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The Pinnacle at Backing and Growing the Right Horses

This allows Pinnacle to benefit from earnings upside as its affiliate boutiques grow in scale and realise operating leverage. A well-known brand and extensive diversification (across managers, asset classes and client cohorts) strengthen Pinnacle’s ability to attract and hold on to FUM across market cycles. Regardless, capital intensity is higher than pure-play asset managers. Dilution from capital raisings, increasing leverage and deploying capital at low rates of return are risks.

Key Investment Considerations

  • Pinnacle’s reputation as a quality growth partner for high performing boutique managers helps attract high calibre asset managers and investors seeking varied investment solutions. Diversity in asset classes, boutiques, and client cohorts provide stability in FUM growth across market cycles.
  • We anticipate ongoing growth in demand for Pinnacle’s solutions due to the increasingly competitive and regulated funds management landscape.
  • Earnings prospects are strong. Notably, there are upsides from the scaling of fixed costs as affiliate boutiques grow in scale, new money from increased distribution and new boutique additions.

Company Profile

Pinnacle Investment Management Group is an Australian-based multi-affiliate investment management firm. The principal activities of the firm are equity, seed capital and working capital, and providing distribution services, business support, and responsible entity services to a network of boutique asset managers, termed as “affiliates.” Apart from deriving revenue from its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. The business is growing rapidly with number of boutiques and FUM more than doubling to 16 and circa AUD 71 billion in December 2020, respectively, from seven and AUD 23 billion in December 2016.

General Advice Warning

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

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Veeva Raises Annual Guidance after First-Quarter Revenue Beat

Commercial Cloud results also benefited from adoption of CRM add-ons, which we see as the fundamental driver of long-term growth for the suite. Vault had a very strong quarter as well, bolstered by its Development Cloud that is composed of an end-to-end stack of modules that integrates different components of the drug development process (clinical, quality, regulatory, safety). The company added a record number of new customers to its Vault Quality suite of offerings. Vault Regulatory and Vault Safety also performed well, adding new customers and expanding adoption of modules among existing customers.

Professional services revenue grew an impressive 38% year over year and despite only composing one fifth of total revenue, contributed to more than half of Veeva’s revenue beat, as demand for Vault R&D services and business consulting was higher than anticipated during the quarter. Management expects service revenue to normalize in the second quarter, as it attributes higher utilization of services to the timing of client project starts. Ultimately, services revenue is more volatile than subscription revenue due to its nature (ad hoc versus SaaS), and we are maintaining our long-term revenue growth estimates for the segment.

Veeva anticipates momentum to carry through the rest of the year and has raised total revenue guidance to a range of $1,815 million-$1,825 million (an increase of $60 million over last quarter’s estimates). Taking this raise into account along with a slight improvement in our short-term operating margin estimates, we are raising our fair value estimate to $305 from $300.

Company Profile

Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning, or ERP, systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics.

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

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Technology Stocks

The Descartes Systems Group Inc

Descartes’ Global Logistics Network is a more modern approach to electronic data interchange, or EDI, that ties together the disparate software systems of many connected parties. In doing so, the platform modernizes the model, which consists of a variety of different data formats that were not necessarily compatible. The GLN also provides deeper intelligence than EDI was capable of. This is especially important as shipping regulations become increasingly complex in a global supply chain.

With so many connected parties on the network, Descartes has a captive audience for its software portfolio. Over time, the firm has developed solid positions in niche markets, mainly for customs and regulatory compliance. We also view both the trade management modules and the broker and forwarder enterprise systems as better positioned competitively, with routing, mobile, and telematics operating in a more competitive niche. E-commerce has also become an important pillar of the business, especially during the COVID-19 pandemic. While the network and software modules are sticky separately, we think they are stronger together, as the firm enjoys strong retention rates of 95%.

Descartes relies on acquisitions to expand its software portfolio and help drive growth. Since 2014, the company has completed 25 acquisitions for $840 million in aggregate. Management is focused on areas that fill holes across the portfolio and functionality that customers request. This strategy has been executed consistently over more than a decade now. We think acquisitions drive approximately half of the company’s growth, and we expect several small deals each year. We see acquisition opportunities as abundant in this highly fragmented $15 billion market.

Bulls Say

  • Descartes operates the largest neutral shipping network, connecting parties across air, land, and sea transportation modes.
  • The company enjoys a growing portfolio of software solutions that address challenges specific to the shipping, supply chain, and logistics industries.
  • Increasing globalization of the supply chain drives increasing complexity, which benefits Descartes.

Bears Say

  • Descartes’ acquisition model makes organic performance impossible to parse out and makes ROICs look worse. Acquisitions may also increase costs, distract management with integration issues, and increase the risk of overpayment.
  • Instead of more traditional guidance, the company offers “baseline calibration,” which is a view of what revenue and adjusted EBITDA will be in the quarter if no additional customers are signed and no acquisitions are made.
  • Ultimately, Descartes is competing with the major ERP vendors.

Source:Morningstar

Disclaimer

General Advice Warning

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

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Global stocks

Medibank Private Ltd

We now assume Medibank can grow policyholders around 3% per year out to fiscal 2025, compared with around 2% previously. With the market estimated to grow at 1% per year, this reflects our expectation that Medibank’s market share edges up to 30% by fiscal 2025 from an estimated 27.2% currently

In the first nine months of fiscal 2021, industry policyholders have grown around 2.5%, or by 166,000, to 6.9 million. In other words, around 18,500 new policyholders a month. Medibank has averaged policyholder growth of around 6,100 per month over the first 10 months of fiscal 2021. This implies Medibank is winning 33% of new policyholders, higher than its existing share of the market. We have increased our fiscal 2021 policyholder forecasts to 4% from 3%, this is in line with Medibank fiscal 2021 guidance to grow policyholder numbers by 3.5% to 4%. Our fiscal 2021 dividend is at the top end of management’s 75%-85% target range.

Medibank being a large and more profitable insurer is able to spend more on marketing and has greater brand awareness than many competitors, hence is more likely to attract new to industry joiners. We also believe Medibank’s advertising of in-home care resonated with the public, especially at a time where aversion to hospital stays increased. Reducing the number of days a patient spends in hospital should prove to be cheaper for the insurer, meaning a slight benefit to average claims paid per policyholder. Medibank also has in-house healthcare and telehealth services, which we believe support better customer outcomes. These factors, along with Medibank benefitting from scale benefits in hospital contracting and claims integrity, provide the insurer sustainable competitive advantages, which underpin our narrow moat rating.

Profile

Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.7 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

Source:Morningstar

Disclaimer

General Advice Warning

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

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Global stocks Shares

AusNet Services Ltd

Revenue is highly secure and predictable between regulatory resets, being close to 90% regulated. Less-favourable regulatory conditions pose headwinds to earnings and distributions.

  • The tougher regulatory environment is a headwind. Earnings are expected to remain subdued in coming years following less generous regulatory resets, though a cost efficiency program should help.
  • The soft economy and high energy utility bills are pressuring the regulator to cut network returns to protect households as much as possible. The environment is likely to remain tough for the foreseeable future.
  • Financial position and distribution policy are relatively conservative, positioning the company well to withstand the tough environment.

AusNet Services owns three regulated energy networks in Victoria: the state’s main high-voltage electricity transmission network; an electricity distribution network; and a gas distribution network. It also owns minor unregulated assets and a third-party asset management business. We like the secure cash flow, solid balance sheet, and full ownership of underlying assets. However, medium-term earnings face major headwinds as the regulator cuts returns to protect households and businesses from high and growing energy bills. AusNet is considered to have no moat, as sustainable excess returns are unlikely, given regular resets and the tough regulatory environment.

Around 85% of AusNet’s revenue is regulated, offering predictable and secure cash flow between regulatory resets. These assets are subject to review by the Australian Energy Regulator, usually every five years. The regulator sets tariffs to provide a fair return for investors after covering forecast costs. AusNet received favourable regulatory decisions for its electricity transmission and distribution assets in past years, including the Advanced Metering Infrastructure program. However, more recent regulatory decisions were relatively unfavorable. We expect future resets will be even tougher, given the soft economy and high energy bills, a key risk for all regulated utilities. Household gas and electricity bills have doubled in the past 10 years because of higher fuel prices, expensive network modernization and government policies to promote green energy.

Long-term government bond yields are a key determinant of regulatory returns, affecting both the cost of debt and the cost of equity allowances. As bond yields have fallen sharply in recent years, regulatory returns have fallen in sympathy. Additionally, rules were changed to give the regulator more power in reducing allowances for other costs. Staggered resets smooth the impact, but all assets will likely generate lower returns in coming years. The electricity distribution network resets in early 2021, the electricity transmission network resets in early 2022, and the gas distribution network resets in early 2023.

Source:Morningstar

Disclaimer

General Advice Warning

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

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Currencies

Goldman has changed its tune towards Bitcoin “Not an asset class to asset class”

The renowned investment bank remains a sceptic of bitcoin and other cryptocurrencies. While cryptocurrencies like bitcoin have gotten a lot of publicity, Goldman says Bitcoin is “not an asset class”.

The previous Goldman Sachs research was pessimistic about cryptocurrency and stated that it was not an asset class. According to “Goldman Sachs, it was not an asset class because of the following characteristics: –

No cash flows –

No earnings –

Unstable correlations –

High volatility –

Goldman Sachs claimed that the only reason that Bitcoin has value is because other people are willing to buy it. They also compared it to a number of other periods of market euporia.

Goldman Sachs, on the other hand, released a study on May 21st addressing their previous stance that Bitcoin was not an asset class changed. The top of the report is headlined ‘Crypto: a new asset class’ they interviewed Mike Novogratz (CEO of Galaxy Digital Holdings Ltd.). He claims that the institutional adoption we’ve observed will likely continue as long as the macro trends we’ve witnessed persist, he also believes that Defi, NFTs, and payments, all of which are currently built on Ethereum, will drive some of the most interesting growth in the crypto world.

Zach Pandl who is one of Goldman’s top strategists agrees with Novogratz, he believes that the Bitcoin has the potential to become a major global macro play factor. Jeff Currie, Heading commodity research, believes that for cryptocurrencies to be an excellent store of value, it must have applications other than price speculation.

Christian Mueller Glissman, a senior strategist at Goldman Sachs illustrated that even a minor investment to Bitcoin (5%) in a traditional 60/40 bond equities portfolio would have outperformed the market. He claims that this is due to Bitcoin’s relative lack of correlation with traditional assets, despite the fact that this correlation has increased significantly over the past year.

They compared the price increase of crypto with those of other assets throughout the course of the year. What’s shocking is the Goldman Sachs Commodities index’s tremendous surge (refer a link below). This indicates that more inflation is on the way. Report also has a chart that shows the volatility that have had for these assets over the year. Report also illustrated that the year’s volatility for various assets. While cryptocurrency is volatile, it must be weighed against the possibility for profit. As the blockchain becomes more widely used, this volatility is likely to decrease over time. As a result, utility demand rises, boosting the currency’s value. They also demonstrate that the people with the biggest pockets are the ones who are most inclined to “Hold on for dear life” in the long run.

(Snap*)

There’s a reason Goldman has shifted its stance on Bitcoin: their clients are asking for exposure to the cryptocurrency. If they believe it isn’t an asset class, they won’t be able to serve these clients. They’ve even set up internal trading desks that have just completed a derivative linked swap transaction.

Get an access of report – https://www.goldmansachs.com/insights/pages/crypto-a-new-asset-class.html

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Shares

GWA Group Ltd – Earnings Likely to Recover

Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

But competition is heating up with new entrants such as Spain’s Roca eyeing the fast growing Asia Pacific region including Australia and have achieved access to local distribution channels. We expect GWA’s margins to come under pressure as the brand portfolios of recent Australian market entrants garner greater

brand awareness.

Key Investment Considerations

  • GWA’s brand strength and leading market share in bathroom and kitchen fittings create enduring competitive advantages. However, competition is heating up.
  • The COVID-19 outbreak represents a significant shock to the Australian economy. We anticipate a sizable contraction in 2020 Australian housing starts. But the dip in construction is expected to be relatively short-lived, with a recovery commencing in early 2021.
  • The outsourcing of vitreous china and plastic manufacturing activities to suppliers in Asia has significantly reduced operating leverage. Operating margins are expected to remain stable through the cycle.
  • Caroma’s strong brand awareness should preserve GWA’s market share and economic profits. OThe Methven acquisition may provide access to growth opportunities in the U.K. and continental Europe.
  • GWA’s outsourced manufacturing model increases the variability of the firm’s cost base, steadying margins through the cycle.
  • Global industry leader Roca has big ambitions for the Asia-Pacific region. While off a low base, Roca is enjoying strong growth in Australia.
  • The top-of-cycle acquisition of Methven introduces execution risk. Value will be destroyed if deal synergies are not fully realised.
  • Falling Australian house prices could affect the typically more resilient renovation and replacement market segment near term.
  • Following the sale of its door and access systems business, GWA Group now operates through a single business division: water solutions. We think this division has competitive advantages that warrant a narrow economic moat rating for the group. Brand strength is high, with Caroma in particular resonating in both retail and wholesale channels in Australia.
  • Established distribution channels, including strong relationships with market-leading plumbing retailers, also help to maintain market position and prices. GWA has strong market positions in most products and is particularly dominant in toilet suites. A long history, since 1941 in Caroma’s case, has allowed it to build its presence.

 (Source: Morningstar)

Disclaimer

General Advice Warning

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

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Global stocks Shares

Harvey Norman Holdings Ltd– Overestimating Upside

Yet, these factors are unlikely to alter the long-term outlook for most retailers. Rather, we expect consumer spending growth will prove relatively weak, while shifts between categories and sales channels could test retailers in the medium term.

The S&P/ASX 200 Consumer Discretionary index has rebounded by some 75% since the recent lows on March 23, 2020, after it collapsed by 45% in just over a month amidst the global equity rout. The discretionary retailing sector was initially much more severely hit than the overall market. In the past, discretionary spending has proven to be procyclical and it was singled out as highly exposed to the impending recession and widespread shutdowns, with these risks further exaggerated by supply chain concerns.

However, unlike the overall domestic equities market, the S&P/ASX 200 Consumer Discretionary index has nearly fully recovered and is just 3% shy of its February 2020 highs. In contrast, the broader Australian market is still down 13% versus its all-time February highs. While our discretionary retailing coverage screened as materially undervalued in March 2020, when we identified Myer, Super Retail and Premier as 5-star investment opportunities, the pendulum has now swung too far the other way.

However, this growth was unevenly distributed because of various restrictions on mobility and gatherings introduced either by federal and state governments or self-imposed by health-conscious consumers. The travel and restaurant industries, as well as fashion retailers, have been amongst the most impacted as consumers redirected their spending to other categories. Clear winners have been liquor, hardware and consumer electronics and home appliances retailers

 (Source: Morningstar)

Disclaimer

General Advice Warning

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

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Commodities Trading Ideas & Charts

Iluka Resources Ltd – Exposed to Mineral Sands

The long life Sierra Rutile operation is the key source of rutile but lacks a cost advantage. It may come in time as the company expands and builds scale economies. The new Cataby mine bolsters zircon output and maintains feedstock for the production of synthetic rutile. Iluka’s 20% ownership of Deterra Royalties brings exposure to the high-returning iron ore royalty over BHP’s Mining Area C. It is the sole moat-worthy asset but comprises less than 10% of our fair value estimate.

Key Considerations

  • Iluka’s shares are undervalued with demand set to recover from coronavirus-inspired lows. Disruption to other suppliers is likely to see prices remain resilient despite lower demand.
  • As a large producer of both zircon and high-grade titanium dioxide products (rutile and synthetic rutile), Iluka has some ability to flex output to meet either weak demand and strong demand.
  • Reserve life is moderate at around 10 years but Iluka has a sizable resource base which covers at least 25 years of production at 2018 rates. We expect resources to convert to reserves as Iluka clears feasibility and technical hurdles.
  • Iluka is an industry leader with relatively high grade zircon and rutile deposits. Supply can be withheld to defend prices and margins in times of weak demand.
  • Management has improved company fortunes with a strong focus on returns on capital. Demand for zircon is likely to be bolstered by new applications such as chemicals and digitally printed tiles.
  • Iluka has some diversification. The revenue mix is approximately half from zircon and half from highgrade titanium products. Geographically, revenue is split between North America, Europe, China and the rest of Asia.
  • Mineral sands markets are relatively small. Sales volumes can go through periods of significant demand weakness, such as in 2008-09 and 2012-16.
  • The largest single source of demand for zircon is China, accounting for nearly half. China could throttle back on fixed-asset investment-driven growth, which may see subdued zircon sales volumes and prices. OThe Jacinth Ambrosia deposit is very high-grade, with a large component of high-value zircon. Reserve life is less than 10 years and it will be nearly impossible to replicate the returns and competitive position once depleted.

 (Source: Morningstar)

Disclaimer

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

Insurance Australia Group – Unexpectedly Large Provision

There is continual pressure from competition on revenue and margins, with premium rate increases generally only covering recent claims inflation. Large insured events occur without warning, and claims trends are largely beyond management’s control in the short term. Reinsurance protection and quota share agreements do help mitigate risks but come at a cost and mean profit sharing. In addition to more-stable fee-based income, quota share deals have the added benefit of releasing capital. We agree with management’s decision to exit Asia with a focus on profitability in its core markets.

Key Investment Consideration

  • Insurance Australia Group, or IAG, is a custodian of well-known brands in Australia and New Zealand. Despite its size and market share, competitors with low-cost digital strategies, or a focus on select regions or products, prevent IAG from exerting pricing power one would expect with its associated scale.
  • The strategic relationship with Berkshire Hathaway reduces uncertainty and IAG shareholders should benefit with less volatile earnings and dividends.
  • Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but competitors have shown these are not insurmountable barriers.
  • Insurance Australia Group is a general insurer with around AUD 12 billion of annual gross written premiums, operating in Australia and New Zealand. Stakes in a Malaysian and Vietnamese insurer are the only remaining remnants of an abandoned Asia growth strategy. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia and State, NZI, AMI, Lumley in New Zealand.
  • The firm’s underwriting discipline, productivity initiatives, and focus on profitable growth, will see returns consistently return its cost of capital.
  • IAG has collectively removed downside risk from 32.5% of its business while retaining exposure to earnings upside via profit share arrangements.
  • A benign claims environment with a lower incidence of major catastrophes considerably boost underwriting profits.
  • A strong balance sheet and good earnings momentum will see consistent dividend growth and surplus capital returned to shareholders.
  • Competition increases and wins market share from incumbents, such as IAG, by offering lower premiums, regardless of the impact on short-term profits and returns.
  • The Asian growth strategy was disappointing, and we endorse the recent sale of operations in Thailand, Indonesia, and India.
  • A higher incidence of large claims events from major catastrophes will reduce profitability to the extent dividends are cut materially and the insurer needs to raise capital.

 (Source: Morningstar)

Disclaimer

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.