year capital spending plan and its equity needs shrink.

Bulls Say’s

  • Dividend is expected 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
Dividend Stocks

Hanesbrands’ Investments in Key Brands as Part of Its Full Potential Plan Support Its Narrow Moat

Business Strategy and Outlook

Hanesbrands is the market leader in basic innerwear (69% of its 2020 sales) in multiple countries. In May 2021, the firm unveiled its Full Potential plan to expand Global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced ecommerce, for example), and streamline its portfolio.

As part of Full Potential, Hanes intends to build on Champion’s increasing popularity in North America, Asia, and Europe. Although COVID-19 and the discontinuation of the C9 label at Target hurt sales in 2020,it is believed that Champion will continue its growth path in 2021 as it and other activewear apparel have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands. Moreover, Hanes recently found a new home for C9 as an exclusive brand for wide-moat Amazon. Hanes’ management forecasts Champion will reach $3 billion in global sales in 2024, up from about $2 billion this year, which we see as an achievable goal.

Another key strategy for Hanes is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past three years. Hanes, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. It is believed that the combination of strong pricing and production efficiencies allow Hanes to maintain operating margins above 20% for its American innerwear business despite somewhat inconsistent sales.

Morningstar analyst maintains per share fair value estimate of $26 after the release of Hanes’ 2021 third-quarter report.The fair value estimate implies 2022 adjusted price/earnings of 13 and enterprise value/adjusted EBITDA of 10.

Financial Strength 

Hanes is saddled with heavy debt from its acquisition spree in 2013-18 and closed September 2021 with $3.7 billion in debt. However, the firm also had nearly $900 million in cash and no borrowings under its revolving credit facilities of just over $1 billion. Moreover, it intends to refinance its $700 million in 5.375% 2025 senior notes at a lower interest rate to save about $35 million per year in interest costs. Hanes has a stated goal of bringing debt/EBITDA below 3 times by 2024.The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. .Hanes, unlike many peers, did not suspend its dividend due to the virus. Its annual dividend has been set at $0.60 per share since 2017.Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. We do not include acquisitions in our model due to uncertainty about timing, size, and profitability.

Bulls Say 

  • Hanes’ Champion is a contender in the hot but crowded athleisure space. The brand is already well known in North America and parts of Europe, and there is significant potential in China and other underpenetrated markets. 
  • Hanesbrands has successfully introduced brand extensions that have allowed it to expand shelf space and increase price points in the typically staid category of basic apparel. 
  • After a review, Hanesbrands announced a new strategic plan called Full Potential to boost growth and reduce expenses, which should benefit its brand strength.

Company Profile

Hanesbrands manufactures basic and athletic apparel under brands including Hanes, Champion, Playtex, Bali, and Bonds. The company sells wholesale to discount, midmarket, and department store retailers as well as direct to consumers. Hanesbrands is vertically integrated as it produces more than 70% of its products in company-controlled factories in more than three dozen nations. Hanesbrands distributes products in the Americas, Europe, and Asia-Pacific. The company was founded in 1901 and is based in Winston-Salem, North Carolina.

(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
Currencies Trading Ideas & Charts

AUD/USD stays depressed at five-week low due to macroeconomic factors

The Aussie pair slumped during the last three days, as the negative Australian employment figures pushed the pair’s latest downside amid the US bank holiday. This was further deteriorated by the talks concerning a likely monetary policy divide between the Reserve Bank of Australia (RBA) and the US Federal Reserve (Fed), as well as the US-China phase 1 deal and Evergrande.

The following graph shows the AUD/USD trend of past 06 months:

Although AUD/USD bulls were trading downwards on account of October month contraction in Australia Employment change and a six-month high Unemployment Rate, they gained a little momentum as the Aussie jobs report showed a vast gap between market forecasts and actual data. The same enables the RBA (Reserve Bank Of Australia) to reiterate its rejection of the rate hike, also citing the inflation figures which are still expected to be ranging between the 2.0% and 3.0% target. On the contrary, the 31-year high US inflation puts the rate hike on the Fed’s platter. Hence, the US Dollar Index (DXY) has this key reason to aim for a fresh high since July 2020 and extend the last two-day uptrend.

Other than the central bank actions, downbeat forecasts concerning the economic growth of Australia’s largest customer China also weighed on the AUD/USD pair, majorly due to credit crisis for real-estate companies and power cut problems.

(Source: FXStreet)

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
LICs LICs

Regal Investment Fund raises $212m through placement and entitlement offers

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Cash Flow TTM is 16.72%. Regal Investment Fund is a Closed Ended Fund Type. Its dividend in July 2021 is 1.0111%. In June 2021, their revenue was AUD$ 262.81 Million and Net Profit is 174.87 Million.

Price Earnings TTM is 2.4% while Earnings per Share is 1.637. Their Year-to date Return is 34.17% and Premium/Discount percent is almost 1.03%. Regal Investment Fund Dividend Indicated Gross Yield is 25.78%.

On 6 October 2021, RF1 announced it was conducting a Placement and Accelerated Entitlement Offer to institutional and wholesale investors and a General Entitlement Offer to eligible unit holders. Combined the Fund was seeking to raise up to $212m.

RF1 successfully completed the Placement and Entitlement Offers during the month, raising $212m. All units issued under the Placement and Entitlement Offers were issued at a price of $3.79 per unit, representing the NAV of the Fund at 1 October 2021 and a substantial discount to the unit price at the time the capital raising was announced.

Capital raised under the Offer will be allocated to existing strategies in line with the Fund’s investment objective with the aim of further diversifying RF1’s portfolio across both private and public alternative investments. The Manager is covering all fees and expenses associated with the Offer.

Asset Allocation

Asset ClassNet Allocation

Australian EquitiesInternational EquitiesCash & Cash EquivalentsOver the Counter DerivativesUnlisted Unit Trusts
52.8%7.7%25.2%0.6%13.7%

Company Profile 

Regal Investment Fund is a listed investment trust incorporated in Australia. The Fund’s Investment Objective is to provide investors with exposure to a selection of alternative investment strategies managed by Regal, with the aim of producing attractive risk adjusted absolute returns over a period of more than five years with limited correlation to equity markets.

(Source: Bloomberg)

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

Mastercard Has Multiple Characteristics That Should Draw Investors’ Attention

Business Strategy and Outlook

Mastercard has multiple characteristics that should draw investors’ attention. First, despite the evolution in the payment space, and view Mastercard’s position in the current global electronic payment infrastructure as essentially unassailable. Second, Mastercard benefits from the ongoing shift toward electronic payments, which provides plenty of opportunities to utilize its wide moat to create value over the long term. 

Mastercard is not without issues in the near term. Cross-border transactions, which are particularly lucrative for the networks, came under heavy pressure due to the fallout from the pandemic and a reduction in global travel. From a longer-term point of view, it is likely that smaller and more regional networks are building out additional capacity for cross-border transactions, which could eat into growth a bit in the coming years, but we haven’t seen a material effect yet. While this situation bears watching, Visa and Mastercard’s global networks remain unparalleled, and this will remain the case for many years to come.

 A downturn in the economy would slow overall growth, as Mastercard’s revenue is sensitive to the volume and dollar amount of consumer transactions. The company has already seen growth decline significantly due to the pandemic.

Morningstar analysts  increased the fair value estimate to $352 per share from $337 due to time value since the last update and some adjustments to assumptions. The fair value estimate equates to 33.6 times projected 2022 earnings, adjusted for one-time expenses.

Financial Strength 

Mastercard’s balance sheet is in solid shape. The company added a small amount of debt to its balance sheet in 2014 and in the years since has steadily increased debt. Still, debt/EBITDA at the end of 2020 was a very reasonable 1.5 times, and Mastercard’s leverage is still a bit below Visa’s. The company has shown a relatively limited appetite for M&A, and the business model requires very little balance sheet investment, so management has considerable flexibility. On the other hand, an overly conservative balance sheet structure could impede long-term shareholder returns.

Bulls Say 

  • Mastercard has been outperforming Visa in terms of growth. Its smaller size and some leveling in market share between the two could maintain this trend. 
  • There is still plenty of runaway for growth in electronic payments. Electronic payments only surpassed cash payments on a global basis a couple of years ago. 
  • Management is appropriately focused on long-term growth opportunities and not near-term margins.

Company Profile

Mastercard is the second-largest payment processor in the world, having processed $4.8 trillion in purchase transactions during 2020. Mastercard operates in over 200 countries and processes transactions in over 150 currencies.

(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

Clover Shows How Fiserv Can Adapt

20025825 - closeup image of businessman drawing 3d graphics

Business Strategy and Outlook

Fiserv’s merger with First Data in 2019 kicked off a string of three similar deals that took place in short order. But it is believed that Fiserv’s move was not attractive relative to the other two, and the company materially didn’t strengthen its competitive position. However, there is a valid strategic rationale for these deals, and the introduction of First Data’s acquiring business should boost overall long-term growth, given the secular long-term tailwind the business enjoys.

First Data has been a laggard compared with peers over the past decade, as it was overwhelmed by an excessive debt load due to a leveraged buyout just before the financial crisis and the defection of a major bank partner. However, in recent years the company worked its leverage down to a more manageable level, and growth improved, suggesting its issues are not structural. With financial health no longer a concern, the stage could be set for First Data to narrow the growth gap with peers. While First Data remains relatively reliant on its banking partners, initiatives such as Clover suggest it is capable of adjusting to a changing industry. Clover, the company’s small-business solution that has similarities to Square’s offering, has seen strong growth, with volume running at an annualized rate of almost $200 billion. 

The COVID-19 pandemic did illustrate one negative of this merger: The acquiring business is significantly more macro-sensitive than Fiserv’s legacy operations. But payment volume has steadily improved and returned to year-over-year growth. Unless the pandemic takes a sharp negative turn, the long-term secular tailwind appears to be reasserting itself and the worst seem to be past the industry. Over the long term, the acquiring operations should be the company’s strongest engine for growth.

Financial Strength 

There are no major concerns about Fiserv’s financial condition. While the First Data merger was stock-based, debt/EBITDA was 4.1 at the end of 2020, as Fiserv absorbed First Data’s heavier debt load. This level is not excessive, considering the stability of the business. Management appears to be focused on debt reduction in the near term. The company enjoys strong and relatively stable free cash flow and doesn’t pay a dividend. This creates significant flexibility and should allow the company to pull leverage down to a level in line with the historical average fairly quickly. 

Bulls Say 

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • The ongoing shift toward electronic payments has created and will continue to create room for acquirers to see strong growth without stealing share from each other. 
  • First Data’s growth had accelerated before the merger as it worked past its financial issues, and the business now has access to greater resources under Fiserv’s roof.

Company Profile

Fiserv is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing, for U.S. banks and credit unions, with a focus on small and midsize banks. Through the merger with First Data in 2019, Fiserv now provides payment processing services for merchants. About 10% of the company’s revenue is generated internationally.

(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

Continental benefits from Auto Industry Trends in Connectivity, Electronics and Safety

Business Strategy and Outlook

Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental’s revenue growth, healthy return on invested capital, and a narrow economic moat rating. After an acquisition binge that culminated in 2007 with the purchase of Siemens VDO, Continental has grown from being predominantly a European tiremaker to a global supplier of automotive components, systems, and modules. In 2008, Continental became an acquisition target as Schaeffler unsuccessfully bid for the company (it still holds 46% of the voting interest). Continental should benefit from automotive industry trends, including advanced driver-assist systems, autonomous driving features, V2X connectivity, and increased vehicular electronics. 

The company invests in and successfully cultivates innovative technologies. Management’s long-term targets are to annually increase revenue in excess of 5% and generate adjusted EBIT margins in the 8% to 11% range. Management spun off its powertrain division in September 2021 into a new company called Vitesco that trades under the ticker VTSC. Since 2008, powertrain segment revenue has grown at an average annual rate of 6%. In 2019, pro forma Vitesco had EUR 9.1 billion in prepandemic revenue and an adjusted EBITDA margin of 9.5%.

Continental sees Q3 Chip Crunch Hit to Results, Maintains Adjusted Guidance; EUR 143 FVE Unchanged 

Narrow-moat-rated Continental reported third-quarter earnings per share from continuing operations of EUR 1.27, handily beating the EUR 0.81 FactSet consensus by EUR 0.46 and jumping EUR 4.54 from the EUR 3.26 loss reported in the COVID-19-affected year-ago period. Consolidated revenue missed consensus by nearly 1%, declining 7% to EUR 8.0 billion from EUR 8.7 billion last year. However, excluding currency effect, organic revenue declined 9%. Our EUR 143 Fair Value Estimate remains unchanged. 

Third-quarter adjusted EBIT was EUR 419 million for 5.2% margin, down from a EUR 727 million with an 8.4% margin last year as the chip crunch made customer production sporadic during the quarter. Consolidated revenue is expected to be in a range of EUR 32.5 billion-EUR 33.5 billion with adjusted EBIT margin forecast in a range of 5.2%-5.6% and free cash flow in the range of EUR 0.8 billion – EUR 1.2 billion. However, management lowered its tax rate assumption to 23% from 27% due to the lower profitability guidance, which had minimal effect on our fair value.   

Financial Strength 

Continental’s financial health appears to be in good shape. Management targets investment-grade credit ratings and a gearing ratio (net debt/equity) range of 40% to 60%. At the end of 2020, the company’s liquidity was EUR 10.8 billion, the gearing ratio was 44%, and total adjusted debt/EBITDAR, which treats operating leases as debt and rent expense as interest, was 2.6 times. Since 2010, Continental has averaged 1.8 times total adjusted debt/EBITDAR, while netting cash against debt results in about a 1.4 times ratio. 

Maturities appear well laddered with the exception of roughly EUR 2.2 billion in short-term debt. The company syndicated a new 365-day EUR 3.0 billion line of credit in 2020 due to the pandemic, which was unused at year-end. While Continental’s EUR 4.0 billion revolving bank line of credit due in 2025 had not been utilized, short-term debt includes EUR 1.5 billion outstanding on other lines of credit. The large short-term debt balance has typically been rolled to the next year.

Bulls Say’s 

  • Continental is well positioned to capitalize on auto industry trends like safety, electronics, fuel economy, and emissions reduction. As a result, we expect the company’s revenue to average growth in excess of average annual growth in global vehicle production. 
  • The ability to continuously innovate new process and product technologies should enable Continental to maintain a narrow economic moat. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile 

Continental is a global auto supplier and tiremaker. Operating segments include the autonomous mobility and safety segment and the vehicle networking and information segment in the automotive group, plus tires and ContiTech, which uses rubber in industrial and automotive components and systems, in the rubber group. Last year, pro forma for the spin-off of the powertrain segment, automotive group revenue was around 50% of the total with AM&S and VN&I each accounting for about 25%. Rubber group revenue, also at around 50% of the total, includes tires at about 32% and CT at around 18%. The company’s top five customers are Daimler, Stellantis, Ford, the Renault-Nissan-Mitsubishi alliance, and Volkswagen, representing about 37% of total revenue (as reported, before the Vitesco spin-off).

(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
IPO Watch

Stellar debut of Nykaa; lists at 80% premium and market cap crosses 1000 billion mark

The issue price of the shares was in the range of INR 1085- 1125 per share, with a lot size consisting of 12 shares amounting to INR 13,500. The subscription in retail category was 12.24 times, in the QIB category 91.18 times and in NII category 112.02 times, taking the whole subscription to 81.78 times.

The proceeds of issue were aimed to use for investment in their subsidiaries (FSN Brands, Nykaa Fashion) for setting up new stores, towards capital expenditure, repayment or prepayment of borrowings, enhancement of visibility and general corporate purposes.

The IPO saw a magnificent listing on the stock exchange by gaining 80% premium, thereby opening at INR 2001 apiece. It closed at a day’s high of INR 2206 per share. The market capitalization of Nykaa exceeded INR 1040 billion.

Founder, MD and CEO Falguni Nayar is very optimistic about the performance of Nykaa. She maintains that beauty and fashion are very high growth businesses with large market size. Nykaa already holds a bunch of brands that they are continuously building. They have recently acquired Dot & Key that adds to their skincare offering. Besides this, Nykaa has entered into inorganic acquisition of 20Dresses, a western wear brand and Pipa Bella, a jewellery brand. The holistic business model of Nykaa makes it a potential investment opportunity.

About the company:

Nykaa is an Indian e-commerce company, founded by Falguni Nayar in 2012 and headquartered in Mumbai. It sells beauty, wellness and fashion products across websites, mobile apps and 76 offline stores. As of 2020, it was valued at ₹85 billion (US$1.1 billion) making it the first unicorn startup headed by a woman in India. 

It sells products which are manufactured in India as well as internationally. In 2015, the company expanded from online-only to an omnichannel model and began selling products apart from beauty. In 2020, it retails over 2,000 brands and 200,000 products across its platforms.

(Source: economictimes.com)

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.