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Property

Vicinity Centres Ltd (ASX: VCX)

  • Cap rates and asset valuations need to be adjusted for negative domestic economic data points around the consumer, which is a risk for VCX.
  • High-quality property portfolio (high occupancy, consistent rental growth, etc.) with portfolio repositioning that makes it resilient to a declining retail sales environment.
  • A strong development pipeline is in place to fuel growth at a reasonable starting yield and IRR.
  • The retail climate is challenging, and is anticipated to stay so for the next 12 months, as households continue to be hampered by high debt levels and a lack of wage growth, despite stable unemployment in the eastern states.
  • Strong specialty growth across retail categories, particularly Luxury retailers (+30.2 percent in the year ending December 2019).

Key Risks

  • The Corona virus has an impact on consumer attitude and retail outlets, which has an impact on VCX tenants.
  • Interest rate hikes have a negative impact on the company’s cost of debt and consumer spending in the retail industry.
  • Increased unemployment leads to lower consumer retail spending, which has an impact on rental growth and property valuations. Inability to mitigate consequences that arise from weak retail environment.
  • Property fundamentals are weaker than projected.
  • Tenancy risk/retailer failures result in more vacancies across the asset portfolio (e.g., Dick Smith) and a negative impact on profitability.
  • Delays in the development timetable and project cost overruns.
  • Any drop in interest in bond-proxy stocks among investors.

FY21 Results Highlights

Funds from operations (FFO) increased to $558.8 million, or 12.28 cents per share, from $520.3 million, or 13.66 cents per share, in FY20, owing to significant Net Property Income (NPI) growth of +8.7% to $743.4 million. The statutory net loss after tax was $258.0 million (compared to $1,801.0 million in FY20) and included a $642.7 million non-cash net property valuation loss. For 2H21, a final DPS of 6.6cps was declared. “4.1 cents attributed to Vicinity’s typical earnings in 2H21 and 2.5 cents attributable to other one-off events recognised over the year,” including “reversal of waivers and allowances recognised in FY20, lower net interest costs,” made up the 6.6 cents.

Due to higher than expected NPI in June 2021, the FY21 dividend of 10.0cps equalled to a payout ratio of 93.7 percent of Adjusted FFO (AFFO), which was an improvement from 7.7cps, payout ratio 69.3 percent in FY20, but somewhat below the goal range of 95 percent -100 percent. VCX’s balance sheet remained robust, with a low gearing of 23.8 percent, investment-grade credit ratings of A/stable (S&P) and A2/stable (Moody’s), $2.4 billion in liquidity, and no debt maturing until FY23. The weighted average debt term of VCX is 4.4 years, while the drawn debt maturity is 5.8 years. 

Company Description  

Vicinity Centres Ltd (VCX) is an ASX-listed real estate investment trust (REIT) with a strong retail portfolio and a well-integrated asset management platform. Vicinity Centres owns or has an interest in the following prominent retail assets: Chatswood Chase (NSW), Chad stone Shopping Centre (VIC), DFO South Wharf (VIC), Queens Plaza (QLD), Emporium Melbourne (VIC), and DFO Home Bush (VIC) (NSW). The merging of Federation Centres and Novion Property Group resulted in VCX.

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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Dividend Stocks

Hanesbrands’ Investment Key Brands Under Its Full Potential Plan Support

While the COVID-19 crisis adversely affected 2020 results, we think Hanes’ share leadership in replenishment apparel categories puts it in better shape than some competitors. Hanes’ management forecasts Champion will reach $3 billion in global sales in 2024, up from about $2 billion this year, which we see as an achievable goal. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past three years. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. 

Financial Strength 

Hanes is saddled with heavy debt from its acquisition spree in 2013-18 and closed June 2021 with $3.7 billion in debt. However, the firm also had nearly $700 million in cash and no borrowings under its revolving credit facilities of just over $1 billion. Moreover, we estimate Hanes will receive about $400 million in cash after it sells its European innerwear operations (expected in 2021). Hanes has a stated goal of bringing debt/EBITDA below 3 times by 2024, which we forecast may happen as early as the end of 2022.Hanes has suspended its share buybacks due to the pandemic, but we expect it will resume repurchases on a large scale in 2022. 

The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. Its annual dividend has been set at $0.60 per share since 2017, but we forecast it will raise in 2022 and in subsequent years. We estimate an average annual dividend payout ratio of 38% in 2022-30.Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. 

Our 2024 sales estimates for innerwear and activewear are $3.0 billion and $1.9 billion, respectively, up from $2.7 billion and $1.7 billion this year. In the long term, we model annual organic innerwear growth rates of 2%-3%. Although long-term growth in domestic innerwear (45% of 2020 sales) is low, Hanes has been gaining share in some basics categories. Our fair value estimate assumes moderate inflation in wage and cotton prices, resulting in a gross margin that stabilizes at 40%.

Bulls Say’s 

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

Company Profile 

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

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks Philosophy Technical Picks

ASX Interest Rate Pressures to Abate From Economic 2023

with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. The ASX has long been protected by two significant barriers to competition through regulation and network effects. 

The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome. In March 2016, the government reiterated its desire for competition in cash equities clearing, which constitutes just 7% of ASX group revenue, but not in cash equities settlements, which make up a further 6% of group revenue. There are currently no proposals to introduce competition in derivatives clearing, ASX’s largest business (comprising around a third of group revenue), with obstacles such as cross-margining acting as a barrier to competition.

Financial Strength 

ASX is in good financial health due to its dominant Australian securities exchange, high margins, and capital-light business model. The wide economic moat has protected consistently strong and stable EBIT margins of around 70% over the past decade, and we forecast an average EBIT margin of around 70% over the next five years. Although revenue is vulnerable to market declines to some degree, the large margins limit leverage at an EPS level. 

ASX lacks an appetite for acquisitions, which is not a bad thing in our opinion. The company seeks to drive growth organically through product innovation and cost efficiencies. Our fair value estimate excludes the value of ASX’s franking credits, which are received by Australian resident taxpayers. However, as discussed in our recent special report, “10 Franked Income Stock Ideas for Australian Investors,” franking credits can effectively boost the fair value estimate for investors that receive them. 

Revenue was 4% above our forecast due to stronger than expected performances from the cash equities, listings, and information services divisions, but a weaker-than-expected performance from the derivatives and OTC division. Our fiscal 2022 expenses growth forecast of 5% is at the lower end of management’s guidance range of 5% to 7%, and lower than the 8% reported for fiscal 2021. Our fiscal 2022 capital expenditure forecast of AUD 114 million is at the top end of the AUD 105 million to AUD 115 million guidance range, and lower than the AUD 125 million in fiscal 2021.

Bulls Say’s 

  • Long-term earnings growth is underpinned by growth in the value of the stock market and protected by a wide economic moat. However, in the short term, earnings can be affected by market weakness, although EPS fell just 7% during the global financial crisis.
  • ASX has a wide economic moat underpinned by network effects and regulation. We expect this competitive advantage to protect EBIT margins of around 70% over the next decade and a low-single digit EPS CAGR.
  • ASX is financially robust with a good balance sheet, strong cash flow, and tight cost control.

Company Profile 

ASX is the largest securities exchange in Australia with an effective monopoly in listing, trading, clearing, and settlement of Australian cash equities, debt securities, investment funds, and derivatives. Other activities include the technology services, enforcing exchange rules, and exchange-related data. The ASX demutualised and listed on its own exchange in 1998 and subsequently acquired the Sydney Futures Exchange in 2006.

(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

Treasury Lacks an Economic Moat Amid the Highly Competitive and Volatile

particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 70% in fiscal 2021 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. We expect continued end-market premiumisation to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020

However, Treasury will face an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations. Treasury also faces risks from unfavourable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. But the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns.

The reason why Treasury lacks an economic moat:

  • Treasury Wine Estates has not carved out an economic moat, in our opinion. Although we expect the firm’s strategic shift to focus on high-end wines and its increased geographic diversification to benefit both long-term top-line growth and profitability, the wine industry’s high degree of competition, and volatile annual demand will likely limit Treasury’s ability to generate sustainable excess economic profits. These concerns are further exacerbated by persistent industry oversupply and specific taxation rules in Australia that award excise tax exemptions against the first AUD 350,000 in direct-to-consumer sales, a barrier to industry consolidation. Furthermore there is also continued pressure from powerful retailers in Australia, where liquor stores owned by grocery giants Woolworths and Coles account for over 50% of total wine sales and
  • We don’t believe owning a portfolio of wine brands builds a moat worthy intangible asset because wine brands are stand-alone assets and therefore consumer awareness of Treasury’s ownership in both Stags’ Leap and Berringer in the U.S., or Penfolds and St Huberts in Australia, leads to improved pricing for the respective brands versus peers, or if such awareness even materially exists. There are some cost benefits to running a portfolio of wine brands, as Treasury can optimise its grape sourcing and production within its many geographies. But we expect premium wines will likely continue to see fluctuations in supply and fruit cost year to year.
  • In all, despite the positives of premiumisation in recent years, ROICs considerably trailed WACC until fiscal 2019. This is due to the substantial inventory requirements of wine-making, the high cost of land ownership, difficult price competition in a very fragmented market, and Treasury’s lack of scale economies and brand intangible assets versus larger peers.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine.
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands.
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilisation, improving margins, and higher ROICs.

Company Profile

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(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

Coles display strong FY21 results benefitting from pandemic

  • Increasing the penetration of private labels – COL just reaffirmed its objective of 40% penetration.
  • Earnings that are relatively safe (food tends to be largely non-discretionary).
  • In comparison to key domestic competition Woolworths, the valuation is undemanding.
  • Now that the company has been demerged, it has improved its focus and capital allocation.
  • Automation and enhancements in the supply chain should result in increased efficiency.
  • The deal with Ocado, in our opinion, positions Coles as a leader in online delivery.
  • Flybuys is a highly appealing asset that may be profited from.

Key Risks

  • Margins could be eroded by significant competitive pressures (including the introduction of new companies).
  • At the forthcoming Strategy update in June 2019, management will reset the earnings base.
  • Disruption on the internet (full online offering).
  • Upgrades to automation and supply chains will necessitate major capital investment, the cost of which has yet to be determined.
  • After accounting for leases, the balance sheet could be extended.
  • Cost inflation is outpacing revenue growth.

FY21 Results Highlights

Strategic sourcing and Smarter Selling benefits drove a 35-basis-point increase in gross margin in the top supermarkets. Since the Company introduced Coles Plus in February 21, the number of paid members has climbed by 6 times. Coles’ market share recovered to pre-Covid-19 levels in the fourth quarter of 2011, with a 4Q21 exit market share of 27.1 percent. This is higher than the 26.4 percent recorded in 2Q20. 

Management attributed this to the relaxation of limitations, which resulted in increased shopping centre performance and a slowing of the local shopping trend. The Ocado Customer Fulfilment Centres (CFC) will open in Melbourne in FY23 and Sydney in FY24, according to management.  In the fourth quarter, omnichannel customers spent 2.2 times more than in-store only shoppers, according to the findings. Coles now offers sale-day home delivery in over 300 stores, as well as Click & Collect at over 500 locations. 

Management did not disclose any earnings guidance in terms of dollars. However, sales growth in the crucial Supermarkets business was muted in the first seven weeks of 1Q22 trading, with sales up 1% on a headline basis and up 12% on a two-year basis.

Company Description  

Coles Group Ltd (COL) is an Australian retailer (supermarket and liquor) that was spun off from Wesfarmers (WES) in 2007. Coles handled more than 21 million customer transactions on average each week as of 30 June 2018, employing over 112,000 team members and operating 2,507 retail stores across the country. Supermarkets, Liquor, and Convenience are the company’s three primary operating segments. The company will also keep a 50 percent share in the flybuys loyalty programme.

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

Narrow-Moat Tapestry Closed Fiscal 2021 on a Good Note; Outlook Is Reasonable; Shares Attractive

Handbags and some types of apparel have been selling well as economies in the U.S. and greater China have recovered. We think Tapestry has good momentum as it enters fiscal 2022, so we expect to lift our per share fair value estimate of $43.50 by a mid-single-digit percentage. Tapestry is one of the few firms in the apparel and accessories space that we currently view as undervalued, especially after its share price slid 3% after the earnings report.

Against an easy comparison, Tapestry reported constant currency sales growth of 122% in the quarter, eclipsing our 118% estimate. More importantly, its sales rose 7% as compared with 2019, with most of the growth attributable to Coach. The Coach brand is the source of our narrow moat rating on Tapestry, and we think it is healthy enough to hold segment operating margins of 29%-30% in the long term. Meanwhile, we see signs of progress at both Kate Spade and Stuart Weitzman, although neither has significant growth from two years ago. We model sales growth rates of 5%-6% for these brands in the long run based on improved product and consumer engagement under the Acceleration Program.

Tapestry’s quarterly adjusted operating margin of 16.9% came in 40 basis points above our 16.5% forecast. As targeted by the Acceleration Program, the firm achieved the $200 million in gross expense savings in fiscal 2021 and expects to achieve $300 million in additional savings this year. These cost savings are somewhat offset by intended increases in marketing and e-commerce investment, which we view as prudent given the rising demand in China and elsewhere and ongoing e-commerce growth (55% for Coach in the fourth quarter).

Tapestry guided to fiscal 2022 EPS of $3.30-$3.35 on $6.4 billion in sales, above our forecast of $3.23 in EPS on $6.1 billion in sales. We think Tapestry’s outlook is achievable based on current momentum in the business. As its business has rebounded nicely from the pandemic, Tapestry has reinstated its dividend and plans to resume share repurchases. It intends to pay a dividend of $1 per share in fiscal 2022. It also guided to $500 million in repurchases in fiscal 2022, which would be its most since before the 2017 Kate Spade deal. We have a favourable view of this buyback plan as Tapestry trades below our fair value estimate and has a reasonable valuation (forward P/E of about 12). Meanwhile, we think Tapestry may look for another large acquisition in the future. The firm’s new CEO, Scott Roe, has considerable experience with acquisitions from his time at narrow-moat VF. Our capital allocation rating on Tapestry is Standard.

Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. The firm’s products are sold through about 1,500 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2020 sales), Europe, Asia (32% of fiscal 2020 sales), and elsewhere. Coach (71% of fiscal 2020 sales) is best known for affordable luxury leather products. Kate Spade (23% of fiscal 2020 sales) is known for colourful patterns and graphics. Women’s handbags and accessories produced 68% of Tapestry’s sales in fiscal 2020. Stuart Weitzman, Tapestry’s smallest brand, generates nearly all (98%) of its revenue from women’s footwear.

(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

Despite higher costs, Oz Minerals’ prominent Hill Shaft Expansion was approved

was more than triple the AUD 80 million profit from first-half 2020. Adjusted net profit was AUD 256 million versus AUD 56 million a year ago, modestly below our AUD 267 million forecast.

 The first-half profit benefited from an AUD 18 million pretax impairment reversal relating to the value of the company’s ore stockpiles at Prominent Hill. Adjusted EBITDA nearly doubled to AUD 561 million. Operating cash flow generation of AUD 460 million in the half was strong and allowed the company to fund all of its capital initiatives, as well as repay all debt. 

Shares remain overvalued, a function of the elevated copper price, in turn a function of both supply challenges and transitory stimulus. Of late, the copper price has started to retreat and has fallen to around USD 4 per pound from record levels of nearly USD 5 per pound in May 2021. Oz Minerals remains very busy on the development front. 

Company’s Future Outlook

It lowers fair value estimate for Oz Minerals by 5% to AUD 15.70 per share. The reduction primarily reflects an approximate one-third increase in the expected capital expenditure to develop the Prominent Hill shaft to around AUD 600 million. The capital cost inflation reflects inflation in commodities and service costs, as well as some scope changes. In the rest of the year, the company expects to update development studies for the West Musgrave nickel/copper project–including an updated estimate of reserves and resources–and the Carajas East, Carajas West, and Centro Gold projects in Brazil. The pipeline remains rich, continues to build and advance, and Oz Minerals is in a strong financial position to execute. At the end of June 2021, the company had no debt and AUD 134 million cash.

Company’s Future Outlook

We also think the company should be able to fund annual dividends averaging over AUD 0.50 per share per year. Dividends are not the main game for Oz Minerals and the company is clearly focused on growth, but we think it’s positive that excess cash is being returned to shareholders. To this end, the company declared an AUD 0.08 per share interim and AUD 0.08 per share special dividend in the half, double last year’s interim dividend.

Company Profile

Oz Minerals Ltd (ASX: OZL) is a mid tier copper/gold producer. Prominent Hill produced about 100,000 tons of copper in 2020 with cash costs well below the industry average. The mine is a very small contributor to total global refined output of about 24 million tons in 2020. Finite reserves are a challenge, but management has extended life at Prominent Hill, albeit at a lower production rate. Life extension comes with development of the nearby Carrapateena mine, which started in 2020. Carrapateena should initially ramp up to produce at about 70,000 tons a year before expanding to just over 110,000 a year from around 2028. The acquisition of Brazil-based Avanco Resources adds volumes but the scale is smaller than the Australian assets, costs are higher and growth is likely to be incremental.

 (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

Persistent Sydney Lockdowns Will Weigh on Star’s Core Casino

the ramp-up of Queens Wharf and Gold Coast growth projects, and solid performance from its Sydney property, despite increased competition. The Star casino in Sydney is the company’s core asset, which has historically generated approximately 70% of group earnings as the city’s only casino. The New South Wales government only issued the second licence because The Star’s performance significantly lagged Crown Melbourne in both revenue and EBITDA, depriving the state of taxation revenue. 

The Star Sydney’s EBITDA is roughly 60% of Crown Melbourne’s, despite Sydney being Australia’s largest city and the international gateway into Australia. The AUD 2.6 billion Queen’s Wharf joint venture development in Brisbane has been rewarded with a new 99-year lease and 25-year exclusivity period when it opens in 2022 (to replace the current Brisbane licence). 

Financial Strength

The Star Entertainment’s balance sheet has improved over fiscal 2021 following asset sales, a halt to the dividend, and relatively low levels of capital expenditure. Leverage, measured as net debt/adjusted EBITDA, moderated to 2.7 in fiscal 2021, from over 3 in fiscal 2020. Additional asset sales are slated for fiscal 2022 to further strengthen the balance sheet. With an improved balance sheet, we forecast the resumption of dividends in the second half of fiscal 2022 at around 75% of underlying earnings. The company has flagged it will not start paying dividends until the firm’s net debt/EBITDA improves to below 2.5. 

Our fair value estimate for shares in no-moat Star Entertainment to AUD 4.10 from AUD 4.00 previously, as lower near-term earnings forecasts are more than offset by time value of money. The firm’s fiscal 2021 results broadly tracked our expectations, with underlying EBITDA of AUD 430 million flat on the previous corresponding period, or pcp, and 1% higher than our prior forecast. Star is beginning the year with some familiar challenges. Persistent lockdowns are weighing on the core Star Sydney property, which has remained closed since late June 2021. our outlook for both table gaming and VIP gaming in Star Sydney, and lower our fiscal 2022 full-year EBITDA forecast by 6% to AUD 449 million. But our longer-term view of Star remains intact.

Bulls Say’s 

  • Despite competition, The Star’s core Sydney casino provides an opportunity to turn around operations and grow in Australia’s most populous market.
  • The Star is well-positioned to benefit from the emerging middle and upper class in China.
  • Long-dated licences to operate the only casino in Brisbane and the Gold Coast, including licensed exclusivity in Brisbane, provide The Star an opportunity to generate strong returns in a regulated environment.

Company Profile 

The Star Entertainment Group operates three hotel and casino complexes in Australia: The Star in Sydney (licence expiring in 2093, with electronic gaming machine exclusivity expiring in 2041), The Star Gold Coast (a perpetual licence), and Treasury Casino and Hotel in Brisbane (licence expiring in 2070). The Queen’s Wharf development in Brisbane will have a 99-year licence on completion in 2022 (with a 25-year exclusivity period), replacing the Treasury Casino and Hotel, which will be repurposed into a hotel and retail site.

(Source: Morningstar)

General Advice Warning

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

Categories
Technology Stocks

TPG Telecom Fiscal 2021 First Half Broadly in Line

or NBN, and take-up of high-traffic products such as Internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. TPG Telecom’s price-leader strategy still sees the company delivering solid subscriber and market share performance. Product bundling has also become a key segment in the market, with all players using broadband as a lead-in product and cross-selling voice, mobile, pay-TV, and digital streaming services. 

The ownership of submarine cable between Australia and Guam offers the group broader cost advantages. Pricing is mainly a function of demand and supply, available capacity, and the length of cable. Economies of scale play a large part in pricing where costs are measured on per unit of volume. Contracts are structured in typical 15-year

leases, providing some certainty in revenue. Clients are allocated a fixed bandwidth and have the right to on-sell capacity. Maintenance fees of 3%-4% of the lease are also levied.

Financial Strength 

TPG Telecom’s financial health is solid. Historically, management has used debt to finance acquisitions and demonstrated a capacity to pay it down in due course. As of June 2021, net debt/EBITDA was 2.8 times, well below the covenant limit of 3.5 times. Highlights from the 2021 first-half result support the key planks of our positive investment thesis for TPG Telecom. The NBN-inflicted EBITDA damage in the broadband unit is on track to fall less than management’s prior AUD 60 million projection for the full year (AUD 25 million in the first half), down from AUD 83 million in 2020. 

Moderating fall in subscribers (128,000 in June half 2021 versus 361,000 in December half of 2020), and ARPU (underlying post-paid down 1.6% in first half versus an estimated 2.3% in 2020) are signs of likely improvements to come. While shares in narrow-moat-rated TPG have climbed 30% since the May 2021 lows, they remain 13% below our unchanged AUD 7.40 fair value estimate. 

The 4% decline in corporate EBITDA to AUD 236 million was especially disappointing. It was mainly due to a fall in lowmargin legacy services, as underlying EBITDA margin was up to 53.2%, from 52.3% a year ago. Nevertheless, the shortfall in this division, coupled with continuing likely impact from COVID-19 (AUD 11 million in the first half) has led to 2% decline in our 2021 group EBITDA forecast to AUD 1,779 million. TPG’s broadband business will also benefit from management’s concerted push into fixed wireless, to bypass the National Broadband Network, or NBN. Indeed, 17,000 fixed wireless customers were signed up in the current second half to date, just a month after launch of the TPG-branded fixed wireless product. 

Bulls Say’s 

  • Cross-selling opportunities remain for both consumer and corporate markets.
  • The merger with Vodafone Australia increases the scale of the combined entity and allow it to better compete against Telstra and Optus in the Australian market.
  • Further rollout of its fibre network also boosts growth, while incremental cost from an additional user is small.

Company Profile 

TPG Telecom is Australia’s third-largest integrated telecom services provider. It offers broadband, telephony, mobile and networking solutions catering to all market segments (consumer, small business, corporate and wholesale, government). The company has grown significantly since 2008, both via organic growth and via acquisitions, and in July 2020 merged with Vodafone Australia. It owns an extensive stable of infrastructure assets. TPG is also a very nimble competitor in the telecom space, with an aggressive operating culture unencumbered by any legacy issues facing incumbents.

(Source: Morningstar)

General Advice Warning

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

Categories
Technology Stocks

CSL Limited (ASX: CSL)

The Seqirus flu business, which achieved positive earnings (EBIT) for the first time in FY18, continues to perform strongly.
There is a lot of interest in their product line.
High entry barriers in terms of knowledge, worldwide channels, and operations/facilities/assets.
The executive team is strong, as are the operational capabilities.
Leveraged against a weakening dollar.
Key Risks
Pressures from competitors.
Behring’s core business, product recalls, disappoints.
Growth is underwhelming (underperform company guidance).
The Seqirus flu business is stalling or deteriorating.
Unfavourable currency fluctuations (AUD, EUR, USD).

FY21 Results Highlights
CSL’s influenza vaccines business, Seqirus, reported NPAT of $2,375 million, up 10%, and revenue of $10,026 million, up 10%, thanks to strong performance in leading subcutaneous Ig product HIZENTRA and leading HAE product HAEGARDA, as well as exceptionally strong performance in CSL’s influenza vaccines business. EBIT increased by 11% to $3,025, while margins remained at 30.2 percent. Earnings per share increased from 10% to $5.22.
The final payout of US$1.18 per share (A$1.61 franked at 10%) brings the total dividend for the year to US$2.22 per share, up 10%. Highlights from each segment: (1) CSL Behring, relative to the pcp and in constant currency. Albumin (+61%), HIZENTRA (+15%), HAEGARDA (+14%), and KCENTRA (+7%) all contributed to an increase in total revenue of 6%. (2) Seqirus is a character in the game Seqirus.
Seasonal influenza vaccine sales increased from 41% on a record volume of 130 million doses, driving total revenue up 30%. FLUAD® QIV was released in the United States in FY21, while FLUCELVAX was marketed in Australia.

Company Description
The Commonwealth Serum Laboratories Limited (CSL) is a company that develops, manufactures, and sells pharmaceutical and diagnostic products made from human plasma. Paediatrics and adult vaccines, infection, pain medicine, skin problem treatments, anti-venoms, anticoagulants, and immunoglobulins are among the company’s goods. These are life-saving products that are not optional.

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.