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Alphinity Sustainable Share Fund: An impressive sustainable strategy with strong foundations

ESG characteristics and contribute towards the advancement of the UN Sustainable Development Goals, or SDGs. The investment process implements negative and positive screens and is based on a sustainable charter developed by the Sustainable Share Fund Compliance Committee. The negative screen seeks to eliminate companies that are involved in activities that are harmful to society. The positive screen aims to discover companies that make a constructive impact on society in areas of economic, environmental, and social development by making a net contribution to one or more of the UN SDGs. The fundamental research focuses on discovering undervalued companies in or entering an earnings upgrade cycle.

Portfolio:

The portfolio typically contains around 35-55 companies, which support the UN Sustainable Development Goals and have strong ESG practices. However, the stocks selected for the portfolio must also have attractive investment fundamentals and underestimated earnings growth potential. A composite research model houses the overall research process, blending ESG evaluations, qualitative analysis, and quantitative assessments. Stocks that score highly in the composite research model populate the biggest active weightings in the portfolio, though the maximum position is restricted to plus or minus 5% of the index weight. Companies that are involved in gambling, alcohol, and tobacco or mine fossil fuels, uranium, and gold are excluded from the portfolio.

People:

Johan Carlberg, AllianceBernstein’s former director of Australian equities, leads Alphinity, and his former AllianceBernstein colleagues Andrew Martin, Stephane Andre, and Bruce Smith all share investment duties. Andre and Smith are the portfolio managers of this strategy. In 2020, two new fundamental analysts were employed: Andrey Mironenko and Jacob Barnes. In addition, an ESG & sustainability manager, Jessica Cairns, was hired in 2020; she supports the strategies’ assessment and integration of ESG-related matters. Cairns also supports the strategy’s Compliance Committee and is involved in its efforts to define an investment universe that considers companies’ contribution towards achieving the UN’s Sustainable Development Goals.

Performance:

Alphinity took over investment management of this fund in late 2010. Alphinity Sustainable Share has outperformed the category index (S&P/ASX 200) and most category peers over three, five, and 10 years to 31 July 2021, on a trailing returns basis. Stocks that played a role in this solid performance include IDP Education, Fortescue, CSL, Goodman Group, and Lifestyle Communities.

(Source: https://www.alphinity.com.au/performance/)

Price:

Analysts find it difficult to analyse expenses since it comes directly from the returns. The share class on this report levies a fee that ranks in middle quintile. This share class is expected to deliver positive alpha relative to the category benchmark index. 


(Source: Morningstar)                                                                       (Source: Morningstar)       

About Fund:

Alphinity was founded in 2010 by Johan Carlberg, Andrew Martin, Bruce Smith, and Stephane Andre, with Stuart Welch joining in 2017. The team structure is relatively flat, with all five senior team members being portfolio managers and undertaking company research. However, for more than a decade, Andre and Smith have made the major decisions on stock selection and portfolio construction for this strategy. The portfolio managers on stock research are capably supported by two fundamental research analysts, senior quantitative analyst, and senior trader. Alphinity Sustainable Share’s strong foundations–including experienced portfolio managers, disciplined multifaceted process, and comprehensive commitment to environmental, social, and governance-focused investments.

(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

TSMC Q3 Profits Top Our Expectations ;Strong Long-Term Outlook Trumps Near-Term Supply Chain Woes

The firm has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fables designers. The rise of fabless semiconductor firms has been sustaining the growth of foundries, which has in turn encouraged increased competition.

To prolong the excess returns enabled by leading-edge process technology, or nodes, TSMC initially focuses on logic products, mostly used on central processing units, or CPUs, and mobile chips, then focuses on more cost-conscious applications. The firm’s strategy is successful, illustrated by the fact it’s one of the two foundries still possessing leading-edge nodes when dozens of peers lagged.

The two long-term growth factors for TSMC: First, the recent consolidation of semiconductor firms is expected to create demand for integrated systems made with the most advanced nodes. Second, organic growth of AI, Internet of Things, and high-performance computing, or HPC, applications may last for decades. AI and HPC play a central role in quickly processing human and machine inputs to solve complex problems like autonomous driving and language processing. Cheaper semiconductors have made integrating sensors, controllers and motors to improve home, office and factory efficiency possible.

TSMC Q3 Profits Beat Our Expectations. Strong LongTerm Outlook Trump Near-Term Supply Chain Woes

During the third-quarter revenue was TWD 415 billion, up 11.4% from the previous quarter and in line with our forecasts. Gross and operating profit rebounded 1.2 and 2.1 percentage points respectively to 51.3% and 41.2%. We think this set of results is commendable, especially amid the market’s concerns of weak smartphone and PC outlook for the second half of 2021.

For the fourth quarter of 2021, TSMC anticipates top line to range between USD 15.4 and 15.7 billion, or 3.5-5.5% sequential growth.Gross and operating margins are guided to range between 51% and 53% and 39%-41% respectively, up 1.5 and 0.5 percentage points against third quarter. 

Management confirmed a fab in Japan, subject to board approval. The fab will focus on specialty applications based on 22nm and 28nm processes, which we believe to be mainly image sensors and high-end automotive microcontrollers. Management treaded carefully regarding price hikes by only saying customers are willing to pay more for the additional value that TSMC can offer in both legacy and leading-edge processes. We are not worried about TSMC hitting physical limits for now, as its suppliers ASML and Tokyo Electron have outlined innovations to sustain performance improvements up to 2030.

Financial Strength 

TSMC has maintained a net cash position for the last 10 year-ends, and together with its low cost of debt, demonstrates the success of its strategy to focus on premium products. The company has issued about TWD 97.9 billion (USD 3.5 billion) in domestic debt at less than 0.7% yield and USD 4.5 billion in overseas debt at less than 3.1% yield year to date in 2021, which is small relative to its balance sheet. We estimate TSMC to maintain a net cash position for the next five years. The annual gross margin has fluctuated between 45% and 51% for the past decade. TSMC has never stopped paying dividends since its first distribution in 2004 with only one minuscule 1% cut in 2008. The company is committed to not cutting dividends. We forecast dividends to increase to TWD 12 per share by 2024.

Bull Says

  • TSMC should consistently earn higher gross margins than competitors because of its economies of scale and premium pricing justified by cutting-edge process technologies. 
  • TSMC wins when customers compete to offer the most advanced processing systems using the latest process technologies. 
  • TSMC will benefit from more semiconductor firms embracing the fabless business model.

Company Profile

Taiwan Semiconductor Manufacturing Company, or TSMC, is the world’s largest dedicated chip foundry, with over 58% market share in 2020 per Gartner. TSMC was founded in 1987 as a joint venture of Philips, the government of Taiwan, and private investors. It went public as an ADR in the U.S. in 1997. TSMC’s scale and high-quality technology allow the firm to generate solid operating margins, even in the highly competitive foundry business. Furthermore, the shift to the fabless business model has created tailwinds for TSMC. The foundry leader has an illustrious customer base, including Apple and Nvidia, that looks to apply cutting-edge process technologies to its semiconductor designs.

General Advice Warning

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

Categories
Dividend Stocks Shares

M&T Bank reported solid third quarter earnings; Aims to create value via acquisition with People’s United

efficient operations, and savvy acquisitions. The bank’s main stronghold is its commercial real estate operations in the northeast. M&T has a history of good underwriting and deep, on the ground relationships. M&T has also recently announced it will acquire People’s United Bank, further expanding its geographical reach in the northeast and its product offerings. We like the pricing of the deal and expected cost savings, and hope the acquisition will lead to some added organic growth in the future as well. 

M&T derives about two thirds of its income from net interest income, and with the bank’s cheaper deposit base, it is more sensitive to movements in interest rates. The remaining one third of revenue comes from non banking businesses like wealth management or deposit service fees. Much of the company’s loan book is composed of commercial loans.

The bank has an especially strong position within its commercial real estate operations in the northeastern United States. M&T has one of the largest CRE exposures under our coverage, and this has come under more scrutiny as the pandemic has developed. While certain CRE assets have come under unique pressure, M&T’s underwriting remains solid, and we expect losses to be very manageable.

M&T Bank reported solid third quarter earning; the acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank

M&T Bank reported solid third-quarter earnings. The bank beat the FactSet consensus estimate of $1.64 per share with reported EPS of $1.90. This equates to a return on tangible common equity of 17.5%. M&T Bank benefitted from a provisioning benefit once again as chargeoffs remain exceptionally low and the bank released some additional reserves.

Nonperforming assets remained stable. Expenses, however, came in a bit hotter than expected, up roughly 9% year over year during the quarter. Management attributed most of this to higher incentive based compensation, which is understandable. On the positive side, fees have done quite well.  Net interest income, meanwhile, was essentially in line with our expectations.

The acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank.

Key attraction of the transaction 

  • Unique strategic position and enhanced platform for growth: The merger will create the leading community-focused commercial bank with the scale and share to compete effectively.
  • Shared commitment to local communities: Both companies have been long recognized for their community commitments and longstanding support of civic organizations.
  •  Compelling financial impacts: M&T expects the transaction to be immediately accretive to its tangible book value per share. It is further expected that the transaction will be 10-12% accretive to M&T’s earnings per share in 2023, reflecting estimated annual cost synergies of approximately $330 million. 

Financial Strength 

We think M&T is in good financial health. The bank withstood the crisis better than peers and has maintained a credit cost advantage over the current economic cycle. Deposits fund roughly three fourths of total assets. We believe the bank is adequately capitalized, with a common equity Tier 1 ratio over 10% as of September 2021.

Bull Says

  • M&T’s acquisition of People’s United was at a good price and should drive additional future growth. 
  • A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher. 
  • M&T has loyal customers, and good management, and investors shouldn’t have to worry much about being burned by bad underwriting.

Company Profile 

M&T Bank is one of the largest regional banks in the United States, with branches in New York, Pennsylvania, West Virginia, Virginia, Maryland, Delaware, and New Jersey. The bank was founded to serve manufacturing and trading businesses around the Erie Canal.

 (Source: Morningstar)

General Advice Warning

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

Categories
Global stocks Shares

Sensient Is Well Positioned to Meet Growing Demand for Natural Ingredients

Sensient has been focused on optimizing its portfolio, divesting less profitable, commodity-like business lines primarily in the flavors and extracts segment.Longer term, we expect consumer preferences will continue to shift toward natural flavors and colors and away from synthetic ingredients. However, with a growing natural ingredient portfolio, we think the company is well positioned for the transition. 

Although Sensient serves both large and small customers, it primarily targets middle-market customers rather than large consumer packaged goods customers. The company’s most valuable business relationships involve the manufacture of customized formulations from proprietary technologies that allow Sensient to be a sole supplier. 

Sensient reports three segments. The color segment is the largest .This business produces natural and synthetic color systems for a variety of end markets, including food, beverage, cosmetics, and pharmaceutical applications. The flavors and extracts segment (a little more than 40% of profits) sells both natural and synthetic taste and texture ingredients. 

Financial Strength 

Sensient is in very good financial condition. At the end of the third quarter of 2021, net debt/adjusted EBITDA was around 2 times. Sensient has historically remained safely below the leverage ratio and above the coverage ratio.We forecast the company will continue to generate healthy free cash flow, which it has consistently done over the last decade. Sensient should have no problem servicing existing debt. The company has only a small pension liability and no other major liabilities that will require material cash outflows in the coming years. Sensient has historically maintained a low cash balance, preferring to return excess cash to shareholders via dividends (management targets a 30%-40% payout ratio) or share repurchases.

Bull Says

  • Sensient’s restructuring program will lead to materially higher margins and ROICs as low-margin facilities are closed. 
  • The demand shift to natural colors from synthetic colors should drive higher volume for Sensient, boosting profits. 
  • Management’s 20% long-term operating margin goal is achievable as specialty colors and flavors will generate an increasing proportion of total sales, driving a mix shift-based margin expansion.

Company Profile

Sensient Technologies manufactures and markets natural and synthetic colors, flavors, and flavor extracts. The company has a widespread network of facilities around the globe, and its customers operate across a variety of end markets. Sensient’s offerings are predominantly applied to consumer-facing products, including food and beverage, cosmetics and pharmaceuticals.

 (Source: Morningstar)

General Advice Warning

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

Categories
Commodities Trading Ideas & Charts

Air Products contribute long-term contract and high switching cost to gas industries

Industrial gases typically account for a relatively small fraction of customers’ costs but are a vital input to ensure uninterrupted production. Demand for industrial gases is strongly correlated to industrial production. As such, organic revenue growth will largely depend on global economic conditions.

Since Seifi Ghasemi was appointed CEO in 2014, new management has launched several initiatives that drastically improved Air Products’ profitability, raising EBITDA margins by over 1,500 basis points. Air Products is poised for rapid growth over the next few years due to its 10-year capital allocation plan. The industrial gas firm aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027 and has already either spent or committed roughly $18 billion of that amount.

Financial Strength

Narrow-moat-rated Air Products announced that it will invest $4.5 billion in a blue hydrogen complex in Louisiana, expected on stream in 2026. The project will produce over 750 million standard cubic feet per day of blue hydrogen. A portion of the blue hydrogen will be injected into Air Products’ existing 700-mile Gulf Coast pipeline network, which is fed by around 25 projects including the firm’s Port Arthur facility (a blue hydrogen project that has been operational since 2013). Air Products recently announced its updated capital deployment plan and aims to invest over $30 billion during the 10-year period from fiscal 2018 to fiscal 2027.

Management has indicated that maintaining an investment-grade credit rating is a priority. The company has used proceeds from its divestments of noncore operations (including the spin-off of its electronic materials division as Versum Materials in 2016 and the sale of its specialty additives business to Evonik in 2017) to reduce debt and fuel investment.The company held roughly $8 billion of gross debt as of Dec. 31, 2020, compared with $6.2 billion in cash and short-term investments. Liquidity includes an undrawn $2.5 billion multicurrency revolving credit facility, which is also used to support a commercial paper program.

Bulls Say’s

  • Air Products is poised for rapid growth due to business opportunities that drive its ambitious $30 billion capital allocation plan.
  • After acquiring Shell’s and GE’s gasification businesses in 2018, Air Products is the global leader in this segment and is poised to benefit from growing coal gasification in China and India.
  • The company’s focus on on-site investments will result in a derisked portfolio with more stable cash flows.

Company Profile 

Since its founding in 1940, Air Products has become one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It has a unique portfolio serving customers in a number of industries, including chemicals, energy, healthcare, metals, and electronics. Air Products generated $8.9 billion in revenue in fiscal 2020.

(Source: Morningstar)

General Advice Warning

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

Categories
Shares Technology Stocks

Netflix’s Growth Will Increasingly Come From Outside the U. S

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.

We believe that many consumers use, and will continue to use, SVODs like Netflix as a complementary service, especially as SVOD prices increase and pay television bundle prices decrease. Larger firms like Disney and WarnerMedia have launched their own SVOD platforms to compete against Netflix. We think this usage pattern and increased competition will constrain Netflix’s ability to raise prices without inducing greater churn. 

We expect that Netflix will expand further into local-language programming to offset the weakness of its skinny offering in many countries. This will likely generate a competitive response from the firm’s global and local rivals, which will augment their own first-party content budgets. In turn, we think Netflix’s international expansion will continue to hamper margin expansion.

Netflix’s Growth Will Increasingly Come From Outside the U. S.

Netflix reported decent third-quarter results as subscriber growth beat the low guidance issued a quarter ago but this is below the previous two years. The 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. 

While we now project that EMEA will have more members than the U.S. by the first quarter of 2022, its revenue and implied margin contribution will remain much lower as its ARPU only hit $11.65 in the quarter. We continue to project price increases for the region but still expect a large gap between it and the U.S. to persist over the next five years.

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. We expect ARPU to decline going forward as the firm rolls out low-price plans in more countries across the region. 

Financial Strength 

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The company’s weak free cash flow due to this spending is a concern, as we don’t see the need to spend decreasing in the near future. As of June 2021, Netflix has $14.9 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($500 million due 2021, $700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($2.7 billion recognized on the balance sheet and over $15 billion not yet reflected on the balance sheet).

Bull Says 

  • Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years. 
  • Netflix has built a substantial content library that will benefit the firm over the long term.
  • International expansion offers attractive markets for adding subscribers.

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.

Categories
Commodities Trading Ideas & Charts

Weatherford to benefit from oil market’s recovery from COVID-19

When CEO Mark McCollum came aboard in March 2017, many wondered whether it was the dawn of a new era for Weatherford International. McCollum made solid progress in turning Weatherford around in 2018, with rapid improvement in profitability thanks to the companywide transformation plan. But this improvement wasn’t quick enough for the highly leveraged company’s creditors, which forced Weatherford into bankruptcy in 2019.

Weatherford emerged from bankruptcy in December 2019 having shed most of its debt. Shortly after, the coronavirus oil market downturn battered the company just as it was getting back on its feet. Given many abortive attempts at turning Weatherford around, many investors are refusing to give the company another chance. While McCollum left in 2020, he laid the groundwork for improvement that should be carried on by the company’s new leadership under CEO Girish Saligram.

Financial Strength:

Weatherford’s balance sheet is somewhat weak, but it is expected to ride out the rest of the oil market downturn without major financial distress. Weatherford has about $1.2 billion in available cash and no debt coming due until 2024. The company posted solid free cash flow of $135 million in 2020 despite very weak oil markets. In 2021, the company won’t have the benefit of working capital inflows, but it is still expected to be slightly positive in total free cash flow. In any case, it should have enough liquidity to meet any cash outflows as COVID-19 wreaks havoc on oil markets in 2021. Improving profitability in subsequent years should drive Weatherford solidly into positive free cash flow territory, despite a very heavy interest burden.

Bulls Say:

  • Weatherford has some hidden gems in its portfolio whose value will be revealed with the divestiture of loss-making business lines and streamlining the company. 
  • The company’s managed pressure drilling technology will become increasingly sought after as wellbores move into deeper, harsher environments.

Company Profile:

Weatherford International provides a diversified portfolio of oilfield services, with offerings catering to all geographies and different types of oilfields. Key product lines include artificial lift, tubular running services, cementing products, directional drilling, and wireline evaluation.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Philosophy Technical Picks

PNC Remains on Track to Complete Most Expense Saves in 2021

the acquisition of RBC’s U.S. branch network in the Southeast, and by updating its core infrastructure and retail branch model. PNC has been very successful at organically expanding its customer base, both in commercial banking and now in retail. The expanding client base has led to solid loan, deposit, and fee income growth. Selling new products into the formerly underperforming RBC branch network has worked particularly well, and PNC now seems poised to repeat this effort with the pending acquisition of BBVA. The bank’s Midwest commercial growth strategy is paying dividends, and PNC will be attempting retail growth efforts in the same areas where commercial expansion was successful.

The successful acquisition history, seemingly successful expansion initiatives, and improved credit performance during the 2007 downturn makes PNC is one of the better operators we cover. PNC has executed on many expense-saving initiatives over the years, and management has been actively reinvesting many of these savings back in the business to stay ahead on the technology front.

Financial Strength:

The fair value of PNC Financial Services is USD 185.00, which is based on analyst’s assumption that the bank’s efficiency ratio eventually declines to about 52%, as management realizes operating leverage from infrastructure investments and the BBVA acquisition helps push efficiency for PNC to the next level. The dividend yield given by company has been very consistent year on year.

PNC is in good financial health. The bank weathered the energy downturn well, and energy loans make up a small percentage of the loan book. The bank has also weathered the COVID-driven downturn well. Most measures of credit strain remain quite manageable, and the bank’s history of prudent lending give us comfort with the risks here. PNC’s common equity Tier 1 ratio was at 10% as of June 2021, handily exceeding the bank’s targets. The capital-allocation plan remains standard for PNC, with 30% plus of earnings devoted to dividends, as much as necessary used for internal investment, and the left overs used for share repurchases.

Bulls Say:

  • PNC’s acquisition of BBVA seems likely to add value to the franchise and for shareholders, and will make PNC the regional bank with the most scale. 
  • A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher. 
  • In additional to acquisitions, PNC has organic expansion opportunities it is taking advantage of, which could lead to higher organic growth than peers over time.

Company Profile:

PNC Financial Services Group is a diversified financial services company offering retail banking, corporate and institutional banking, asset management, and residential mortgage banking across the United States.

(Source: Morningstar)

General Advice Warning

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

Categories
Global stocks

Lufthansa’s Fair Value Estimate Lowered to EUR 8.15 to Account for Rights Issue

As a result of the coronavirus downturn the group is embarking on a cost and fleet restructuring program, which will see it emerge as a smaller business. In 2020, the group received a government-backed support package totaling EUR 9 billion, which included an equity stake of 20% by the German government for EUR 306 million. 

As part of the approval process the European Commission required the group to surrender 26 slots at its Frankfurt and Munich hubs to new competitors. Despite the recent EUR 2.1 billion rights issue, the group remains highly indebted, which may require additional capital restructuring if cash flows don’t recover to suitable levels to de-leverage organically. Due to the group’s indebtedness and highly uncertain timing of a recovery in cash flows, there is still a wide range of possible outcomes for the group’s equity value.

Financial Strength

Lufthansa is in a weak financial position due to its high levels of indebtedness. The coronavirus pandemic dealt a heavy blow to the aviation industry, resulting in record losses, cash outflows, and growing debt levels. To bolster liquidity, the group agreed to a EUR 9 billion government support package, which included the German state taking a 20% ownership in the group. Net debt, including pension provisions of EUR 7.6 billion, at the end of June 2021 equated to EUR 18 billion. The group has since raised EUR 2.1 billion in equity capital through a rights issue concluded in October 2021, the proceeds of which will be used to repay state aid. The group’s pro-forma net debt and liquidity position after the capital increase is expected to be EUR 16 billion and EUR 7.7 billion, respectively. Despite the capital raise, we believe the group remains highly geared, with a net debt to pre-pandemic EBITDA ratio of 3.5 times, and it will require multiple years of deleveraging to restore the balance sheet to sustainable levels.

Bulls Say’s

  • COVID-19 presents the group with a unique opportunity to structurally lower its cost base and emerge from the crisis with better profitability.
  • The airline has dominant positions at the key European hubs of Frankfurt and Munich, which could be an early beneficiary of a recovery in air travel.
  • Fleet reduction through the retirement of older and less efficient aircraft could lead to a more rational fleet with higher load factors and unit revenue.

Company Profile 

Deutsche Lufthansa is a European airline group. The company operates under the Lufthansa, Swiss Air, Austrian Airlines and Eurowings brands. In 2019, the company carried 145 million passengers to its network of 318 destinations globally. The group’s main airport hubs are Frankfurt, Munich, Vienna and Zurich. The company generated sales of EUR 36.4 billion in 2019.

(Source: Morningstar)

General Advice Warning

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

Categories
Shares Technology Stocks

Xero Investors Should Check Its ARPU and CAC in Its Interim Financial Result

SME accounting software users have historically shown little inclination to switch providers, and Xero enjoys annual customer retention rates of over 80%.

The transition from desktop- to cloud-based products offers a rare opportunity for relatively new providers to win market share via the transition of customers to cloud-hosted SaaS products that offer material productivity improvements. We expect switching costs to recapture their earlier resilience once customers transition to cloud products and accounting software becomes more integrated with third-party software.

Xero Investors Should Check Its ARPU and CAC in Its Interim Financial Result

Xero has announced little of note since its fiscal 2021 financial result in May 2021. However, the company will announce its interim fiscal 2022 financial result next month, which is likely to reignite investor attention. However, Xero shares are materially overvalued and the current market price of AUD 145 per share is significantly above our AUD 50 fair value estimate. 

Although Xero reported a NZD 20 million profit after tax in fiscal 2021, this was partly due to the company’s decision to cut back on spending in the first half.In the long term, we expect Xero’s EBIT margin to expand significantly, from 7% in fiscal 2021 to 30% by fiscal 2027.

We expect investors to largely overlook Xero’s profitability at its interim result and instead focus on other metrics like subscriber growth, revenue growth, customer acquisition costs, or CAC, and annual revenue per user, or ARPU. Particularly focused on ARPU because it forms a key component of our investment thesis, and expected that strong price-based competition to limit Xero’s ability to raise prices. This will be interesting because a strong subscriber growth figure may be supported by weak ARPU growth or possibly strong CAC growth, indicating Xero is competing harder for customers.

Financial Strength

 Xero is in reasonable financial health but needs to maintain high revenue growth rates to increase profits and justify its market capitalisation. We expect EBIT margins to expand to around 30% by fiscal 2025, in line with peer companies. As the company matures, we expect the capital-light business model to enable strong cash generation. Strong customer retention rates of over 80% should mean earnings volatility will be relatively low in the long term.

Bulls Say 

  • Xero is experiencing strong revenue and customer growth driven by the transition of desktop accounting software to the cloud, a trend we expect to continue for at least the next decade.
  • Xero operates in the software sector, which is typically an industry with low capital intensity and strong cash generation. We expect Xero to generate strong returns on invested capital and free cash flow in the long term. 
  • Xero has already achieved dominant positions in the New Zealand and Australian cloud accounting markets and is a leading competitor in the U.K. and U. S. markets.

Company Profile

Xero is a provider of cloud-based accounting software, primarily aimed at the small and medium enterprise, or SME, and accounting practice markets. The company has grown quickly from its base in New Zealand and surpassed local incumbent providers MYOB and Reckon to become the largest SME accounting SaaS provider in the region. Xero is also growing internationally, with a focus on the United Kingdom and the United States. The company has a history of losses and equity capital raisings, as it has prioritised customer growth.

 (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.