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Global stocks Shares

After a 54 percent dividend increase, Ansell’s stock is in the spotlight.

Investment Thesis

  • Based on our valuation, ANN’s share price trades at a >10% discount to our DCF valuation.  
  • ANN is a quality business with global manufacturing capabilities.
  • We believe our 5-yr forward earnings estimates are on the conservative side and capture the moderating growth likely to be seen from the elevated levels experienced in FY21. 
  • FX translation should be positive for the Company.
  • Raw material cost pressures can be shared with customers and suppliers.
  • ANN has a strong balance sheet position with flexibility to return cash to shareholders or borrowing capacity for acquisitions

Key Risks

We see the following key risks to our investment thesis:

  • Product recall.
  • Trade wars escalate, leading to higher tariffs. 
  • Increase in competitive pressures.
  • Adverse movements in AUD/USD.
  • Emerging or developed market growth disappoints. 
  • Any worst or better prices for raw materials.

FY21 key trading metrics 

  • Sales of $2,027m, up +25.6% (+22.5% in CC) with Healthcare organic growth of +34.8% and Industrial organic growth of +7.1%. 
  • EBIT of $338m, up +56.0% (+51.4% in CC) with margin improving +330bps to 16.7%, driven by higher production volumes, pricing/mix benefit and SG&A operating leverage, partly offset by elevated labour and freight costs combined with increase in inventory provisions 
  • Profit Attributable to ANN shareholders of $246.7m, up +57.5% (+48.5% in CC) and EPS of 192.2cps (EPS would have been 193.9cps, without Cloud Computing accounting policy change), up +59.9% (+50.8% I CC). 
  • Operating Cash Flow of $49.2m (down -74.3% over pcp) representing cash conversion of 60.9%, negatively impacted due to greater investment in working capital to support top line growth along with pricing impact as well as higher capex to increase capacity in a number of higher demanded products. Capex increased +36.5% over pcp to $82.7m, however, remained below management’s $95-105m guidance due to temporary delays to shipments and installation as a result of COVID-19, with management expecting FY22 capex spend to be $80-100m. 
  • ROCE saw significant improvement (up +590bps to 19.8% pre-tax and up +550bps to 16.8% post tax), predominantly due to strong EBIT growth.

Company Description  

Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its sold its Sexual Wellness Global Business Unit group.

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
ETFs ETFs

VanEck Australian Property ETF: A sound choice for diversified exposure to Australian REITs

The process sets its universe by screening ASX-listed stocks with a market cap greater than USD 150 million. International companies incorporated outside of Australia are considered as well, provided they generate 50% of their revenue in Australia or have 50% of their total assets in Australia. For existing holdings, the market-cap limit is set at $75 million and the revenue threshold for offshore companies is established at 25%. To meet liquidity requirements, stocks must also have had at least USD 1 million daily trading average over three months and at least 250,000 shares traded per month. Stocks, which make up the top 90% of the investable universe, are equally weighted and capped at 10% at the time of quarterly rebalancing. VanEck has a deep global presence and uses robust daily portfolio monitoring systems and multi-levelled risk management to ensure trading is efficient and compliant. 

Portfolio

The ETF mirrors the composition of the MVIS Australian A-REIT Index. The index consisted of 15 names as of July 2021. The portfolio holds a minimum of 10 stocks and excludes the smaller end of the cap spectrum, while mid-cap exposure is beefed up. Stocks that meet size and liquidity requirements are weighted by their free-float market capitalisation subject to a 10% weighting cap. While about a third held in the portfolio is directly invested in retail A-REITs, it has almost half of the allocation to diversified REITs. Sector exposures are significantly more consistent through time. A-REIT Index owing to limited stock changes in the top of the ASX/200 and the stock exposure limit of 10%. The portfolio is rebalanced every quarter; because of its exposure cap, turnover is typically 20%-40% .

Sub- Industry Weightage
Diversified REITS46.20%
Retail REITS28.00%
Office REITS11.90%
Industrial REITS10.70%
Specialized REITS3.20%
Other/Cash0.00%

                                                Source: MVA-Factsheet

Performance

MVA has closely matched the broader A-REIT market return while delivering standout performance against the category average from its inception through 31 July 2021. The ETF has annually outperformed the category average by 1.4% or 21% on a cumulative basis since inception. 

C:\Users\Akhila\Downloads\performance.png

                Source: MVA-fact-sheet

Fundamentals

No. of securities15
Price/Earnings Ratio*10.66
Price/Book Value Ratio*1.12
Dividend Yield4.26
Weighted Avg. Market Cap (M)$12,362.00 

                                                  Source: MVA-fact-sheet

People

The VanEck investment team is headed by Russel Chesler with Jamie Hannah as his deputy. Chesler is an industry veteran with over 25 years of experience across Sunstone Partners, Perpetual Limited, and Liberty Life. Hannah joined VanEck in 2014 from Source ETF where he was a part of the investment management team. The duo is supported well by two senior associates: Cameron McCormack and Alice Shen.

Price 

The Net Asset Value of the fund (NAV) is $24.88 as on 31 August 2021 while the management cost is 0.35% p.a.n.m.

Top 10 Holdings of VanEck Australian Property ETF

C:\Users\Akhila\Downloads\Top HOLDINGS.png

Source: MVA-fact-sheet

About the fund

The VanEck Australian Property ETF incorporated on 14/10/2013 which  invests in a diversified portfolio of ASX-listed securities with the aim of providing investment returns (before management costs) that closely track the returns of the MVIS Australia A-REITs Index.

The MVIS Australia A-REITs Index is a pure-play Australian sector index that aims to reflect the performance of Australia’s property sector.

The shares outstanding is 23,955,918 and the dividend is paid two times each in a year.

Individual Index components are chosen based on a strict rules-based system that prioritises liquidity, with a minimum of 10 holdings and a maximum weighting of 10% for each. . The underlying index sets itself apart from market-cap-weighted benchmarks with its sensible portfolio size that covers 

 (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
ETFs ETFs

iShares USD Corporate Bond UCITS ETF: An interesting proposition to gain exposure

The ultimate result is that this allows managers to decide on the portfolio that represents the index’s overall risk profile, while allowing the ETF manager to avoid purchasing bonds that suffer from illiquidity. The management process is highly automated, and managers use proprietary analytical and risk control systems. The key objective is to minimise trading costs, mainly around primary market events (for example, auctions) that cause rebalancing. All trading is executed by the in-house capital markets desk. Bond coupons are reinvested in line with index rules.

Portfolio:

The Markit iBoxx USD Liquid Investment Grade Index measures the performance of the most liquid USD denominated corporate bonds with investment-grade ratings and minimum remaining life of 3 years by issuers from developed countries. To be considered for inclusion, bonds must have a minimum remaining maturity of 3.5 years and a minimum outstanding of USD 750 million. In addition, the index also requires a minimum outstanding of USD 2 billion per issuer. The index is weighted by market capitalisation, subject to an issuer overall cap of 3%.

People:

The strategy is managed by the EMEA core portfolio management team. Sid Swaminathan is the head of the core portfolio management team. This is a large team where portfolio managers specialise in two broad groupings, one focusing on rates and inflation strategies and the other on credit and aggregate funds. The portfolio managers are supported by a large team of analysts and IT professionals, as well as by the global capital markets team.

Performance:

The strategy has delivered returns above the category average in short and long periods over the past 15 years both on a total and risk-adjusted basis. The strategy struggled during the worst of the coronavirus sell-off in March 2020, but it rebounded strongly once the US Federal Reserve cut interest rates from 1.50% to just above 0.00% and started buying corporate-bond ETFs.

The annualized performance (%USD) displayed by this fund as on 31st August, 2021 has been shown below:

(Source: Factsheet from iShares.com)

Price:

The fees levied by the share class is in the cheap category. Analysts expect that this share class will be able to generate positive alpha relative to the category benchmark index, which affirms the outperformance of this ETF.


(Source: Factsheet from iShares.com)                                                       (Source: Morningstar)

(Source: Morningstar)

About ETF:

iShares USD Corporate Bond ETF tracks an index that excludes bonds with maturity below three years, which account for up to 20% of the investable universe. This causes the strategy to have higher duration than all-maturity passive alternatives. This can work both in favour and against investors depending on the path of interest rates. The strategy is expected to deliver returns over a full market cycle; that is inclusive of periods of both rising and falling interest rates. Considering the benefits of low fees and the broad diversification at the sector level, the strategy retains a Morningstar Analyst Rating of Bronze. iShares’ passive bond fund management process and the high level of expertise of the people behind it showcases a positive view of the ETF.

General Advice Warning

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

Categories
Funds Funds

Fidelity Australian Opportunities Tenured stock-picker with a unique approach

Approach 

Fidelity analysts use a variety of proprietary models and valuation methodologies to assess earnings, cash flows, and value. Site visits and extensive company management meetings play a critical role in the investment process, as fidelity believes these provide valuable insights into a company’s future prospects.  Each investment analyst covers around 25 companies, grouped along sector lines but sectors are rotated every three to four years. The overall portfolio tends to exhibit a growth bais. 

Portfolio

Fidelity Australian Opportunities is an all-cap domestically focused approach. The portfolio typically holds 40 – 70 stocks with core holdings in large-cap names but a longer portfolio tail of small-cap names. As a result, the average market cap slightly lower than other large-cap peers and around 50-55% of the portfolio sits in the top 10. This means active share hover around 45-50%. Positioning is aligned with a long term view of companies, and the historical average annual turnover has been moderate at about 30-50%, which will also make it reasonably tax effective.

People

Howitt was promoted to portfolio manger soon after joining fidelity in 2004 as an analyst covering banks, insurers and diversified financials. Prior to fidelity, she was an analyst/portfolio manager in AMP capital’s value team and also worked as an consultant with the Boston Consulting Group. Support comes from a wide range of local and global sources, including the Sydney based investment research team and the implementation of an assistant portfolio manager. Each analyst coverage responsibilities for a specific sector and these rotate every three to four year to ensure the analysts continued to produce well rounded insights. 

Performance 

Fidelity Australian Opportunities continues to impress long-term track records. The year 2018 was more Tricky, as positions in blue sky and Lynas materially detracted. The strategy responded well in 2019 as Lynas recovered, while CSL and Wisetech continued their strong appreciation. Despite the volatile markets during calendar 2020, performance was particularly strong, beating the benchmark and most peers. The sector Neutral-Approach protected capital on the downside, with the strong showings from Lynas, Mineral Resources, and BlueScope. Despite no significant sector bets, positions in the materials sector played a key role in the Outperformance, with Howitt’s stock picking talents on full display.

FAO Fund Performance .png
FAO Top Holidings .png

About the Fund

Fidelity Australian Opportunities continues to impress with its quality management and unique approach, bolstered by the firm’s global footprint and top-tier research capabilities. Despite the numerous benefits that come with size and scale, the large footprint of the Fidelity group does create limitations for portfolio construction. Where the firms owns 10% of a company, strategies under the fidelity banner can no longer invest in the stock, though it’s a small price to pay for fidelity’s resources. An adaptive process and tenured portfolio manager set the strategy apart, offering an solid choice for diversified exposure to Australian equities.

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

Simon Property Group’s Class A Mall Portfolio Should Continue to Outperform Other Malls

manages one of the top retail portfolios in the country. It owns and operates Class A traditional regional malls and premium outlets in markets with dense populations and high incomes; these malls frequently have domestic or international tourist appeal. The high-quality properties will continue to provide consumers with unique shopping experiences that are hard to replicate elsewhere, and as a result, we think Simon’s portfolio will be sought after by retailers that are increasingly pursuing an omnichannel strategy.

E-commerce continues to pressure brick-and-mortar retail as consumers increasingly move their shopping habits online. However,physical retail sales growth will still be positive over the next decade. Retailers are becoming more selective with their physical locations, opting to locate storefronts in the highest-quality assets that Simon owns while closing stores in lower-quality malls. Additionally, many e-tailers are beginning to open stores in Class A malls to take advantage of the high foot traffic, as a physical presence provides additional marketing, a showroom for products they want to highlight, and another source of sales.

However, Simon is still dealing with the fallout of the coronavirus pandemic. Shopping at brick-and-mortar locations fell as some consumers shifted purchases to e-commerce platforms. While Simon’s revenue is somewhat protected by long-term leases, occupancy fell near 90% in 2020 and has only recently started to recover while rent still remains below prepandemic levels. We believe that Class A malls will rebound and that these high-quality malls will eventually return to their prior occupancy and rent levels, but the short-term impact to Simon’s cash flow has been significant.

Financial Strength

Simon is in good financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which we believe will serve stakeholders well. Simon has an A/A3 credit rating, so it should be able to easily access low-rated debt to service financial obligations. Debt maturities in the near term should be manageable through a combination of refinancing and significant free cash flow. Additionally, the company should be able to access the capital markets when development and redevelopment opportunities arise. We expect 2021 net debt/EBITDA and EBITDA/interest to be roughly 7.1 and 4.5 times, respectively. We expect the company’s credit rating to remain stable through steady net operating income growth in its existing portfolio. We think Simon has unrivaled access to capital markets in general, given its current strong balance sheet and a large, higher-quality, unencumbered asset base.

Bulls Says

  • Simon’s access to capital, scale, and validated record position the firm to execute on any attractive and available investment opportunities. 
  • Simon’s high-quality portfolio will continue to present attractive locations for tenants to place stores even as retail companies look to reduce store counts and present the most desirable locations for e-tailers looking to establish a physical presence. 
  • Simon’s mall and outlet portfolio contains a high percentage of the best malls in the country where redevelopment capital can be deployed at the most promising yields.

Company Profile

Simon Property Group is the second-largest real estate investment trust in the United States. Its portfolio includes an interest in 207 properties: 106 traditional malls, 69 premium outlets, 14 Mills centers (a combination of a traditional mall, outlet center, and big-box retailers), four lifestyle centers, and 14 other retail properties. Simon’s portfolio averaged $693 in sales per square foot over the past 12 months. The company also owns a 21% interest in Klepierre, a European retail company with investments in shopping centers in 16 countries, and joint venture interests in 29 premium outlets across 11 countries.

 (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

Exelon Secures Another Legislative Win; Byron and Dresden to Remain Open

We expect Exelon’s regulated utilities to drive all of our earnings growth through 2025. The segment’s four-year, $27 billion capital investment plan supports 7.5% rate base growth and 6%-8% utility earnings growth. 

Exelon’s generation continues to be a primary concern and the reason we value the company at a discount to its peer regulated utilities. As the largest nuclear power plant owner in the United States, Exelon has suffered as low natural gas prices slashed power prices. The company has shown its political clout, winning price subsidies in Illinois, New York, and New Jersey to keep some of its nuclear fleet running. Illinois recently approved clean energy legislation that will subsidize the Byron and Dresden nuclear facilities.

Illinois lawmakers passed energy legislation that would provide subsidies worth $700 million to Exelon’s Dresden and Byron nuclear plants. Gov. J.B. Pritzker has indicated he plans to sign the legislation, and Exelon has said it is in the process of refuelling both plants.

Financial Strength:

Management has done a good job paring down its nonutility debt. Only about 15% of Exelon’s consolidated debt is directly tied to its generation segment. As long as power markets remain relatively stable and Exelon maintains its investment-grade ratings, we don’t expect the company to have trouble refinancing its near-term maturities. Continued power market weakness could make refinancing more difficult and stress Exelon’s credit metrics.

Balance sheet is expected to remain sound and in line with regulatory requirements, supported by the company’s low revenue cyclicality. Exelon’s operating leverage is somewhat higher than its regulated utility peers’ due to its merchant generation unit.

Exelon’s dividend policy to pay out 70% of regulated earnings is appropriate, given the high quality and relatively stable nature of its regulated assets.

Bulls Say:

  • Exelon’s proposed divestiture of its merchant generation unit would eliminate its earnings sensitivity to cyclical commodity prices that have dragged down returns recently. 
  • The company’s regulated utilities have good growth investment opportunities that should support earnings and dividend growth. 
  • The state subsidies that management has secured for a portion of its nuclear portfolio are a positive for shareholders

Company Profile:

Exelon serves approximately 10 million power and gas customers at its six regulated utilities in Illinois, Pennsylvania, Maryland, New Jersey, Delaware, and Washington, D.C. Exelon owns approximately 31 gigawatts of generation capacity throughout North America.

(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

Encouraging Signs from Telstra’s Investor Day

although the impact on high-margin roaming revenue was notable. The cost-out program is back on track, with management in February 2021 increasing the T22 cost-out target by the end of fiscal 2022 to AUD 2.7 billion, from AUD 2.5 billion previously. Telstra is the leading telecommunications services provider in Australia. It has dominant market share in each service category and customer segment, and enjoys cost advantages which underpin its narrow moat rating.

Telstra is not the cheapest provider of telecommunications services but is the lowest-cost provider resulting in earnings before interest, taxes, depreciation and amortisation, or EBITDA, margins of over 30%. As the National Broadband Network, or NBN, is rolled out, the traditional copper and cable networks will be progressively decommissioned. Compensation payments amount to an after-tax net present value of AUD 11 billion. Mobile market share of 44% remains well ahead of rivals Optus and Vodafone at 35% and 21% respectively. Competitive advantage in coverage and speed of the Telstra mobile network attracts customers demanding reliable mobile connectivity.

Financial Strength

Telstra’s balance sheet is strong. Net debt/EBITDA was 2.0 times at the end of June 2021, while EBITDA interest cover was 13.2 times. The strong capital position and cash flow allows spectrum acquisition and renewals, as well as network reinvestment, to be debt-funded.

Bulls Say’s 

  • Telstra has market-leading shares across all vital telecommunications segments and is likely to maintain these positions in the future.
  • While the telecommunications space is incredibly competitive, Telstra has a significant competitive advantage via its extensive mobile and wireless networks.
  • Decommissioning of the copper network lowers capital intensiveness of the business. Telstra can redirect capital to the higher-growth mobile segment.

Company Profile 

Telstra is Australia’s largest telecommunications entity, with material market shares in voice, mobile, data and Internet, spanning retail, corporate and wholesale segments. Its fixed-line copper network will gradually be wound down as the government-owned National Broadband Network rolls out to all Australian households, but the group will be compensated accordingly. Investments into network applications and services, media, technology and overseas are being made to replace the expected lost fixed-line earnings longer term, while continuing cost-cuts are also critical.

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

Cisco’s Software and Subscription Push Providing Investors with Greater Insight and Predictability

its strategic focus of increasing recurring revenue via selling software and services to supplement its hardware products. Software and services were more than half of fiscal 2020 revenue, up from 43% in fiscal 2017. In our view, Cisco embracing software from hardware disaggregation, and even selling networking chips, can help keep demand for its solutions high although some customers rely on cloud-based resources or generic hardware.

The company is the dominant supplier of switches, routers, cybersecurity, and complementary networking products. Cisco’s products are mission critical for network performance, stability, and security. Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends, and we see Cisco as the only one-stop-shop networking vendor. Despite Cisco’s commanding position in switches and routers, IT professionals are increasingly shifting computer workloads to the cloud, in turn buying less data center hardware. Alongside changing its product offerings, Cisco is moving product sales toward subscription-based offerings, which is the preferred method of consumption for cloud-based resources.

Financial Strength

Cisco a financially healthy Company. With a fiscal 2021 debt/capital ratio of 22%, abundant free cash flow generation, and expected on-time debt payments. The company could safely lever back up to fund development projects, acquisitions, and shareholder returns if needed. Cisco has continually exceeded its commitment to return at least 50% of free cash flow, calculated as cash from operating activities minus capital expenditures, to shareholders. Cisco initiated its share repurchase program in 2001, has increased the authorization over time, had about $8 billion remaining at the end of fiscal 2021, with no termination date. 

Cisco has recurrently raised its dividend year over year, and modest annual increases. Even after shareholder returns and debt repayments, the company remains financially flexible with plenty of cash to support acquisitions and its large marketing and R&D expenditures. Growing recurring revenue will provide a steadier income stream, and we expect strong operational and free cash flow generation to continue in the future. Our view is that Cisco will manage its growing war chest with future cash deployments into strategic developments and acquisitions.

Bulls Say’s

  • Cisco’s one-stop-shop ecosystem, from switches to data analytics, should remain valued as more networking customers migrate to hybrid clouds.
  • Despite the rise of public clouds, Cisco should continue to grow its customer base via hybrid cloud and software offerings.
  • The expected rapid proliferation of devices to hit networks should drive customer demand for Cisco products. We foresee Cisco’s hardware as needed for access points, routing, and switching while software is crucial for analytics, security, and intent-based networking.

Company Profile 

Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The infrastructure platforms group includes hardware and software products for switching, routing, data center, and wireless applications. Its applications portfolio contains collaboration, analytics, and Internet of Things products. The security segment contains Cisco’s firewall and software-defined security products. Services are Cisco’s technical support and advanced services offerings. The company’s wide array of hardware is complemented with solutions for software-defined networking, analytics, and intent-based networking. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.

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

AusNet’s Returns Are Falling but Revenue to Rise on Network Expansion

Business Strategy and Outlook

AusNet Services’ security price has risen in recent months in sympathy with Spark Infrastructure, after the latter received a takeover offer. While the two businesses are very similar, AusNet is 51%-owned by Singapore Power and China’s State Grid, which may deter any takeover approach. AusNet trades at a 16% premium to our unchanged AUD 1.70 fair value estimate, offering a distribution yield of 4.8% with modest growth potential.

 As the owner of monopoly infrastructure assets, revenue is highly defensive but heavyhanded regulation rules out excess returns and thus an economic moat. Returns at its three regulated networks are reset every five years to ensure they aren’t overearning, with no meaningful ability to appeal decisions. Slightly better returns can be achieved by cutting costs below allowances set by the regulator. But cost allowances get trued up every five years and outperforming is getting more difficult as privatised networks get more efficient.

Company’s Future Outlook

Timing of the Victorian electricity distribution network’s regulatory reset was fortuitous. The spike in 10-year government bond yields in early 2021 resulted in an allowed return on equity of 5.1% for the distribution network for the five years to mid-2026, up from 4.6% in the draft decision. All else being equal, we estimate this translates to an additional AUD 100 million, or 2.6 cents per security, in earnings each year compared with the draft decision. Bond yields have since weakened but we expect them to trend higher over the long term, pushing allowed returns on equity higher.

For now, an allowed return of 5.1% isn’t too bad. While allowed return on equity has fallen from 7.5% in the prior period, we expect the 30% larger regulated asset base to drive a near 10% increase in average revenue for the next five years. The draft decision for the Victorian electricity transmission network uses a 5.3% allowed return on equity, but that will likely fall to 4.9% in the final decision later this year if government bond yields remain around current levels. That represents a significant fall from 7.1% in the past five years. Revenue, however, should get a boost from lower inflation forecasts and an expanded regulated asset base.

Company Profile 

AusNet Services is a diversified energy infrastructure business, operating Victoria’s primary electricity transmission network, an electricity distribution network in eastern Victoria and a gas distribution network in western Victoria. Singapore Power owns 31% of AusNet, and China’s State Grid owns 20%.

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

Oracle Begins Fiscal 2022 With a Mixed Quarter As Cloud Shines; Shares Overvalued

Revenue in the first quarter increased 4% year over year to $9.7 billion. Once again, cloud services and license support drove the top line upward, growing 6% year over year and accounting for 76% of the firm’s sales in the June quarter. Additionally, adjusted operating margins for the quarter remained flat year over year at 45%, and non-GAAP earnings per share was $1.03, compared with our estimate of $0.94.

The company’s cloud business continues to perform well and grow as a portion of Oracle’s overall sales. Since the cloud business typically offers better margins than the firm’s on-premises business, we view this mix shift positively as the increasing cloud mix will help the company grow its profitability. At the same time, however, we remain aware of the intense competition in the database management market and maintain our fair value estimate of $65 per share. With shares trading around $87, we recommend waiting for a pullback before committing capital to the narrow-moat name.

Within the cloud space, management highlighted a recent Gartner report that reviews Oracle’s strong execution within cloud infrastructure. At the same time, we find it important to highlight that while Gartner positions Oracle as the number three player in the cloud infrastructure space, Amazon and Microsoft (the current number one and two, respectively) have built their cloud infrastructure business over many years. As a result, it’ll be hard for Oracle to displace these two cloud giants off their perches, as doing so would require companies to make cloud infrastructure decisions primarily based on database functionality. 

Additionally, on the call, management stressed the outperformance of its MySQL offering, HeatWave, over Amazon’s and Snowflake’s MySQL offering. While we continue to think Snowflake boasts significant benefits over Amazon due to its customers’ ability to avoid vendor lock-in, we found it compelling that Oracle claimed it plans to make its MySQL product available on competing public clouds. 

Company Profile

Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.

(Source: Morningstar)

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.