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Categories
Technology Stocks

General Dynamics’ business jet segment primarily produces long-range wide-cabin business jets

Business Strategy & Outlook

About three-fourths of General Dynamics is a defense prime contractor and the other fourth a business jet manufacturer. Defense primes rely on defense spending for revenue, and companies with tangible growth profiles through a steady stream of contract wins, ideally to contracts that are fulfilled over decades are favorable. General Dynamic’s crown jewel of long-cycle contracts, the Columbia-class submarine, exemplifies this with planned procurement through 2042. Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense primes to deliver a lot of cash to shareholders, which is positive because there’s no substantial growth seen in this industry. Defense primes are implicitly a play on the defense budget, which is ultimately a function of both a nation’s wealth and a nation’s perception of danger. As the U.S. budget is looking increasingly bloated with pandemic relief, there’s a near-term slowdown in defense spending to flat or even negative growth, but the contractors will be able to continue growing due to sizable backlogs and think that defense budget growth is likely to return. There is a substantial political uncertainty in the budget, but it will be difficult to materially decrease the defense budget due to structural geopolitical changes that make great-power conflict more salient. It is to be noted that one of the most common budgetary compromises of the previous decade has been more nondefense spending for more defense spending.

General Dynamics’ business jet segment primarily produces long-range wide-cabin business jets. This market is low volume, at roughly 200 global deliveries each year and many repeat customers. New, quality, product drives demand in this segment, so the company must continuously convince customers that it has built a better aircraft. Gulfstream dominates volume in this segment, with roughly 50% market share, which leads to superior margins due to progression along the learning curve. It can be anticipated that the introduction of the G700, G800, and G400 in 2022, 2023, and 2025, respectively will be major sales drivers.

Financial Strengths

General Dynamics historically has one of the best balance sheets among defense primes, and this is a proper business strategy as the company is somewhat more cyclical than peers. General Dynamics issued some debt in 2020 due to pandemic-related uncertainties, and gross debt/EBITDA stood at 2.3 times at the end of 2021. General Dynamics had a sizable debt maturity in 2021, and has a much more manageable maturity schedule over the rest of the forecast period. Over the medium term, the company will bring gross debt/EBITDA to its normal historical levels below a single turn. Hence it makes sense for General Dynamics to generally carry a lower debt burden than peers because they have a highly cyclical business jet segment in addition to the acyclical defense prime contracting business. General Dynamics produces a substantial amount of cash flow to service any debt burden and the company would be able to access the capital markets at minimal cost if necessary.

Bulls Say

  • General Dynamics’ Gulfstream franchise has top-tier volume share and margin in the large-cabin business jet market and has successfully transitioned to the G500 and G600, and G650. Business jets are in a postpandemic cyclical upswing.
  • General Dynamics’ marine segment has decades of revenue visibility, thanks to the long-cycle nature of shipbuilding.
  • Defense prime contractors operate in an acyclical business, which could offer some protection if the U.S. enters a recession

Company Description

General Dynamics is a defense contractor and business jet manufacturer. The firm’s segments include aerospace, combat systems, marine, and technologies. The company’s aerospace segment creates Gulfstream business jets. Combat system produces land-based combat vehicles, such as the M1 Abrams tank. The marine subsegment creates nuclear-powered submarines, among other things. The technologies segment contains two main units, an IT business that primarily serves the government market and a mission systems business that focuses on products that provide command, control, computers, intelligence, surveillance, and reconnaissance capabilities to the military.

(Source: Morningstar)

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

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

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

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

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

Categories
Technology Stocks

KBR’s portfolio transformation is the culmination of the firm’s shift away from more cyclical and lower-margin end markets

Business Strategy & Outlook

Under the leadership of CEO Stuart Bradie, who took the helm in 2014, KBR has focused on shifting its portfolio toward differentiated government solutions. The portfolio rebalancing, which included the acquisitions of Wyle and HTSI in 2016, SGT in 2018, and Centauri in 2020, has already started to bear fruit and led to improved results in recent quarters. In 2020, KBR restructured its portfolio into two segments: government solutions and sustainable technology solutions. The government solutions segment accounted for roughly 64% of the firm’s backlog as of December 2021 (compared with only about 16% as of December 2014), and the shift to long-term government contracts resulted in a more stable portfolio. The segment has some moat-forming potential based on switching costs, as many of the firm’s government contracts are multi year agreements that generate relatively stable cash flows. 

The sustainable technology solutions segment (roughly 36% of KBR’s backlog as of December 2021) includes the legacy technology solutions business (which has a unique portfolio of licensed technologies and offers consulting services across a variety of markets, including refining, petrochemicals) as well as the advisory consulting business from the legacy energy solutions segment. Management believes the segment can expand its margins through cost reductions by roughly 100-200 basis points per year, to the high teens by 2024. KBR’s portfolio transformation is the culmination of the firm’s shift away from more cyclical and lower-margin end markets. The company has exited lump-sum engineering, procurement, and construction (including LNG) projects, which will result in a less risky and more profitable portfolio.

Financial Strengths

KBR is on solid financial footing. The firm’s leverage has increased significantly in recent years as a result of acquisitions, from no long-term debt prior to 2016 to roughly $1.9 billion in long-term debt as of December 2021. That said, the company ended 2021 with $370 million in cash and equivalents and has a $1 billion revolving credit facility. Furthermore, there’s no debt maturities to pose any problems over the next few years, as no major debt payments are due until 2023. Considering that an investment-grade credit rating can have strategic importance for E&C firms and boost their competitiveness in winning new awards, KBR is to prioritize paying down its debt balance. The company will have a net debt/adjusted EBITDA ratio of roughly 1.9 times in 2022, and the leverage ratio to remain consistent with management’s 2.5-3.0 times target, which is in line with its government solutions peers. KBR will generate average annual operating cash flow of roughly $550 million over the next five years. Management has indicated that it will prioritize maintaining an appropriate leverage ratio, maintaining a dividend, and investing in organic growth, with excess capital allocated to potential M&A opportunities and share repurchases.

Bulls Say

  • KBR’s sustainable technology solutions segment is well positioned to benefit from growing demand for solutions that address energy efficiency and energy transition.
  • The acquisitions of Wyle, HTSI, SGT, and Centauri have derisked KBR’s portfolio and shifted it toward relatively stable and high-margin government services work. 
  • There is room for margin expansion in both segments, driven by cost reductions and mix shift to higher-margin differentiated solutions work.    

Company Description

KBR (formerly Kellogg, Brown & Root) is a global provider of technology, integrated engineering, procurement, and construction delivery, and operations and maintenance services. The company’s business is organized into two segments: government solutions and sustainable technology solutions. KBR has customers in more than 75 countries, with operations in 40, and employs 36,000 people. The firm generated $7.3 billion in revenue in 2021.

(Source: Morningstar)

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

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

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

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

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

Categories
Technology Stocks

Idex has consistently generated returns on invested capital in the upper mid-teens

Business Strategy & Outlook

Idex owns a collection of moaty businesses that tend to be leaders in their respective niche end markets, typically holding the number-one or -two market share. It manufactures a wide array of products, ranging from equipment used in DNA sequencing to wastewater pumps to Jaws of Life hydraulic rescue tools. Idex’s lean manufacturing process allows it to effectively operate in a high-mix and low-volume environment, offering customers a wide variety of highly engineered products that are configurable or customizable. Furthermore, a common theme across its businesses is that they specialize in making mission-critical equipment that performs a vital function but typically constitutes a small part of the customer’s total bill of materials. This aspect of the business contributes to Idex’s narrow moat through customer switching costs and allows the firm to command premium pricing. In the long run, Idex is a GDP-plus business. The organic sales growth will continue to outpace industrial production by around 1%-2% annually as the firm’s commitment to innovation and investments in research and development continue to bear fruit and generate additional revenue through introductions of new or refreshed products. Organic sales are to grow at a roughly low-single-digit clip in fluid and metering technologies as well as the fire and safety segment and the diversified products segment, and at a mid-single-digit rate in the health and science technologies segment.

Additionally, the firm will continue to supplement its organic sales growth with acquisitions. Historically, management has avoided overpaying for acquisitions. As such, despite regular mergers and acquisitions, which add goodwill and assets to the firm’s capital base, Idex has consistently generated returns on invested capital in the upper mid-teens. Management has remained disciplined in the current elevated valuation environment, and it will continue to manage acquisition risk appropriately and focus on

Financial Strengths

Idex maintains a sound capital structure, which will help the firm navigate the uncertainty due to the coronavirus pandemic. As of Dec. 31, 2021, the firm owed roughly $1.2 billion in short- and long-term debt while holding approximately $0.9 billion in cash and cash equivalents. The company can also tap into its $800 million revolving credit facility. Idex will generate average annual operating cash flows of roughly $800 million over the next five years. Given its healthy balance sheet and solid cash flow generation, Idex is adequately capitalized to meet its upcoming debt obligations. Idex will have a debt/adjusted EBITDA ratio of roughly 1.5 times in 2022.The management will continue to prioritize investing in organic growth and executing M&A, growing the dividend, and allocating excess capital to opportunistic share repurchases. The firm has raised its quarterly dividend by an average annual rate of roughly 10% over the last five years, and the dividend will keep growing roughly in line with earnings. The payout ratio will remain around 30% over the next five years.

Bulls Say

 
  • Idex generates strong free cash flows, which have averaged around 16.5% of sales during the last 10 years.
  • Recent acquisitions of Akron Brass and AWG, as well as new product introductions (including eDraulic and SAM), have reinforced Indexes already strong competitive position in the fire and safety business. 
  •  Idex has a portfolio of moaty businesses that have leading shares in niche end markets.

Company Description

Idex manufactures pumps, flow meters, valves, and fluidic systems for customers in a variety of end markets, including industrial, fire and safety, life science, and water. The firm’s business is organized into three segments: fluid and metering technologies, health and science technologies, and fire and safety and diversified products. Based in Lake Forest, Illinois, Idex has manufacturing operations in over 20 countries and has over 7,000 employees. The company generated $2.8 billion in revenue and $661 million in adjusted operating income in 2021.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

QBE manages a sizable investment portfolio of about USD 27 billion as of June, 2022

Business Strategy & Outlook

QBE Insurance is an international property and casualty insurance company with around USD 20 billion of annual gross written premiums. It writes about 25% of its annual premiums in its home region of Australia and New Zealand, which accounts for more than half of the groups underwriting profit. Other key markets include North America, Europe, and Asia Pacific. QBE is predominantly focused on specialty insurance lines, but the offering is extremely wide ranging across property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health. The size and diversity of insurance is built on the back of hundreds of acquisitions made over decades. The extended period of global growth via acquisition failed to deliver the cost-synergies or scale benefits management had hoped. The strategy has rightfully shifted, and progress is being made in turning the business around. The balance sheet has been strengthened and operational efficiency improving. The way senior management has reshaped insurance portfolios, cut costs, tightened underwriting standards and increased accountability across the group is likable. In addition to divesting several businesses, a greater focus on returns has led to group wide improvement in attritional claims. While reducing premiums, decisions to reduce exposure to certain areas–for example, large commercial properties, and properties in higher risk areas–has improved profitability and reduced volatility.

The performance of investment markets brings another element of volatility to earnings. QBE manages a sizable investment portfolio of about USD 27 billion as of June 30, 2022, being both policyholder and shareholder funds. Around 90% is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and–to a lesser extent–equity market. The returns are to remain suppressed in the short-term but will gradually recover as global cash rates normalize.

Financial Strengths

QBE Insurance is in sound financial health. After a multi decade strategy of growth by acquisition, a much-needed period of consolidation has included the exit from Latin America, North American personal lines, a number of Asian markets where the group lacks scale, and underwriting agencies and travel insurance in Australia and New Zealand. QBE Insurance held USD 3 billion in gross debt with a debt/equity ratio of 32.4% at June 30, 2022. Debt/total capital of 24.5% is within management’s 15%-30% target. QBE’s prescribed capital amount, or PCA, multiple is 1.77 times, at the top of the group’s 1.6-1.8 times target range.

Bulls Say

  • Rising insurance premiums, underwriting discipline, productivity initiatives, and focus on profitable growth, to drive consistent excess returns.
  • The U.S. operations have significant upside potential. There could be few years of disappointment to eventually lead to premium rates reflective of the underlying insured risks.
  • The strong balance sheet and positive premium pricing supporting dividend growth and the return of surplus capital to shareholders.    

Company Description

QBE Insurance is an international property and casualty insurance company. It writes about 25% of its annual gross written premiums in its home region of Australia and New Zealand, which accounts for more than half of the group’s underwriting profit. Other key regions include North America and Europe. QBE Insurance offers a number of personal, commercial, and specialty lines, including property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health.

(Source: Morningstar)

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion litres of refined product annually

Business Strategy & Outlook

Viva, along with Ampol, BP and Mobil, is a rare breed of vertically integrated Australian refined fuel supplier. The Australian downstream petroleum industry runs from sourcing, transporting and storing crude oil, refining that crude into marketable products or directly sourcing imported refined product, and then transporting refined products for sale to retail and commercial customers. Refined products are mostly used in the transport sector, including commercial and private motoring, aviation, marine, and other transport demand. The Australian market equates to approximately 60 billion litres of product, with road use the largest segment at over 50%, followed by aviation at 14% and industry at 12%. Coronavirus notwithstanding, volumes in the Australian fuels market grow at close to rates in GDP, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol.  There’s a comparatively steady Australian refined fuels demand growth of 1.5% per year.

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion litres of refined product annually or approximately 24% of national requirement. Viva is vertically integrated because it refines, supplies and markets fuel to customers. Few companies refine fuel locally with much of Australia’s refining capacity shut in recent decades, unable to compete with Asian mega-refineries. There are only four refineries remaining including Viva’s Geelong in Victoria. Geelong converts imported and locally sourced crude oil into gasoline, diesel, jet fuel and lubricants. These are then distributed, along with directly imported products, into the retail channel via supply channels. The Geelong refinery is one of the most complex in the country due to its greater ability to produce higher value products. Against the sanguine outlook for the refined fuels industry, there are a number of concerns. These include the potential for heightened competition, driving lower margins given the entrance of new players. Further, investing in older and far smaller refineries than Asian mega-cousins is a potential money pit.

Financial Strengths

First-half net operating cash flow increased 173% to AUD 678 million, with strong cash generation across the segments though inclusive of favorable inventory drawdown. This supports future investment and dividend payments, with the balance sheet moving to an AUD 324 million net cash position at end-June 2022 versus AUD 95 million net debt at end-December 2021. Viva to retain a relatively ungeared balance sheet. Viva intends to buy Coles Express for AUD 300 million in the first half of 2023. The consideration will be funded entirely out of existing cash reserves and debt facilities. Viva is to retain a modestly leveraged balance sheet even after the acquisition, sub-20% gearing and maximum sub-0.5 net debt/EBITDA, assuming a 65% payout ratio. The strong status is despite returning AUD 680 million in aftertax Viva Energy REIT sale proceeds in full to shareholders in 2020 and making a AUD 100 million capital return in 2021. The solid free cash flows in the foreseeable future, growing to over AUD 350 million by 2025, which should comfortably support Viva’s target dividend payout ratio of between 50% and 70% of underlying distributable NPAT.

Bulls Say

  • Viva boasts significant refined fuel distribution, supplying around 24% of Australia’s national requirement; second only to Ampol.
  • Australia’s fuel demand continues to grow at low single digits as population growth and rising aviation use offset increasing vehicle fuel efficiency gains.
  • While not sufficient to warrant awarding an economic moat, Viva’s pipeline and terminal infrastructure furnish competitive advantages–notably the efficient scale with its jet fuel pipeline supplying Sydney Airport.

Company Description

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier. Viva is the second-most-significant pipeline owner, and at approximately 1,155 locations, Viva supplies the third-largest number of retail sites in Australia behind Ampol at approximately 1,985 and BP at 1,400. Vitol bought Shell’s Australian downstream operations in 2014, and renamed them Viva Energy. Viva subsequently bought Shell’s Australian aviation operations and a 50% investment in Liberty Oil. In 2016, Viva sold (and leased back) a portfolio of its retail sites to Viva Energy REIT and listed Viva Energy REIT on the ASX. It has since sold its entire REIT stake for AUD 734 million.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks

Qantas Frequent Flyer is essentially a capital-light business attached to a capital-intensive flying business

Business Strategy & Outlook

The COVID-19 pandemic has wreaked havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Qantas’ wings. Stringent Australian entry requirements for international arrivals and an effective ban on noncitizen, nonpermanent resident arrivals decimated passenger revenue, and despite aggressive cost-cutting, operating deleverage led to significant after-tax losses in 2021 and 2022. Qantas remains well-positioned to participate in the recovery as skies gradually reopen. A continued easing of international border restrictions will lead to a boon in tourism. The domestic business, of which Qantas typically captures around two thirds market share, to exceed pre-COVID-19 levels around fiscal 2023. The international recovery is to be more gradual. Prior to the international border reopening in February 2022, Qantas’ international business was virtually grounded. While there is room for optimism over loosening restrictions and pent-up demand, it is believed the recovery will prove protracted, and expect Qantas’ international flying business to exceed pre-COVID-19 levels around fiscal 2024.

The Qantas’ loyalty program, Qantas Frequent Flyer, to some extent cushion earnings volatility in the flying business. Despite a lack of flying activity, the loyalty business is to remain profitable and deliver stable cash flows. Qantas Frequent Flyer is essentially a capital-light business attached to a capital-intensive flying business. Consumers want to earn loyalty points when they fly, and status benefits are important to corporate passengers. The program generates earnings from the sale of points to hundreds of partners, including banks, supermarkets, telephone companies, and department stores. This offers more ways to redeem and earn points, attracting more customers, which in turn attracts new partners–a network effect but not enough to warrant a moat for the group.

Financial Strengths

Qantas’ balance sheet is in a strong position, bolstered by an equity raising in June 2020. While the dilutive impact of the raising has negative consequences for shareholder value, the additional capital positions the company in a comfortable position to navigate near-term challenges. Qantas boasts a cash balance of AUD 3.3 billion at the end of June 2022, a debt book with no covenants, and a further AUD 1.3 billion in undrawn facilities. Qantas has aggressively cut operating costs to weather the coronavirus storm, targeting AUD 15 billion in cost savings over the three years to fiscal 2023–largely temporary savings in rightsizing and operating costs amid a lack of flying activity. Qantas’ freight and loyalty have also cushioned earnings volatility. There’s a return to profitability and a reinstatement of dividends in late-fiscal 2023.

Bulls Say

  • Qantas’ earnings are highly leveraged to improving macroeconomic conditions and unrestricted air travel.
  • The two-brand Qantas and Jetstar strategy provides flexibility to align capacity and costs with prevailing demand and economic conditions, without affecting the Qantas brand and service perception.
  • The Qantas Frequent Flyer program continues to deliver strong earnings and cash flow, underpinning dominant domestic market share.   

Company Description

Qantas Airways is Australia’s largest domestic airline with typically a two thirds market share, effectively competing in a duopoly with Virgin. The company operates a multibrand strategy, with low-cost carrier Jetstar complementing the full-service Qantas brand. Its frequent-flyer loyalty program continues to expand with new partnerships, which are integral to retaining customer loyalty for its core airline business.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

News Corporation is better placed than peers in the publishing space to transition its print business to the digital age

Business Strategy & Outlook

News Corp operates in an industry undergoing significant changes, with the traditional print-based publishing business model being dismantled by proliferating news and information outlets in the digital space. This is compounded by ever improving means for consumers to access them, driven by mobility and continuing device innovation. Consequently, News Corporation faces enormous structural headwinds, with consumers migrating from newspapers to the digital arena and advertisers following suit. Having said that, News Corporation is better placed than peers in the publishing space to transition its print business to the digital age. It has some of the most venerable masthead brands in the industry (The Wall Street Journal, The Times), and boasts significant editorial resources, especially compared with those of its rivals, which have been dwindling. The company’s financial position is solid, having split in 2013 from Twenty-First Century Fox, with no debt on the balance sheet. Even with the recent consolidation of Foxtel’s debt and a string of acquisitions, News boasts sufficient financial strength to transition the business to the digital age while also exploring opportunities to diversify away from the traditional newspaper business. Recent efforts to simplify the group are also positive, while a USD 1 billion buyback was announced in August 2021. 

While News Corporation deals with the structural challenges facing its publishing business, the company was partly shielded by its Australian pay-television operations in 65%-owned Fox Sports and Foxtel. Unfortunately, these two businesses are also coming under severe pressure from digital streaming alternatives to pay TV. On the positive side, the 61%-owned REA Group’s growth outlook remains robust in the online real estate classifieds space and the Move (acquired in November 2014) is making strong progress in the U.S. digital property

Financial Strengths

News Corporation is in solid financial health. It currently has a net debt position of just USD 1.2 billion, or 0.7 times EBITDA. Furthermore, the legacy newspaper publishing business is still generating solid free cash flow, albeit at a declining rate, augmented by resilient earnings from REA Group. Consequently, the company is well placed financially as it attempts to transition the publishing business model to the digital age, while also exploring opportunities to diversify away from it. In November 2021, management began a share buyback. Even after closing several acquisitions in 2022, News can repurchase up to USD 1 billion worth of shares and still keep net debt/EBITDA below 1.5. However, the last time News instituted a buyback in 2013 due to a “lazy” balance sheet, it only repurchased 14% of the USD 500 million program, even though the stock price was much lower during that time.

Bulls Say

  • News Corporation’s strong financial position and still-solid free cash generation separate the company from its s
  • The solid balance sheet provides management with critical flexibility, as it attempts to navigate the treacherous
  • News Corporation also boasts a number of resilient online property classified assets in Australia and the U.S., ones that add to its cash flow profile and provide a template for the kind of businesses that management wishes to acquire as part of a diversification strategy.

Company Description

News Corporation is a diversified media conglomerate with a large presence in the U.S, the U.K., and Australia. Key brands include The Wall Street Journal, Herald Sun, and The Times. The company also has a strong presence in the Australian pay-TV market through Fox Sports and Foxtel (both 65%- owned), while its 62%-owned REA Group is the dominant real estate classified business in Australia. In addition, it owns HarperCollins, one of the largest book publishers globally, and also has a substantial digital property advertising business (Move) in the U.S.

(Source: Morningstar)

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

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

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

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

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

Categories
Property

The quality of Kilroy’s portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers

Business Strategy & Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. Management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients is impressive. Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers. Economic uncertainty emanating from pandemic recovery and the remote work dynamic created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in first-quarter 2022. 

The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains negative to marginally positive as of first-quarter 2022 and rental growth figures are disappointing especially given the inflationary environment. Having said this, there’s an increasing number of companies requiring their employees to return to the office. In the long run, remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths

Kilroy Realty is in sound financial health. The company’s total debt was $4.1 billion as of the end of the first quarter in 2022, resulting in a debt/EBITDA ratio of 6.6 times. It can be pointed out that the debt/EBITDA ratio should trend lower over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.70% and the weighted average maturity period was 7.0 years. The maturity schedule of the company’s debt shows that there are no major debt maturities until the end of 2024 and the maturities are adequately spread. In an increasing interest rate environment 100% of the company’s debt is fixed-rate debt. The leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest expenses), was 3.5 times and the interest coverage ratio was 8.4 times as of the end of the first quarter of 2022. As a real estate investment trust, Kilroy Realty is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 67.0% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and payout dividends. The company is also in a comfortable position with respect to liquidity as it has a robust liquidity position of around $1.4 billion including the cash on the balance sheet and the revolving credit facility. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities.

Bulls Say

  • Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as there’s buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend.
  • Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle.
  • Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.    

Company Description

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust.

(Source: Morningstar)

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

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

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

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

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

Categories
Technology Stocks

The 2020 merger with Vodafone Australia is one-way TPG Telecom is trying to limit the impact of the NBN

Business Strategy & Outlook

TPG Telecom is grappling with structural changes in the Australian telecommunications industry. Rollout of the national broadband network, 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. However, the NBN will also force TPG Telecom to become a reseller, impacting its consumer broadband margins. 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. A longer cable results in increased material and maintenance costs, meaning cost per unit is higher. Cables with large capacity reduce costs per unit, as costs such as fixed construction and rollout costs are spread across a larger base. A sharp price decline in international traffic remains a risk. 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. The 2020 merger with Vodafone Australia (the third-ranked mobile player in the country) is one-way TPG Telecom is trying to limit the impact of the NBN. Mobile offers a critical strategic path to future-proof the group in the face of onslaught from the NBN. The government entity is already wreaking havoc on the narrow-moat-rated group’s retail fixed-line broadband and could even potentially impact the lucrative enterprise segment.

Financial Strengths

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 at the end of June 2022, and factoring in the AUD 890 million proceeds from the mobile towers’ sale, net debt/EBITDA was 2.0 times, below the covenant limit of 3.5 times.

Bulls Say

  • 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 fiber network also boosts growth, while incremental cost from an additional user is small.

Company Description

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 group has grown significantly since 2008, both via organic growth and acquisitions, and in July 2020 merged with Vodafone Australia. It owns an extensive stable of infrastructure assets.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks

Mercedes-Benz limit exposure to downturns suffered by mass-market auto companies because wealthier customers’ spending is less sensitive to recessions

Business Strategy & Outlook

Daimler AG completed the spinoff of its truck and bus operations on Dec. 10, 2021 and changed its name to Mercedes-Benz Group AG on Feb. 1, 2022. In 2021, the truck and bus business, now called Daimler Truck AG, accounted for 20% of consolidated revenue including discontinued operations and 11% of group adjusted EBIT. The remaining operations of Mercedes-Benz Group include premium and luxury passenger vehicles and light commercial vans as well as Mercedes-Benz Mobility, which includes financial services and other mobility services like ride-hailing. The highly regarded Mercedes-Benz brand is one of the top luxury automobile names in the world. The firm is also a European leader in commercial vans. Even so, Mercedes faces stiff competition in all of its markets. The company operates in the cyclical, capital-intense, highly competitive passenger vehicle industry where raw material commodity costs can be volatile and unionized labor can be expensive.

Geographically diverse sales reduce exposure to the economic conditions of any one region. Even so, premium brands such as Mercedes-Benz limit exposure to downturns suffered by mass-market auto companies because wealthier customers’ spending is less sensitive to recessions. Global population growth of high-net-worth individuals has averaged 5%, increasing Mercedes’ addressable market, faster than the 1%-3% rate it can be estimated for long-term global light-vehicle demand growth. New product is critical to spurring consumer interest and can help results even in an economic downturn. Mercedes-Benz launches new or significantly refreshed models in various markets around the world every year. Research and development spending, including capitalized development costs, is substantial, averaging roughly 6% of sales, which is a necessary part of a long-term strategy. Environmental legislation worldwide forces automakers to design vehicles with more efficient combustion engines and electrified powertrains. By 2030, the company says it will be “ready to go all-electric.”

Financial Strengths

Mercedes-Benz’ balance sheet to be in good shape. The company maintains a substantial cash balance and healthy availability on bank lines of credit. To remain competitive, automakers need high liquidity to fund R&D and capital investment to support product launches throughout economic cycles. At the end of 2021, the company had net industrial liquidity of EUR 21.0 billion (cash and credit line availability less debt). The company has healthy liquidity. The industrial business’ total adjusted debt/EBITDAR, which takes into consideration rent expense and operating leases, has averaged 0.7 times since 2011, which can be viewed as strong for a capital-intensive, cyclical passenger vehicle maker. Financial liability maturities, including financial services, appear to be well laddered and matched with maturing financial loan assets. Mercedes’ consolidated capital structure is complex from its captive finance operations, which support industrial operations’ sales by providing credit to dealers and consumers but also have banking operations and other financial services. Aside from its balance sheet cash hoard, the company relies mostly on notes and bonds for its funding requirements but also uses lines of credit, deposits from banking customers, and commercial paper. The consolidated capital structure’s total debt/total capital historical average since 2011 is 63.0%. Taking Mercedes’ substantial cash position into account, net debt/total capital averages 51.6%. With the financial-services business accounted for on an equity basis, Mercedes’ total debt/total capital averages 13.8%, while net debt/total capital averages only negative 11.5%, denoting an average net cash position.

Bulls Say

  • Mercedes-Benz is a highly recognizable, well-respected global luxury brand, giving the company a modest buffer against the cyclical downturns of auto sales.
  • Mercedes’ strong R&D capabilities and electrified powertrain technologies should prove valuable because of global clean-air legislation.
  • Management’s long-term return on sales targets are higher than the model, so upside potential exists to the valuation.

Company Description

Based in Stuttgart, Germany, Mercedes-Benz Group AG makes premium passenger vehicles and commercial vans. Brands include Mercedes-Benz, AMG, and Maybach. Mercedes-Benz Mobility provides the company’s dealers and its customers with vehicle financing as well as mobility services in ride hailing, car sharing, and charging. Mercedes owns 11.9% of Aston Martin and 9.6% of Beijing Automotive Group. Li Shufu, chairman of Chinese automaker Geely Automobile, owns 9.7% of Mercedes-Benz. Other major shareholders include Kuwait Investment Authority at 6.8% and Beijing Automotive group at 5.0%.

(Source: Morningstar)

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

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

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

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

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