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Dividend Stocks

Texas Instruments Has Secular Growth Opportunities in Industrial and Automotive

Texas Instruments has a leading share of the fragmented yet lucrative analog chip market. Analog chips are used to convert real-world signals, such as sound and temperature, into digital signals that can be processed. Since analog chips are neither particularly expensive, nor do they require cutting-edge manufacturing techniques, high-quality analog chipmakers tend to retain design wins for the life of the product, yet maintain healthy pricing and strong profitability on such sales over time.

Additionally, Texas Instruments’ size allows the firm to compete across a broader spectrum of industries, without its fortunes tied to a single customer or end market. Texas Instruments’ embedded chip business is a bit more exposed to the automotive and communications infrastructure end markets, but should also see healthy growth over the next few years. The “Internet of Things” is an interesting tailwind for TI, as the company’s chips could be key components in a massive array of new electronics devices with improved connectivity and processing power.

Financial Strength

Revenue in the September quarter was $4.64 billion, up 1% sequentially, up 22% year over year and above the midpoint of guidance of $4.40 billion-$4.76 billion as provided in July. Industrial chip demand was strongest, up 40% year over year, even though sales were down a mid-single-digit percentage sequentially. Automotive revenue was up 20% year over year and up more than 30% from pre-pandemic levels (fourth quarter of 2019). These near-term results still bode well for strong long-term tailwinds for TI, in terms of rising chip content per car and industrial device. Gross margin expanded 70 basis points sequentially to 67.9%, thanks to higher sales levels. In turn, operating margin expanded 130 basis points sequentially to 49.6%.

Texas Instruments is in a modest net debt position, with $6.6 billion of cash on hand versus $6.8 billion of debt as of December 2020. The company’s target is to pay out 100% of free cash flow (less debt repayments) to investors over time. The firm offers a $1.02 quarterly dividend that yields over 2%, and the company intends to issue 40%-60% of its 4-year trailing free cash flow out to investors via dividends. Meanwhile, Texas Instruments continues to make hefty share repurchases (over $2 billion per year in each of the last six years). Nonetheless, we do not believe Texas Instruments will adopt a balance sheet with reckless leverage anytime soon, as the industry is highly cyclical and firms with healthy cash cushions are often able to better handle the inevitable industry downturns.

Bulls Say’s 

  • Texas Instruments has a leading market share position in several chip segments, such as analog semiconductors and digital signal processors.
  • A key element of Texas Instruments’ success has come from its massive global sales staff, which allows the firm to cross-sell its extensive semiconductor product portfolio to existing customers.
  • Texas Instruments’ ability to manufacture analog parts on 300-millimeter silicon wafers has provided the company with robust gross margin expansion in recent years, and we anticipate further expansion in the years ahead.

Company Profile 

Dallas-based Texas Instruments generates about 95% of its revenue from semiconductors and the remainder from its well-known calculators. Texas Instruments is the world’s largest maker of analog chips, which are used to process real-world signals such as sound and power. Texas Instruments also has a leading market share position in digital signal processors, used in wireless communications, and microcontrollers used in a wide variety of electronics applications.

(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.

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Technology Stocks

Netflix Beats Low Subscriber Guidance; Competition Appears to Be Weighing on Net Adds

It is believed that lower subscriber growth reflects not only saturation in its largest markets but strong competition in the regions with the most potential growth remaining, including Latin America and India. 

Netflix posted 4.4 million net subscriber adds during the quarter, up only 2% sequentially and up 9% from 195 million a year ago. Growth was slower in the U.S., with fewer than 100,000 net additions–only the third time below that mark since the start of 2012. Latin America has also seen anemic growth in 2021, with only 330,000 net adds in the quarter and only 1.45 million year to date, which is well below the same periods in 2019 (3.3 million) and 2018 (4.4 million).

Revenue of $7.5 billion, up 16%.U.S. revenue improved by 11% year over year, largely due to the price hike in 2020 as the subscriber base only increased 1% versus last year. Average revenue per customer for the region was up 10% versus a year ago to $14.68, implying that most customers are on the standard HD plan at $14 with a growing share on the 4K plan at $18. The 4K plan remains the most expensive streaming option in the U.S. marketplace right now, potentially capping Netflix’s ability to continually raise prices as subscriber growth dwindles.

Europe, Middle East and Africa, Netflix’s second-largest region by revenue and subscribers, posted continued strong revenue growth of 21% as the region continues to benefit from price hikes along with a large influx of new subscribers. The region now has over 70 million subscribers with almost 19 million net adds over the last seven quarters, 5 million more than any other region. 

Asia-Pacific, Netflix’s supposed long-term growth engine, increased revenue year over year by an impressive 31% in the quarter but ARPU remained under $10 and actually declined sequentially. It is expected that ARPU will decline going forward as the firm rolls out low-price plans in more countries across the region. These lower priced plans will be necessary to compete with both Amazon and Disney in emerging markets like India and Indonesia. 

Company Profile

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, Internet-connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

 (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.

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Technology Stocks

Microsoft Flexes Cloud Muscle

Additionally, Microsoft has largely transitioned from a traditional perpetual license model to a subscription model. Finally, Microsoft exited the low-growth, low-margin mobile handset business and is driving Gaming to be more cloud-based. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins. 

Azure is the centerpiece of the new Microsoft. It is already an approximately $30 billion business, it grew at a staggering 50% rate in fiscal 2021. Azure also is an excellent launching point for secular trends in AI, business intelligence and Internet of Things, as it continues to launch new services centered around these broad themes. 

Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, and Dynamics 365, with these moves now beyond the halfway point and no longer a financial drag.Lastly, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years.

Microsoft Continues to Impress with All Around Strength and Another Positive Guide; FVE Up to $345

Wide-moat Microsoft continues to benefit from digital transformation efforts at enterprise customers. Azure and commercial related demand was robust by any measure, and gaming and Windows were strong even as supply constraints for PCs and Surface tablets remain challenging. We see a slowdown in remaining performance obligation, or RPO, growth and commercial bookings, two forward-looking metrics, as driven by large Azure deals in the prior year period and not a reflection of deteriorating demand

For the second quarter, revenue growth accelerated by 22% year over year to $45.32 billion. All segments were ahead with more personal computing driving the most upside.Operating margin was 44.7%, compared with 42.7% last year, driven by improved scale, upside to quarterly results, and lower operating expenses generally resulting from COVID-19-related dampening of travel, entertainment, and related expenses. Gross margins were down 50 basis points year over year, with a prior change in depreciable life assumption serving as a headwind, offset by growing Azure margins. 

Financial Strength 

Microsoft enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenue, and high and expanding margins. As of June 2020, Microsoft had $136.5 billion in cash and equivalents, offset by $63.3 billion in debt, resulting in a net cash position of $73.2 billion, or nearly $10 per share. Gross leverage is at 1.0 times fiscal 20202 EBITDA. Free cash flow margin has averaged 30% over the last three years and the company has generated more than $32 billion in free cash flow in each of the last three years.

Bulls Say 

  • Public cloud is widely considered to be the future of enterprise computing, and Azure is a leading service that benefits the evolution to first to hybrid environments, and then ultimately to public cloud environments. 
  • Shift to subscriptions accelerates growth after the initial growth pressure, and the company has passed the margin inflection point now such that margins are increasing again and have returned to pre-Nokia and pre-“cloud” levels. 
  • Microsoft has monopoly-like positions in various areas (OS, Office) that serve as cash cows to help drive Azure growth.

Company Profile

Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three equally sized broad segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops).

 (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.

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Funds Funds

AMP Capital Specialist Property and Infrastructure Fund: A fully listed real assets portfolio

The AMP Capital team also decides on strategic weights to each manager and allowable tactical deviations. Managers are assessed on such criteria as business structure; experience of the team; their alignment of interest, investment merit, and performance; and capacity and fees. The team is also responsible for portfolio review and rebalancing. Portfolio monitoring is undertaken using FactSet and Cortex risk systems.

Portfolio:

AMP Capital Specialist Property and Infrastructure is a multimanager portfolio designed to bring together a mix of Australian and global managers to produce a diversified portfolio of listed real estate and infrastructure. The strategy removed its last direct property asset in May 2021. The portfolio’s composition of the underlying managers had been fairly stable since its inception in 2014, but an October 2019 strategic asset allocation review spurred the decision to remove exposure to unlisted property from its prior 15% allocation (increasing the global listed infrastructure by 15%). AMP Capital has shown strong conviction and patience with the underlying strategies in the listed space, with listed investments now comprising the total portfolio. Both global listed property and global listed infrastructure are represented by internal AMP Capital managers, with allocations of 32% and 47%, respectively, as at July 2021. Australian listed real estate exposure of 20% is managed by passively in the UBS property index. This vehicle makes a suitable supporting holding, and it managed around AUD 259 million as at 31 July 2021.

People:

AMP Capital’s multimanager team sits within the shop’s Multi-Asset Group. MAG is headed by CIO Anna Shelley, who joined in AMP Capital in July 2021. Duy To was appointed head of public markets in August 2021. Day-to-day management of the strategy lies with Rebecca Liu and Trent Loi, who is also portfolio manager for the International Share strategy. External consultant Willis Towers Watson is used at times to work on specific projects and provide research on existing and potential strategies.

Price:

Analysts find it difficult to analyse expenses since it comes directly from the returns. The fees levied by the share class is under middle quintile. Analysts expect that it would be difficult to generate positive alpha relative to its benchmark index for this fund.

Performance:

AMP Capital Specialist Property and Infrastructure lagged its blended benchmark after fees to June 2021 since its December 2014 inception. The passive Australian listed property strategy (UBS Australian Property Index) has closely closely tracked the S&P/ASX 200 AREIT Index over time. The AMP Capital global property securities portfolio has delivered returns ahead of the FTSE EPRA NAREIT Developed TR AUD Hedged Index over the trailing three and five years to June 2021.

(Source: Factsheet from https://www.ampcapital.com/)


(Source: Factsheet from www.schwabassetmanagement.com)           (Source: Morningstar)

About the Fund:

While AMP Capital Specialist Property and Infrastructure’s move to a fully listed real assets portfolio is well received, a period of team instability continues to hinder. This is a multimanager strategy combining Australian and international property and infrastructure managers to build a diversified core portfolio of real assets. The managers are assessed on various criteria such as business structure, team and its alignment, performance track record, and fees and capacity. Its inception date is 01 July, 2014. Total Assets under this fund are 264.9 AUD Million.

(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.

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Uncategorized

Origin’s earnings to benefit from higher LNG export prices

As a producer of commodities, Origin is a price-taker and has few competitive advantages over peers. Capital and efficient scale are potential barriers to competition, but they’re not strong enough to justify an economic moat. 

Origin’s domestic energy retailing business grew quickly during the past decade, but strong acquisition-driven growth is unlikely to reoccur, with earnings growth largely dependent on Australia Pacific LNG. Acquisitions of government-owned energy assets were previously a key growth driver, but all state-owned retailers are now privatised. Origin, Energy Australia, and AGL Energy collectively control 80% of the market, and the Australian market regulator is unlikely to allow further consolidation among the majors. Future growth depends on energy demand growth, which is likely to remain modest. Domestic energy retailing is Origin’s core business and the cash cow that funds growth projects. Its relatively low-risk attributes are in stark contrast to APLNG. 

Financial Strength:

The fair value estimate of AUD 6.50 per share implies a P/E of 19 times for fiscal 2022, and an enterprise value/EBITDA of 7.5 times, including Origin’s share of APLNG earnings.

Origin is in sound financial health following the APLNG selldown, which netted AUD 2 billion in proceeds. Net debt/EBITDA (including cash distributions from APLNG) was 2.9 times in June 2021, at the top of management’s target range of 2.0-3.0 times. Credit metrics were likely to deteriorate further given the formidable earnings headwinds in the utility business, but the APLNG selldown has strengthened the balance sheet and alleviated the risk of an equity raising. Earnings from the energy retailing business are falling because of weak wholesale electricity prices but are likely to recover from fiscal 2023. Strong oil and LNG prices and a conservative dividend policy should help credit metrics further improve.

Bulls Say:

  • The Australia Pacific LNG project is the largest coal seam gas to LNG project in Australia and could significantly increase earnings if oil prices strengthen. 
  • Origin’s energy retail business is the market leader and should benefit from cost-saving initiatives. 
  • Origin’s cash flow base is diversified, and the company is less susceptible to the vagaries of the market than a non-integrated energy provider.

Company Profile:

Origin Energy is a major vertically integrated Australian energy utility. Its energy retailing business is the largest in Australia, with about 4 million customers and a 33% market share. Its portfolio of base-load, intermediate, and peaking electricity plants is one of the largest in the national electricity market, with a capacity of 6,000 megawatts. Origin also operates and owns 37.5% of Australia Pacific LNG, which owns large coal seam gas fields and LNG export facilities in Queensland.

(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.

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Global stocks Shares

Lockdowns Cause Transurban’s Traffic Volumes To Slump in Key Markets

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Concessions grant the right to operate the roads and collect tolls for predetermined amounts of time. The roads benefit from strong competitive advantages, and the assets generate attractive returns on initial investment, warranting a wide economic moat rating.

Operating cash flow should increase strongly during concession lives, as solid revenue growth, driven by rising tolls and traffic volumes, is leveraged over a mostly fixed cost base. Cash flow stops when concessions end. Concessions on the Australian roads are set to end between 2026 and 2065. Including the long-life U.S. assets, the weighted average is 30 years. To extend its existence, Transurban will look to build new roads or undertake road upgrades which may require new equity issues or increased financial leverage, given that the firm currently pays out all free cash flow as distributions to investors. 

Typically, cash flow is defensive and grows strongly, but returns are lower than they appear at first blush, given that the roads are handed over to the government for no consideration when concessions end.

Lockdowns Causes Transurban’s Traffic Volumes To Slump in Key Markets

Sydney and Melbourne–51% and 25% of fiscal 2021 revenue, respectively–have suffered through prolonged lockdowns to slow the spread of the delta variant while rolling out vaccinations. September quarter traffic volumes in Sydney and Melbourne were down 43% and 46% in the same quarter in 2019, prior to the COVID-19 outbreak. Lockdowns are ending and traffic volumes are now recovering, with Sydney leading the way.  A rapid recovery is expected consistent with the experience in other markets as they exit lockdowns. 

Financial Strength 

Transurban is in sound financial health after selling 50% of U.S. assets. As of June 2021, Transurban had a proportional gearing ratio (defined as debt/enterprise value) of 34.3%, a corporate senior debt interest cover ratio of 2.8 times and funds from operations/debt of 8.9%. While financial leverage is high compared with other infrastructure firms, it should quickly improve on strong earnings growth. There is also comfort from relatively defensive revenue and immaterial maintenance capital expenditure requirements. Almost all debt is hedged, and the average maturity (which is currently 7.7 years) has been lengthening. Typically, debt associated with each road is repaid progressively during the last 10 years of concession lives.

Bull Says

  • Core Australian roads generate defensive revenue that grows with traffic volumes and toll price increases, which are at a minimum pegged to inflation. Solid revenue growth and a high fixed-cost base translate to strong cash flow and distribution growth. 
  • Transurban owns high-quality infrastructure assets with limited regulatory risk. 
  • There are attractive organic growth opportunities, such as potential widening of roads.

Company Profile

Transurban Group is an owner/operator of toll roads in Melbourne, Sydney, and Brisbane. It also owns toll roads in Virginia, USA and Montreal, Canada. The weighted average concession life across the portfolio is close to 30 years. Australian assets contribute around 90% of proportional revenue

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Technology Stocks

Secular Tailwinds Within Electronic Design Automation and IP Drive Cadence’s Strong Growth

Stock market graph with screen

Over the years, there has been a demand for faster, smaller, and more-efficient chips to keep pace with the rapid evolution of modern technology. Many companies are also placing increasing importance on chip customization as a point of differentiation. These trends have provided a boon for Cadence, as the firm’s tools are essential for designers needing to keep pace with growing demands. Such developments in chip design will benefit narrow-moat Cadence and support healthy long-term growth.

There are additional secular tailwinds in the industry buoying Cadence and other EDA vendors. Technologies such as cloud computing, 5G, Internet of Things, AI, and autonomous vehicles will support demand for new, more advanced chip designs. This is reflected in the advent of systems companies such as Tesla designing more chips in-house, thus expanding Cadence’s customer base beyond traditional semiconductor designers. As a result, we expect higher demand for Cadence’s EDA and IP offerings.

Cadence has been a pioneer in the cloud EDA space and has made significant investments in developing its cloud offerings, ranging from hosted cloud to hybrid cloud. While the pace of cloud adoption in the EDA space has been slow, it offers customers a broad range of options with regard to tool deployment. This service also poses a point of differentiation for Cadence relative to chief competitor Synopsys.

Cadence’s moat is supported by strong user metrics. Per company insiders, Cadence has relationships with approximately 100% of chip design companies in the U.S. today, that is if a company is involved in the chip design process, it uses Cadence tools at some stage of its design process. Furthermore, churn is negligible, with customer retention consistently at approximately 100%, showcasing the stickiness of Cadence’s offerings.

Financial Strength 

Cadence is in a very healthy financial position. As of April 2021, Cadence had $743 million in cash and cash equivalents versus $347 million in long-term debt due in fiscal 2024.Approximately 85%-90% of the firm’s revenues are of a recurring nature, given that the firm primarily sells time-based licenses.Cadence is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows; free cash flow margin has averaged 25% over the last five fiscal years. A healthy growth in free cash flow is expected as industry tailwinds lead to long-term growth for Cadence. On a non-GAAP basis, Cadence has exhibited an operating margin of approximately 30% over the last five fiscal years. Expected this to continue to expand and believe the company will hit 38% non-GAAP operating margins by the end of our explicit forecast period. In the long term, Cadence will be able to exhibit healthy free cash flows while continuing to support both organic and inorganic investments.

Bull Says

  • Cadence enjoys a leadership position in the EDA space that has helped the firm develop strong relationships with chip designers, enhancing switching costs. This is reflected in retention rates of approximately 100%. 
  • Secular tailwinds in chip design such as 5G, Internet of Things, AI/ML, and others should increase demand for EDA tools and support growth for Cadence. 
  • Cadence Cloud can support a growing total addressable market as systems companies and small/ medium enterprises may take advantage of more flexible and cost-effective chip design capabilities

Company Profile

Cadence Design Systems was founded in 1988 after the merger of ECAD and SDA Systems. Cadence is known as an electronic design automation, or EDA, firm that specializes in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems. Historically, semiconductor firms have relied on the firm’s tools, but there has been a shift toward other nontraditional “systems” users given the development of the Internet of Things, artificial intelligence, autonomous vehicles, and cloud computing. Cadence is headquartered in Silicon Valley, has approximately 8,100 employees worldwide, and was added to the S&P 500 in late 2017.

(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.

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Global stocks Shares

Raising Tesla FVE to $680 on Increased Vehicle Sales From Fleet Opportunity

In addition to luxury autos, the company competes in the midsize car and crossover SUV market with its platform that is used for Model 3 and Model Y vehicles. Tesla also plans to sell multiple new vehicles over the next several years. These include a platform that will be used to make an affordable sedan and SUV, a light truck, a semi truck, and a sports car. Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow.

Financial Strength

Rental Car company Hertz announced plans to purchase 100,000 Tesla Model 3 vehicles by the end of 2022. While rental car companies typically get a discount for purchasing vehicles, it is expected that Tesla offered no discount to Hertz, given the company’s growing vehicle backlog. Tesla raised fair value estimate to $680 per share from $650. Our narrow moat rating is unchanged. The market responded positively to the news, sending Tesla shares up 12% at the time of writing. At that point, for consumers who are interested in electric vehicles but hesitant to buy one, renting an EV is an opportunity for an extended test drive to alleviate road trip anxiety. This drives our above-consensus forecast for 30% EV adoption by 2030.

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

Bulls Say’s

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

Company Profile 

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

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Santos Ltd. rides high on strong LNG pricing

with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier. Santos boasts some of Australia’s largest and highest-quality coal seam gas reserves. East-coast LNG attracts export pricing and indirectly drives domestic prices in the direction of export parity.

Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 mmboe, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs. 

Financial Strength:

The fair value of Santos Ltd. is 10.20 which is mainly driven by time value of money and near-term energy price strength.

At end-June 2021 Santos had net debt of USD 2.8 billion, gearing (ND/(ND+E)) at 28% and annualised first-half net debt/EBITDA conservative at just 1.2. Santos’ debt covenants have adequate headroom and are not under threat at current oil prices. The weighted average term to maturity is around 5.5 years. Capital efficient development and fast up-front cash flows from Dorado’s oil should combine to ensure Santos’ leverage ratios continue to decline from current levels despite outgoings.

Bulls Say:

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is expanding faster still. 
  • Santos is in a strong position, with 0.9 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets. 
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out.

Company Profile:

Santos was founded in 1954. The company’s name is an acronym for South Australia Northern Territory Oil Search. The first Cooper Basin gas discovery came in 1963, with initial supplies in 1969. Santos became a major enterprise, though over-reliance on the Cooper Basin, along with the Moomba field’s inexorable decline, saw it struggle to maintain relevance in the first decade of the 21st century. However, the stage has been set for a renaissance via conversion of coal seam gas into LNG in Queensland and conventional gas to LNG in PNG.

(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.

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Global stocks Shares

Strong unit economics and digital platforms position Chipotle well in restaurant space

or LTV, through its loyalty program, and serving sustainably sourced, healthier fare than quick service restaurant, or QSR, peers. The company has carved out an enduring niche in the U.S. restaurant landscape, with competitive menu prices, extreme convenience, and “food with integrity” allowing the firm to lure away customers from both upscale fast-casual and traditional fast-food competitors. 

The burrito chain’s unit development narrative remains compelling, with strong returns on investment driving our high-single-digit unit growth estimates. New format stores (Chipotlanes, digital-only concepts) offer attractive upside, yielding access to heretofore inaccessible or uneconomic trade areas like office buildings, college campuses, and freestanding suburban concepts, leaving us encouraged as Chipotle diligently links appropriate store footprints to various trade areas.

Financial Strength:

Chipotle’s financial strength is sound, with the firm maintaining $1 billion in cash, investments, and cash equivalents at the end of third-quarter 2021, access to a $500 million credit facility, and no long-term debt obligations. The company’s only meaningful fixed charges come in the form of operating leases. Given the company’s growth profile, management has indicated a preference for internally funding expansion (with the intention of maintaining financial flexibility) and has channelled some $1.5 billion into capital expenditure over the last five years, matching $1.5 billion in capital returns through share repurchases over the same time frame.

Bulls Say:

  • Accelerated digital adoption during the pandemic supercharged Chipotle’s loyalty program, which should drive increased order frequency and reduce customer churn. 
  • New format stores (Chipotlanes and digital-only pickup concepts) should position the brand to better compete with quick-service competitors, while opening up new trade areas. 
  • The success of recent menu innovations (quesadillas, queso blanco, cauliflower rice) validates Chipotle’s stage-gate innovation process and could drive daypart expansion.

Company Profile:

Chipotle Mexican Grill is the largest fast-casual chain restaurant in the United States, with systemwide sales of $7.2 billion over the last twelve months. The Mexican concept is entirely company-owned, with a footprint of nearly 2,900 stores at the end of the third quarter of 2021 heavily indexed to the United States, though the firm maintains a small presence in Canada, the U.K., France, and Germany. Chipotle sells burritos, burrito bowls, tacos, quesadillas, and beverages, with a selling proposition built around competitive prices, high-quality food sourcing, speed of service, and convenience. The company generates its revenue entirely from restaurant sales and delivery fees.

(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.