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Commodities Trading Ideas & Charts

Genesis hedges its gas requirements by holding a 46% stake in New Zealand’s Kupe gas field

Business Strategy & Outlook

Genesis operates a mix of thermal (coal and gas) and hydro generation, with total annual production of approximately 7,000 GWh. The company’s hydro generation provides it with low-cost generation during times when there is sufficient rainfall and/or snowmelt. Conversely hydro generation can fall sharply when inflow to the firm’s lakes recedes because of insufficient rainfall. During such times, production from its thermal power plants can be ramped up to make up for the shortfall in hydro generation. Spot prices can increase dramatically during periods of low rainfall, reflecting the demand-supply mismatch caused because of lower nationwide energy output. Such times tend to favor Genesis as the excess generation is sold at higher prices. Consequently, Genesis’ profitability and margins can increase during periods of low rainfall and high electricity prices. 

Genesis hedges its gas requirements by holding a 46% stake in New Zealand’s Kupe gas field. Under the current contract, Genesis is obligated to purchase the entire natural gas output from Kupe. This provides the firm with a reliable supply of gas to power its thermal plants and also underpins Genesis’ dual-fuel offering to its customer base. Genesis is also entitled to its share of LPG and oil from Kupe. The oil is exported, while LPG is on-sold to its residential and commercial customers. Kupe introduces oil price risk, though hedging helps in the near term. The main concern is that Kupe earnings will end in 10-15 years, depending on the extent to which its life can be extended through new oil and gas discoveries. This is a risk to Genesis’ earnings, cash flow, and dividends over the long term. As transmission lines are upgraded and more renewable energy is developed, Genesis will likely close some of its aging thermal generation units in the medium term.

Financial Strengths

Genesis Energy’s financial leverage increased following recent acquisitions, however, one can be comfortable given expectations for solid earnings growth, long average debt maturity profile and the ongoing dividend reinvestment plan. As of June 2022, gearing (as measured by debt/capital) was 36%, down slightly on last year. Net debt/EBITDA (adjusted for equity credit on subordinated debt and excluding one-off costs) was 2.7 times in fiscal 2022, within management’s target of 2.4-3.0 times. There’s a forecasted unadjusted net debt/EBITDA, which is the better way to judge financial strength, of 2.5 times in the next few years, which is reasonable. Guidance is for capital expenditure of up to NZD 80 million in fiscal 2023. The elevated capital expenditure for a few years before falling back to typical levels of below NZD 70 million per year. Nonetheless, free cash flow should remain strong.

Bulls Say

  • Persistently high wholesale electricity prices are flowing through to customer tariffs, supporting earnings growth.
  • A mix of thermal and hydro generation assets allows Genesis Energy to take advantage of high electricity prices during periods of low rainfall and low hydro storage.
  • The Pole 3 cable, linking the South Island to the North Island, reduces price disparity between the two islands and reduces location cost risk for all generators.

Company Description

Genesis Energy is one of New Zealand’s leading producers of electricity, accounting for more than 15% of the country’s total generation. The firm enjoys a strong retail presence, with the highest retail market share, at over 25%. The company has a mix of renewable and thermal assets, with the latter accounting for about 55%-60% of the firm’s overall production. The company has a 46% interest in the Kupe oil and gas field.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio

Business Strategy & Outlook

Endeavour is Australia’s pre-eminent omnichannel liquor retailer, operating the largest network of brick-and mortar stores throughout the country, with more than 1,600 liquor outlets across the well-known Dan Murphy’s and BWS brands. Endeavour also has substantial interests in hotels and electronic gaming machines, operating more than 12,000 gaming machines across its portfolio of more than 300 hotels, pubs, and clubs. Endeavour is one of Australia’s leading employers, with staff of more than 28,000 throughout Australia. Endeavour’s business is divided into two segments. Its retail segment is Australia’s leading omnichannel liquor retailer, while its hotels segment provides hospitality services and gambling operations. Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio, which operates several wineries, as well as bottling and packaging facilities. Products produced are supplied exclusively to Dan Murphy’s, BWS, and ALH Group in Australia and provide a source high-margin differentiation while also minimizing supply chain risks in the wine category. 

Shifting consumer trends toward online shopping and convenience have led to strategic investments in online shopping platforms and delivery capabilities, such as smartphone applications for each brand and online pure play retailers Jimmy Brings and Shorty’s Liquor. Almost 9% of all Endeavour’s liquor sales are transacted online. Endeavour’s revenue is highly skewed to the retail segment, which will contribute approximately 85% of revenue over the next decade, with the balance coming from the hotels segment. The split is more evenly balanced at an EBT level due to the higher margins achieved in the hotels business, with approximately 65% of EBT derived through the retail business and 35% through the hotels business. The consumer demand for alcohol is to be relatively steady through the economic cycle, exhibiting attributes of consumer defensives. The Australian hotels market will predominantly be driven by the same factors as the off-premises retail liquor market, namely population growth and inflation.

Financial Strengths

Endeavour Group is in reasonable financial shape. Endeavour’s leverage ratio, measured as net debt/EBITDA, including lease liabilities, was approximately 3.5 at the end of June 2022. Endeavour Group’s strong market positioning and wide economic moat provide us with confidence that current gearing levels are maintainable. There’s an interest coverage—defined as reported EBITDA/interest expense—of approximately 6 times at fiscal 2023 year-end. There might not be any material increase in the level of gearing as consistent with the investment-grade credit profile Endeavour is targeting.

Bulls Say

  • Endeavour’s dominant retail market share of about 50% is multiples of its closest competitor and provides a source of long-term maintainable cost advantage. 
  • Endeavour’s partnership agreements with Woolworths allow the business to leverage the scale and capabilities of Australia’s largest supermarket.
  • Endeavour’s wide economic moat, strong competitive positioning and strong balance sheet will underpin a maintainable and steadily growing dividend.

Company Description

An investment in wide-moat-rated Endeavour Group provides investors with exposure to one of the most well entrenched dividend-paying businesses in the Australian retail landscape. Following decades of enduring organic growth through store rollouts, Endeavour’s off-premises retail segment—with more than 1,600 retail outlets mainly across its Dan Murphy’s and BWS brands—accounts for approximately half of all off-premises retail liquor sales within Australia. Endeavour’s immense scale in the off-premises retail segment is unrivaled within Australia. Indeed, Endeavour’s sales are almost three times larger than its nearest retail competitor, Coles.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Property

Relative to its largest rivals, Cromwell is more exposed to economic and property market conditions

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Business Strategy & Outlook

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income. Cromwell yearns to grow its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets. Directly held property investments account for more than half of group revenue, nearly all of this being offices. The office portfolio has significant exposure to less supply-constrained areas such as fringe central business districts, or CBDs, or suburban sites in Sydney, or less built-up capital cities such as Canberra, Adelaide, or Brisbane.

Relative to its largest rivals, this makes Cromwell more exposed to economic and property market conditions. Increasing CBD supply and cautious businesses could particularly hurt tenant demand in suburban and fringe locations. Reassuringly, Cromwell has solid tenants in many sites, with government accounting for circa half of Australian rent, and a decade-long lease to Qantas a big chunk of its Australian rent. A minority of earnings is from funds management activities, but this segment is likely to grow as Cromwell sells property assets and increases its focus on funds management. This segment generates a high return on equity because while it relinquishes rental income, it frees up capital for use elsewhere, while still generating management fees. A portion of revenue comes from indirect property holdings, mostly Cromwell’s stake in the Cromwell European REIT, listed in Singapore.

Financial Strengths

Cromwell targets gearing of 30%-40%. This is aggressive given Cromwell’s portfolio is largely in secondary locations. Group gearing (net debt/assets) as at June 2022 was in the mid-40s, and gearing on balance sheet was just below the top of the target range. Cromwell points out that gearing should reduce once various assets are sold, but this is subject to appropriate prices being achieved. Other assets up for sale include an Italian logistics portfolio and its LDK retirement living business. That makes us nervous given the group’s substantial investments in Europe. There’s a long-term cost of debt of 6.5%, significantly above current levels. Interest-rate risk is hedged but with a weighted average term of just 2.1 years. The group has a manageable AUD 200 million of debt expiries in fiscal 2023, but has AUD 800 million of expiries in 2024. Cromwell doesn’t have a large buffer to the 60% gearing limit specified in its banking covenants. The latter is boosted by the additional earnings from holding the Polish retail assets. Gearing ratios would rise if asset prices fell, which is possible given a spike in interest rates in early 2022, and the effects of hybrid-working yet to be fully felt in office markets. The group has a pipeline of developments, and may make further debt-funded acquisitions, which could also push up gearing. This can be offset by divestments and growing earnings from its funds management business. Cromwell reduced its targeted gearing ratio in 2019, having previously stated a target range of 35%-55%. Gearing needs to reduce meaningfully, likely through further asset sales.

Bulls Say

  • Cromwell’s portfolio avoids highly priced office assets in core CBD markets, opting instead for cheaper assets in secondary locations that it views as having greater potential for price upside or development.
  • Cromwell’s solid tenant profile means income on its directly held portfolio is more secure than most of its REIT rivals. 
  • A recovery in population growth could help shore up the value of Cromwell’s assets due to urban infill, with better quality sites achieving more rent bargaining power, and some low-quality sites potentially switching to higher value uses.

Company Description

Cromwell Property Group is an internally managed Australian real estate investment trust. It owns an Australian portfolio of (mostly office) properties and also develops and manages properties on behalf of third-party investors. The group is exploring opportunities to sell some assets, particularly in Europe, and to spin out its office portfolio into a separate REIT, leaving the Cromwell business to focus more on funds management. The timetable is uncertain given higher interest rates are a headwind for property sales.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Property

CLW has been acquisitive, buying properties and other REITs, using debt, and issuing new equity

Business Strategy & Outlook

Charter Hall Long Wale REIT’s, or CLW’s, portfolio is high-quality. Liquor retailer and pub operator Endeavour Group is the largest tenant at 18% of passing income. At least four fifths of passing income comes from tenants as unlikely to miss a rent payment, including Endeavour Group, government agencies, Telstra, BP, Inghams, Coles, Metcash, Arnotts, Bunnings, Westpac, and Linfox. External fund manager Charter Hall has a strong track record and good relationships with tenants. But continued acquisitions may have diluted CLW’s portfolio, particularly as long-WALE assets have been in high demand, and thereby came with a hefty price tag. CLW has been acquisitive, buying properties and other REITs, using debt, and issuing new equity. It issued circa AUD 386 million of new equity in fiscal 2019 to fund acquisitions, including various offices, a bus terminal in Eagle Farm, Brisbane, and several agricultural logistics properties from Inghams on a sale-and-leaseback arrangement. 

In fiscal 2020 it issued AUD 850 million of equity to purchase telco exchanges, a Brisbane office building, Telstra’s Melbourne headquarters, and BP service stations in Australia. In fiscal 2021 it issued AUD 626 million of equity, using the proceeds to purchase Telstra exchanges, a portfolio of offices, and BP sites in New Zealand, taking its BP portfolio to circa AUD 500 million in Australia and New Zealand. CLW has issued substantial new equity every year since its 2016 listing, with the number of securities on issue tripling from circa 208 million in June 2017 to 720 million at March 2022. Higher interest rates are likely to slow the group’s expansion and weigh on earnings, given the group’s relatively high gearing.

Financial Strengths

CLW is in reasonable financial health. Interest cover is a solid 5.4 times, compared with a covenant of two times. To breach that, earnings would have to fall by more than 60%, other things equal, unlikely given revenue is underpinned by long leases. A breach arising from increased finance costs is also unlikely, as it would require finance costs to roughly triple. That sounds like a massive increase, and while it can be viewed as extremely unlikely, it’s not impossible considering a low average cost of debt of 2.8% as at 30 June, 2022. However, under that scenario management would likely respond, for example, by selling assets. Admittedly though under that scenario, asset sales would probably be at much lower prices than present, given the higher property capitalization rates that would be implied by substantially higher interest rates. Reassuringly, CLW has debt locked in with an average maturity of 5.2 years, and maturities are well staggered, with no outsize expiries until fiscal 2027. About 75% of existing debt is fixed or hedged, which limits the impact of interest rate moves on finance costs, at least in the near term. The group has additional debt and covenants pertaining to underlying joint venture vehicles. Loan-to-valuation ratios there are reasonable, with the largest exposure being a debt facility that funds the BP Australia portfolio, with an LVR of 39%, versus a covenant of 60%. That implies the asset values would have to fall by one third for a breach. All that said, a rise in interest rates could increase finance costs, and pressure valuations on CLW’s long-lease assets. That means gearing could elevate at the same moment that buying opportunities might arise in property markets, limiting opportunity to buy assets during downturns, or limiting income growth.

Bulls Say

  • With markets pricing in substantial interest rate rises, listed long-duration assets are looking better value than in recent history.
  • Long WALE REIT has very long leases to strong tenants.
  • Charter Hall’s scale and track record of managing sale-and-leasebacks puts CLW in a strong position to acquire similar assets in future.

Company Description

Charter Hall Long WALE REIT is a diversified property trust, with assets in Australia and New Zealand. Occupancy is near 100%, and weighted average lease length is a long 12.0 years (as at June 30, 2022). More than half the REIT’s leases are triple-net, where tenants pay rates, maintenance and most outgoings. The REIT’s circa AUD 7 billion portfolio of 550 properties spans offices, industrial, retail, social infrastructure, and agricultural logistics assets, with more than three quarters of the portfolio on Australia’s eastern seaboard. Leases are evenly spread between CPI-linked (6.3% average rent increase expected in 2023) and fixed uplifts (average 3.1% uplift expected). The tenant profile is strong, with almost all occupiers being government, multinational or national businesses.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Property

Dexus’ portfolio has held up relatively well in major downturns compared with rivals with lower-quality portfolios

Confident beautiful businesswoman in hardhat explaining blueprint to forewoman at construction site

Business Strategy & Outlook

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading. Rent is the biggest revenue driver with the office and industrial divisions accounting for over 90% of funds from operations, or FFO. High-quality offices in Sydney dominate, with Dexus having interests in many trophy assets including Sydney’s Australia Square, 1 Farrer Place, and 1 Bligh Street. It also owns or manages a seasoned industrial portfolio, including the massive Dexus Industrial Estate in one of Australia’s fastest-growing industrial precincts, Truganina, Victoria. It also has a small retail portfolio, mostly retail sites attached to offices, and a small healthcare portfolio. Dexus has sold stakes in office, industrial and healthcare assets into funds management vehicles that it manages.

Funds management is the smallest but fastest-growing portion of revenue, and more developments are being rotated into funds management vehicles, adding capital efficiency and management fees. It accounted for about 6% of revenue in fiscal 2019, and the funds management grows by about a third by the end of the discrete 10-year forecast period. The high-quality portfolio should see Dexus perform better than most, with about 90% of its office portfolio either premium or A-grade by Property Council of Australia guidelines. Dexus’ portfolio has held up relatively well in major downturns compared with rivals with lower-quality portfolios. It’s hard to imagine a worse scenario for an office property than that experienced in 2020-21. In those years, Dexus reduced rents somewhat on the small portion of leases that expired, but occupancy remained high.

Financial Strengths

Dexus is in solid financial health, with look-through gearing of 26.9%, below the group’s targeted range of 30%-40%. The group has substantial buffers to its banking covenants. However, gearing is likely to rise as Dexus commences development projects. Gearing ratios are also likely to rise as asset prices fall, given remarkably low capitalization rates of 4%-5% being seen on CBD office transactions in fiscal 2022, and bond markets pricing in meaningfully higher interest rates. The group has a large pipeline of developments, and could make debt-funded acquisitions during the downturn, or a buyback, which could also push up gearing. This can be offset by divestments, including rotating some assets into its funds management vehicles, thereby taking them off the group balance sheet. On balance though, it still can be expected gearing to rise from current levels. Dexus’ reasonably conservative management team looks comfortable, and the health of other financial metrics. Interest cover is 6.0 times on a look-through basis, compared with covenant of 2 times. Interest rate sensitivity is modest, with about two thirds of debt being hedged, and debt maturities are staggered. If inflation intensifies, further rate rises could increase the cost of rolling over maturing debt facilities and put pressure on Dexus’ earnings and distributions in the near term. However, it can be consistently assumed a long-term cost of debt of 5.8%, significantly above current levels.

Bulls Say

  • Dexus owns a high-grade office property portfolio and a solid industrial portfolio, and it will likely benefit from an ongoing demand for quality property from the likes of pension funds, sovereign wealth funds and other offshore investors.
  • Population growth boosts Dexus’ assets with high-quality sites achieving more rent bargaining power, and some low-quality sites potentially switching to higher-value uses.
  • Lower credit spreads and improving rental collections as office precincts recover could offset potential interest-rate rises.

Company Description

Dexus is a major Australian property owner, developer, and manager. It owns a large, high-grade office portfolio and a smaller industrial portfolio in Australia. It also manages properties on behalf of third-party investors. Dexus was formed by the merger of Deutsche Office, Industrial and Diversified Trusts. Management is internal, as opposed to external, as it is for some peers.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles

Business Strategy & Outlook

Advanced Micro Devices designs an array of chips for various computing applications. These products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives us confidence that the firm will generate excess returns over its cost of capital over the next decade and thus warrants a narrow economic moat rating.AMD outsources its chip designs to third-party foundries such as Taiwan Semiconductor Manufacturing and GlobalFoundries. While AMD has historically been a smaller x86 chip supplier than Intel, it has recently offered materially more competitive products across all of its segments, thanks to a combination of strong execution in new innovative chip designs and Intel’s own manufacturing struggles, which allowed AMD’s chief foundry partner TSMC to leapfrog Intel in process technology.

The firm is well positioned to enjoy data center growth driven by the shift from on-premises to cloud computing. In the mature PC market, AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in PCs and servers, though x86-based chips is to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semi custom processor applications, such as game consoles. AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though AMD isn’t as competitive in GPUs as it is in CPUs. In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. FPGAs can be reconfigured to address the unique needs of users. AMD is to leverage FPGAs in the data center alongside its CPUs.

Financial Strengths

At the end of June 2022, the firm reported $5 billion in cash and cash equivalents against total debt of $2.8 billion. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While it has generated solid cash flow in recent years, its longer-term competitiveness remains heavily dependent on its ability to retain healthy market share across the PC, server, and GPU segments.

Bulls Say

  • AMD’s recent CPU and GPU offerings have been more competitive with Intel’s and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies.
  • AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage.
  • AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.

Company Description

Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook

Coupa software is a moaty cloud-only platform in the business spending management, or BMS, space with significant market share gains to come. Coupa benefits from a narrow moat based on strong switching costs and a network effect. Coupa’s core platform allows users to procure indirect or direct spending for a company—including everything from bottled water to laptops. While these use cases vary in mission criticality, switching costs persist throughout the business from the significant implementation time and costs as well as risks involved in changing vendors. Coupa’s network effect is driven by the increased benefits each supplier and procurer gain when additional users are added to the platform. Since its founding, Coupa has enabled $3.3 trillion in spending through its platform—and such stickiness will allow cumulative spending to snowball, benefiting long-term investors. Once items are procured, Coupa’s platform enables invoicing, expense, and payment. By having all these functionalities within one system, users benefit from better visibility of their spending. Nonetheless, existing attach rates leave ample room to grow—which informs that a positive moat trend is at play—as Coupa customers continue to use more value-adding modules, which increases overall stickiness.

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering, as customers are willing to forgo the synergies of having their ERP and procurement vendor all in one in order to gain benefits of Coupa’s user experience. In addition, while it can be considered Workday to be the greatest long-term threat to Coupa given its cloud-only architecture and reputation for highly intuitive human capital management and financial service software, Workday has admitted that it cannot compete effectively with Coupa. This is comforting that at least Coupa has a considerable head start, which will be protected in the long run by its hard-to-dismantle network effect.

Financial Strengths

Coupa is in good financial health. As of January 2022, Coupa had $730 million in cash and marketable securities with $1.6 billion in convertible debt. The firm is rightly focusing on growth of the business over allocating capital toward dividends or share repurchases. A large proportion of debt does not mature until 2025 and 2026, and the firm does not face material risk in terms of funding it, as it is capable of issuing $1.5 billion in additional debt if investors do not take the option to convert the debt to stock. Coupa has an ability to raise additional debt if needed, as the company boasts healthy adjusted free cash flow. Altogether, the 2025 notes have a conversion price of $159.60 while the 2026 notes have a conversion price of $296.45. While Coupa acquired Llamasoft for $1.5 billion in 2020, the large acquisition was well justified—as significant synergies can be seen between Coupa’s bread and butter, indirect spending, and direct spending-related offerings, like Llamasoft’s supply chain design functionality. Coupa will not make such hefty acquisitions over the next 10 years. While Coupa currently is not achieving excess returns on invested capital, or ROICs, the firm will be able to do so by fiscal 2026. While Coupa could be excess ROIC positive today, Coupa is making the right approach in funneling significant sales and marketing spending on new customer acquisition today to reap the long-term benefits later—as Coupa software is sticky, which informs a narrow moat rating.

Bulls Say

  • Coupa could take share within the direct spending and supply chain design market much faster than expected as frustration with other solutions nears a tipping point.
  • Coupa could be able to push boundaries further on price increases for existing offerings.
  • Regulation on reporting third-party liabilities in a timely manner could expand to other industries, further necessitating the Coupa platform.

Company Description

Coupa Software is a cloud-based provider of business spend management, or BSM, solutions. Coupa’s BSM platform provides visibility into all spend, allowing companies to gain control over their spending, optimize their supplier network and supply chains, and manage liquidity. The platform’s transactional core consists of procurement, invoicing, expense management, and payment solutions, while supporting modules ranging from strategic sourcing solutions to supply chain design and planning solutions round out the comprehensive spend management ecosystem.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce

Young female explaining new idea to her colleague in creative office.

Business Strategy & Outlook

Fiscal 2023 should be another banner year for BRP’s sales given still robust consumer demand and high level of backfill units needed at its dealers. However, this will distract the team from its long-term product and operational priorities, which should improve the firm’s competitive positioning. BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should capture efficiencies in its plants. Firmwide centres of expertise and excellence should allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product line-up (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, acquisitions aren’t required for expansion. However, entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

BRP has fiscal 2025 goals of CAD 12 billion-CAD 12.5 billion in sales and CAD 13.50-CAD 14.50 in EPS. Sales of CAD 12.4 billion and EPS of $14.68 in fiscal 2025. Demand has persisted despite economic uncertainty, and innovation should continue to drive sales, particularly in the marine segment where BRP has launched Project Ghost (altering placement of outboard engines) and the Sea Doo Switch (marine is expected to grow to CAD 1 billion by 2025, from CAD 513 billion in 2022, according to BRP, although less than CAD 800 million with current products). In the base case, BRP’s brand intangible asset and leading market share position result in competitive returns on invested capital and a narrow economic moat. With further improvements to the manufacturing process and scale, BRP could also develop a cost advantage over time.

Financial Strengths

BRP has been reducing its leverage ratio in recent years, taking debt/adjusted EBITDA down to 1.4 times at the end of fiscal 2022 from more than 4 times in 2011, as profitability has improved. It’s not surprising that significant leverage was taken on under the management of private equity partners, and leverage will continue to be contained now that the company is publicly held. The firm is comfortable operating below its targeted leverage ratio of 2 times EBITDA, and it could be around 1-1.5 times at the end of fiscal 2023.BRP has a $1.5 billion term loan set to mature in May 2027, a $100 million term loan due 2024, as well as a small euro-denominated term loan to support research and development projects in Austria (where Rotax engines are developed). The company has a CAD 1.5 billion revolving credit facility through May 2027 to access incremental liquidity. In normal operating periods, the company expects cash on hand, cash from operations, and utilization of the credit facility should allow it to meet capital expenditure, working capital, and debt service needs. The firm has agreements in place with companies like Wells Fargo and TCF to provide floor-plan financing for dealers. The company maintains flexibility in its capital structure through stock repurchases. BRP continued on its normal course issuer bid in fiscal 2023, repurchasing around 464,000 subordinate voting shares, and also executed a substantial issuer bid for 2.4 million shares in fiscal 2022 (for CAD 250 million). Additionally, the firm returns excess cash to shareholders via a quarterly dividend of CAD 0.16 per share, which could rise at a 20% clip over the long term.

Bulls Say

  • BRP has white-space opportunities to expand the business faster than expectations, particularly in the marine business and some niches (like electric) of the year-round lines.
  • Demand from underpenetrated international markets and expansion into new markets like China could lead to demand that is higher than the forecast, which could raise utilization and productivity, leading to higher profitability.
  • Marine is becoming a segment with higher priority to the company, which could generate a better-than-expected operating margin as the category scales, providing cash flow upside.

Company Description

BRP designs, develops, manufactures, distributes, and markets snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names. It also builds engines under the Rotax brand (after discontinuing the Evinrude outboard engine business in 2020) and offers clothing, parts, and accessories that cater to its core consumers. In 2018, BRP created a marine group, acquiring boat manufacturers Alumacraft, Triton (which makes Manitou pontoon boats), and Telwater (in Australia). At the end of fiscal 2022, the company marketed its products through a network of more than 2,800 independent dealers and 170 distributors in about 120 countries.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

NetEase maintains a high level of profitability above 30% operating margin for its gaming business, thanks to stable revenue from core titles

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy & Outlook

NetEase started as a Chinese internet portal in the late 1990s but has now become the second-largest mobile game company in the world. The firm owns one of the most well-known massively multiplayer franchises in China—Fantasy Westward Journey. Over the past decade, NetEase has capitalized on the industry shift toward mobile gaming and now focuses on developing innovative, high-quality, and long-cycle games with a mobile-first approach. Over the past years, the firm has established iconic titles such as Onmyoji, Knives Out, and Identity V. Every year, the company publishes dozens of games across almost every genre and game play. In addition, NetEase is also collaborating with firms such as Blizzard, Marvel, and Microsoft to release games based on famous global intellectual property like Diablo, Harry Potter, and Lord of the Rings. Over the foreseeable future, NetEase is to continue to leverage its in-house research and development team and user data to develop next-generation games. Like its global gaming peers, NetEase maintains a high level of profitability (above 30% operating margin) for its gaming business, thanks to stable revenue from core titles and the steady development of new franchises. The firm is positioned to not only continue capitalizing on the success of Westward Journey titles, but to also keep diversifying its revenue into new franchises.

While games will remain NetEase’s core cash flow driver, the firm’s investments in other areas (music streaming, online education, e-commerce) also offer long-term potential. Cloud Village, the group’s music streaming arm, had over 180 million monthly active users in 2021 and remained the second-largest music streaming platform in China. Youdao is the group’s attempt at cracking the online education market, but recent regulatory changes in China add uncertainty to this business model.

Financial Strengths

NetEase has a rock-solid balance sheet. At the end of December 2021, the company had CNY 98 billion in cash, cash equivalents, short-term investments, and time deposits under current assets. There was also a restricted cash balance of CNY 2.9 billion under current assets. This compares with only CNY 19.4 billion of short-term debt. Thanks to its strong net cash position and strong operating cash flow that amounted to 147% of net income in 2021, the firm should have no problem funding its gaming business and innovative businesses. NetEase’s capital structure is conservative but not uncommon among Chinese internet firms, given that the company needs to have abundant cash on hand to quickly seize opportunities in the fast-changing internet industry and give it a leg up on competition. Given the growth potential in the Chinese internet space, many of these companies under the coverage do not pay dividends. However, NetEase has returned capital to shareholders via dividends and has set quarterly dividends at 20%-30% of its anticipated net income after tax in each quarter starting in the second quarter of 2019. In addition, the company announced the expansion of its share-repurchase program in May 2020, from up to $1 billion worth of outstanding ADSs to $2 billion, this amount was maintained in 2021. At the end of December 2021, approximately $1.8 billion ADSs had been repurchased under such program.

Bulls Say

  • NetEase’s expertise in asymmetric multiplayer (Identity V and Dead by Daylight) would allow it to capitalize on future opportunities in this genre.
  • The firm has done an admirable job at organically expanding into Japan, and it is likely that it will be able to replicate same success in Europe and the U.S.
  • NetEase Music could see stronger user growth now that Tencent Music was told to end its exclusive licensing agreements with music labels on anti-trust grounds.

Company Description

NetEase, which started on an Internet portal service in 1997, is a leading online services provider in China. Its key services include online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. The company develops and operates some of the China’s most popular PC client and mobile games, and it partners with global leading game developers, such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Poshmark now has access to the resources of a profitable multinational sponsor, affording investments in marketing and international expansion

Business Strategy & Outlook

Poshmark is among the largest apparel resale platforms on the market, boasting an interactive marketplace that benefits from a triumvirate of secular tailwinds: social commerce, an ongoing mix shift toward online retail sales, and the stratospheric growth of the apparel resale market. The firm’s strategy coalesces around four key priorities: product innovation, category expansion, international growth, and buyer acquisition. As a slew of firms have entered the resale space, competition has arisen around exclusive access to customers, inventory assortment, and distribution channels, with long-term equilibrium remaining uncertain. Consolidation looks inevitable, evidenced by the firm’s pending acquisition by narrow-moat South Korean Conglomerate Naver (expected to close in the first quarter of 2023), particularly as the scope of resale firms’ offerings see increasing category, price point, and geographic overlap. Poshmark’s right to win hinges on its ability to convincingly answer the “why Poshmark?” query, attracting platform participants with some combination of competitive seller services, frictionless listing, quick inventory turnover, attractive fees, broad assortment, and authentication services. Working in its favour, the firm now has access to the resources of a profitable multinational sponsor, affording investments in marketing and international expansion that were previously off the table as investors demanded a quicker route to profitability.

Each international market must be approached as a greenfield development, with local competitors boasting a home field advantage at the outset. Winning any of a handful of culturally similar markets (Canada, Australia, the U.K., Germany, France) would meaningfully expand the long-term addressable market, but the firm’s entry into India will remain dubious, which has proven notoriously difficult to monetize. Finally, the management is to target efforts at ameliorating the shipping pain point, with more diversified last-mile providers and a thrust toward higher-priced products likely helping to defray costs that currently constitute about a quarter of average order values, weighing on GMV growth.

Financial Strengths

Poshmark’s financial strength is sound. The firm carries no long-term debt, has $581 million in cash and cash equivalents on its balance sheet as of the second quarter of 2022, and the firm is to be free cash flow positive (operating cash flow plus capital expenditures) by 2024. The management has adequate wiggle room to pursue moat-bolstering investments, while narrowing operating losses should provide a route to enduring operating profitability by 2026. Provided that the firm realizes the planned $30 million run-rate synergies from its acquisition by narrow-moat South Korean conglomerate Naver, Poshmark could achieve operating profitability as early as 2024.Poshmark’s waterfall of investment priorities as consistent with other high growth firms: pursuing internal investments and strategic mergers and acquisitions. There’s no pressure building for shareholder returns through repurchases or cash dividends until the firm achieves operating profitability, with the model suggesting the inception of a modest repurchase program in 2027, though this timeline could be delayed by a strategic acquisition or more circuitous route to positive earnings. As Poshmark emerges from its high-growth phase, it will encourage management to consider optimizing the firm’s capital structure (adding debt) and initiating a cash dividend, but this remains a long-dated concern as forecasts don’t contemplate a dividend until 2030.

Bulls Say

  • Five straight quarters of operating profitability during 2020 and 2021 (ending in the third quarter of 2021) suggest a strong underlying business model once customer acquisition costs normalize.
  • Early traction in Australia and Canada could augur well for long-term success in those and other culturally similar markets.
  • The firm’s planned acquisition by Naver could accelerate marketing spending, customer acquisition, and position Poshmark more effectively to win the peer-to-peer resale space.

Company Description

Poshmark is one of the largest players in a quickly growing e-commerce resale space, connecting more than 30 million active users on a platform that sells men’s and women’s apparel, accessories, shoes, and more recently consumer electronics and pet products. The marketplace operates in four countries–the U.S., Canada, Australia, and India–with a capital-light, peer-to-peer model that dovetails nicely with prevailing trends toward social commerce, apparel resale, and an ongoing pivot toward the e-commerce channel. With $1.8 billion in 2021 gross merchandise volume, or GMV, hence the firm captured about 13%-14% of the domestic online resale market, with rolling lockdowns and tangled supply chains providing a meaningful impetus for channel trial during 2020 and 2021.

(Source: Morningstar)

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