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Technology Stocks

Keysight Dominates Communications Testing With a Broad and Comprehensive Portfolio of Solutions

Business Strategy & Outlook

Keysight Technologies is the leader in communications testing and measurement solutions, and offers a vendor-agnostic way to invest in the rapidly growing 5G market. Keysight has the strongest and broadest communications testing capabilities in the market, inclusive of hardware, software, and services. A comprehensive portfolio allows Keysight to act as a strategic partner to its customers, enabling new designs and accelerating time to market for network operators, network equipment OEMs, device OEMs, and suppliers. Keysight can reduce time to market for customers more than competitors as a result of its end-to-end portfolio of premium offerings. Keysight’s leadership stems from its large investment in R&D–annually doubling that of the nearest competitor–that it focuses on the communications market. The hefty organic and inorganic investment has led to Keysight leading the market pivot toward software and credit its unmatched portfolio breadth for its top market share. A broad portfolio that layers software and services on top of hardware embeds Keysight into customer workflows and entrenches customers in its ecosystem. A broad, sticky portfolio underpins the wide economic moat rating for the firm. Keysight should continue to dominate the communications market, especially as it pivots toward more complex 5G testing in which it is already demonstrating proficiency. The market share gains for Keysight and think greater complexity in 5G networks will expand its wallet share at customers–both of which would result in continued outperformance of the underlying testing market. The firm continues shifting customers to subscription billing for its software and services and thinks it will complement continued organic investment with strategic M&A to further build out its software portfolio. The growing mix of software and services to expand margins. Finally, the Keysight to continue generating impressive cash flow and to send a large proportion of it back to shareholders.

Financial Strengths

The Keysight Technologies to continue generating impressive cash flow, which will fund organic and inorganic investment as well as returns to shareholders. As of Oct. 31, 2021, the firm held a net cash position, with $2.1 billion in cash on hand and $1.8 billion in gross debt. The firm will stay leveraged–especially with its current long-term maturities–but pay off its debt as it comes due. The firm also has an untapped $450 million revolver that expires in February 2022.The Keysight to continue its record of strong cash generation. The firm has converted well over 100% of its net income into free cash flow since 2017, and this pattern to carry forward through the forecast. As per forecast over 100% free cash flow conversion through 2026 and anticipate more than $1 billion in free cash flow annually during this period.

Bulls Say

  • Keysight’s large research and development budget has created a competitively advantaged portfolio for communications testing that one doesn’t expect other firms would be able to easily replicate. 
  • Keysight holds a majority share of the 5G testing market, which will elicit strong top-line growth and expand profitability over the next five years. 
  • The Keysight to continue converting over 100% of net income into free cash flow, and predict it to generate over $1 billion in free cash flow annually over the forecast.

Company Description

Keysight Technologies is a leader in the field of testing and measurement, helping electronics OEMs and suppliers alike bring products to market to fit industry standards and specifications. Keysight specializes in the communications market, but also supplies into the government, automotive, industrial, and semiconductor manufacturing markets. Keysight’s solutions include testing tools, analytical software, and services. The firm’s stated objective is to reduce time to market and improve efficiency at its more than 30,000 customers.

(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

Keysight Dominates Communications Testing With a Broad and Comprehensive Portfolio of Solutions

Business Strategy & Outlook

The Keysight Technologies is the leader in communications testing and measurement solutions, and offers a vendor-agnostic way to invest in the rapidly growing 5G market. The Keysight has the strongest and broadest communications testing capabilities in the market, inclusive of hardware, software, and services. A comprehensive portfolio allows Keysight to act as a strategic partner to its customers, enabling new designs and accelerating time to market for network operators, network equipment OEMs, device OEMs, and suppliers. The Keysight can reduce time to market for customers more than competitors as a result of its end-to-end portfolio of premium offerings. The Keysight’s leadership stems from its large investment in R&D–annually doubling that of the nearest competitor–that it focuses on the communications market. The hefty organic and inorganic investment has led to Keysight leading the market pivot toward software and credit its unmatched portfolio breadth for its top market share. A broad portfolio that layers software and services on top of hardware embeds Keysight into customer workflows and entrenches customers in its ecosystem. A broad, sticky portfolio underpins the wide economic moat rating for the firm. Keysight should continue to dominate the communications market, especially as it pivots toward more complex 5G testing in which it is already demonstrating proficiency. The market share gains for Keysight and think greater complexity in 5G networks will expand its wallet share at customers–both of which would result in continued outperformance of the underlying testing market. The firm to continue shifting customers to subscription billing for its software and services and think it will complement continued organic investment with strategic M&A to further build out its software portfolio. The growing mix of software and services to expand margins. Finally, the Keysight to continue generating impressive cash flow and to send a large proportion of it back to shareholders.

Financial Strengths

The Keysight Technologies to continue generating impressive cash flow, which will fund organic and inorganic investment as well as returns to shareholders. As of Oct. 31, 2021, the firm held a net cash position, with $2.1 billion in cash on hand and $1.8 billion in gross debt. The firm will stay leveraged–especially with its current long-term maturities–but pay off its debt as it comes due. The firm also has an untapped $450 million revolver that expires in February 2022.The Keysight to continue its record of strong cash generation. The firm has converted well over 100% of its net income into free cash flow since 2017, and this pattern to carry forward through the forecast. As per forecast over 100% free cash flow conversion through 2026 and anticipate more than $1 billion in free cash flow annually during this period.

Bulls Say

  • The Keysight’s large research and development budget has created a competitively advantaged portfolio for communications testing that one doesn’t expect other firms would be able to easily replicate. 
  • Keysight holds a majority share of the 5G testing market, which will elicit strong top-line growth and expand profitability over the next five years. 
  • The Keysight to continue converting over 100% of net income into free cash flow, and predict it to generate over $1 billion in free cash flow annually over the forecast.

Company Description

Keysight Technologies is a leader in the field of testing and measurement, helping electronics OEMs and suppliers alike bring products to market to fit industry standards and specifications. Keysight specializes in the communications market, but also supplies into the government, automotive, industrial, and semiconductor manufacturing markets. Keysight’s solutions include testing tools, analytical software, and services. The firm’s stated objective is to reduce time to market and improve efficiency at its more than 30,000 customers.

(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

Dexus has sold stakes in office, industrial and healthcare assets into funds management vehicles that it manages

Business Strategy & Outlook

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading. Rent is the biggest revenue driver with the office and industrial divisions accounting for over 90% of funds from operations, or FFO. High-quality offices in Sydney dominate, with Dexus having interests in many trophy assets including Sydney’s Australia Square, 1 Farrer Place, and 1 Bligh Street. It also owns or manages a seasoned industrial portfolio, including the massive Dexus Industrial Estate in one of Australia’s fastest-growing industrial precincts, Truganina, Victoria. It also has a small retail portfolio, mostly retail sites attached to offices, and a small healthcare portfolio. Dexus has sold stakes in office, industrial and healthcare assets into funds management vehicles that it manages.

Funds management is the smallest but fastest-growing portion of revenue, and more developments being rotated into funds management vehicles, adding capital efficiency and management fees. It accounted for about 6% of revenue in fiscal 2019, and the funds management grows by about a third by the end of the discreted 10-year forecast period. The high-quality portfolio should see Dexus perform better than most, with about 90% of its office portfolio either premium or A-grade by Property Council of Australia guidelines. Dexus’ portfolio has held up relatively well in major downturns compared with rivals with lower-quality portfolios. It’s hard to imagine a worse scenario for an office property than that experienced in 2020-21. In those years, Dexus reduced rents somewhat on the small portion of leases that expired, but occupancy remained high.

Financial Strengths

Dexus is in solid financial health, with look-through gearing of 26.9%, below the group’s targeted range of 30%-40%. The group has substantial buffers to its banking covenants. However, gearing is likely to rise as Dexus commences development projects. Gearing ratios are also likely to rise as asset prices fall, given remarkably low capitalisation rates of 4%-5% being seen on CBD office transactions in fiscal 2022, and bond markets pricing in meaningfully higher interest rates. The group has a large pipeline of developments, and could make debt-funded acquisitions during the downturn, or a buyback, which could also push up gearing. This can be offset by divestments, including rotating some assets into its fund’s management vehicles, thereby taking them off the group balance sheet. On balance though, it is still expected gearing to rise from current levels. The Dexus’ reasonably conservative management team, and the health of other financial metrics look comfortable. Interest cover is 6.0 times on a look-through basis, compared with covenant of 2 times. Interest rate sensitivity is modest, with about two thirds of debt being hedged, and debt maturities are staggered. If inflation intensifies, further rate

rises could increase the cost of rolling over maturing debt facilities and put pressure on Dexus’ earnings and distributions in the near term. However, consistently it can be assumed a long-term cost of debt of 5.8%, significantly above current levels.

Bulls Say

  • Dexus owns a high-grade office property portfolio and a solid industrial portfolio, and it will likely benefit from an ongoing demand for quality property from the likes of pension funds, sovereign wealth funds and other offshore investors.
  • Population growth boosts the value of Dexus’ assets with high-quality sites achieving more rent bargaining power, and some low-quality sites potentially switching to higher-value uses.
  • Lower credit spreads and improving rental collections could offset potential interest-rate rises.

Company Description

Dexus is a major Australian property owner, developer, and manager. It owns a large, high-grade office portfolio and a smaller industrial portfolio in Australia. It also manages properties on behalf of third-party investors. Dexus was formed by the merger of Deutsche Office, Industrial and Diversified Trusts. Management is internal, as opposed to external, as it is for some peers.

(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

Downer has established strong relationships with local and state governments that outsource operational and management activities

Business Strategy & Outlook

Downer is a major domestic infrastructure, rail, engineering, and maintenance business. The company is chiefly exposed to the domestic rail, water, road, and telecommunications sectors. The future of Downer is focused on urban services, with mining and high-risk construction businesses sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution. Downer’s mining operation contributed an approximate 15% share of group EBIT, down from 45% at the peak of the mining boom. It was an asset-heavy business undertaking only a small number of long-term large-scale open-cut mining service contracts. The business faced increasing competition and cyclical demand, being highly dependent on the expenditure plans of major mining and energy companies.

A large-scale network of facilities affords it a dominant position in service and maintenance of locomotives and wagons. The rail business is highly leveraged to both the mining sector and state government public transport expenditure. EBIT contribution from Downer’s engineering, construction, and maintenance, or EC&M, segment has fallen from 35% of group total to approximately 10%. The utilities segment comprises 15%-20% of Downer’s EBIT. Downer bought the majority 88% of Spotless Group in 2017 under an AUD 1.3 billion takeover and the balance in December 2020. Spotless fits with Downer’s diversification drive away from mining services.

Financial Strengths

Downer is now in good financial health. Net debt at June 2022 was AUD 623 million, down from AUD 1.5 billion levels just two years ago, and current 22% gearing and net debt/EBITDA of 1.1 excluding operating leases are more than conservative. Including operating leases, net debt/EBITDA is 1.6 and well below Downer’s 2.0-2.5 target range. The balance sheet is to be in net cash before decade’s end, flagged potential for incremental Urban Services acquisitions notwithstanding. Downer has set up a more capital-light business model for the future, with an emphasis on urban services. It’s

interesting to note that 65% of group fiscal 2020 capital expenditure went on mining and laundries. It’s clear why these segments were sold. Success on this front has enhanced the balance sheet.

Bulls Say

  • Downer is emerging from a period of turmoil and transformation. Restructurings, write-downs, major project losses, and contract disappointments of the past appear to be over.
  • Since July 2010, maintenance/infrastructure contract wins and introduction of a new project management framework have helped to re-establish Downer’s reputation.
  • Downer’s growing revenue streams from maintenance contracts in the social infrastructure, transport, telecommunications, and government sectors are helping to increasingly insulate the company from the downturn in mining work.

Company Description

Downer operates engineering, construction, and maintenance; transport; technology and communications; utilities; and rail units. But the future of Downer is focused on urban services, and mining and high-risk construction businesses have been sold. The engineering, construction, and maintenance business had exposure to mining and energy projects through consulting services. The mining division had provided contracted mining services. The rail division services and maintains passenger rolling stock, including locomotives and wagons.

(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

Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance

Business Strategy & Outlook

Cleanaway’s strategy is positive, which seeks to maintain its leading position in commercial and industrial, or C&I, and municipal waste collections and to continue to improve its moat profile by investing in midstream materials recovery assets and, where possible, in downstream disposal assets. Cleanaway’s is the leading player in C&I and municipal waste with around 140,000 C&I customers and some 90 municipal council waste collection contracts. The economics of the waste management industry are overwhelmingly local in nature. Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance. This local market dominance in turn delivers route density that better spreads fixed costs—an imperative for-profit generation in waste collection. Cleanaway is a relative latecomer to disposal, biological treatment, and midstream materials recovery with global players waste management competitors Veolia and Suez possessing high-quality disposal assets Cleanaway cannot replicate. An exit from the Australian market by either player would be the only route to materially increasing disposal earnings.

As such, the sale of the Lucas Heights Landfill by Suez to Cleanaway–the result of the Veolia-Suez merger–is a rare windfall. Cleanaway’s growth into materials recovery is optimistic which feature more favourable economics than waste collection. Under its “Blueprint 2030” capital allocation strategy, the group will continue to focus investment in materials recovery and energy from waste, or EfW. Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in greenfield materials recovery, waste treatment, and EfW projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industry’s midstream. Further diversifying Cleanaway away from waste collections, the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.

Financial Strengths

Cleanaway debt-funded its acquisition of key Australian post-collection assets from Suez. Leverage–defined as net debt/EBITDA excluding IFRS-16 lease liabilities–sits at 2.78 times at the end of fiscal 2022, up from 1.0 times at fiscal 2021 year-end. Nonetheless, significant headroom to Cleanaway’s leverage covenant on existing debt facilities–calibrated at 3.0 times–exists. Therefore, balance sheet flexibility exists should further acquisition opportunities arise. Cleanaway’s balance sheet amid COVID-19 induced turbulence is comfortable. Specifically, Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021–fiscal 2024 period, Cleanaway’s sources of cash— those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations over said period. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or greenfield–under Cleanaway’s Blueprint 2030 strategy. Return of capital to shareholders could be considered in the absence of suitable mid- or downstream waste asset investment opportunities.

Bulls Say

  • Cleanaway is benefiting from industry consolidation.
  • Municipal waste contracts provide relatively stable cash flows through the economic cycle.
  • Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.

Company Description

Cleanaway Waste Management is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment, and valorisation, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I,

waste stream segments and in non-hazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection 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
Dividend Stocks

ASX’s Elevated Cost Growth Unlikely to Be Sustained

Business Strategy & Outlook

The ASX to deliver a low-single-digit EPS compound annual growth rate over the next decade, with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means the share price to be largely driven by bond market movements and central bank interest rates. One cannot expect competition to materially undermine earnings, despite the evolving regulatory and competitive landscape. One can expect long-term growth in market value to underpin EPS growth. The relatively reliable nature of earnings influences the medium fair value uncertainty rating. The ASX has long been protected by two significant barriers to competition through regulation and network effects. The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome. In March 2016, the government reiterated its desire for competition in cash equities clearing, which constitutes just 7% of ASX group revenue, but not in cash equities settlements, which make up a further 6% of group revenue. However, a government report found that even if competition were allowed in cash equities clearing, competitors are unlikely to emerge, as the regulatory requirement to maintain operations and regulatory capital in Australia reduce potential synergies for overseas clearinghouses. There are currently no proposals to introduce competition in derivatives clearing, ASX’s largest business (comprising around a third of group revenue), with obstacles such as cross-margining acting as a barrier to competition.

Financial Strengths

ASX is in good financial health due to its dominant Australian securities exchange, high margins, and capital-light business model. The company is debt-free and has been for many years, a situation to continue for the foreseeable future. The wide economic moat has protected consistently strong and stable EBIT margins of around 70% over the past decade, and as per forecast an average EBIT margin of around 65% over the next five years. Although revenue is vulnerable to market declines to some degree, the large margins limit leverage at an EPS level. A lack of capital requirements enables a dividend payout ratio of 90%, which one can expect to continue for the foreseeable future. ASX lacks an appetite for acquisitions, which is not a bad thing in one opinion. The company seeks to drive growth organically through product innovation and cost efficiencies. One cannot expect this strategy to change. ASX has a simple, maintainable capital structure comprising solely ordinary equity. Shares on issue have been reasonably stable for the past decade, with capital expenditures funded from cash flow. ASX also records participant balances on its balance sheet, which represents cash deposits that clearing participants are required to make to satisfy margin requirements on outstanding positions. This cash is invested in cash, as well as various money market instruments.

Bulls Say

  • Long-term earnings growth is underpinned by growth in the value of the stock market and protected by a wide economic moat. However, in the short term, earnings can be affected by market weakness, although EPS fell just 7% during the global financial crisis. 
  • ASX has a wide economic moat underpinned by network effects and regulation. This competitive advantage to protect EBIT margins of around 65% over the next decade and a low-single digit EPS CAGR. 
  • ASX is financially robust with a good balance sheet, strong cash flow, and tight cost control.

Company Description

ASX is the largest securities exchange in Australia with an effective monopoly in listing, trading, clearing, and settlement of Australian cash equities, debt securities, investment funds, and derivatives. Other activities include the technology services, enforcing exchange rules, and exchange-related data. The ASX demutualized and listed on its own exchange in 1998 and subsequently acquired the Sydney Futures Exchange in 2006.

(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

Genesis’ Strong Fiscal 2022 Underpinned by High Prices and Increased Rainfall

Business Strategy & Outlook

Genesis operates a mix of thermal (coal and gas) and hydro generation, with total annual production of approximately 7,000 GWh. The company’s hydro generation provides it with low-cost generation during times when there is sufficient rainfall and/or snowmelt. Conversely hydro generation can fall sharply when inflow to the firm’s lakes recedes because of insufficient rainfall. During such times, production from its thermal power plants can be ramped up to make up for the shortfall in hydro generation. Spot prices can increase dramatically during periods of low rainfall, reflecting the demand-supply mismatch caused because of lower nationwide energy output. Such times tend to favor Genesis as the excess generation is sold at higher prices. Consequently, Genesis’ profitability and margins can increase during periods of low rainfall and high electricity prices. Genesis hedges its gas requirements by holding a 46% stake in New Zealand’s Kupe gas field. Under the current contract, Genesis is obligated to purchase the entire natural gas output from Kupe. This provides the firm with a reliable supply of gas to power its thermal plants and also underpins Genesis’ dual-fuel offering to its customer base. Genesis is also entitled to its share of LPG and oil from Kupe. The oil is exported, while LPG is on-sold to its residential and commercial customers. Kupe introduces oil price risk, though hedging helps in the near term. The main concern is that Kupe earnings will end in 10-15 years, depending on the extent to which its life can be extended through new oil and gas discoveries. This is a risk to Genesis’ earnings, cash flow, and dividends over the long term. As transmission lines are upgraded and more renewable energy is developed, Genesis will likely close some of its aging thermal generation units in the medium term.

Financial Strengths

Genesis Energy’s financial leverage is aggressive following recent acquisitions, however, the given expectations for solid earnings growth, long average debt maturity profile and the ongoing dividend reinvestment plan. As of June 2022, gearing (as measured by debt/capital) was 36%, down slightly on last year. Net debt/EBITDA (adjusted for equity credit on subordinated debt and excluding one-off costs) was 2.7 times in fiscal 2022, within management’s target of 2.4-3.0 times. The forecasted unadjusted net debt/EBITDA, which one can think is the better way to judge financial strength, of 2.7 times in fiscal 2023. This is a little aggressive but this ratio is to fall toward 2.5 times by fiscal 2024. Guidance is for capital expenditure of up to NZD 80 million in fiscal 2023. The elevated capital expenditure for a few years before falling back to typical levels of below NZD 70 million per year. Nonetheless, free cash flow should remain strong.

Bulls Say

  • Persistently high wholesale electricity prices are flowing through to customer tariffs, supporting earnings growth. 
  • A mix of thermal and hydro generation assets allows Genesis Energy to take advantage of high electricity prices during periods of low rainfall and low hydro storage. 
  • The Pole 3 cable, linking the South Island to the North Island, reduces price disparity between the two islands and reduces location cost risk for all generators.

Company Description

Genesis Energy is one of New Zealand’s leading producers of electricity, accounting for more than 15% of the country’s total generation. The firm enjoys a strong retail presence, with the highest retail market share, at over 25%. The company has a mix of renewable and thermal assets, with the latter accounting for about 55%-60% of the firm’s overall production. The company has a 46% interest in the Kupe oil and gas field.

(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
Property

Hotel Property Investments’ Outlook Is Depressed by Rising Interest Rates

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy & Outlook

A key attraction of Hotel Property Investments is favorable lease terms that provide predictable above-inflation rental income from long-term leases to joint venture entity Queensland Venue Company, which is an agreement between supermarket giant Coles and private equity owned (Kohlberg Kravis Roberts) Australian Venue Company. AVC manages the day-to-day operations of the hotels, with Coles needing the hotel licenses to operate its liquor retailing business under restrictive Queensland laws. There is ongoing uncertainty around Coles’ longer-term strategy regarding its liquor business following competitor Woolworth’s decision to exit its liquor and hotel businesses. Close to 90% of Hotel Property’s freehold properties are in Queensland, predominantly pubs that are leased to QVC. The joint venture leases generate about 90% of Hotel Property’s rental income. Since annual rents are not linked to earnings, investors do not generally benefit from the upside of stronger pub operating performance and face the downside risk of the joint venture not renewing leases on poorly performing pubs. 

Although this risk has been substantially alleviated due to the renewal of most leases for an extended 10- to 15-year period. The further trade-off is the defensive nature of the long lease terms, and strong tenants that generate above-inflation rentals with low maintenance costs. Most properties are on attractive triple-net lease terms where the tenant is responsible for most expenses other than land tax in Queensland, which recently increased. The portfolio currently has a weighted average lease term of about 10 years. Hotel Property is the ultimate holder of hotel licenses on most properties. These licenses allow the sale of liquor at up to three detached bottle shops within 10 kilometers of the main premises. Licenses revert to Hotel Property at the end of the lease term with respect to most pubs. Where the joint venture owns the license but opts to terminate the lease, Hotel Property has right of first refusal over the license at a preset price tied to trading data at that time.

Financial Strengths

Hotel Property is in sound financial health, with gearing (debt less cash/total assets less cash) of about 35% at the end of fiscal 2022, well below covenant gearing of 60% and within its target gearing of between 35% and 45%. It is also comfortably meeting its interest cover covenant of 1.5 times, with current interest cover (earnings before interest and tax/interest expense) of above 3.5 times. Debt maturity profile is fairly long at 4.1 years. The recent rise in interest rates could significantly increase interest expenses in the medium term because about 45% of all debt is fixed rate and begins to mature in 2025.

Bulls Say

  • Hotel Property Investments’ distribution yield is higher than most Australian REIT peers, supported by most contracted annual rental increases averaging the lesser of 2 times CPI or 4%. 
  • Rental income is underpinned by long lease terms. 
  • Liquor and most gaming licenses are retained by Hotel Property when leases expire. This is a contingent asset that should be a draw-card for potential pub tenants in the absence of adverse regulatory changes.

Company Description

Hotel Property Investments is an Australian REIT with a portfolio of freehold pub properties primarily in Queensland. Its portfolio is almost exclusively leased to Queensland Venue Company on triple-net long-term leases where the tenant is responsible for outgoings (except land tax in Queensland), resulting in relatively low maintenance expenses. Most leases also provide for annual rental increases typically at the lower of 4% or two times the average of the last five years consumer price index.

(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

SQM’s Growing Lithium Capacity Should Benefit From Higher Prices as EV Adoption Rises

Business Strategy & Outlook

Through its access to high-quality mineral deposits, Sociedad Quimica y Minera de Chile is a large, low-cost producer of lithium, iodine, and nitrates used in specialty fertilizers. SQM’s crown jewels are its geologically advantaged lithium and caliche ore assets. SQM’s low-cost lithium deposit in the Salar de Atacama boasts the highest concentration of lithium globally and benefits from high evaporation rates in the Chilean desert. As electric vehicle penetration increases, the high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities. SQM is the top three lithium producers globally. The company is in the midst of expanding its lithium carbonate production capacity to at least 250,000 metric tons from 70,000 in 2019. SQM is also investing in lithium hydroxide production in Australia through a joint venture with Wesfarmers, Covalent Lithium, which will be a fully integrated spodumene-based lithium hydroxide producer. The first part of the project entered production in the mid-2020s, with a capacity expansion in the second half of the decade. Unit costs should sit on the lower half of the lithium hydroxide cost curve. SQM is a market leader in potassium nitrate, a specialty fertilizer used in high-value crops, including fruits and vegetables. Specialty potash demand should benefit from the shift in emerging-market diets to higher-value foods. While specialty fertilizer prices tend to move in line with commodity potash prices, they have been less affected by movements in commodity potash prices. SQM is also a small player in commodity potash. SQM is the world’s largest producer of iodine, used in X-ray contrast media, pharmaceuticals, and LCD films. Iodine demand has grown 3% annually over the past decade and should continue to grow at this pace as healthcare spending rises with aging populations. SQM had increased its market share to 35% by the end of 2017 through a volume-over-price strategy, which caused iodine prices to fall. After higher-cost supply reduced production and SQM achieved its market share goals, the company is now acting as a rational player and prices have increased since 2018.

Financial Strengths

SQM is in excellent financial health. As of June 30, 2022, cash and cash equivalents, including current financial assets, and total debt both stood at roughly $2.6 billion. SQM’s debt position has grown in recent years as the company is in the midst of quadrupling its Chilean lithium capacity, funding development of its Australian lithium joint venture project, and expanding its fertilizer and iodine production capacities. The company plans to spend over $2 billion in capital expenditures from 2021 to 2024 to support these growth initiatives. To help fund these investments, the company issued $1.1 billion in equity in early 2021. However, given the recent rise in lithium, fertilizer, and iodine prices, it is expected SQM will be able to pay for the remaining capital expenditures with cash generated from its operations. Ultimately, the company’s balance sheet remains healthy as profits grow from the increased volumes and higher lithium prices. SQM’s dividend varies each year. It is calculated as a percentage of net income that ranges between 50% and 100% depending on balance sheet metrics, including total current assets divided by total current financial liabilities and total liabilities minus current financial assets divided by total equity. While SQM’s dividend will fluctuate from year to year, the company will generate enough cash flow to meet all of its financial obligations, including dividends.

Bulls Say

  • SQM’s crown jewel is its Salar de Atacama operation in Chile, which is the lowest-cost lithium deposit globally. Its capacity expansions at this resource should create long-term value. 
  • The company’s specialty fertilizer blends of potassium, nitrates, and sodium garner a premium to commodity fertilizers due to their use in high-value crops, including fruits and vegetables. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for SQM.

Company Description

Sociedad Quimica y Minera de Chile is a Chilean commodities producer with significant operations in lithium (primarily used in batteries for electric vehicles and energy storage systems), specialty and standard potassium fertilizers, iodine (primarily used in X-ray contrast media), and solar salts. The company extracts these materials through its high-quality caliche ore and salt brine deposits. SQM is also developing a hard rock lithium project in Australia.

(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

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021

Business Strategy & Outlook

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021. Amcor’s operations span over 40 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets. Amcor has focused its portfolio on segments within flexible and rigid thermoplastics that feature attractive returns, largely underpinned by significant merger and acquisition, or M&A, activity. To this end, Amcor has completed 25 acquisitions since 2010 and is pushing forward with its largest transaction to date, making an all-scrip offer in August 2018 for leading U.S. flexibles player Bemis Co. 

Amcor divested its Australasian fiber, glass, and aluminum beverage can packaging businesses in conjunction with its North American fiber-packaging distribution business in December 2013, in order to focus solely on plastics. The focusing the portfolio on segments requiring more complex, greater value-add manufacturers that attract higher margins is entirely appropriate. In the longer term, the Amcor’s returns and moat benefit greatest from the scale in resin procurement that the enlarged group enjoys as a scale player in each of its geographies. The plastics industry remains a significantly fragmented industry in spite of the efforts of Amcor and other large regionally and globally active players to roll up the industry. Thus, resin procurement advantages for players with regional scale are both material and long-lasting, particularly in light of the mature nature of markets that the plastics industry sells into, where demand is derived from household consumption. Therefore, Amcor’s strategy positively and the key driver of returns on invested capital, or ROICs, have averaged 10.8% over fiscal 2016-20, comparing favorably with the weighted average cost of capital, or WACC, estimated at 7.9%. In the future, this advantage is to bolster Amcor’s positive ROIC-WACC spread, with ROICs expected to average 11% over fiscal 2021-25.

Financial Strengths

Amcor maintains substantial financial leverage but the defensive nature of packaging markets provides scope for relatively high gearing. Leverage–defined as net debt/EBITDA before IFRS-16 lease liabilities–stood at 2.7 times at fiscal 2022 year-end. With a free cash flow forecast of USD 1.2 billion in fiscal 2023, one commends Amcor’s freshly announced USD 400 million share buyback. Upon completion of the buyback, the leverage to remain at 2.7 times at fiscal 2023 year-end. In considering the use of leverage, Amcor aims to retain investment-grade credit ratings with credit ratings agencies S&P and Moody’s. Amcor speaks to a long-term leverage range of 2.25 – 2.75 times as sufficient to maintain its current credit ratings. However, net debt/EBITDA stood at 2.9 times at fiscal 2021 half year-end following the completion of the Bemis acquisition in fiscal 2020. Leverage is anticipated to recede as Bemis cost synergies are realized medium-term. Nonetheless, Amcor is comfortable running its balance temporarily above 2.75 times, noting that both S&P and Moody’s could downgrade Amcor one further notch and its debt would still retain a desired investment-grade designation. Given the highly defensive nature of Amcor’s business, this threshold for downgrade by the ratings agencies is likely in the range of 3.5 times to 4.0 times net debt/EBITDA. With leverage even under the bear case scenario–where Amcor’s volumes contract by circa 0.5% over the fiscal 2021 and fiscal 2022 period–leverage peaks at 2.8 times in fiscal 2025. Therefore, with Amcor not at risk of breaching its internal leverage targets, one can be confident that a breach of debt covenants in the current environment is highly unlikely.

Bulls Say

  • Amcor’s efforts to focus its portfolio toward more complex, greater value-added categories will lead to consistently higher margins. 
  • Exposure to emerging markets, with rapidly rising per capita incomes, helps offset Amcor’s mature demand from developed markets. 
  • Completion of the Bemis deal significantly augments Amcor’s existing flexibles portfolio, while adding additional scale in resin procurement.

Company Description

Amcor is a global plastics packaging behemoth, with global sales of USD 14.5 billion in fiscal 2022 following the acquisition of Bemis in 2019. Amcor’s operations span over 40 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end 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.

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