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Avantis® U.S. Equity Institutional

The fund offers broad exposure to stocks of all sizes listed in the U.S. and tilts toward those with lower price/book multiples and higher profitability. To accomplish this, the managers assign weights based on a stock’s market cap and a market-cap multiplier. They apply larger multipliers to stocks with lower valuations and higher profitability, while those with opposite characteristics receive smaller multipliers. This technique has two advantages. It effectively leans toward factors that have historically been associated with superior long-term returns, which should give the fund an edge when those styles are in favour. It also cuts back on turnover and trading costs because a stock’s market cap is incorporated into the weighting scheme. Overall, this is one of the best diversified and lowest turnover funds in the large-blend Morningstar Category.

The portfolio’s emphasis on stocks with lower valuations has been persistent. But its preference for profitable firms was less obvious because cheaper stocks tend to be less profitable than their larger and faster-growing counterparts. However, the fund’s profitability tilt is still at work, even if its holdings, on average, generate lower returns on invested capital than the market. Incorporating profitability paints a more complete picture about each stock’s expected return and should steer the portfolio away from lower-quality names. Leaning toward stocks trading at lower valuations has paid off over this fund’s short live track record. It modestly outperformed the Russell 1000 Index, beating the bogy by 1.1 percentage points per year from its launch in December 2019 through April 2021. The fund’s 0.15% expense ratio lands within the cheapest decile of the category and should provide a long-term edge over many of its peers.

The Fund’s Approach

The fund’s managers start with a broad universe that includes U.S. stocks of all sizes. They use market-cap multipliers to emphasize those trading at low price/book ratios (adjusted to remove goodwill) and high profitability (using a cash-based measure of operating income that removes accruals). Names with lower price/book ratios and higher profitability receive larger multipliers than those with opposite characteristics. This effectively tilts the portfolio toward profitable names trading at lower valuations without incurring a lot of turnovers because each stock’s weight remains linked to its market cap, so weights will change proportionally with price changes.

The strategy takes measures to reducing trading costs. Some turnover is required when a stock’s book value or profitability changes, but the mangers will allow stocks to float within predetermined tolerances to avoid unnecessary trading. Traders can help further cut back on transaction costs.

The Fund’s Portfolio

The strategy’s broad reach and emphasis on stocks trading at lower multiples pushes it away from the largest and most expensive names in the market and improves diversification relative to the Russell 1000 Index. Its average market capitalization has been less than half that of the index. As of April 30, 2021, the fund’s 10 largest names represented 16% of assets, while the same ten firms represented about one fourth of the Russell 1000 Index.

Including small caps expands the fund’s reach and makes it one of the broadest in the large-blend category. It holds more than twice the number of stocks in the Russell 1000 Index. The benchmark does not include small-cap companies, which represent about 15% of this fund. The fund’s emphasis on stocks with low price/book ratios has been evident. Its average price/book ratio has consistently landed below that of the Russell 1000 Index, though it still lands in the large-blend segment of the Morningstar Style Box. Its value orientation also steers it toward cyclical sectors. The fund has larger stakes in the consumer cyclical and financial-services sectors, with comparably smaller positions in names from the technology and communications sectors. The portfolio’s average return on invested capital has also been lower than the index because companies trading at lower multiplies tend to be smaller and less profitable, on average.

The Fund’s Performance

This fund has a short live track record, but it managed to outperform the Russell 1000 Index by 1.1 percentage points from its launch in December 2019 through April 2021. On balance, its value orientation contributed to that mild advantage. Overweighting stocks trading at lower multiples hurt performance during the coronavirus sell-off in the first quarter of 2020, when it lagged the Russell 1000 Index by 3.7 percentage points. But value stocks aided performance during the ensuing rebound. The fund outperformed the index by 7.2 percentage points between October 2020 and April 2021. So far, this strategy has been more volatile than the Russell 1000 Index. Its standard deviation since its December 2019 inception has been about 6% higher than the benchmark, so it slightly underperformed the index on a risk-adjusted basis.

Source: Morningstar

General Advice Warning

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

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Fixed Income Fixed Income

DWS Global High-Income Inst

Gary Russell has led this strategy since August 2006 and previously ran DWS’ high-yield team in Europe. Thomas Bouchard and Lonnie Fox have comanaged the strategy since 2016 and 2018, respectively, after joining as credit analysts in 2006 and 2008. The trio is supported by European counterpart Per Wehrmann and 14 analysts split between the United States and Europe. The support team is sizable, but with 19 departures since 2016, turnover has been an issue.

The managers leverage the firm’s macro-outlook to shape risk budgeting and industry allocation. Analysts assign a recovery value and probability of default to each bond and loan and look at standard fundamental metrics to assess attractiveness relative to the constituents of the strategy’s BofAML Non-Financial Developed Markets High Yield Index benchmark. High-conviction names are typically sized up to 3%, while names perceived as riskier are scaled down accordingly.

The strategy’s higher-quality and global approach sets it apart from peers. The allocation to riskier bonds rated CCC and below stood at 5% as of March 31, 2021, well under the high-yield bond Morningstar Category’s 13% median. The managers pursue opportunities across the globe, and while allocation to the U.S. represents the bulk of assets (60% as of March 31), the portfolio includes sizable exposures to Europe (19%) and Canada (7%). Low-single-digit stakes in emerging markets round out the portfolio.

Over Russell’s tenure from Aug. 1, 2006, through April 31, 2021, the 6.5% annualized gain of the strategy’s institutional share class slightly edged out the category median (comparing distinct funds) peer, landing it in the top half of the category, while the strategy’s volatility-adjusted performance beat over two thirds of rivals.

The Bond Fund’s Approach

The strategy’s disciplined and conservative credit-driven process has demonstrated its value through time, but the analyst churn casts a shadow on its execution and puts a lid on our confidence level, supporting an Average Process Pillar rating. The team takes a conservative and straightforward approach to credit investing. Lead manager Gary Russell and six other high-yield managers focus on portfolio construction, translating the firm’s macro view into investment decisions. Analysts assign each company a recovery value and probability of default, which helps the managers appropriately size positions. All positions are typically capped at 3% and riskier names are scaled down, resulting in a portfolio that usually counts over 350 holdings, ensuring proper diversification, especially on the portfolio’s riskier sleeves.

The strategy’s global mandate has historically resulted in about 60% of assets invested in U.S. high-yield bonds, with most of the balance split between Canadian and European issues, but non-U.S. currency exposure is hedged back to the U.S. dollar. In terms of credit profile, the portfolio tends to skew higher-quality than its high-yield bond category peers, with a relatively large BB stake and limited allocations to issues rated CCC or below.

The Bond Fund’s Portfolio

The team has expressed its conservatism by favouring higher-quality segments of the high-yield market. For example, issues rated BB represented 57% of this strategy’s portfolio as of March 31, 2021, versus 41% for its typical high-yield bond category peer. On the other hand, issues rated CCC and below totalled just 5% of assets or 8 percentage points less than the strategy’s typical peer. The strategy uses its global team to offer a distinct geographic footprint that separates it from many of its peers. Indeed, its non-U.S. exposure stood at 30% as of March 2021, or almost 3 times its typical peer’s. Developed European corporates accounted for 19% of assets and Canadian positions for 7%. Smaller allocations to Asia, Latin America, Africa, and the Middle East stood in the low single digits.

The strategy has had a sluggish start to 2021 owing to its higher-quality tilt and minimal use of bank loans. Rising rates for much of 2021 has prompted many peers to favour higher-yielding and lower-quality assets and bank loans to offset this. As of March 2021, the 41% in B and below was on the aggressive end for this strategy, but its typical peer had over 50% here, including 13% in CCC and below. At the same time, the strategy held less than 1% in bank loans, while a fifth of its peers held about 10% here.

The Bond Fund’s Performance

| Owing to its conservative credit profile and good security selection, this strategy has produced solid returns under lead manager Gary Russell’s watch. Since Russell took over in August 2006 through April 2021, its institutional shares returned 6.5% annualized, landing it in the top half of its high-yield bond category peers. Impressively, the team was able to keep volatility at bay for most of this period, and the strategy’s volatility-adjusted performance–as measured by Sharpe ratio–beat 66% of rivals. During the energy-led credit sell-off from June 2015 to February 2016, a lower exposure to bonds rated CCC or below helped the strategy hold up better than most rivals. Over the period, its 5.9% loss outperformed the category median by 2.3 percentage points, landing ahead of 70% of its distinct peers.

Source: Morningstar

General Advice Warning

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

Categories
Fixed Income Fixed Income

First Eagle US Value A

First Eagle’s multifaceted global value team runs the strategy. Its co-heads, Matt McLennan and Kimball Brooker, each have more than 25 years of investing experience and have cooperated as managers here since March 2010. They also spearhead siblings First Eagle Global SGIIX and First Eagle Overseas SGOIX. Comanager Matt Lamphier directs the research team whose coverage ranges from equities to sovereign bonds and investment-grade credits–all fair game for this portfolio. The manager team added depth in May 2021 with Mark Wright’s promotion to full-fledged comanager after two years of honing his skills as an associate manager.

The team takes a risk-averse approach. With capital preservation in mind, it invests mostly in large-cap equities having what it sees as margins of safety–or prices well below the value of those firms’ average earnings or profitability over a business cycle, their hard assets (such as forest lands), or the strength of their balance sheets. The managers also hold cash (often 10%- 20% of assets) and gold (5%-15%), with gold serving as a hedge against economic calamity.

The Fund’s Approach

This risk-averse approach works well on sibling strategies with broader geographic reach but is less effective for this U.S.-focused offering. It warrants an Average Process rating. Whether investing internationally or in the U.S., First Eagle’s global value team takes an uncommon line. Its managers prioritize capital preservation. While sticking mostly with large-cap equities, they will also hold bonds, gold bullion, and cash. The managers target investments with a margin of safety–that is, a price well below intrinsic value–and assets (real or intangible) that should hold value even during economic distress. The team takes a long-term view, looking at average earnings and profit margins over a business cycle, earnings stability, and balance-sheet health to determine valuations. They often keep annual portfolio turnover under 20%.

Cash and gold stakes are key to this defensive approach. The managers typically keep around 10% of assets in cash–more if opportunities are scarce–and 5%-15% in gold and the equities of gold miners as hedges against economic calamity. The team’s prowess outside the U.S. has served First Eagle’s global and international strategies well, but this U.S.-focused version has struggled to compete. Keeping so much cash and gold on the side-lines has held it back in equity bull markets, and mediocre stock selection over time hasn’t helped.

The Fund’s Portfolio

This portfolio stands out in many ways. With so much cash and gold and so few bonds, equities typically account for 60%-80% of total assets, unlike the equity-only S&P 500 prospectus benchmark and many allocation–70% to 85% equity peers who wade more into bonds. The managers usually own 70-90 stocks. Cash had never been less than 12% of assets at the end of any month in manager Matt McLellan’s 12- year tenure until April 2020; it went on to hit a low of 2% in October 2020 before rising to nearly 10% in March 2021. The portfolio’s gold stake had hovered around 10% going into 2020; it appreciated to more than 15% in July 2020 before dropping back to 10% in early 2021.

The portfolio’s equity exposure is also distinctive. It has tended to be light on consumer cyclicals relative to peers (1.5% of total assets in March compared with the 8.9% category norm) but heavy on energy (7% versus 2%) and basic materials (6% to 3%). The basic-materials stake can be larger if the team is buying the stocks of gold miners such as Newmont NEM and Barrick Gold ABX, but it pared most of those as the price of gold rallied in 2020. Firms with hard assets– such as Weyerhaeuser WY, which owns forest lands, and integrated oil firm Exxon Mobil XOM– also suit this portfolio’s conservative bent.

The Fund’s Performance

This fund’s track record is middling, though a recent category change offers better points of comparison. The portfolio’s gold and cash stakes made it a poor match for its equity-only S&P 500 prospectus benchmark in the decade-long bull market for stocks following the 2007-09 global financial crisis. The strategy’s value tilt didn’t help either, as growth stocks drove much of the rally. A December 2020 Morningstar Category change to allocation–70% to 85% equity from large blend improves the picture somewhat. From manager Matt McLennan’s January 2009 start through April 2021, the fund’s I share class gained 10.6% annualized; that beat the allocation category’s 10.2% average but trailed the S&P 500’s 15.3% and the large-blend category norm of 13.5%. The fund also lagged a custom index approximating the fund’s historical asset exposures (to stocks, cash, gold, and bonds), albeit by a narrower 1.3-percentage-point margin.

Source: Morningstar

General Advice Warning

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

Categories
Technology Stocks

Nvidia Continues to Enjoy Record Revenue, Though Crypto Demand Is Concerning; Raising FVE to $515

Online stock exchange team

Nvidia was negatively impacted by lower cryptocurrency prices in late 2018 that resulted in gaming GPU sales falling 12% in 2019 (fiscal 2020). We estimate crypto mining related demand contributed around $400 million to $500 million in GPU sales during the quarter.

Narrow-moat Nvidia continues to execute well in growing its data center business thanks to its A100 GPU for Artificial Intelligence and networking products from its 2020 Mellanox acquisition. We are raising our probability weighted fair value to $515 per share from $400. We are raising our standalone fair value estimate for Nvidia to $465 per share from $352, as we incorporate the stronger results and outlook for the second quarter. Nvidia is in the process of acquiring ARM, and if the deal closes, our fair value would increase to $565 per share. Our probability-weighted fair value estimate assigns a 50% probability of closing due to potential regulatory scrutiny and ARM customer pushback. Nvidia is paying a high multiple for ARM’s earnings but given the GPU leader’s share price is trading at a significant premium to our updated standalone $465 fair value estimate, we like that Nvidia is using its rich shares to fund a large portion of the deal.

First-quarter sales grew 84% year over year to $5.7 billion, with gaming and data center revenue up 106% and 79%, respectively. Data center sales benefitted from the inclusion of Mellanox and continued adoption of Nvidia’s A100 GPUs. We estimate data center sales were up about 30% year on year. We expect the firm’s automotive segment to resume growth in the coming years as its autonomous solutions are adopted and its legacy infotainment business is ramped down. Specifically, Nvidia’s automotive design win pipeline exceeds $8 billion through fiscal 2027. Gross margins during the first quarter grew 100 basis points sequentially thanks to a more favorable product mix.

Management expects second-quarter sales to be at a midpoint of $6.3 billion, which implies 63% year-over-year growth and was also ahead of our estimates. The chief growth drivers are expected to be gaming, data center, and crypto mining processors, or CMPs. CMPs are optimized for crypto mining power efficiency and will provide Nvidia’s management some visibility into the contribution of crypto mining to total revenue. For the second quarter, CMP sales are expected to be $400 million. We still think Nvidia’s gaming GPUs are receiving an artificial boost from crypto mining that could be difficult to sustain.

Nvidia’s channel inventories remain lean, and management expects the firm to be supply constrained into the second half of the year. While we anticipate strong growth for Nvidia in the coming quarters, we remain vigilant of signs of weaker crypto-mining demand for its GPUs should crypto prices fall.

Nvidia Corp’s Company Profile

Nvidia is the leading designer of graphics processing units that enhance the experience on computing platforms. The firm’s chips are used in a variety of end markets, including high-end PCs for gaming, data centers, and automotive infotainment systems. In recent years, the firm has broadened its focus from traditional PC graphics applications such as gaming to more complex and favorable opportunities, including artificial intelligence and autonomous driving, which leverage the high-performance capabilities of the firm’s graphics processing units.

Source: Morningstar

General Advice Warning

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

Categories
Global stocks

Seagate’s Mass Capacity Drives Poised to Capture Demand Swell, but Shares Still Rich; FVE up to $70

We expect demand for Seagate’s mass capacity drives for cloud customers and enterprises to more than offset secular declines in consumer hard drives over the next five years, leading to our stable trend rating and revised forecast for 2% compound annual sales growth through fiscal 2025. Nonetheless, we think Seagate’s recent price appreciation (61% since Jan. 1) has been a case of multiple expansion not rooted in fundamentals, and we view shares as overvalued even at our new fair value estimate.

Seagate is a leading designer and manufacturer of hard disk drives used for data storage in consumer and enterprise applications. We think Seagate is successfully transitioning its portfolio to focus on mass capacity drives for cloud providers and enterprises as consumer applications for legacy HDDs switch to faster flash-based solid-state drives, or SSDs. We expect sustained demand for mass capacity drives over the next five years as enterprises look to capture more data and use a multi-tiered storage approach, implementing both mass capacity HDDs and smaller enterprise grade SSDs as complements in data centers. Seagate has consistently driven costs down for its mass capacity HDDs by advancing to larger capacities, and we think it will continue to do so by leveraging new technologies like heat-assisted magnetic recording.

We note that a potential contributor to recent price appreciation has been strong demand for HDDs related to a new cryptocurrency called Chia that uses data storage alongside computing power to generate new coins. While we think this has led to some tighter supply in the HDD market, we think this is short-term in nature, and pales in comparison to the levels of demand for data center HDDs. Crypto demand doesn’t alter our long-term thesis.

We expect mass capacity HDD demand to offset consumer declines and drive revenue growth over the next five years, but don’t think Seagate’s drives allow it to establish an economic moat. We think HDDs are commodity like even at the enterprise level, with Seagate and Western Digital matching each other’s technological roadmaps and competing with one another for volume—preventing both from earning pricing power. In periods of tight supply and favorable pricing, Seagate can earn excess returns on invested capital, but when the market hits oversupply, pricing falls, bringing Seagate’s economic profits with it.

Going forward, we think Seagate will focus on expanding to new capacities for its enterprise drives, while implementing new technologies like heat-assisted magnetic recording that will help it drive costs down and expand margins. Still, we think technological advancements like these will be matched by rivals, and won’t shield Seagate from cyclical market downturns. Longer-term, we expect demand for mass capacity drives to slow as the cost gap with enterprise SSDs narrows further.

We think Seagate will try to create new growth opportunities through its module-like Lyve platform, which layers software onto multiple drives, but don’t think this business is large enough to offset a secular decline in HDD sales.

Nvidia Corp’s Company Profile

Seagate is a leading supplier of hard disk drives for data storage to the enterprise and consumer markets. It forms a practical duopoly in the market with its chief rival, Western Digital, both of whom are vertically integrated.

Source: Morningstar

General Advice Warning

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

Categories
Shares

Metcash Is Falling Behind

Convenience and locally tailored product ranges remain a point of differentiation for smaller independent retailers, but consumers are increasingly willing to sacrifice convenience for value.Scale has proved to be an important attribute, enabling the larger retailers to pass on better pricing through purchasing power and the ability to spread the cost of distribution across a wider revenue base. The volumes that Woolworths and Coles flow through their supply chains are considerably larger than those for Metcash.

  • The expansion of discount supermarket Aldi is likely to continue pressuring on profit margins in the Australian supermarket sector.
  • The larger supermarket groups are using their scale advantage to offer lower prices and take market share from independent retailers.
  • The expansion of its hardware business through the acquisition of the Home Timber & Hardware Group further diversified earnings, but the food and grocery business still accounts for the majority of earnings.
  • Metcash’s supermarket sales grew by 14% in the first quarter, still ahead of supermarket giant Coles. However, the temporary advantage of the many stores within Metcash’s network of independent IGAs is likely waning. While restrictions were severe, customers were more inclined to shop at their local grocer to avoid longer travel distances and crowds.
  • Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From th small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.
  • The predominant supplier of packaged groceries to independent retailers provides a monopolistic market position to sustain above-average returns on capital.
  • Strategic and cost-cutting initiatives undertaken by Metcash are gaining traction. Also, independent supermarket operators across all states are stepping up investments in new stores, additional floor spare, and refurbishments.
  • Metcash’s acquisitive expansion of its hardware business has diversified the company’s earnings and cash flows away from the robust competition and lower margins experienced in the food and grocery business.
  • Intense competition between Coles, Woolworths, and Aldi is leading to price deflation to capture sales volume. A loss of volume from the independent channel could make it increasingly difficult for Metcash to match grocery pricing from its larger rivals.
  • Metcash’s customers (independent retailers) are effectively competing through differentiation of convenience, product range and service. These points of difference are likely to become marginalised in periods of economic constraint.

 (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

Spark New Zealand Ltd

Vodafone New Zealand will have been under private equity ownership for close to three years by the time its fiscal 2022 ends in March 2022. During that time, its EBITDA is likely to have posted a CAGR of 2.3% to NZD 495 million, the midpoint of management’s fiscal 2022 guidance range. The lift has primarily been driven by cost-outs and efficiency gains, with revenue CAGR at just 0.3% but EBITDA margin lifting by 140 basis points to our estimated 24.7% in fiscal 2022. Over the same period (but with a June-end balance date), narrow-moat Spark could post EBITDAI CAGR of 1.7% based on our fiscal 2022 forecast. Margin has been consistent at just above 31%.

The stable competitive environment, with the two major players focused on margin optimisation against a stagnant revenue backdrop, has seen Spark grow its free cash flow to our forecast NZD 452 million in fiscal 2021. This represents a CAGR of 24.5% from fiscal 2019 (before Vodafone fell into private equity ownership), fortifying the NZD 0.25 annual dividend, come rain, hail, or COVID. The key issue for Spark is what Vodafone might do beyond fiscal 2022? Will Vodafone’s private equity owners be content to continue to chip away costs from the circa NZD 500 million EBITDA base (from NZD 463 million in fiscal 2019 before they took over)? Or will they take advantage of the recent heightened capital expenditure intensity to facilitate a step-up in Vodafone’s revenue which has remained static at NZD 2.0 billion since the takeover?

Our current intrinsic assessment for Spark largely assumes the status quo in competitive dynamics. But Vodafone owners’ actions from next year warrant close attention. For the record, Vodafone management is emphasising an intention to keep simplifying and digitising the business. It implies a continuation of the current cost-optimisation strategy, while lifting the utilisation of its network assets, including the 5G network being rolled out (for example, fixed wireless). That private equity 101 strategy has served Vodafone well to-date. In fiscal 2019 before the company fell under private equity ownership, its revenue was NZD 2.0 billion and EBITDA was NZD 463 million, at a margin of 23.3%. By fiscal 2022, we forecast stable revenue at around NZD 2.0 billion but EBITDA at NZD 495 million, equating to 24.7% margin.

Granted, fiscal 2022 may still have some remnant COVID impact, but the point remains that Vodafone’s earnings growth has been mostly cost-driven. Meanwhile, Vodafone’s capital expenditure/revenue averaged under 12% for four years before it was bought by private equity. Since then, its capital expenditure/revenue has steadily increased to over 13%. This is designed not only to address previous under-investment under Vodafone plc ownership, but also as an important prerequisite to realising management’s long-term aspiration to lift Vodafone’s EBITDA margin to Spark’s 30%-plus level. To achieve this, we believe cost-out can only go so far and revenue growth resuscitation must play a role. This is in part why we forecast Spark’s earnings before interest, tax, depreciation, amortisation, and investment income, or EBITDAI, margin to drift slightly towards the 30% level longer-term.

This would be below the 31.2% we project for fiscal 2022—a level Spark management is aspiring to maintain on a sustainable basis. Of course, Spark shareholders would prefer to see the current competitive stability continue. In fiscal 2019 before Vodafone’s ownership change, Spark’s EBITDAI was NZD 1,090 million at a margin of 31.0%, while producing free cash flow of NZD 292 million.

By fiscal 2021, we project Spark’s EBITDAI to have increased to NZD 1,120 million (inclusive of NZD 50 million of COVID-related hit), at a margin of 31.2%, while producing free cash flow of NZD 452 million. However, we suspect even Spark management will not expect this competitive stability to continue indefinitely. This may well be why the group is keen to showcase its non-telco businesses such as its IT and managed services division. It is a unit that accounts for a third of group revenue, 28% of group gross margin and with solid fundamentals to lift its share in an NZD 6.0 billion market that is growing at 4% to 6% per year.

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
Commodities Trading Ideas & Charts

Origin Energy– Outlook Is Poor

To drive earnings growth, Origin developed the Australia Pacific liquefied natural gas, or APLNG, project, which started exporting LNG from Queensland in 2016. But the project saddled the firm with too much debt and earnings have disappointed because of the low oil price. We forecast a sharp deterioration in earnings and credit metrics in fiscal 2021 on lower oil prices and headwinds in the utility business.

Key Considerations

  • Profits are supported by the relatively defensive utility business, while the oil price is a swing factor.
  • The massive Australia Pacific LNG project should generate strong cash flows in fiscal 2020 but recent falls in oil and spot LNG prices suggest major downside in 2021.
  • Origin’s credit metrics are forecast to deteriorate significantly in 2021 and could require remedial action.
  • Origin’s energy markets division is one of Australia’s largest energy utilities. It has some competitive advantages from being a major player in the concentrated national electricity market, or NEM, and vertical integration. But its generation fleet lacks cost advantages to major peers, and it’s difficult to build a moat in the competitive retail market.

  • Origin is one of the largest energy retailers in Australia, with more than one third of the market. Energy retailing is not a moat business, as the product is commodity-like, while barriers to entry and customer switching costs are low.
  • The Australia Pacific LNG project is the largest coal seam gas to LNG project in Australia and could significantly increase earnings if oil prices strengthen.
  • Origin’s energy retail business is the market leader and should benefit from cost-saving initiatives. OOrigin’s cash flow base is diversified, and the company is less susceptible to the vagaries of the market than a nonintegrated energy provider.
  • The value of APLNG is highly uncertain, given volatility in the oil price and the relatively high operating and financial leverage.
  • Falling wholesale electricity, gas and carbon credit prices have created a headwind for earnings. Retail price caps and competition should force Origin to pass lower wholesale prices through to customers.
  • The oil price slump should hurt earnings and credit metrics in 2021.

 (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
Dividend Stocks

Nanosonics Rebounds but Outlook Remains Uncertain

While this is a promising rebound, the outlook continues to remain uncertain as the world battles a more severe third wave of coronavirus, particularly in Nanosonics’ key geographies. Our forecast for fiscal 2021 revenue growth of 19% and EPS growth of 25% is unchanged, and we think early performance is tracking in line with our full-year expectations.

Shares continue to screen as overvalued, reflecting the market’s more optimistic view of Nanosonics’ new product in infection prevention, which remains undefined but is expected to begin commercialisation in fiscal 2022.

Despite improvements in hospital access for the company’s sales team, new trophon units installed still declined 9% pcp, with 19% growth in the EMEA segment but a 10% decline in North America. We view the differing growth rates as indicative of the company finding it increasingly difficult to sell additional units in North America where it’s enjoyed most of its success. New capital sales in North America contributed 87% of the total in fiscal 2020 but fell 18% and have fallen 13% on average over the last three years.

Total installed base growth rate to slow to 10% on average over the next three years, followed by lower growth once the device patent expires in 2025 and the more easily addressable markets are heavily penetrated. We maintain our five-year group revenue and EPS CAGR forecasts of 15% and 32%, respectively.

Our five-year revenue growth forecast reflects 17% CAGR in capital sales and 11% CAGR in consumables and service.

 (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
Dividend Stocks

National Storage REIT – Continues Its Acquisition Strategy

It’s the largest owner-operator of self-storage centres in Australia and New Zealand. This gives it another lever to increase earnings by developing centres in its existing portfolio. Its short lease terms, averaging less than two years over its portfolio, also provide it with levers such as dynamic occupancy and rental price management to generate earnings. Shorter rental agreements and reliance on its acquisition strategy make it more sensitive than the average passive REIT to a downturn in economic activity, and availability of capital.

Key Considerations

  • The highly fragmented self-storage industry in Australia and New Zealand provides scope for National Storage to implement its acquisition strategy.
  • National Storage is the largest owner-operator of selfstorage centres in Australia and New Zealand. Its extensive portfolio provides it with the opportunity to generate earnings growth from occupancy and revenue management and via developing existing centres.
  • Its short lease terms and capital-intensive acquisition and development strategy require it to be able to access capital markets and make it riskier than a more passive REIT.
  • Acquiring and developing self-storage centres in a fragmented self-storage industry in Australia and New Zealand is a key part of National Storage REIT’s strategy. National Storage operates under a REIT structure, with the consolidated group comprising a shareholding in National Storage Holdings Limited and a unit in National Storage of its storage centres are located within a 20-kilometre radius of major city CBDs in Australia and New Zealand, and about 10% of its revenue is also sourced from sale of storage packaging, design, development, and project management fees.
  • Australia’s fragmented self-storage industry and National Storage’s relationships with self-storage vendors and stakeholders such as local councils provide it with significant opportunity to successfully implement its acquisition strategy.
  • Its current extensive portfolio of self-storage properties also enables it to generate earnings growth via its development strategy and its dynamic pricing and occupancy techniques.
  • It has had a strong stable management team with strong industry experience in the specialised selfstorage industry that has generated strong underlying earnings per share and net tangible asset growth per share since listing on the ASX.
  • We believe the barriers to entry in self-storage are low. Increased competition and supply of self-storage will likely affect earnings.
  • NSR’s acquisition and development strategy means it is reliant on access to the equity and debt markets. A tightening of credit markets and fall in equity markets may inhibit its ability to implement its acquisition and development strategy.
  • Its short lease terms mean it is more sensitive than the average passive REIT to macroeconomic conditions such as the availability of finance and slowdowns in economic activity and population growth.

 (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.