Author: lvc-admin

Categories
Technology Stocks

Synopsys Enjoys Being in Demand As Technical Complexity Persists; FVE Up to $343

Business Strategy & Outlook

Synopsys provides electronic design automation, or EDA, software, intellectual property, and software integrity products that are critical to the semiconductor chip design process. As secular trends toward artificial intelligence, 5G communications, autonomous vehicles, and cloud computing, among others, accelerate, Synopsys will benefit from both the rising complexity of chip designs and the advancing digitization of various end markets. The narrow-moat Synopsys has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform amid a growing semiconductor landscape. The Synopsys’ products are transformational in enabling increasingly complex integrated circuit (IC) and system-on-chip (SoC) design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Synopsys is the largest player in the EDA space, and specifically in digital design as well. With a larger digital exposure, the Synopsys privy to higher growth vectors and as a result expected growth greater than that of top competitor Cadence. Outside of core EDA, Synopsys’ IP and SI businesses are benefiting from industry trends. As systems companies increasingly design their own differentiated silicon in-house, the Synopsys to benefit as its customer base expands beyond traditional semiconductor designers. This trend in achieving technological differentiation through chip customization to support IP adoption, as leveraging IP blocks for standardized components allows for significant time and resource savings and reallocation to differentiating components. Further, given the rising complexity of chip design, rising cost of failure, and increasing importance of software security, Synopsys’ growing SI business presents an important point of differentiation for the company. Reflecting the mission criticality of EDA tools, Synopsys exhibits negligible churn, with customer retention consistently at approximately 100%, and has relationships with all major chip design companies in the United States.

Financial Strengths

Synopsys is in a healthy financial position. As of January 2022, Synopsys had $1.1 billion in cash and cash equivalents versus $24 million in debt. The firm repaid its $75 million outstanding term loan balance in 2021 and is now solely liable for a 12-year credit agreement of approximately $33 million in aggregate, of which about $24 million is outstanding as of January 2022. One does not have any material concerns about Synopsys’ ability to finance this debt. Approximately 90% of Synopsys’ revenue is of a recurring nature, given that the firm primarily sells time-based licenses. Synopsys’ average license length is approximately three years, with periodic software updates delivered throughout the license’s term ensuring continued access to Synopsys’ evolving technology. The ratable revenue of time-based licenses tends to smooth returns compared with utilizing a perpetual license model, allowing for better visibility into the future of the business. Synopsys is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows. Free cash flow margin has grown from 21% in fiscal 2017 to 33% in fiscal 2021, and return on invested capital is increasingly widening its spread above cost of capital. The margins continue to expand and believe management will deliver on its target of 100 basis points of annual non-GAAP operating margin expansion. The healthy growth in free cash flow as industry tailwinds lead to long-term growth for Synopsys.

Bulls Say

  • Secular tailwinds in chip design such as 5G, Internet of Things, AI, and others should increase demand for EDA tools and support growth for Synopsys. 
  • The growing Software Integrity business enables a larger TAM for Synopsys and addresses expanding demand for real-time identification of security vulnerabilities across the entire software development lifecycle. 
  • Synopsys provides mission-critical EDA software, having relationships with all major domestic chip designers and retention rates of approximately 100%.

Company Description

Synopsys is a provider of electronic design automation software, intellectual property, and software integrity products. EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. The firm’s growing SI business allows customers to continuously manage and test the code base for security and quality. Synopsys’ comprehensive portfolio is benefiting from a mutual convergence of semiconductor companies moving up-stack toward systems-like companies, and systems companies moving down-stack toward in-house chip design. The resulting expansion in EDA customers alongside secular digitalization of various end markets benefits EDA vendors like Synopsys.

(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
Dividend Stocks

Even Against a Souring Backdrop, Wide-Moat Mondelez Continues to Bake Up Sweet Gains

Business Strategy & Outlook

Since taking the helm at Mondelez more than four years ago, CEO Dirk Van de Put has orchestrated a plan to drive balanced sales and profit growth by extending the distribution of its fare, fueling investments behind its local and global brands, empowering its local leaders, and increasing its innovation agility (aims that are hitting the mark). Against this backdrop, Mondelez targets 3%-5% sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends at home and abroad. Further, it has looked to acquire niche brands to build out its category and geographic exposure, which has been prudent. But despite opportunities to bolster sales, one can never expect the pendulum to shift entirely to top-line gains under Van de Put’s watch; rather, based on his tenure at privately held McCain Foods and past rhetoric, one can suspect ensuring such growth was profitable would prove to be the priority.

As such, the suggestion that Mondelez is poised to realize additional efficiency gains favorably. While management has refrained from quantifying its cost-saving aims, an additional $750 million in costs (a low- to mid-single-digit percentage of cost of goods sold and operating expenses, excluding depreciation and amortization) it could remove (on top of the $1.5 billion realized before the pandemic). This can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities. One doesn’t expect these savings to merely boost profits, though. In this vein, management has stressed a portion of any savings realized would be spent in support of its brands in the form of research, development, and marketing, buttressing the brand intangible asset underpinning Mondelez’s wide moat. This aligns with the forecast for research, development, and marketing to edge up to nearly 7% of sales on average over the next 10 years (or about $2.4 billion annually), above historical levels of 6% ($1.7 billion).

Financial Strengths

In assessing Mondelez’s balance sheet strength, one doesn’t foresee any material impediments to its financial flexibility. In this vein, Mondelez maintained $3.5 billion of cash on its balance sheet against $19.5 billion of total debt as of the end of fiscal 2021. As per forecast free cash flow will average around 15% of sales annually over 10-year explicit forecast (about $5.4 billion on average each year). And returning excess cash to shareholders will remain a priority. Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2031 (implying a payout ratio between just north of 40%), while also repurchasing around 2%-3% of shares outstanding annually. Beyond prudently bolstering shareholder returns, Mondelez will continue scouring the landscape to expand its reach by adding brands and businesses in untapped categories and/or geographies from time to time–although one doesn’t believe it has much of an appetite for a transformational deal. The opportunity to expand its footprint into untapped markets–such as Indonesia and Germany–or into other adjacent snacking categories (like health and wellness) could be in the cards. Recent deals have included adding Tate’s Bake Shop for $500 million in 2018, Perfect Snacks (in 2019, refrigerated snack bars), Give & Go (2020, an in-store bakery operator), Chipita (2021, Central and Eastern European croissants and baked goods), Ricolino (2022, a leader in the Mexican confectionery space), and Clif Bar (2022, U.S. manufacturer of energy bars) to its fold. But at just a low-single-digit percentage of sales, none of these deals are material enough to move the needle on its overall results.

Bulls Say

  • Mondelez’s decision to empower in-market leaders and fuel investments behind its local jewels (which historically had been starved in favor of its global brands) stands to incite growth in emerging markets for some time. 
  • The posit the firm is committed to maintaining a stringent focus on extracting inefficiencies from its business, including the target to shed more than 25% of its non core stock-keeping units to reduce complexity. 
  • Management has suggested it won’t sacrifice profit improvement merely to inflate its near-term sales profile.

Company Description

Mondelez has operated as an independent organization since its split from the former Kraft Foods North American grocery business in October 2012. The firm is a leading player in the global snack arena with a presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles. Mondelez’s portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm derives around one third of revenue from developing markets, nearly 40% from Europe, and the remainder from North America.

(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

Pebblebrook should continue to recover as business and group travel eventually returns to 2019 levels by 2024

Business Strategy & Outlook

Pebblebrook Hotel Trust is the largest U.S. lodging REIT focused on owning independent and boutique hotels. After Pebblebrook merged with LaSalle Hotel Properties in December 2018, the company owns 54 upper-upscale hotels, with more than 13,300 rooms located in urban, gateway markets. Pebblebrook’s combined portfolio has a higher revenue per available room price point and EBITDA margin than its hotel REIT peers. The recent merger with LaSalle provides Pebblebrook some new avenues to create value for shareholders. The company doubled in size while taking on only a portion of the general and administrative costs, making the combined company more efficient. Pebblebrook’s CEO, Jon Bortz, previously ran LaSalle and acquired many of the hotels in that portfolio. His knowledge of those hotels combined with management’s demonstrated ability to maximize margins should allow him to implement cost-saving initiatives that drive up margins. Additionally, management has begun an extensive renovation program across both the LaSalle portfolio and the legacy portfolio that will drive EBITDA gains over time.

In the short term, the coronavirus outbreak significantly affected the operating results for Pebblebrook’s hotels, with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations allowed leisure travel to quickly return, driving high growth in both 2021 and 2022. The company should continue to recover as business and group travel eventually returns to 2019 levels by 2024. However, there are several factors that will remain headwinds for hotels over the long term. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing hotels from pushing rate increases even though it is nearing full occupancy on many nights. Finally, while the shadow supply created by Airbnb doesn’t directly compete on most nights, it does limit Pebblebrook’s ability to push rates on nights when it would have typically generated its highest profits.

Financial Strengths

Pebblebrook is in solid financial shape from a liquidity and a solvency perspective after the merger with LaSalle, but the additional assets sales will put the company in great financial shape. The company seeks to maintain a solid but flexible balance sheet, which will serve stakeholders well. Pebblebrook does not currently have an unsecured debt rating. Instead, it uses secured debt on its high-quality portfolio and takes out unsecured term loans. Debt maturities in the near term should be manageable through a combination of refinancing and the company’s free cash flow. Additionally, the company should be able to access the capital markets when acquisition opportunities arise. In the year 2024, the operations will fully return to normal, net debt/EBITDA and EBITDA/interest will be roughly 5.5 and 5.8 times, respectively, both of which are within the long-term target for the company and should continue to improve over time. As a REIT, Pebblebrook is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cash flow from operating activities, providing plenty of flexibility for capital allocation and investment decisions. Pebblebrook will continue to be able to access the capital markets given its current solid balance sheet and its large, higher-quality, unencumbered asset base.

Bulls Say

  • Potentially accelerating economic growth may prolong a robust hotel cycle and benefit Pebblebrook’s portfolio and performance.
  • The acquisition of the LaSalle Hotel Trust portfolio provides management many renovation opportunities to drive revenue and margin growth.
  • After the merger, Pebblebrook’s larger size could increase the company’s negotiating power with online travel agencies.

Company Description

Pebblebrook Hotel Trust currently owns upper-upscale and luxury hotels with 13,366 rooms across 54 hotels in the United States. Pebblebrook acquired LaSalle Hotel Properties, which owned 10,451 rooms across 41 U.S. hotels, in December 2018, the company current Pebblebrook CEO founded in 1998, though management has sold many of those hotels over the past few years. Pebblebrook’s portfolio consists mostly of independent hotels with no brand affiliations, though the combined company does own and operate some hotels under Marriott, Starwood, InterContinental, Hilton,

and Hyatt brands.

(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
Dividend Stocks

Edison faces regulatory scrutiny to prove its investments are producing customer benefits

Business Strategy & Outlook

California’s aggressive clean energy goals, including the state’s quest to eliminate carbon emissions from the economy by 2045, offer Edison International more growth opportunities than most utilities. Edison will invest at least $6 billion annually, resulting in 7% annual earnings growth at least through 2025. It already has regulatory and policy support for investments to support grid safety, renewable energy, electric vehicles, distributed generation, and energy storage. Wildfire safety investments alone could reach $4 billion during the next four years. California will always present political, regulatory, and operating challenges for utilities. But state utility regulators are in a bind because implementing the state’s public policy mandates will require healthy utilities that are incentivized to invest in infrastructure. In August 2021, regulators approved nearly all of Edison’s 2021-23 investment plan. Regulatory proceedings in 2022 will address wildfire-specific investments and Edison’s $6 billion investment plan for 2024. In 2023, Edison will begin work with regulators to set an investment budget through 2028. Operating cost discipline will be critical to avoid large customer bill increases related to its investment plan. Edison faces regulatory scrutiny to prove its investments are producing customer benefits. It also must resolve and seek to recover what could end up being $7.9 billion of liabilities related to 2017-18 fires and mudslides.

Large equity issuances in 2019 and 2020—in part to fund the company’s $2.4 billion contribution to the state wildfire insurance fund and a higher equity allowance for ratemaking—weighed on earnings the last two years. Edison now has most of its financing in place to execute its growth plan. It is expected to continue its streak of 18 consecutive annual dividend increases. Edison’s management team seems committed to retaining a small share of unregulated earnings likely tied to low-risk energy management businesses wrapped into Edison Energy. It is not expected that the business is to have a material impact on shareholder returns in the near term.

Financial Strengths

Edison’s credit metrics are well within investment-grade range. California wildfire legislation and regulatory rulings in 2021 removed the overhang that threatened Edison’s investment-grade ratings in early 2019. Edison has kept its balance sheet strong with substantial equity issuances since 2019. Edison won’t have any liquidity issues as it resolves 2017-18 fire and mudslide liabilities while funding its growth investments. Edison issued $2.4 billion of new equity in 2019 at prices in line with the fair value estimate. This financing supported both its growth investments and half of its $2.4 billion contribution to the California wildfire insurance fund. The new equity also allowed Southern California Edison to adjust its allowed capital structure to 52% equity from 48% equity for ratemaking purposes, leading to higher revenue and partially offsetting the earnings dilution. Edison’s $800 million equity raise in May 2020 at $56 per share was well below the fair value estimate but was necessary to support its growth plan in 2020 and early 2021. Edison also raised nearly $2 billion of preferred stock in 2021 and might issue more preferred stock to limit equity dilution as it finances its growth program. In particular, Edison will have to raise equity to finance its $1 billion energy storage project in 2022. Dividends are to grow in line with SCE’s earnings.  The board approved a $0.15 per share annualized increase, or 6%, for 2022, its 18th consecutive annual dividend increase. Management has long targeted a 45%-55% payout based on SCE’s earnings, but the board appears to be comfortable going above that range based on the 2021 and 2022 dividends that implied near-60% payout ratios. As long as Edison continues to receive regulatory support, the board will keep the dividend at the high end of its target payout range.

Bulls Say

  • With Edison’s nearly $6 billion of planned annual investment during the next four years, it can project 7% average annual average earnings growth in 2022-25.
  • Edison has raised its dividend for 18 consecutive years to $2.80 in 2022, a 6% increase from 2021. Management appears comfortable maintaining a payout ratio above its 45%-55% target.
  • California’s focus on renewable energy, energy storage, and distributed generation should bolster Edison’s investments in transmission and distribution infrastructure for many years.

Company Description

Edison International is the parent company of Southern California Edison, an electric utility that supplies power to 5 million customers in a 50,000-square-mile area of Southern California, excluding Los Angeles. Edison Energy owns interests in nonutility businesses that deal in energy-related products and services. In 2014, Edison International sold its wholesale generation subsidiary Edison Mission Energy out of bankruptcy to NRG Energy.

(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

CSL was able to grow plasma collections significantly, albeit at a higher cost, with collections up by 24%

Investment Thesis

  • The DCF valuation of CSL is >10% above the current share price. 
  • Strong FY23 earnings guidance momentum as CSL continues to see strong demand. 
  • Seqirus flu business which recorded its first year of positive earnings (EBIT) in FY18 and continues to perform well.
  • Strong demand for their portfolio of products.
  • High barriers to entry in establishing expertise + global channels + operations/facilities/assets.
  • Strong management team and operational capabilities. 
  • Leveraged to a falling dollar. 

Key Risks

  • Competitive pressures.
  • Product recall / core Behring business disappoints.
  • Growth disappoints (underperform company guidance).
  • Turnaround in Seqirus flu business stalls or deteriorates.
  • Adverse currency movements (AUD, EUR, USD)

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenue was up +3% to $10,242m, driven by strong growth in haemophilia B product IDELVION® and key specialty product KCENTRA®, up +20% and 18% respectively, and strong performance in its influenza vaccines business, CSL Seqirus, which saw revenue up +13%. HPV royalties were up 55% rebounding strongly to now exceed pre-Covid levels following strong demand and increased supply. 
  • NPAT of $2,236m, down -6% was at the top end of guidance, despite a difficult global environment, and immunoglobulin sales limited by constrained plasma collections in FY21, which however, improved 2H22 which saw growth in plasma collected. 
  • Earnings per share of $4.81, was down -8%. 
  •  Acquisition of Vifor Pharma completed on 9 August 2022.
  • By key segments. CSL Behring: Revenue was up +2% to $8,598m driven by Haemophila, up 8% to $1,166m, and Specialty, up +3% to $1,792m, offsetting Immunoglobulins, down -3% to $4,024m and Albumin, down -1% to $1,072m. The segment was driven by IDELVION, up +20%; KCENTRA, up +18%; HAEGARDA, up +5%; HPV royalties, up +55%; whilst Immunoglobulin declined -3%. Plasma collected was up +24%. Gross profit of $4,580m was down -4%, whilst gross profit margin fell to 53.3% from 56.5%. 
  • CSL Seqirus: Revenue of $1,964m was up +13%. Seasonal influenza vaccines sales were up +16% driven by US sales which were greater than $1bn for the first time and FLUAD® was up +41%. The segment saw record volume of ~135 million doses distributed in FY22. On a further positive note, the US Centers for Disease Control and Prevention adopted the Advisory Committee on Immunisation Practices recommendation that FLUAD® be a preferentially recommended seasonal vaccine option for adults aged 65+ years. Gross profit of $1,152m was up +16%, whilst gross profit margin improved to 58.7% from 57.3%.

Company Description

CSL Limited (CSL) develops, manufactures and markets human pharmaceutical and diagnostic products from human plasma. The company’s products include pediatric and adult vaccines, infection, pain medicine, skin disorder remedies, anti-venoms, anticoagulants and immunoglobulins. These products are non-discretionary life-saving products. 

(Source: Banyantree)

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

Charter Hall Social Infrastructure REIT (CQE) reported as expected FY22 earnings results

Stock market information

Investment Thesis:

  • CQE trades on a ~6.7% discount current NTA, which is not justified.
  • Solid dividend yield.
  • Quality assets with strong property fundamentals such as 100% occupancy and WALE of 14.3 years.
  • Majority of leases are triple-net leases.
  • CQE is a play on (1) population growth; (2) increasing awareness of early childhood education; (3) increasing the number of families with both parents working and hence demand for childcare services. CQE has increased its portfolio weighting towards social infrastructure assets.
  • CQE’s tenants possess strong financials 
  • Strong history of delivering continuing shareholder return and dividends.
  • Solid balance sheet position.
  • Strong tailwinds for childcare assets and social infrastructure assets.

Key Risks:

  • Regulatory risks.
  • Deteriorating property fundamentals.
  • Concentrated tenancy risk, especially around Goodstart Early Learning.
  • Sentiment towards REITs as bond proxy stocks impacted by expected cash rate hikes.
  • Broader reintroduction of stringent lockdowns across Australia due to Covid-19. 

Key Highlights: FY22 Results Highlights. Relative to the pcp:  Statutory profit of $358.5m, up $184.4m relative to the pcp. 

  • Operating earnings of $62.9m, was up +8.4%. Operating earnings of 17.3cpu, up +8.1%. 
  • The REIT declared distribution of 17.2 cpu, up +9.6%. 
  • Gross assets of $2.1bn, up 35.0% since June 2021. Net Tangible Assets of $4.08 per unit up +25.5% since June 2021. 
  • CQE has a weighted average debt maturity of 3.9 years and no debt maturity until January 2025. As at 30 June 2022, including contractual commitments, CQE’s balance sheet gearing is 29.8% and look-through gearing is 30.7%. CQE’s available investment capacity is $160m, comprising undrawn debt facilities. 
  • Property Portfolio Highlights. CQE’s property portfolio saw a valuation uplift of $269.43m or +19.4%. This resulted in the passing yield across the property portfolio firming to 4.7%. Overall, CQE property portfolio was up +38.8% to $1.97bn via both acquisition and valuation activities during FY22.
  •  CQE made $232.7m of social infrastructure assets acquisitions including 234 childcare assets, 25 healthcare assets and a 50% interest in a recently completed TAFE Queensland education campus. 
  • CQE completed 6 childcare development assets with a total value of $42.3m. 
  • CQE’s property portfolio retained a long WALE of 14.3 years, 100% occupancy, and solid lease expiry profile with less than 5% of leases expiring within the next five years. According to management, 75% of leases are on fixed rent reviews (average 3.0%) and the balance CPI-linked; and 44% of rental income subject to market rent reviews within the next 5 years. CQE retained strong tenant customers including Goodstart Early Learning, G8 Education, Only About Children, Mater Misericordiae, Busy Bees, Healius and both state and local Governments.
  • Property Portfolio 

Company Description:

Charter Hall Social Infrastructure REIT (formerly Charterhall Education Trust) (ASX: CQE) is an ASX listed Real Estate Investment Trust (REIT). It is the largest Australian property trust investing in early learning properties within Australia and New Zealand but recently widen its mandate to also invest in social infrastructure properties.

(Source: Banyantree)

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

WSP provides a communications workflow platform that automates interactions between businesses and people

Investment Thesis:

  • Sizeable market opportunity – in the U.S. alone WSP TAM is US$4.7bn (WSP North American target markets) vs total U.S. CPaaS TAM of US$98bn.
  • Established a solid foundation to build from – the Company has over 800 customers worldwide with leading brand names.  
  • Structural tailwinds – ongoing automation and digitization. 
  • Increasing direct sales penetration.
  • Attractive recurring revenue base via subscriptions. 
  • Investment in R&D to continue developing the Company’s competitive position and enhance value proposition with customers.   

Key Risks:

  • Rising competitive pressures.
  • Growth disappoints the market, given the company trades on high valuation multiples – growth in subscriptions, new customers and penetration of existing clients. 
  • Product innovation stalls and fails to resonate with customers. 
  • Emergence of new competitors and technology.
  • Key channel partnerships breakdown. 

Key Highlights: Headline FY22 results. Group revenue of $70.6m was up +48% YoY and ahead of management’s guidance range of $64-68m. Management noted the Company is seeing growing interest in the Whispir platform from governments and government agencies, as highlighted by the recent high-profile launch by Victoria Police of the public transport initiative “STOPIT”, which is built on the Whispir platform. 

  • Regional performance – ANZ region was up $22m (or +56%) to $62m revenue for FY22, which was driven by the pandemic response (Covid-19 vaccine rollout programs). North America revenue was up +38% to $1.8m, with management highlighting growth opportunities in this market and WSP’s investment in digital marketing campaigns to drive revenue growth. Asia revenue of $6.7m was mostly flat YoY due to the region still being impacted by Covid-19 related disruptions and lockdowns (e.g., fresh China lockdowns in July). However, WSP recently signed contract with telco Singtel should drive growth in the region.
  • Customer churn of 2.1% was +30bps better than 2.4% in pcp. 
  • Group gross margin (GM) was down -130bps to 58.5%, due to change in revenue mix – that is, a higher revenue contribution from transaction revenue which has lower GM than platform and services. On a positive note, GM on transaction revenue also improved +250bps over the year (with further improvement expected), whilst GM on platform and services was unchanged YoY.
  • Group operating earnings (EBITDA) for the year was a loss of $10.6m, which was ahead of the guidance which was looking for a loss of $11.2 – 13.2m for FY22. EBITDA building blocks: ANZ $16.1m + Asia loss $2.5m + North America loss $4.7m + R&D cost $16.2m + Corporate costs $11.9m. Management is “firmly” focused on becoming EBITDA positive by 2H23. Operating expenses in 4Q22 were -11% below 3Q22, driven by efficiencies program.
  • Balance sheet remains well placed with $26.1m in cash and no debt, which should take the company to profitability in FY23 and cash flow positive by FY24.

Company Description:

Whispir Ltd (WSP), founded in 2001, is a global enterprise software-as-a-service (SasS) company. WSP provides a communications workflow platform that automates interactions between businesses and people. The Company has over 800 customers, operates in 60 countries and more than 200 staff globally. WSP operates in an emerging subset of the enterprise communications SaaS market known as Workflow Communications-as-a-Service (WCaaS). WSP currently solves two communication problems: (1) Operational Messaging – engaging with employees; and (2) External Messaging – engaging with customers. WSP operates in 3 key markets – Operational messaging (size $8bn), API messaging (size $32bn) and Marketing messages (size $66bn). 

(Source: Banyantree)

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

Chevron expects the combination of new higher-margin projects along with ongoing cost reductions and operational improvements

Business Strategy & Outlook

Chevron is to deliver higher returns and margin expansion thanks to an oil-leveraged portfolio as well as the next phase of growth, which is focused on developing its large, advantaged Permian Basin position. Its latest capital plan maintains its focus on capital discipline without sacrificing growth. Thanks to improved cost efficiencies and the acquisition of Noble Energy, Chevron plans to grow production to over 3.5 million barrels of oil equivalent per day by 2026 from 3.1 mmboe/d in 2022. New volumes will largely come from new production from its differentiated Permian Basin position (size, quality, and lack of royalties), where it expects to grow volumes to over 1 mmboe/d by 2025 from 608 mboe/d in 2020 while delivering returns in excess of 30% and over $4 billion of free cash flow by 2026.

Chevron’s Permian growth will be supplemented by expansion projects at Tengiz in Kazakhstan, due to begin producing in mid-2023, new developments in the Gulf of Mexico, and potential new discoveries in Mexico and Brazil. Chevron also now has growth options with offshore gas fields in the Eastern Mediterranean with the Noble acquisition. Oil and gas prices will dictate Chevron’s earnings and cash flow for the foreseeable future. However, the company is investing in low-carbon businesses to adapt to the energy transition. It recently tripled its investment to $10 billion cumulatively by 2028, with this

capital flowing to emerging low-carbon areas that fit with Chevron’s existing value chains and experience. Greenhouse gas reduction projects and carbon capture and offset will enable Chevron to achieve its emission targets while investments in hydrogen and renewable fuels will give it a toehold in emerging businesses that could expand in the future.

Financial Strengths

Chevron carries relatively little debt, with a net debt/capital ratio below 10%, one of the lowest among its peer group. It is targeting a debt/capital ratio of 20%-25% through the cycle and estimates that in a low-price oil scenario of $50/bbl, the ratio will remain within that range. The company makes maintaining and increasing the dividend a priority; as such, there’s steady growth during the next few years as free cash flow rises. Chevron has reduced its break-even level so that free cash flow allows for dividend growth and repurchases at $50/bbl, implying that it has ample cushion if oil prices fall below that level. If need be, Chevron could always take on debt to defend the dividend, given its low leverage levels. At higher oil prices, Chevron can generate excess cash flow that would go toward repurchases. With debt at desired levels, Chevron introduced an annual repurchase of $2 billion-$3 billion in the second quarter of 2021, which management later increased the upper end of the range to $5 billion and then $10 billion. Its most recent guidance and quarterly run rate is for $15 billion of repurchases annually, which it aims to maintain through the cycle, even relying on debt if necessary. In a $75 price environment through 2026, Chevron estimates it can generate enough free cash flow to repurchase 25% of its outstanding shares. Capital spending is expected to be below $15.3 billion in 2022 while remaining between $15 billion and $17 billion per year through 2026.

Bulls Say

  • Free cash flow growth is expected to accelerate beyond 2021 as capital spending remains capped while Permian production could nearly double and expansion at Tengiz adds volumes.
  • Chevron’s large Permian position is mostly composed of legacy acreage, meaning the firm did not overpay to enter the play; 75% has no or a low royalty rate, giving it a cost advantage.
  • Chevron should realize improved downstream earnings and returns as conditions in its California refineries improve and new chemical production capacity is added via its CPChem joint venture.

Company Description

Chevron is an integrated energy company with exploration, production, and refining operations worldwide. It is the second-largest oil company in the United States with production of 3.1 million of barrels of oil equivalent a day, including 7.7 million cubic feet a day of natural gas and 1.8 million of

barrels of liquids a day. Production activities take place in North America, South America, Europe, Africa, Asia, and Australia. Its refineries are in the U.S. and Asia for a total refining capacity of 1.8 million barrels of oil a day. Proven reserves at year-end 2021 stood at 11.3 billion barrels of oil equivalent, including 6.1 billion barrels of liquids and 30.9 trillion cubic feet of natural gas.

(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

Deere has exposure to end markets with attractive tailwinds

Business Strategy & Outlook

Deere offers customers an extensive portfolio of agriculture and construction products. It will continue to be the leader in the agriculture industry and one of the top players in construction. For over a century, the company has been the pre-eminent manufacturer of mission-critical agricultural equipment, which has  led to its place as one of the world’s most valuable brands. Deere’s strong brand is underpinned by its high-quality, extremely durable, and efficient products. Customers in developed markets also value Deere’s ability to reduce the total cost of ownership. The company’s strategy focuses on delivering a comprehensive solution for farmers. Deere’s innovative products target each phase of the production process, which includes field preparation, planting and seeding, applying chemicals, and harvesting. The company also embeds technology in its products, from guidance systems to seed placement and spacing and customized spraying applications. Deere is committed to expanding customer offerings and providing value-added services. Additionally, the management team will look to reduce the company’s cost structure as some markets have matured, providing an opportunity to rethink its footprint and create a leaner organization.

Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Deere provides, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed. Deere has exposure to end markets with attractive tailwinds. In agriculture, demand for corn and soybeans will be strong in the near term, largely due to robust demand from China and tight global supplies. On the construction side, the company will benefit from the $1.2 trillion infrastructure deal in the U.S. The country’s roads are in poor condition, which has led to pent-up road construction demand.

Financial Strengths

Deere maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of fiscal 2021, coming in at 0.4. Total outstanding debt, including both short- and long-term debt, was $10.4 billion. Deere’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favours organic growth and also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of fiscal year-end 2021 stood at $7.2 billion on its industrial balance sheet. Deere has access to $5.7 billion in credit facilities. Deere can generate solid free cash flow throughout the economic cycle. The company can generate over $6 billion in free cash flow in the midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, management is determined to rationalize its footprint by reducing the number of facilities in mature markets. If successful, this will put Deere on much better footing from a cost perspective, further supporting its ability to return cash to shareholders. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $38 billion in fiscal 2021, along with $38 billion in finance receivables and $829 million in cash. Deere enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

  • Higher crop prices encourage farmers to grow more crops and will lead to more farming equipment purchases, substantially boosting Deere’s revenue growth.
  • Deere will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand has eased, encouraging farmers to refresh their machine fleet.
  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, benefiting Deere.

Company Description

Deere is the world’s leading manufacturer of agricultural equipment, producing some of the most recognizable machines in the heavy machinery industry. The company is divided into four reportable segments: production and precision agriculture, small agriculture and turf, construction and forestry, and John Deere Capital. Its products are available through an extensive dealer network, which includes over 1,900 dealer locations in North America and approximately 3,700 locations globally. John Deere Capital provides retail financing for machinery to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Deere product sales.

(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

REA Group Ltd (REA) reported strong FY22 results reflecting revenue growth of +26% to $1,170m, an increase in EBITDA

Investment Thesis:

  • Clear 1 market position in online property classifieds, with consumers spending over more time on realestate.com.au app than the number two website. 
  • Growth opportunities via expansion into Asia and North America.
  • Recent strategic partnerships with National Australia Bank (property finance) could potentially be positive in the long term. 
  • Upside in key markets – particular in areas where REA is under-penetrated and could potentially win market share from competitors. 
  • New product developments to increase customer experience. 
  • Regular price increases help offset listing pressure. 

Key Risks:

  • Competitive pressures lead to a further de-rating of the PE-multiple.
  • Volume (listings) outlook remains subdued in the near term. 
  • Execution risk with Asia/North America strategy.
  • Failing to get an adequate return on the recent acquisition of iProperty.
  • Value/EPS destructive acquisitions. 
  • Decline in Australian property market.
  • Given REA trades on a very high PE-multiple, underperforming to market estimates can exacerbate a share price de-rating.
  • Recent tightening of lending practices by banks would affect the Financial services business.

FY22 Results Highlights: Relative to the pcp: Revenue of $1,170m, up +26%. 

  • EBITDA (including associates) of $674m, up +19%. Core operating costs jumped +34%, mainly due to Mortgage Choice and REA India acquisitions. Excluding acquisitions, core operating costs increased +11%, reflecting a tight labour market driving higher remuneration costs, an increase in revenue-related variable costs, and investment in brand and marketing. 
  • Net profit of $408m, up +25%. EPS of 308 cents, up 25%. 
  • The Board declared a fully franked final dividend of 89cps which brings the full year dividend to 164cps, up 25%. 
  • REA retains a solid balance sheet. As at 30 June 2022, REA’s total drawn debt was $414m, with a cash balance of $248m. Free cash flow generation remains strong at $394m in FY22, up +55%.
  • Performance by segments. Relative to the pcp: Australia. In Australia, REA operates realestate.com.au and realcommercial.com.au, data and insights business, PropTrack, and mortgage broking business, Mortgage Choice. Core revenue of $1,116m was up 23%, or 18% excluding the impact of the Mortgage Choice acquisition, driven by Residential revenue up +24% to $776m, Commercial and Developer revenue up +3% to $134m, Media, Data and Other revenue up +9% to $97m, and Financial Services core operating revenue jumping +12%, on a pro forma basis to $79m (assuming REA owned Mortgage Choice in the prior period). India. REA India achieved strong results with revenue growth of 92% to $54m on a pro forma basis (assuming it was owned for the full prior period), largely driven by Housing.com’s property advertising business, which saw strong customer growth. 
  • Equity accounted investments. REA has a 20% investment in Move, Inc. (Move) which operates realtor.com®, a property portal in North America. Move revenue increased 11% on traditional lead generation and referral model growth. However, Move also saw higher employee and marketing costs as the business continues to reinvest. This resulted in a $2m decline in Move’s equity accounted contribution to $14m. REA also holds a 17.5% stake in PropertyGuru Group Ltd, which contributed an equity accounted loss of $6m in FY22 to core EBITDA. 
  • FY22 Results 

Company Description:

REA Group (REA) provides online property listings, web management, financial services and data analytics to the real estate industry via advertising services. For consumers, REA offers the largest online real estate search engine in Australia. The Company also has operations and a growing presence in Asia and other parts of the world.

(Source: Banyantree)

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