Author: lvc-admin

Categories
Dividend Stocks Philosophy Technical Picks

U.S. Foods Experiencing Strong Recovery From the Pandemic, but Moat Remains Out of Reach

will emerge from the pandemic in a stronger position that it was prior to the crisis, given the $1 billion in new business secured over the past year and the permanent elimination of $130 million in operating expenses. We expect the increasing availability of COVID-19 vaccines in 2021 will return US Foods’ organic sales to pre-pandemic levels by 2022, with long-term opportunities remaining intact. But as US Foods has not demonstrated a cost advantage, organic market share gains , consistent economic returns, or superior profits, we do not grant the firm a moat.

US Foods has improved profits the past few years, as gross margins increased from 16.8% in 2014 to 17.8% in 2019 (pre-pandemic), operating margins from 2.0% to 3.2%, and ROICs .We attribute this to positive customer mix (both to more profitable segments and more selective customer contracts within segments), more effective data-driven pricing, the centralization of purchasing and administrative functions, and a reduction of the sales force, facilitated by productivity-enhancing tools. But despite the added profits, we believe the reduction in the sales force hampered organic market share gains, a move with nontrivial consequences, as we view scale as the path to a competitive edge.

The lack of organic share gains impairs the firm’s ability to leverage its scale and progress toward a scale-based cost advantage. But we are encouraged by the firm’s recent decision to invest $50 million in growth opportunities, including expanding the sales force. We expect the firm will continue to grow inorganically, and we have a favourable view of its $1.8 billion tie-up with SGA Food Group and the $970 million acquisition of Smart Foodservice Warehouse, but we hold these deals fall short of providing a scale-based competitive edge.

Financial Strength

 US Foods has the financial strength to weather the pandemic. Given the firm’s acquisitive strategy, leverage runs high, with net debt/adjusted EBITDA at 5.4 times as of June. US Foods secured a $300 million term loan, issued $1 billion in long-term notes, and $500 million in convertible preferred stock since the onset of the pandemic. We expect leverage to return to a comfortable 2.6 times by 2023 as the market recovers from the pandemic and US Foods lightens up on share repurchases to prioritize debt reduction, which we think is prudent. We expect US Foods will resume repurchasing shares in 2025 (to the tune of 4%-5% of shares outstanding annually). We view this as a prudent use of cash when shares trade below our assessment of its intrinsic value. Furthermore, we have no concerns in the firm’s ability to service its debt (even during the pandemic), as interest coverage (EBITDA/interest expense) should average 6.5 times over the next five years, better than the 4.4 times average over the past three years. The firm’s priorities for cash use are capital expenditures, which we expect to amount to 1% of revenue annually over the next decade) and acquisitions (we expect about $140 million to $220 million annually, contributing a 1% bump to revenue each year). Further, the firm paid a $3.94 per share special dividend in 2016, but management has no plans to initiate an ongoing dividend as they view share repurchase as a more flexible way to return capital to shareholders. 

Bull Says

  • Continued acquisitions could modestly enhance US Foods’ scale, and the addition of its e-commerce platform should help increase share of wallet and loyalty with acquired firms’ customers.
  • US Foods is emerging from the pandemic as a stronger player, having secured over $1 billion in new business and eliminated $130 million in fixed costs.
  • US Foods benefits from secular tailwinds, such as Americans’ tendency to consume more food outside the home and industry share shifts to independent restaurants.

Company Profile

US Foods is the second-largest U.S. food-service distributor behind Sysco, holding 10% market share of the highly fragmented food-service distribution industry. US Foods distributes more than 400,000 food and non-food products to the healthcare and hospitality industries (each about 16.5% of sales), independent restaurants (33%), national restaurant chains (22%), education and government facilities (8%), and grocers (4%). In addition to its delivery business, the firm has 80 cash and carry stores under the Chef’Store banner .After Sysco’s attempt to purchase US Foods failed to gain federal approval in 2015, US Foods entered the public market via an initial public offering.

(Source: Morningstar)

General Advice Warning

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

Categories
Shares Technology Stocks

Mirvac Group Ltd (ASX: MGR) Updates

20025825 - closeup image of businessman drawing 3d graphics
  • High quality portfolio composition with stronger weighting towards Melbourne and Sydney urban areas minimizing risk from submarket weakness from Brisbane. 
  • MGR has secured 90% of expected Residential EBIT for FY22.
  • Strong pipeline of residential projects to come, delivering earnings growth by FY22. 
  • Solid balance sheet. Gearing at 22.8% (at lower end of target range of 20%-30%).
  • Continuing recovery in weak retail sales especially for supermarkets.
  • Strong management team.

Key Risks

  • Deterioration in property fundamentals for Office, Industrial and Retail portfolio, such as delays with developments or lower than expected rental growth causing downward asset revaluations.
  • Tenant defaults as the economic landscape changes (increasingly competitive retail sector especially from online retailers such as Amazon). For instance, retailer bankruptcies causing rising vacancies in the retail portfolio.
  • Generally softening outlook on the broader retail market. 
  • Residential settlement risk and defaults. 
  • Higher interest rates impacting debt margins. 
  • Consumer sentiment towards impact of higher interest rates and effect on retail and residential businesses. 

FY21 Results Summary

Operating profit of $550m was down -9% over pcp and operating EBIT of $704m declined -12% over pcp, negatively impacted by lower development profit and higher unallocated overheads, partially offset by growth in NOI (especially growth in Integrated Investment Portfolio NOI following newly completed office asset developments).However, statutory profit was up +61% to $901m and EPS of 14cpss exceeded management’s earnings guidance of greater than 13.7cpss. 

AFFO declined -23% over PCP, reflecting the lower operating earnings together with increased tenant incentives and normalization of maintenance capex. Total distribution was $390m, representing a DPS of 9.9cpss, an increase of +9%, funded from operating cash flows which increased +41% over pcp to $635m, driven by final fund through receipts following capitalization of Older fleet, lower development spend and stronger cash collection from the investment portfolio. Net tangible assets (NTA) per stapled security increased +5% over PCP to $2.67.

The Company extended its development pipeline, ending the year with $28bn across mixed use, office, industrial, residential and build to rent. Balance sheet remained strong with cash and undrawn debt facilities of $867m, investment grade credit ratings of A3/A- by Moody’s/Fitch, gearing of 22.8% (lower end of target range of 20-30%). The Company saw cost of debt decline -60bps over PCP to 3.4%, with management expecting further reduction in FY22.

Company Description  

Mirvac Group Ltd (ASX: MGR) is a real estate investment and development company. The company operates in Residential and Commercial & Mixed Use space within the real Estate sector. Mirvac Group Ltd is headquartered in Sydney, Australia.

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

AGL’s Earnings Falling as Expected but Light at the End of the Tunnel

in line with our expectations and in the middle of the guidance range. Earnings are expected to fall again in fiscal 2022 as management has been flagging for some time. Guidance is for underlying NPAT of AUD 220 million to AUD 340 million, with the midpoint down 48% in 2021. AGL’s cheap coal supply underpins its competitive advantage.

Competitors with shorter dated coal supply contracts should start to be hurt by high coal prices in coming years, potentially forcing them out of the market and pushing electricity prices higher. EBITDA fell 21% to AUD 1.6 billion in fiscal 2021 on lower electricity prices and higher gas supply costs. Headwinds from low electricity prices continue into fiscal 2022, and management is focused on reducing operating costs and maintenance capital expenditure through efficiency initiatives.

EBITDA rose 16% to AUD 337 million on cost savings and higher retail gas prices. The retail business has made a few interesting acquisitions recently to expand its geographic footprint to the West Coast, widen its service offering to include telecommunications and solar installations, and benefit from economies of scale. This should generate good returns.

Company’s Future Outlook

It is estimated that NPAT bottoms in fiscal 2023 at AUD 231 million before recovering back to AUD 442 million by 2026. The stock materially undervalued on a long-term view. Based on the current share price, it is forecasted to have a PE ratio of about 10 by 2026. Far more important is the expected recovery in electricity prices, given AGL is a huge producer of electricity through its three coal-fired power stations. It is expected that AGL’s financial position is sound; though there is modest risk given, banks are making life difficult by trying to reduce lending to coal power stations.

Company Profile

AGL Energy Ltd (ASX: AGL) is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(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

Telstra Corporation updates

  • Solid dividend yield in a low interest rate environment. 
  • On market buyback of $1.35bn (post sale of part of Towers business) should support its share price.
  • Additional cost measures announced to support earnings.
  • InfraCo provides optionality in the long-term. 
  • Despite intense competition, subscriber growth numbers remain solid. 
  • Company looking to monetize $2.0bn of assets. 
  • In the long-term, the introduction of 5G provides potential growth, however we continue to monitor the ROIC from the capex spend. 
  • TLS still commands a strong market position and has the ability to invest in growth technologies and areas (e.g. Telstra Ventures) which could provide room for growth.
  • Industry consolidation leading to improved pricing behavior by competitors.

Key Risks

We see the following key risks to our investment thesis:

  • Further cuts to dividends.
  • Further deterioration in the core mobile and fixed business.  
  • Management fail to deliver of cost-out targets and asset monetisation. 
  • Any increase in churn, particularly in its Mobile segment – worse than expected decrease in average revenue per users (or any price war with competitors).
  • Any network disruptions/outages.
  • More competition in its Mobile segment. Merger of TPG Telecom and Vodafone Australia creates a better positioned (financially and resource wise) competitor
  • Quicker than expected deterioration in margins for its Fixed segment.
  • Risk of cost blowout in upgrade network and infrastructure to 5G.

FY21 Results Highlights

Relative to the pcp: 

  • On a reported basis, total income fell -11.6% to $23.1bn (within FY21 guidance of $22.6bn to $23.2bn); EBITDA declined -14.2% to $7.6bn; NPAT increased +3.4% to $1.9bn. 
  • Underlying EBITDA of $6.7bn was within FY21 guidance of $6.6bn to $6.9bn. Underlying EBITDA, which includes an estimated $380m Covid impact fell -9.7% on a guidance basis including an in-year nbn headwind of $650m. Excluding the in-year nbn headwind, underlying EBITDA declined by ~$70m. (3) TLS FY21 underlying earnings were $1,191m while net one-off nbn receipts were $561m versus underlying earnings of $1,224m and net one-off nbn receipts of $1,075m in FY20. 
  • Capex of $3,020, was -6.6% lower, but within FY21 guidance of $2.8bn to $3.2bn. 
  • Free cashflow of $4,887m, was up +21.1%. Free cashflow after operating lease payments of $3.8bn beat FY21 guidance of $3.3bn to $3.7bn. (6) Basic EPS of 15.6 cents, was up +2%.

Company Description  

Telstra Corporation (TLS) provides telecommunications and information products and services. The company’s key services are the provision of telephone lines, national local and long distance, and international telephone calls, mobile telecommunications, data, internet and on-line. Its key segments are Mobile, Fixed, Data & IP, Foxtel, Network applications and services and Media.

General Advice Warning

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

Categories
Dividend Stocks Philosophy Technical Picks

Narrow-Moat Sysco’s Recipe for Growth Is Cooking up Improved Performance

the food-service market has nearly fully recovered, with sales at 95% of prepandemic levels as of the summer of 2021, and Sysco has emerged as a stronger player, with $2 billion in new national account contracts (3% of prepandemic sales) and 13,000 new independent restaurant customers. The plan should allow Sysco to grow 1.5 times faster than the overall food-service market by fiscal 2024. Sysco is investing to eliminate customer pain points by removing customer minimum order sizes while maintaining delivery frequency and lengthening payment terms. It improved its CRM tool, which now uses data analytics to enhance prospecting, rolled out new sales incentives and sales leadership, and is launching an automated pricing tool, which should sharpen its competitive pricing while freeing up time for sales reps to pursue more value-added activities, such as securing new business.

Further, Sysco has switched to a team-based sales approach, with product specialists that should help drive increased adoption of Sysco’s specialized product categories such as produce, fresh meats, and seafood. Lastly, Sysco is launching teams that specialize in various cuisines (Italian, Asian, Mexican) that should drive market share gains in ethnic restaurants. Looking abroad, Sysco has a new leadership team in place for its international operations, increasing our confidence that execution will improve.

Financial Strength 

Sysco’s solid balance sheet, with $5 billion of cash and available liquidity (as of June) relative to $11 billion in total debt, positions the firm well to endure the pandemic. Sysco has a consistent track record of annual dividend increases (even during the 2008-09 recession), and in May 2021 it announced an increase in its dividend, taking the annual rate to $1.88. Sysco has historically operated with low leverage, generally reporting net debt/adjusted EBITDA of less than 2 times. Leverage increased to 2.3 times after the fiscal 2017 $3.1 billion Brakes acquisition, and to 3.7 times in fiscal 2021, given the pandemic. But we expect leverage will fall back below 2 by fiscal 2023, given debt paydown and recovering EBITDA.

In May 2021, Sysco shifted its priorities for cash in order to support its new Recipe for Growth strategy. It’s new priorities are capital expenditures, acquisitions, debt reduction when leverage is above 2 times, dividends, and opportunistic share repurchase. Its previous priorities were capital expenditures, dividend growth, acquisitions, debt reduction, and share repurchases. In fiscal 2022-2024, as it invests to support accelerated growth, Sysco should spend 1.3%-1.4% of revenue on capital expenditures (falling to 1.1% thereafter). 

Bulls Say’s 

  • As Sysco’s competitive advantage centers on its position as the low-cost leader, we think Sysco should be able to increase market share in its home turf over time.
  • Sysco has gained material market share during the pandemic, allowing it to emerge a stronger competitor.
  • Sysco’s overhead reduction programs should make it more efficient, enabling it to price business more competitively, helping it to win new business, and further leverage its scale.

Company Profile 

Sysco is the largest U.S. food-service distributor, boasting 16% market share of the highly fragmented food-service distribution industry. Sysco distributes over 400,000 food and nonfood products to restaurants (62% of revenue), healthcare facilities (9%), travel and leisure (7%), retail (5%), education and government buildings (8%), and other locations (9%) where individuals consume away-from-home meals. In fiscal 2020, 81% of the firm’s revenue was U.S.-based, with 8% from Canada, 5% from the U.K., 2% from France, and 4% other.

(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
Uncategorized

Broadridge Is Benefiting From Retail Investor Boom

Broadridge’s regulated proxy and interim business is its crown jewel, and a disproportionate amount of the firm’s net income comes from its fiscal third and fourth quarter during proxy season. In addition, Broadridge generates about 30% of its fee revenue and profit from its global technology and operations or GTO segment, which provides securities processing solutions. Operationally, Broadridge entered into an IT-services agreement with IBM in 2010 to increase efficiency. Expanding on its mailing, data security, and processing capabilities, Broadridge has completed numerous acquisitions.

Since 2010, Broadridge has completed at least 25 acquisitions. Notable acquisitions include DST’s North American customer communications business for $410 million in 2016 and RPM Technologies for $300 million in 2019. The NACC business provides print and digital communication solutions, content management, postal optimization, and fulfillment to a variety of sectors, including financial-services firms, utilities, and healthcare firms.

RPM Technologies provides enterprise wealth management software solutions and services. In March 2021, Broadridge announced it would acquire Itiviti, a provider of order and execution management trading software and order routingnetworking and connectivity solutions, for $2.5 billion. During its December 2020 investor day, Broadridge laid out its three-year per year goals including recurring revenue growth of 7%-9% (organic: 5%-7%), adjusted operating margin expansion of 50 basis points, and adjusted EPS growth of 8%-12%.

Financial Strength

Broadridge’s financial health is sound, in our view. As of June 30, 2020, Broadridge had long-term debt of approximately $1.8 billion. Broadridge’s adjused net leverage ratio was 1.6 times EBITDAR and its gross leverage ratio was 2.0 times EBITDAR. Of the $3.2 billion in fee revenue that Broadridge generated in fiscal 2020, over 90% was classified as recurring. Also, during the last financial crisis, equity proxy position count was flat to slightly negative and mutual fund/ETF positions grew.

Given the stability of Broadridge’s business and the modest leverage, we believe Broadridge’s debt load is very manageable and that it could increase its debt for M&A if it wanted to, like it will for its acquisition of Itiviti. The acquisition is expected to add about $2.55 billion in a term credit facility. Broadridge expects a gross leverage ratio of about 3.6 times at closing, and then expects to deleverage to its updated 2.5 times target over the following two years.

Bulls Say’s

Broadridge has a dominant market share position on delivering proxies and interims to beneficial shareholders.
During the financial crisis, Broadridge’s equity position count was down only 2% in 2009, indicating that its business model is close to recession-proof.
Broadridge’s investor communication solutions and global technology and operations businesses are sticky, with retention rates near 98%.

Company Profile

Broadridge, which was spun off from ADP in 2007, is a leading provider of investor communications and technology-driven solutions to banks, broker/dealers, asset managers, wealth managers, and corporate issuers. Broadridge is composed of two segments: investor communication solutions and global technology and operations.

(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
IPO Watch

Sapphire Foods IPO: Another KFC, Pizza Hut operator files draft papers with SEBI to raise funds

Sapphire Foods’ initial public offering (IPO) consists of 1,75,69,941 equity shares and is a full offer for sale by shareholders. QSR Management Trust (QMT) owns 8.5 lakh equity shares, Sapphire Foods Mauritius owns 55,69,533 equity shares, and WWD RUBY owns 48,46,706 equity shares, Amethyst has 39,61,737 equity shares, AAJV Investment Trust has 80,169 equity shares, Edelweiss Crossover Opportunities Fund has 16,15,569 equity shares, and Edelweiss Crossover Opportunities Fund – Series II has 6,46,227 equity shares.

Sapphire Foods’ potential IPO was initially reported by Moneycontrol on December 17. Sapphire Foods, which is backed by Samara Capital, raised Rs 1,150 crore from private equity investors Creador, NewQuest Capital Partners, and TR Capital earlier this week. As of March 2021, Sapphire Foods runs 437 restaurants in India, Sri Lanka, and the Maldives under the KFC, Pizza Hut, and Taco Bell brands. Investors such as Samara Capital affiliates, Goldman Sachs, CX Partners, Creador, and Edelweiss are backing an omnichannel restaurant operator.

Due to the increased demand for delivery and takeaway services as a result of the Covid-19 outbreak, and depending on market dynamics and adjacent catchments, the company is contemplating smaller formats for new restaurants in order to cut down on one of the company’s biggest expenses – rent. 

Colonel Harland D Sanders started KFC in Corbin, Kentucky, in 1939; the first Pizza Hut restaurant opened in Wichita, Kansas, in 1958; and the first Taco Bell restaurant opened in Downey, California, in 1962. YUM! and its franchisees operated more than 50,000 locations worldwide as of December 31, 2020.

The book running lead managers for Sapphire Foods’ IPO are JM Financial, BofA Securities India, ICICI Securities, and IIFL Securities. Devyani International, another KFC, Pizza Hut, and Costa Coffee quick service restaurant operator, recently collected Rs 1,838 crore through a public offering that was oversubscribed 116.7 times.

Company Profile 

SAPPHIRE FOODS INDIA PRIVATE LIMITED COMPANY, is an entity incorporated on 10 November 2009 under Ministry of Corporate Affairs (MCA). SAPPHIRE FOODS INDIA PRIVATE LIMITED COMPANY is also an entity listed under Class as a Private organization having Registration Number for the Company or Limited Liability Partnership as 197005. SAPPHIRE FOODS INDIA PRIVATE LIMITED COMPANY is a Non-govt company and further SAPPHIRE FOODS INDIA PRIVATE LIMITED COMPANY is Classified as a Company limited by Shares. The concerned entity is incorporated and registered under its relevant statute by the Registrar of Companies (i.e. R.O.C), RoC-Mumbai. The official address for the Registered office of the organization in question i.e. SAPPHIRE FOODS INDIA PRIVATE LIMITED COMPANY is 131, 13th Floor Free Press House Building Mumbai Mumbai City MH 400021 IN.

(Source: Fact Set)

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
Property

Charter Hall Long WALE REIT(CLW) updates

  • Strong history of delivering continuing shareholder return and dividends.
  • Solid balance sheet position.
  • Strong property portfolio metrics.
  • Selective asset acquisitions.
  • Expiry risk is relatively low in the near-term. 
  • Attractive yield in the current low interest rate environment.

Key Risks

We see the following key risks to our investment thesis:

  • Regulatory risks.
  • Deteriorating property fundamentals, including negative rent revisions. 
  • Deterioration in economic fundamentals leading rent deferrals etc. 
  • Sentiment towards REITs as bond proxy stocks impacted by expected cash rate hikes.
  • Deterioration in funding costs.

Portfolio highlights.

 $5.6bn property portfolio, up from $3.6bn, driven by $1.4bn of property acquisitions and $523m net property revaluation uplift. NTA of $5.22 per security, is a +16.8% increase from FY20. The acquisitions are broken down as follows:

  • $638m of Retail: 50% interest in David Jones, Sydney CBD flagship store with a 20-year triple net lease to David Jones; bp NZ Portfolio of 70 convenience retail properties on triple net leases to bp Oil New Zealand for 20-year WALE; 33.3% interest in Myer Bourke Street Mall, Melbourne flagship store with a 10-year net lease to Myer; Bunnings property to be developed in Caboolture, Brisbane and established Bunnings property in Baldivis Perth; 50% interest in The Parap Tavern, Darwin and Terrey Hills Tavern, Sydney, leased to Endeavour Group on initial 15-year triple net leases and 100% interest in Ampol travel centre in Redbank Plains, Brisbane.   
  • ( ii) $361m of Social Infrastructure: Telco Exchange property at 76-78 Pitt Street, Sydney with 10-year triple net lease to Telstra and 50% interest in life sciences property leased to Australian Red Cross in Sydney, with 9.6-year lease remaining. 
  • $311m of Office: 50% interests in Commonwealth Government properties, comprising A-grade office building in Tuggeranong, Canberra, leased to Services Australia and two A-grade office towers in Box Hill and Albury, Victoria majority leased to Australian Tax Office.
  • $83m of Industrial & Logistics: 100% interest in prime industrial property in Carole Park, Brisbane leased to Simon National Carriers on a 15-year net lease.

Company Description  

Charter Hall Long WALE REIT (ASX: CLW) is an Australian REIT listed on the ASX and investing in high quality Australasian real estate assets (across office, industrial, retail, agri-logistics and telco exchange) that are predominantly leased to corporate and government tenants on long term leases. CLW is managed by Charter Hall Group (ASX: CHC).

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
Property

Goodman Group (GMG) Updates

  • Strong property fundamentals which should see valuation uplifts. 
  • With more than 50% of earnings derived offshore we expect GMG to benefit from FX translation and a prolonged period of lower rates.
  • Transitioning to longer and larger projects in development
  • Strong performances in Partnerships such as Cornerstone.
  • GMG’s solid balance sheet providing firepower and access to expertise to move on opportunities in key gateway cities with demand for logistics space (and supply constraints) and diversify risk by partnering (i.e. growth in funding its development pipeline) or co-investment in its funds and or make accretive acquisition opportunities. 
  • Expectations of continual and prolonged lower interest rate environment globally (albeit potential rate hikes in the US) should benefit GMG’s three key segments in Investments, Development and Management.

Key Risks

We see the following key risks to our investment thesis:

  • Any negative changes to cap rates, net property income.
  • Any changes to interest rates/credit markets.
  • Any development issues such as delays.
  • Adverse movements in multiple currencies for GMG such as BRL, USD, EUR, JPY, NZD, HKD and GBP.
  • Any downward revaluations.
  • Poor execution of M&A or development pipeline.
  • Key man risk in CEO Greg Goodman.

By segments

 (1) Property investment: – GMG’s portfolio retained strong property fundamentals driven by “the prolonged impacts of the global pandemic [which] continue to accelerate consumers’ propensity to shift to online shopping. Logistics and warehousing has provided critical infrastructure to enable distribution of essential goods to time-sensitive consumers through this period”. GMG’s portfolio had high occupancy at 98.1%, weighted average lease expiry of 4.5 years, and like-for-like NPI growth at 3.2%. 3.9m sqm of leasing equated to $517.1m of annual rental property income. 

(2) Development: – GMG was able to grow WIP to $10.6bn, up +63% on FY20 (across 73 projects with a forecast yield on cost of 6.7%). According to management, 81% of current WIP is being undertaken within Partnerships and GMG commenced $6.6bn in new developments with 57% committed. Management noted “metrics across the workbook remain robust as we maintain our focus on infill target markets, resulting in high levels of pre-commitment at 70% with a 14-year WALE”. 

(3) Management: – GMG saw strong uplift in revaluations of $5.8bn driving growth in total AUM to $57.9bn (up +12%). GMG expects development WIP will organically grow AUM (which management expects to exceed $65bn in FY22). Weighted average cap rate (WACR) compressed 55bps to 4.3% during FY21. Average Partnership gearing is 17.5%. Average total return in the Partnerships of 17.7% driven by strong development performance. 

Company Description  

Goodman Group Ltd (GMG) own, manage, develop industrial, warehouse and business park property in Australia, Europe, Asia and Americas. GMG actively seeks to recycle capital with development properties providing stock for ownership by either the trust or third party managed funds, with fees generated at each stage of the process.

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

GrainCorp’s Fortunes Rely on a Normalized Crop Growing Year over the Long Term

handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. However, the firm has carved an economic moat, and forecast returns on invested capital to trail the firm’s cost of capital over the long run.

GrainCorp’s core Australian grain storage and logistics business is heavily reliant on favorable weather patterns. Beyond storage and logistics, the grain marketing segment competes domestically and internationally against other major commodities trading houses such as Cargill and Glencore. 

Outside of the agribusiness segment, it is forecasted roughly 2% organic annual growth in the processing segment top line after adjusting for a planned sale of Australian bulk liquid storage assets, combined with slight profitability expansion following recently completed restructuring. As such, project overall group revenue growing at a low-single-digit average annual pace past fiscal 2020, while EBIT margins rise to roughly 3.3%. We use a 9.5% weighted average cost of capital to discount future cash flows.

Financial Strength

Graincorp Ltd (ASX: GNC) capital structure is reasonable. It comprises debt and equity, with noncore debt associated with the funding of grain marketing inventory. As a result of swings in crop prices, GrainCorp’s cash flow and working capital requirements can be volatile, so the company will need to drawdown on debt on demand. The primary metrics are its net debt/capital gearing ratio and EBITDA/interest ratio. Gearing ratios can be volatile, given the swings in inventory levels.  Management doesn’t disclose the minimum EBITDA/interest ratio. In fiscal 2020, this ratio was about 4 times on an adjusted basis. We expect improvement to an average of around 19 times over the next five years, as EBITDA rebounds and interest expense remains low.

Bull Says

  • With strategic processing, storage, and transportation assets, GrainCorp’s size gives the company scale advantages over regional competitors.
  • Global thematic, such as increased food demand, particularly in Asia, should benefit agribusinesses such as GrainCorp. 
  • Despite divesting the malt business, GrainCorp has entered into a new grains derivative contract which assists with smoothing out earnings through the cycle.

Company Profile

Graincorp Ltd (ASX: GNC) is an agribusiness with an integrated business model operating across three divisions. The company operates the largest grain storage and logistics network in eastern Australia. GrainCorp provides grain marketing services to all major grain-producing regions in Australia, as well as to Canadian and U.K. growers. The company has also diversified

(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.