Author: lvc-admin

Categories
Global stocks Shares

Blackmores has seen strong growth in its international segment

Business Strategy & Outlook

Blackmores’ customer profiles are very different in its two key markets, Australia and China. Vitamin-taking Australians tend to be older or females either before or during pregnancy, while in China the market is dominated by young, online shoppers who view international vitamin and dietary supplements as luxury purchases. Nonetheless, the importance of perceived product quality—largely

an extension of brand positioning—is common to both customer groups. Blackmores’ brand intangible assets support its narrow economic moat. Blackmores’ position within the core Australian market as stable and the market as well penetrated. Actual performance in Australia is clouded by informal exports of products purchased for the daigou channel and sent to China. In fiscal 2021, roughly 9% of ANZ sales were ultimately sent to China. While this contribution remaining below 10% due to coronavirus and regulatory changes requiring daigous to register as businesses and pay taxes, this will be offset by growth in the direct China segment.

China presents a large opportunity for Blackmores as it is the second-largest global VDS market after the U.S, and it will contribute roughly 30% of group revenue at mid-cycle. Other than the informal daigou trade, Blackmores primarily distributes into China via cross-border e-commerce where the product is sold on online platforms. Further opportunity lies in establishing a sizable offline retail business, but this hinges on the company obtaining regulatory approval. Blackmores has seen strong growth in its international segment, which now contributes more to earnings than the China segment

and is forecast to remain larger. The segment is largely composed of regions in Southeast Asia including Malaysia, Thailand and Indonesia. Blackmores aims to continue the momentum after entering India in 2021 and gaining halal accreditation to serve Muslim consumers, particularly in Indonesia.

Financial Strengths

Blackmores is in a solid financial position with net cash of AUD 92 million as at June 2022. It should maintain its net cash position over the forecast period and afford a 45% dividend payout ratio. Free cash flow conversion of net income has averaged 102% over the preceding five years (before acquisitions), above the average 54% dividend payout ratio. Free cash conversion of net income to average 93% over the next five years.

Bulls Say

  • A reputation for quality is fundamental in the VDS market and Blackmores’ reputation is untarnished.
  • Bar fiscal 2020, the company has earned returns on invested capital well above its single-digit cost of capital, demonstrating its brand strength and associated pricing power.
  • Blackmores’ new CEO brings experience in navigating international brand sales and distribution in Asian markets which should allow the company to progress its business outside of Australia.

Company Description

Blackmores is a leading Australian vitamin and health supplement manufacturer and is the larger of two major vitamin brands by market share in Australia. Overseas sales also contribute a significant amount to earnings, particularly from Southeast Asia and the Chinese market via both formal (cross-border e-commerce) and informal (daigou) sales channels.

(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

Cochlear is investing significantly to increase awareness as well as funding research to support payer reimbursement

Business Strategy & Outlook

Cochlear is the market leader in cochlear implants with a consistent share of roughly 60% across developed markets. Cochlear implants became the standard of care many years ago for children in developed markets with profound hearing loss or deafness. With this market segment largely penetrated, the company is looking elsewhere for growth with developed-markets adults the next primary focus and emerging-markets children after that. Roughly 70% of units are sold to developed markets and the remaining 30% to emerging markets, where over 90% are for children. Large price differentials in the lower range of products result in 80% of revenue being earned in developed markets and 20% in tender-oriented emerging markets. The average unit prices achieved in developed markets are double those in emerging markets. In the developed-markets children segment, the growth tailwinds from increasing market penetration and the shift from single to bilateral implants over the last 15 years have played out, and forecast growth in this segment to reduce to the birth rate over time.

The adult developed market is more difficult to penetrate, and required investment to expand this segment will restrain significant operating margin expansion. Currently, penetration is still estimated to be under 5%, and Cochlear is at a pivot point as it invests to be adopted more widely by seniors with profound hearing loss. Prevalence of profound hearing loss increases over 65 years and has a steep increase over 80 years of age. As such, an ageing population and low penetration suggest a large opportunity. However, hearing aids, not cochlear implants, are the standard of care. Cochlear is investing significantly to increase awareness as well as funding research to support payer reimbursement. But two main challenges can be seen to accessing this market fully: first, the relatively low willingness of older candidates to undertake such invasive surgery, and second, the improvements

in hearing aids. The hearing aid market is increasing its penetration in the severe hearing loss category, leaving only the smaller profound hearing loss as the cochlear implant niche.

Financial Strengths

The company has typically enjoyed low capital intensity and high cash conversion, affording it to pay out 70% of earnings as a dividend. However, with the confluence of operational weakness due to deferred elective surgeries as a result of the coronavirus, a peak in the capital cycle, and a patent infringement penalty becoming payable, the company faced a liquidity crunch. Consequently, it completed an AUD 850 million equity raise in fiscal 2020, adding an additional 10% to shares on issue and forecast the company to carry no net debt for the foreseeable future. The company is not acquisitive and organic growth is driven by R&D spending of roughly 12% of revenue per year.

Bulls Say

  • There are signs Cochlear is looking to expand beyond the hearing market with the investment in Nyxoah, a company focused on development of a hypoglossal nerve stimulation therapy for the treatment of obstructive sleep apnea.
  • The annuity like revenue stream from sound processor upgrades and accessories is an increasingly important component of the revenue stream.
  • Cochlear earns ROICs well ahead of the cost of capital even in bear-case scenario, which is testament to the high quality of the company.

Company Description

Cochlear is the leading cochlear implant device manufacturer with around 60% global market share. Developed markets contribute 80% of group revenue where cochlear implants are the standard of care for children with severe to profound hearing loss. The company also actively targets the growing cohort of seniors in developed markets. Tender-oriented emerging markets contribute the remaining 20% of group revenue. Main products include cochlear implants, bone-anchored hearing aids, and associated sound processors. In fiscal 2020, 49% of revenue came from the Americas, 35% from Europe, the Middle East, and Africa, and 16% from the Asia-Pacific segment.

(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

Treasury’s volume share gains and positive mix shift support strong enough brand assets

Business Strategy & Outlook

Treasury Wine Estates has increasingly focused on building high-end brands in its portfolio, particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 90% in fiscal 2022 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. Continued end-market premiumization to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020. In recent years, global wine consumption has proven sluggish, but high-priced wines have bucked this trend, with luxury and masstige volumes growing at mid- to high-single-digit rates in developed regions such as Australia and the U.S., per company estimates. However, Treasury faced an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations.

Treasury also faces risks from unfavorable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. That said, the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns. And bringing in a significant proportion of its grape and bulk wine from outside suppliers increases the proportion of variable costs and ensures a lower-cost supply in times of surplus. But it cannot be believed Treasury’s volume share gains and positive mix shift support strong enough brand assets to offset industry fragmentation, a proliferation of branded offerings, limited customer switching costs, and potential for changing consumer tastes. As such, despite a strong position in Australia, the company will likely continue to combat competitive pricing and promotional activity globally.

Financial Strengths

Treasury is in good financial health. The firm’s net debt/adjusted EBITDA ratio, including operating leases stood at 1.8 times at June 2022, and EBITDA to cover interest expense (including operating leases) an average of 8 times over the next five years. The company’s next major debt maturity is in fiscal 2024, but there are no issues either relaying or refinancing this payment. At June 2021 the company’s liquidity, comprising cash and undrawn committed debt facilities, was solid at approximately AUD 1.3 billion. Over the long run, there’s probably some room for additional debt, given management’s target of net debt/adjusted EBITDA of 2.0 times through the cycle, potentially stretching to 2.5 times, compared with the low levels today. That said, the company will remain focused on maintaining an investment-grade credit profile. The company aims to pay out 55%-70% of its earnings as dividends; an average of about 65% over the next five years. Treasury can continue to pay out dividends near the top of this range, but anticipate dividends to be only partially franked from fiscal 2025. While Treasury is an Australian taxpayer, the majority of earnings are derived outside Australia, and the available franking credits to be exhausted more quickly than they are replenished over the coming years.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine. 
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands. 
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilization, improving margins, and higher ROICs.

Company Description

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(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

Fresenius is pursuing the biosimilar market, which looks like a relatively large intermediate to long-term opportunity

Business Strategy & Outlook

Fresenius SE’s prowess in dialysis and injectable therapies has created opportunities to vertically integrate into several medical service and technology businesses by organic and inorganic means. Through its partial ownership of Fresenius Medical Care, the company seeks to benefit from that unique entity’s position as the world’s top dialysis service and product provider. In the U.S., this segment operates a convenient network of dialysis clinics at a similar scale as key peer DaVita, with the two firms cumulatively serving about three fourths of the U.S. dialysis outpatient population. Fresenius has established a number of clinics in more fragmented international markets, too, where it has a relatively. long runway for growth by opening or acquiring new clinics. Fresenius leads the dialysis product market primarily by providing haemodialysis equipment and consumables to clinics globally but also sells at-home haemodialysis and peritoneal dialysis tools.

Fresenius focuses on being a reliable provider of injectable therapies in its Kabi segment. This strategy requires Fresenius to efficiently manufacture safe and high-quality solutions, and because of this core competency, Fresenius has been a net beneficiary of competitor shortages in recent years. Fresenius also provides the pumps to automatically administer injectable therapies. By integrating into a hospital’s workflow and systems, Fresenius aims to benefit from recurring consumable sales during the pump’s long working life. Fresenius is also pursuing the biosimilar market, which looks like a relatively large intermediate to long-term opportunity. Through its Helios and Vamed segments, Fresenius provides services related to healthcare facility operation, management, and construction. In its Helios segment, it aims to provide top-quality hospital services in Germany, Spain, and Latin America, and it continues to look for acquisition opportunities especially in the latter two geographies. In Vamed, it helps caregivers operate more efficiently by providing construction project management, ongoing operations management, and post-acute care services.

Financial Strengths

Fresenius SE operates with an investment-grade credit profile. On a consolidated basis as of September 2021, Fresenius owed about EUR 27 billion in debt and lease obligations, including EUR 13 billion of debt and leases owed by Fresenius Medical Care that is not guaranteed by Fresenius SE. With about EUR 2 billion of cash as of September 2021, the company’s net leverage stood around 3.6 times. While easily manageable, management has expressed a desire to deleverage further after taking the hit to profits in the dialysis business in 2021. However, refinancing and acquisition-related activities may make Fresenius a debt issuer once it hits its deleveraging goal. Beyond acquisitions, Fresenius’ capital allocation strategy regularly includes dividends with a payout ratio around 20% of net income. And while the company typically does not make large share repurchases, those activities could become more attractive for Fresenius in future periods if acquisition opportunities do not present themselves, which would welcome at recent prices.

Bulls Say

  • Underlying demographic trends—such as aging, obesity, and diabetes—and international expansion opportunities should keep Fresenius’ dialysis services and related medical product growth in positive territory after the pandemic recedes.
  • Kabi’s biosimilar pipeline targets AbbVie’s Humira and Amgen’s Neulasta products, which could lead to a relatively large new revenue stream in this segment in the intermediate term.
  • The company maintains a manageable balance sheet, which should give it financial flexibility during potential future shocks.

Company Description

Fresenius SE is a healthcare holding company based in Germany with four segments. The company owns a large stake in dialysis service provider and equipment manufacturer Fresenius Medical Care, which accounts for about half of its consolidated revenue. The Kabi segment manufactures intravenous drugs, nutrition products, infusion and transfusion therapies, and related pumps. The Helios segment operates private hospitals in Germany, Spain, and Latin America. Vamed provides a variety of services such as healthcare facility construction and operation management, including post-acute care rehabilitation.

(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

The Continued Recovery of the Hotel Industry Will Drive High Growth for Park Hotels

Business Strategy & Outlook

Park Hotels & Resorts is the second largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all the international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper upscale hotels that should help to diversify Park’s hotel brands to include Marriott, Hyatt, and IHG hotels. In the short term, the coronavirus significantly impacted the operating results for Park’s hotels with high-double-digit RevPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations across the country allowed leisure travel to quickly recover, leading to significant growth in 2021 and 2022. The company should continue to see strong growth as business and group travel also recover to Prepandemic levels with Park eventually returning to 2019 levels by 2024. However, the hotel industry will continue to face several long-term headwinds. 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 Park from pushing rate increases. Finally, while the shadow supply created by Airbnb doesn’t directly compete with Park on most nights, it does limit Park’s ability to push rates on nights where it would have typically generated its highest profits. Still, the Park does have some opportunities to create value. Management has only had control of the portfolio for three years, and there is some additional growth that can be squeezed out of current renovation projects. The Chesapeake acquisition should provide an additional source of growth as the company drives higher operating efficiencies across this new portfolio. The pandemic could create additional opportunistic ways for Park to grow the portfolio.

Financial Strengths

Park is in solid financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which will serve stakeholders well. Park does not currently have an unsecured debt rating. Instead, Park utilizes secured debt on its high-quality portfolio. Currently, the majority of Park’s debt is secured by five of its largest hotels, leaving Park with 39 consolidated hotels that are free of debt encumbrance. Even if Park is unable to pay its debt obligations, the company can return the collateral secured by its debt to the lenders and proceed with its unencumbered business essentially debt free. That said, debt maturities in the near term should be manageable through a combination of refinancing, the company’s free cash flow, and the large cash position Park currently has on their balance sheet. Additionally, the company should be able to access the capital markets when acquisition opportunities arise. In 2024, which is the year hotel operations should return to normal, net debt/EBITDA and EBITDA/interest will be roughly 4.1 and 4.2 times, respectively, both of which suggest that the company should weather any future economic downturn and that it would be able to selectively acquire assets as the market recovers. As a REIT, Park 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 cashflow from operating activities, providing Park plenty of flexibility to make capital allocation and investment decisions. The Park 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 Park’s portfolio and performance. 
  • Low leverage gives Park greater financial flexibility to be opportunistic with new investments or return more capital to shareholders through dividend growth or share buybacks. 
  • Park’s management identified several enhancement initiatives that it can execute to drive EBITDA higher on the newly acquired Chesapeake portfolio.

Company Description

Park Hotels & Resorts owns upper-upscale and luxury hotels with 27,224 rooms across 45 hotels in the United States. Park also has interests through joint ventures in another 4,297 rooms in seven U.S. hotels. Park was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017, so most of the company’s hotels are still under Hilton brands. The company has sold all its international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Commodities Trading Ideas & Charts

Lower Production, Higher Costs Drive Newcrest’s Weak Fiscal 2022 Result, FVE Lowered to AUD 31

Business Strategy & Outlook:   

Newcrest Mining is a gold-copper miner with mines in Australia, Papua New Guinea, Canada, and its minority-owned mines in Ecuador. The company is estimated to produce more than 1.8 million ounces of gold and around 120,000 tonnes of copper in fiscal 2022, with the acquisition of Brucejack resulting in gold production increasing to average more than 2 million ounces per year for the next decade. Around 80% of its estimated mid cycle revenue is from gold with most of the remainder from copper. Copper’s contribution is likely to rise over time as Newcrest’s various developments commence production. Newcrest has no moat despite a history of low-cost production, save a cost spike around 2013, and long mine lives. Returns have improved post the expensive acquisition of Lihir, but are likely to remain below the company’s cost of capital for the foreseeable future. Newcrest accounts for less than 2% of global mine production and is a price taker. Gold is increasingly the plaything of investors and subject to swings in sentiment. In 2001, gold consumption for jewellery and technology accounted for 91% of global demand, but in 2021 this had fallen to 50% as a result of increased investor demand and weaker gold consumption. There is also uncertainty around exploration success and the cost to buy or develop new mines, which are an important part of Newcrest’s future value. 

Current management was installed in 2014 and brought a focus on cost efficiency, capital discipline and optimisation. Under Sandeep Biswas, Newcrest has been a much more reliable producer and has delivered incremental improvements at its operations, boosting throughput and lowering unit costs, particularly at Lihir and Cadia. Newcrest has a solid exploration record, with successful discoveries expanding reserves at Cadia and Telfer in particular in recent decades. Reserves at the end of 2021 were 54 million ounces of gold and 7.9 million tonnes of copper, representing more than two decades of reserves at current production rates.

Financial Strengths:  

The company’s balance sheet is in reasonable shape. Newcrest ended June 2022 with net debt of USD 1.3 billion after buying the Brucejack gold mine in Canada, up from net cash of about USD 0.2 billion at the end of fiscal 2021. Despite the increase, the balance sheet will likely remain strong. Net debt/EBITDA is forecasted to peak at around 0.7 in fiscal 2023 before declining over the remainder of the forecast period. Newcrest has long-dated corporate bonds totalling USD 1.65 billion. The bonds mature in fiscal 2030, 2042, and 2050 with maturities of USD 650 million, USD 500 million, and USD 500 million, respectively. Newcrest has significant liquidity. As at the end of June 2022, the company had USD 0.6 billion of cash and USD 1.9 billion of undrawn debt.

Bulls Say: 

  • The shares are undervalued. Newcrest is well managed and has a suite of low-cost, long-life mines, which isn’t currently being recognized by investors. 
  • Gold can provide a hedge to inflation risk and offer some benefit in times of market uncertainty. Gold can gain from continued money printing and/or if there is a flight to safety. 
  • Newcrest owns several world-scale deposits in Cadia, Telfer, Lihir, and Wafi-Golpu. Large deposits typically bring significant exploration upside and expansion options.

Company Description:  

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are mainly in Australia and Papua New Guinea. The company also owns a 32% stake in the Fruta Del Norte gold mine in Ecuador, while the acquisition of Brucejack in 2022 adds to its 70% stake in the Red Chris mine in Canada. The company is likely to produce around 2 million ounces of gold per year over the next decade, making it one of the larger global gold producers but still only accounting for less than 2% of total supply. Cash costs are below the industry average and amongst the lowest of the global gold miners, underpinned by improvements at Lihir and Cadia. Organic growth options include its Havieron prospect, the Red Chris underground mine, and the high-grade Wafi-Golpu copper-gold prospect in PNG.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Commodities

Exxon’s Integrated Model Benefits From Current Market; Increasing Fair Value Estimate

Business Strategy & Outlook

While many of its peers have announced intentions to divert investment to renewables to achieve long-term carbon intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emissions reduction targets. It is also investing in low-carbon technologies, but each of these efforts is measured and keeps oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, it’s likely to prove more successful and probably holds less risk. The end of oil is likely to occur, but not anytime soon. Gas is likely to have an even longer life, thanks to the relative attractiveness of its emissions intensity to coal for power generation and the need to supplement intermittent renewable power. These trends along with growing demand for chemicals are what drives Exxon’s investment strategy and will likely deliver superior returns. To satisfy investors, Exxon has reduced previously aggressive spending plans by over 30% to $20 billion-$25 billion annually for 2022-26, which should keep the dividend safe at $50 a barrel. Earnings should still grow, however. Current plans call for a doubling of earnings and cash flow from 2019 levels by 2027, thanks to structural cost efficiencies and high-margin new projects. Production will grow modestly through 2027, but portfolio profitability is set to improve thanks largely to high-margin Guyana volumes (more than 850 thousand barrels of oil equivalent per day by 2027) backfilling declines in North American dry gas production and lower value divestments. Exxon’s high-quality Permian position, which affords capital flexibility and generates free cash flow, should surpass 800 mboe/d by 2027. Exxon’s downstream and chemical segments have suffered from decade-low industry margins in the recent past, but market conditions are beginning to revert to midcycle levels, lifting earnings. Investments will focus on producing higher-value lubricants and diesel in its downstream segment and performance products in its chemical segment, which should lift returns and earnings further.

Financial Strengths

In 2020, Exxon relied on its balance sheet to avoid cutting its dividend. As a result, gross debt increased from $46.9 billion at year-end 2019 to $67.6 billion at year-end 2020. By year-end 2021, Exxon reduced total debt to $47.7 billion, bringing debt/capital to 22%, within its targeted range of 20%-25%. Further debt reduction year to date has brought net debt/capital to 13% by mid-2022. Management expects to spend $21 billion-$24 billion in 2022, in line with its long-term guidance of $20 billion-$25 billion annually through 2027. At this level, Exxon estimates it can cover the capital program and dividend, assuming $37/bbl oil and average downstream and chemical margins in 2022. Proceeds from the remaining half of an ongoing $15 billion divestment program should supplement cash flow, as well. There is enough flexibility in the plan to keep the dividend safe in the event that commodity prices are marginally lower than expected. In a higher oil price environment, one does not expect Exxon to increase capital spending but to direct excess cash flow to debt reduction and shareholder returns. After reintroducing share repurchases with a $10 billion plan, Exxon increased that amount to $30 billion through 2023. Dividend growth is likely to resume soon, given the sharp reduction in debt. Shareholder return increases, particularly repurchases, should continue, considering the high oil price environment and guidance for $100 billion in surplus cash flow through 2027 assuming $60/bbl oil.

Bulls Say

  • Exxon has responded to shareholder concerns by reducing spending, appointing new board members, increasing disclosure, and announcing emissions reduction targets. 
  • Exxon will see its portfolio mix shift to liquids pricing as gas volumes decline and new oil projects start production. Cash margins should improve as a result, thanks to Permian and Guyana volumes. 
  • With coordination between upstream and downstream operations, as well as integrated refining and chemical facilities, Exxon achieves a high level of integration that creates value, as opposed to simply owning the assets.

Company Description

ExxonMobil is an integrated oil and gas company that explores for, produces, and refines oil around the world. In 2021, it produced 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas per day. At the end of 2021, reserves were 18.5 billion barrels of oil equivalent, 66% of which were liquids. The company is the world’s largest refiner with a total global refining capacity of 4.6 million barrels of oil per day and one of the world’s largest manufacturers of commodity and specialty chemicals.

(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

Vinci’s Defensive Concessions Business Will Drive Robust Growth in 2022

Business Strategy & Outlook

Vinci’s strategy to extend the maturity of its concession portfolio will help the company earn durable excess returns. Vinci’s business models rests on managing and operating critical infrastructure over long concession contracts, such as motorways and airports. The company’s actions to increase the portion of its concession-driven revenue, over its short-cycle contracting business. The concessions business earns high profit margins and enjoys significant barriers to entry. In contrast, the contracting business is less attractive on a stand-alone basis but allows Vinci to draw on its knowledge of critical infrastructure to bid on large projects that require greater know-how and less competition, supporting higher margins. Its expertise is likely a factor behind winning major infrastructure works such as the Grand Paris Express and sections of the High Speed 2 line. Vinci’s highly profitable acquisition of toll roads from the French government in 2006 has formed the backbone of the firm over the past 15 years. However, subsequent public disapproval of the deal has seen the state become less generous in awarding long-term extensions to Vinci’s existing network. The shorter-term extensions to be awarded given the need to invest in the decarbonization of motorways. Mergers and acquisitions have helped Vinci become the second-largest airport operator, which enjoys similar barriers to entry as its autoroutes business. While air travel remains depressed due to travel restrictions, Vinci estimates that its airports are only 10% exposed to international long-haul traffic and thus should see a quicker recovery in traffic once travel restrictions are lifted. A return to pre pandemic passenger numbers in 2024. The acquisition of the energy contracting division of ACS will provide Vinci with exposure to the fast-growing renewable energy sector as well as eight concessions mainly in electrical transmission. The development of greenfield projects fits with its expertise and may be the start of the company committing more capital into the renewables sector with the aim of potentially also operating these long-dated assets.

Financial Strengths

Vinci has been able to withstand the worst of global travel restrictions, which have kept earnings from the group’s concessions business heavily depressed, without a significant impact on the group’s balance sheet. Vinci has enough liquidity to meet approximately EUR 3.2 billion of debt maturing in 2022, while still being able to reward investors with a healthy dividend and share buyback of up to EUR 600 million. Vinci’s healthy balance sheet has allowed the company to refinance debt at extremely attractive rates. 57% of the company’s debt is at fixed rates, protecting it against a rising interest rate environment. The Vinci will generate between EUR 4 billion-EUR 5 billion of free cash flow during the five-year forecast period, which incorporates the acquisition of the energy contracting division of ACS at an enterprise value of EUR 4.2 billion paid fully in cash. The net debt/EBITDA to drop below 2 times in 2022, due to the consolidation of ACS and recovery in earnings from the airport segment. Both Vinci’s airport and autoroutes businesses have experienced a sharp upturn in traffic as travel restrictions have eased.

Bulls Say

  • Vinci’s portfolio of diversified concession assets is a unique opportunity for investors to own irreplaceable infrastructure across multiple assets. Returns are supported by long-term concession contracts and favorable demographics. 
  • Vinci’s balance sheet and global presence position the company to boost its portfolio of high-quality assets, should governments look to privatize aging infrastructure. 
  • A healthy order book provides earnings visibility and allows the company to be more selective when bidding on construction projects without taking on additional risks.

Company Description

Vinci is one of the world’s largest investors in transport infrastructure. Significant concession assets include 4,400 kilometers of toll roads in France and 45 airports across 12 countries, making Vinci the world’s second-largest airport operator in terms of managed passenger numbers. The concession’s business contributes less than one fifth of group revenue but the majority of operating profit. Vinci’s contracting business is made up of three divisions, offering a broad variety of engineering and construction services.

(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

Raising the Valuation of Carlsberg After Margins Expand in First Half

Business Strategy & Outlook

Until recently, Carlsberg had underperformed its close peers. Although it has a very strong competitive positioning in its native Denmark and other Scandinavian markets, in other major developed markets it is a second-tier player and has suffered shelf space loss, including the high-profile removal of the flagship brand from Tesco’s shelves in 2015. In addition, Carlsberg’s second-largest market, Russia, has been undergoing volume declines since 2012 due to a decadelong government clampdown on the availability and affordability of beer and a shrinking drinking age population. Returns on invested capital were regularly below the cost of capital, and the low-teens operating margin was below that of the firm’s largest competitors. Yet, under new management at around the same time as the Tesco incident, Carlsberg has come out fighting and now looks in far better shape. SAIL’22, an umbrella for strategic initiatives designed to cut costs and reignite growth, has been a coherent set of strategies to deliver the margin opportunity that for several years was possible. Progress has been decent, with organic sales having grown by over 3% annually over the five years of the program, in spite of the COVID-19-related declines in 2020, and almost 200 basis points being added to the operating margin, which stood at 16.3% on an adjusted basis in 2021. Benchmarking against competitors, however, there is further room for improvement, and the encouragement was that the recently unveiled SAIL’27 strategy suggests more profitability improvement to come. Mix should play a pivotal role. Some of Carlsberg’s markets, including China, are undergoing structural premiumization, and Carlsberg’s premium and above portfolio, including the Tuborg and 1664 brands, as well as line extensions to the Carlsberg brand, should continue to grow at rates well above the market. Medium-term guidance under SAIL’27 is 3%-5% organic revenue growth. The medium-term growth slightly below the midpoint of that guidance, primarily because of Carlsberg’s heavy presence in developed markets, in which beer is likely to lose share to other categories including wine and spirits.

Financial Strengths

Carlsberg is in sound financial shape, and after a multiyear period of paying down debt, it is now less leveraged than Heineken and AB InBev. Following the S&N acquisition in 2008, Carlsberg’s net debt/EBITDA ratio increased to 4.1 times. Since that time, debt has fallen from DKK 48 billion to just DKK 29 billion at year-end 2021, when the adjusted net debt/EBITDA ratio stood at just under 1.4 times. Under the SAIL’22 initiative, management targets a net debt/EBITDA ratio of 2 times, so Carlsberg has some room for releveraging for M&A, increasing the dividend, or repurchasing shares. Carlsberg increased its annual dividend 60% in 2018 and after a further 9% increase in 2021, its payout ratio was 49% last year. This is more or less in line with the large-cap consumer staples peer group. The free cash flow to average over DKK 12 billion over the next five years, and with leverage under control and an average of DKK 4 billion paid out in dividends at the new annualized rate, Carlsberg now has more balance sheet optionality than it has had in several years. The company completed a share-repurchase program of DKK 4 billion and announced an additional program to repurchase a further DKK 1 billion in the first quarter of 2022. Acquisitions could be one use of the company’s excess cash. That said, it showed little interest publicly in the assets being divested by AB InBev as part of the SABMiller acquisition, and most deals have been bolt-on in nature in recent years. The Grolsch and Peroni brands, sold to Asahi, had the potential to be value-accretive to Carlsberg. With cash and stock, Carlsberg could enter into a transformative deal, especially as the company delivers on its SAIL’22 and SAIL’27 targets of strengthening the core business.

Bulls Say

  • Although Carlsberg is under indexed in premium segments, it does have a presence with brands such as Tuborg and 1664 Blanc, and the premiumization of the portfolio could be seen as a long-term opportunity. 
  • Carlsberg is present in the attractive market of Vietnam and has the opportunity to raise its economic interest in its local subsidiary, Habeco. 
  • Management’s medium-term guidance around its SAIL’27 strategy implies that there is more margin expansion to come in the years ahead, which will further close the financial performance gap to Heineken.

Company Description

Carlsberg is the fourth-largest brewer in the world following the combination of Anheuser-Busch InBev and SABMiller, with major operations in Russia, Europe, and Asia. It holds leading shares in Russia, Scandinavia, Laos, Cambodia, and parts of western China. Its key brands include Carlsberg, Tuborg, Baltika, Holsten, and Somersby. The company’s 2021 beverage volume was split among Northern and Western Europe (30%), Eastern Europe (39%), and Asia (31%).

(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

Heineken Delivers Strong First Half of 2022, but Risks Loom

Business Strategy & Outlook

Heineken’s “green diamond” strategy, its new approach to long-term value creation, focuses on four metrics: growth, profitability, capital efficiency, and sustainability and responsibility. The newly announced Evergreen strategy targets growth and profitability. Growth targets are vague and noncommittal, but the Heineken has structural growth drivers that will allow it to generate above-average net revenue growth. Volume growth in early-stage emerging markets such as central and southern Africa, premiumization in its late-stage developing markets such as Brazil, and a limited amount of pricing should combine to drive mid-single-digit growth in the medium term. Heineken plans to extract EUR 2 billion gross in costs by 2023, primarily from reducing headcount by around 9%, at a cost of EUR 900 million in operating and capital expenditure, and it targets an EBIT margin of 17% by 2023, which is achievable and probably beatable. As per report 18% as a reasonable medium-term margin expectation, driven by product mix and operating leverage as volume grows in some of Heineken’s greenfield emerging markets. Some organizational change will be required, however, and embedding a culture of cost control, especially given the size of the headcount reduction, without affecting the productivity of employees as being the biggest challenge new CEO Dolf van den Brink will face. Still, there are opportunities to expand margins through footprint optimization, and process standardization and digitalization. Heineken’s returns on invested capital are structurally lower than those of Anheuser-Busch InBev, for example. The ownership of pubs in the U.K. is an example of the heavy investments Heineken has made in its growth and competitive advantages. While it’s notable that return on assets has been dropped as a performance metric in the green diamond strategy, this is mostly related to the drop in demand during COVID-19 lockdowns, and if Heineken delivers on its volume growth and margin expansion opportunities, higher returns on invested capital should follow. The mid teens ROICs in the medium term, up from about 10% now on a normalized basis.

Financial Strengths

Heineken is in solid financial health. The company increased the gearing on its balance sheet in 2012 to acquire the remaining shares of Asia Pacific Breweries. Following the acquisition, Heineken’s adjusted net debt/EBITDA ended 2012 at 3.4 times, and the firm has committed to reducing that ratio to maintain its credit ratings. Despite a spike in the net debt/EBITDA ratio caused by the COVID-19 disruptions in 2020, by 2021, despite the U.K. pubs acquisition, the company had deleverage to levels below most of its peer group, with adjusted net debt/EBITDA at 2.6 times. Even if it increases the dividend at a high-single-digit rate and initiates a share-repurchase program in the outer years, Heineken’s roughly EUR 2 billion in annual free cash flow should allow it to deleverage to net debt/EBITDA of under 2 times by 2023, which would still be well below AB InBev’s current level of roughly 4 times and in line with the 2 times is the normalized durable level in the brewing industry. Given the limited options for transformative mergers and acquisitions, Heineken is unlikely to be involved in any major transactions in the near term, but the bolt-on acquisitions of small and midsize breweries are still possible, particularly in Asia. Equity swaps and the use of stock are possibilities, as was the case in the 2010 merger with Femsa. The stated target payout ratio is 30%-35%. The firm also reduced the dividend significantly during the financial crisis in 2009. This level of payout gives the firm plenty of flexibility to make organic or acquisition investments to expand the business.

Bulls Say

  • The premium portfolio includes Heineken, the only truly global premium lager brand, Affligem, Lagunitas, and Birra Moretti. It is well positioned to capture market share through premiumization. 
  • Although it will weigh on ROIC, the acquisition of Punch Taverns means.

Heineken controls almost 3,000 pubs in the U.K., a competitive advantage that will give it direct feedback from consumers in a competitive market. 

  • Heineken is the global leader in cider, a category that is growing around 2.5 times faster than beer, and several key markets offer significant room for growth.

Company Description

Heineken is Western Europe’s largest beer producer, selling 231 million hectolitres in 2021, and following the Anheuser-Busch InBev acquisition of SABMiller, it is the world’s second-largest brewer. It has the leading position in many European markets, including the Netherlands, Austria, Greece, and Italy. Its flagship brand, Heineken, is the world’s leading international premium lager and has spawned several brand extensions. Its brand portfolio spans nonalcoholic, Belgian, and craft beer. Heineken is the world’s biggest cider producer.

(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.