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Technology Stocks

Nokia is a key provider of telecommunication hardware, software, and services to communication service providers

Laptop with chart on its display at workplace of economist

Business Strategy & Outlook

Nokia is a key provider of telecommunication hardware, software, and services to communication service providers. CSP equipment spending provides robust growth during generational wireless upgrade cycles followed by spending lulls, with 5G being the latest tailwind. 5G’s promise of connecting billions of wireless devices at incredible speed across more spectrum bands, along with more use cases than 4G, may offer Nokia more upside than previous wireless generations. However, one does not view Nokia’s core market as moat supportive because CSPs typically multisource equipment and possess purchasing power over their vendors. Nokia has a fundamentally strong strategy to remain a leader in its competitive environment after bloated initial 5G costs caused the firm to overhaul its products. 

Nokia’s core operation should benefit from 5G network infrastructures requiring more hardware to cover the increased quantity of spectrum bands and transmit at the highest speeds. Nokia’s solutions could appeal to a wider client base as industries integrate “Internet of Things” devices into their networks and enterprises build private wireless networks. The healthy demand for Nokia’s software and service offerings as software-defined networking becomes commonplace and customers desire solutions to optimize increasingly complex networks. Nokia’s technology segment creates revenue through licensing critical communication patents and receiving royalty payments through HMD’s Nokia-branded smartphone sales. Nokia has license agreements with leading 5G handset manufacturers, and the company has stated its intention to pursue licensing in industries such as automotive and consumer electronics. Alongside selling more enterprise private wireless networks, the 5G networks and Internet of Things device propagation offer Nokia a chance to be less reliant on CSPs’ generational network upgrade spending.

Financial Strengths

After taking corrective actions to remove excess costs in its 5G products, Nokia is a financially stable company that generates positive free cash flow as 5G networks are built out. While Nokia primarily funnels cash toward organic development, sales, and marketing efforts, the company has made minor acquisitions since its large Alcatel-Lucent purchase in 2015, and Nokia is well positioned to bolt-on smaller software, Internet of Things, or related technology firms as needed. Nokia finished 2021 with EUR 9.3 billion in cash and equivalents with a debt to capital ratio of 21%, and the company to repay its debts on schedule. As 5G networks are rolled out alongside cost-extraction efforts, the revenue growth to outpace operating expenditures as Nokia capitalizes on up-front 5G innovation expenditures while strengthening operational efficiencies. After pausing its dividend to fix bloated product costs in 2019, Nokia announced a plan to restart payments in 2022, alongside a buyback program.

Bulls Say

  • 5G should have more uses and a longer build-out cycle than previous wireless generations. Internet of Things device proliferation, from autonomous vehicles to smart factories, should broaden the demand for Nokia solutions. 
  • Nokia’s moving away from an end-to-end networking portfolio could be aligned with purchasing preferences. Its focus on software for 5G networks is wise, as enterprises may require custom data analytics and optimized networks. 
  • 5G may create licensing opportunities outside of handsets, and Nokia royalties could grow via a resurging smartphone brand.

Company Description

Nokia is a leading vendor in the telecommunications equipment industry. The company’s network business derives revenue from selling wireless and fixed-line hardware, software, and services. Nokia’s technology segment licenses its patent portfolio to handset manufacturers and makes royalties from Nokia-branded cellphones. The company, headquartered in Espoo, Finland, operates on a global scale, with most of its revenue from communication service providers.

(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

One-Off Costs dent Wartsila’s Profitability Despite Strong H1 demand; FVE reduced to EUR 10.80

Business Strategy & Outlook

The decarbonization of the marine and energy market has created new business opportunities for Wartsila. The company has invested significantly in anticipation of these trends, ensuring its marine engines are compatible with a wide range of environmentally friendly fuel types, while also emerging as one of the top three players in the energy storage market. A broad range of solutions that help customers reduce their carbon emissions will help grow their installed base and provides a foundation to perform recurring aftermarket services, which is less susceptible to the highly cyclical marine newbuild market and mitigates the shift toward renewable energy, away from Wartsila’s traditional thermal engine business. Both the marine and energy segments have potential to grow the contribution of revenue from services by moving up the service ladder toward performance-based agreements. Wartsila has increased its level of research and development expenditure as well as making significant investments into the Energy Storage business to help offset the declining demand for its thermal energy engines resulting from the shift to renewable energy sources. 

The energy storage business has yet to achieve scale and is loss-making and thus the path toward Wartsila’s 12% operating margin target seems difficult to achieve in the short term, as the shift in product mix toward energy storage has a dilutive impact on margins. A recovery in marine markets has supported strong demand for Wartsila’s equipment and services. Demand is expected to remain robust due to regulatory pressure aimed at reducing the carbon footprint of the marine sector, which will create a wave of shipbuilding and retrofit activity. In addition, Wartsila’s important cruise vessel category market stands to benefit from the reactivation of vessels due to the easing of travel restrictions that will support the service business. Working capital efficiencies have placed Wartsila in a healthy financial position, ensuring the majority of profits are returned to shareholders through dividends, helping to mitigate the potential downside for shareholders if new business opportunities fail to transpire.

Financial Strengths

Wartsila is currently in a stable financial position and only has EUR 4 million of net debt. Net Gearing of 0.0 falls comfortably below the company’s target of 0.5 times. Wartsila’s conservative balance sheet has allowed the company to consistently return the majority of profits to shareholders irrespective of the cyclicality of its end markets and without compromising on investments in growth initiatives. Wartsila’s healthy balance sheet allows the company to continue to invest into the fast growing but loss-making energy storage business to help it achieve scale.

Bulls Say

  • Regulatory requirements are likely to spark a new wave in shipbuilding activity and decarbonization retrofits, which, combined with Wartsila’s investments in fuel agnostic engines, would see an increase in demand. 
  • Approximately half of the group’s sales are from aftermarket activities, which are more predictable, thus reducing the cyclicality of demand from its marine and energy end markets. 
  • The reactivation of cruise vessels driven by the removal of travel restrictions will support demand for Wartsila’s services and spare parts.

Company Description

Wartsila is a global manufacturer of critical equipment and services for the marine and energy markets with operations in over 70 countries. Approximately one half of the group’s sales are derived from the sale of services and spare parts through its network of 258 sales and service network locations. Wartsila is listed on the Nasdaq Helsinki exchange in Finland. Approximately 1 in 3 oceangoing vessels has a Wartsila solution on board, translating into an installed base of over 50,000 vessels and 10,000 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

Seagate will try to create new growth opportunities through its module-like Lyve platform, which layers software onto multiple drives

Business Strategy and Outlook 

Seagate is a leading designer and manufacturer of hard disk drives used for data storage in consumer and enterprise applications. Seagate is successfully transitioning its portfolio to focus on mass-capacity drives for cloud providers and enterprises as consumer applications for legacy HDDs switch to faster flash-based solid-state drives. There is a continued demand for mass-capacity drives over the next five years as enterprises look to capture more data and use a multi tier storage approach, implementing both mass-capacity HDDs and smaller enterprise-grade SSDs as complements in data centres. Seagate has consistently driven costs down for its mass-capacity HDDs by advancing to larger capacities, and it will continue to do so by leveraging new technologies like heat-assisted magnetic recording. Mass-capacity HDD demand is to offset declines in consumer HDDs over the next five years, but Seagate’s drives doesn’t allow it to establish an economic moat. The HDDs are commodity like even at the enterprise level, with Seagate and Western Digital matching each other’s technological roadmaps and competing with one another for volume, preventing both from earning pricing power. In periods of tight supply and favourable pricing, the firm can earn excess returns on invested capital, but when the market hits oversupply, pricing falls, bringing Seagate’s economic profits with it.

Seagate will focus on expanding to new capacities for its enterprise drives while implementing new technologies like heat-assisted magnetic recording that will help it drive costs down and expand margins. Still, technological advancements like these will be matched by rivals and won’t shield Seagate from cyclical market downturns. Longer term, there will be demand for mass-capacity drives to slow as the cost gap with enterprise SSDs narrows further. Seagate will try to create new growth opportunities through its module-like Lyve platform, which layers software onto multiple drives, but isn’t large enough to offset a secular decline in HDD sales.

Financial Strength

Seagate to focus on generating free cash flow to finance its obligations and send capital back to shareholders. As of the end of fiscal 2022, Seagate carried $5.6 billion in gross debt and $600 million in cash. The firm is to fulfil its obligations with its free cash flow, an average of $1.6 billion in free cash flow annually through fiscal 2027, and Seagate has less than $600 million in principal due annually over the same period. If Seagate were to run into a liquidity or cash flow crunch, it has $1.5 billion available under its revolving credit facility. After paying its obligations, Seagate will focus on sending the remainder of its cash flow back to shareholders in the form of its consistent dividend and repurchase program. Seagate aims to increase its dividend by 3% annually and send 70% of free cash flow back to shareholders, inclusive of its dividend and repurchases.

Bulls Say’s

  • There is strong demand for Seagate’s nearline drives which will power mid-single-digit top-line growth in the short term as enterprises look to store the growing amount of data they generate. 
  • Advancements to larger capacities and new technologies like HAMR to modestly expand Seagate’s midcycle gross margin. 
  • Seagate has maintained a trailing 12-month dividend yield above 3% every fiscal year since 2016, making it a leader among the technology coverage.

Company Profile 

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

(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 is 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

Swiss Re has a history of overly aggressive expansion and typically too much leverage

Business Strategy & Outlook

Swiss Re has a history of overly aggressive expansion and typically too much leverage. The first example of this can be seen in the acquisition of General Electric Insurance Solutions in the earlier part of the new millennium. This was financed through a combination of debt and share issuance, a historic and largest Swiss Re acquisition in that period. Furthermore, Swiss Re continued down a path of building out its reinsurance securitization offering, structuring pools of credit, mortality and natural catastrophe risk. This did not work out well because the Swiss Re increased correlation and dependence and when financial markets fell so did the value of these securities. Swiss Re’s leverage position and problems with its securitization program led the business to complete a capital raise and take on Berkshire as a preferential terms investor.

This investment built on a previously established relationship where Berkshire reinsured substantially all of Swiss Re’s yearly renewable-term United States mortality book, another area where Swiss Re had run into difficulties. The latest round has been aggressive expansion for commercial insurance and this came back to bite the business. What one can see now is a business that is still overleveraged and one where the levels of debt do need to be addressed. However, from an operational perspective one can see a company that is focusing on building a cleaner and more traditional reinsurance business, one that focuses on underwriting and shifts away from reliance on investment returns to fund unprofitable long-tailed lines of underwriting. A turnaround in corporate solutions starting to come to fruition and the nascent stronger move into more specialist lines of business and find the management team to be a lot more disciplined. However, one would like to see the business reign in its buybacks and concentrate more on building out the long-term profitability of this business.

Financial Strengths

Swiss Re does not have a particularly strong balance sheet. It would help the business immensely if management chose to pay down more debt. Swiss Re has around $11.2 billion of debt. The majority of this is long term, and the most substantial portions don’t mature for a few years. The shape of the debt isn’t well balanced, with the vast majority issued as subordinated. This means there are some pockets of very high interest rates and this is reflected in the broader group’s interest. Swiss Re pays an annual dividend that it intends to grow annually in line with long-term earnings growth and maintain the prior year’s dividend as a minimum level. The business also actions buybacks, though given the macro uncertainty it would be prudent if the business held off over the next few years from doing this.

Bulls Say

  • Swiss Re looks to be on the cusp of producing consistent results in the long term under the performing commercial insurance division. 
  • One can believe the quality of Swiss Re’s investment portfolio is high. 
  • Swiss Re pays a good dividend.

Company Description

Swiss Re was established in 1863 in Zurich. Since then, the business appears to have cycled through quite a few strategies. Namely in the early part of the millennium Swiss Re took on an investment banker who eventually led the business. Over the next 10 years CEO Jacques Aigrain built Swiss Re’s financial solutions into a powerhouse and helped the company complete its first securitization, finalized in 2005 for credit reinsurance. This division became a leader for Swiss Re but then disaster struck during the global financial crisis. Swiss Re mothballed this unit and approved a CHF 5 billion capital raise. Now the business concentrates more fundamentally on property and casualty, life and health reinsurance. Swiss Re also has a good commercial insurance offering named corporate solutions.

(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

SL Green Reported Lackluster Results in Q2; Reducing FVE to $64 Per Share

Business Strategy & Outlook

SL Green Realty is a real estate investment trust engaged in the acquisition, development, repositioning, ownership, and management of commercial real estate properties, principally office properties. Most of the companies’ properties are in the Manhattan area. The company held interests in approximately 35 million SF, which includes ownership interests in 26.7 million SF in Manhattan buildings and 7.2 million SF securing debt and preferred equity investments. The strategy of the company is to maintain a high-quality portfolio of buildings in desirable locations and focus on creating value through new developments, capital recycling, and joint venture investments. As an instance, SL Green’s $3 billion megaproject One Vanderbilt was completed amidst the pandemic and has already achieved high occupancy rates. The economic uncertainty emanating from pandemic recovery and the remote work dynamic have created a challenging environment for office owners. 

Employees are still hesitant in returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rate for office spaces in Manhattan was recorded at 21% in first-quarter 2022, which is roughly 1000 basis points higher than pre-pandemic levels. On the supply side, approximately 17 million SF of office space, which amounts to around 4% of the total inventory, is currently under construction in Manhattan and would be added to the market in upcoming years. This additional supply to further pressure fundamentals in the market. The Manhattan net absorption rate remains negative as of first-quarter 2022 and rental growth figures are disappointing especially given the highly inflationary environment. Having said this, an increasing number of companies require their employees to return to the office. In the long run, one can believe that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths

SL Green has relatively more debt compared with other office REITs especially after considering its share of debt in unconsolidated joint ventures. The firm owns a majority of its properties through unconsolidated JVs and these properties are significantly more leveraged than the firm’s balance sheet. However, the unconsolidated JV debt is secured by the portfolio assets and has limited recourse to the parent company. The company’s share of debt which also includes its share of unconsolidated JV debt was $9.9 billion as of the end of first-quarter 2022, resulting in a debt/EBITDA ratio of 13.1 times. The current debt/EBITDA ratio is also high because of a lower base in the current challenging environment. The figure should come down slightly over the next few years as fundamentals recover and EBITDA sees healthy growth. Having said this, SL Green’s higher leverage implies a higher financial risk for the firm. The weighted average interest rate on the company’s debt was 3.11% and the debt maturity schedule shows that the maturities are adequately spread. Approximately 77% of the total debt is fixed-rate debt with the other 23% being floating rate debt. The debt service coverage ratio which is a ratio of EBITDA divided by interest and principal payments was 2.2 times as of the end of first-quarter 2022. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest) was 1.9 times as of the end of first-quarter 2022. The debt and fixed-charge coverage ratios are 3.8 times and 2.9 times, respectively, if one can consider only consolidated figures. As a REIT, SL Green is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 70% for the year 2021. This shows the firm is generating sufficient cash to cover its fixed expenses and payout dividend.

Bulls Say

  • SL Green’s midtown focus allows it to access one of the most vibrant business districts in the world. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • The development pipeline of the company is poised to drive significant net operating income growth for SL Green 
  • SL Green attracts the highest-quality tenants with the deepest pockets, greatly reducing risk across its portfolio.

Company Description

SL Green is one of the largest Manhattan property owners and landlords, with interest in around 35 million square feet of wholly owned and joint venture office space. The company has additional property exposure through its limited portfolio of well-located retail space. It operates as a real estate investment trust.

(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

Kinder Morgan Continues to Be Prudent in Hot Gas Market in Q2

Business Strategy & Outlook:    

Kinder Morgan’s assets span natural gas, natural gas liquids, oil, and liquefied natural gas. The company’s U.S. gas pipeline business is particularly impressive. Management claims its daily gas transportation capacity is equivalent to 40% of average U.S. gas consumption and it handles 50% of the LNG market. Kinder serves most major U.S. gas supply and demand regions. Kinder Morgan’s size is both an opportunity and a challenge. Its expansive asset footprint provides numerous investment opportunities if supply or demand bottlenecks develop. Kinder has the financial and commercial heft to execute any project, no matter the size. However, large-scale projects have been fleeting in the past few years, particularly as legal, regulatory, and stakeholder protests have successfully delayed and canceled major U.S. and Canadian pipelines. The shift forced Kinder out of Canada, particularly as Trans Mountain pipeline costs have soared since Kinder’s exit. With limited growth prospects, management has slashed investment, strengthened the balance sheet, and focused on returning cash to shareholders through the dividend and stock buybacks. For example, it has bought back $270 million in stock so far in 2022 with some of the cash generated by better-than-expected results. With ample excess free cash flows, Kinder is pursuing more clean energy investments. It already considers about 70%-75% of its backlog to be low-carbon investments, and it has formed an energy transitions group to pursue investments in renewable natural gas, biofuels, and carbon capture projects. 

The Kinetrex deal added several renewable natural gas projects at a highly attractive multiple in 2021, and it built on this success with the Mas CanAm deal in mid-2022. Given Kinder’s extensive experience with CO2 pipelines and processing facilities, it is better positioned than most U.S. peers to evaluate and invest in carbon capture and storage opportunities across its footprint, as well. Methane reduction is another opportunity, and Kinder has been working on this area since 2014 via its ONE Future efforts.

Financial Strengths:  

After stretching the balance sheet to consolidate in 2014, Kinder Morgan has completed its plan to strengthen its balance sheet and achieve investment-grade credit ratings while buying back stock and bringing the dividend back to a level in line with peers’. Kinder has channeled most of its cash into debt reduction recently. Debt/EBITDA peaked at 5.5 times following the 2014 consolidation, but Kinder has reached management’s 4.5 times target and should be able to maintain that on a normalized basis.  Leverage is expected to be about 4.3 times in 2022. Beyond 2022, leverage will eventually fall below 4 times. Kinder’s stable cash flow can support an investment-grade balance sheet, $1.5 billion of annual growth investment factoring in contributions from joint venture partners (or $2.35 billion factoring in sustaining capital spending), and a growing dividend. A drop in growth investment gives management more financial flexibility. Kinder’s dividend is expected to hit $1.25 per share in 2020, in line with management’s plan announced in 2017 after a 75% cut in 2016. But management abandoned that target, paying $1.05 per share in 2020 and $1.08 annualized in 2021. The dividend will eventually reach $1.20 a share in the next few years. Kinder’s share-buyback plan could expand as management looks for ways to deploy excess free cash flow, now that its balance sheet goals have been met and its growth investment has normalized. Management doesn’t expect to pay federal cash taxes for several more years even if the 2017 tax cuts are reversed.

Bulls Say: 

  • Kinder Morgan’s natural gas midstream footprint is unrivaled in North America, giving it high-return investment opportunities as gas supply/demand fundamentals shift.
  • The Kinetrex deal shows that Kinder is willing to aggressively pursue clean energy efforts, putting it well ahead of most peers.
  • After paying down $12 billion of debt since 2015, Kinder Morgan now has the financial flexibility to invest in growth projects, raise the dividend, and repurchase stock.

Company Description: 

Kinder Morgan is one of the largest midstream energy firms in North America, with an interest in or an operator on about 83,000 miles in pipelines and over 140 storage terminals. The company is active in the transportation, storage, and processing of natural gas, crude oil, refined products, natural gas liquids, and carbon dioxide. The majority of Kinder Morgan’s cash flows stem from fee-based contracts for handling, moving, and storing fossil fuel products.

(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

Status Quo for Crown Castle in Q2: Towers Look Good While Small Cells Lag

Business Strategy & Outlook:    

Crown Castle’s strategy has deviated from that of its two biggest competitors, which focus almost exclusively on towers and have a multinational footprint. Crown operates exclusively in the United States and is aggressively investing in fiber to pursue small-cell communications sites. Crown Castle has adopted a high-risk strategy. Small cells require heavy initial investment and lack the competitive advantage that Crown has with its towers.

Crown’s legacy tower business (70% of total revenue in 2021), where it leases space on its towers to wireless carriers, which install antennas and other equipment. The carriers enter long-term leases with Crown that include rent escalators (annual increases of about 3%), giving the business a highly visible and stable revenue stream. Towers are also the beneficiaries of the explosion in mobile data use, which has been growing 30%-40% per year in the U.S. To meet the demand, carriers either locate equipment on additional towers or add or modify equipment on existing towers. Significant operating leverage makes both alternatives highly profitable for Crown–additional tenants and equipment upgrades can be added to towers for very little incremental cost. Towers will continue to be an integral part of the long-term mobile network solution. Since 2017, Crown has focused its investment on fiber and building small cells rather than towers. Management emphasizes that the fiber will be very lucrative when it can co-locate additional tenants on fiber it has already built, but it has yet to show significant colocation demand. The skeptical significant colocation demand will ever come to fruition, as AT&T and Verizon each own a lot of fiber on which to build small cells. Over the past five years, about 75% of Crown’s total capital spending has been on fiber, yet growth in the much smaller fiber segment still has not been able to outpace tower revenue growth. 

Financial Strengths:  

Although Crown Castle is highly leveraged, the steady cash flows it receives from its tower business allow it the financial flexibility it needs and alleviate any concerns about its ability to service its debt. The firm closed 2021 with a net debt/EBITDA ratio of 5.4 times, above the 5 times EBITDA ratio it targets, but its interest coverage ratio (adjusted EBITDA/interest expense) was also over 5.0. At the end of 2021, Crown had more than $450 million in cash and access to $5 billion on its revolving credit facility. As a real estate investment trust, Crown Castle is obligated to make dividend payments of at least 90% of its REIT taxable income (excluding income from its non-REIT subsidiaries) each year. In recent years, the payout ratio has been well in excess of 100% of free cash flow, but capital spending is now declining, so don’t expect a change to the roughly 7% annual dividend increases or the firm’s stance that it can do so without having to raise equity or materially increasing its leverage ratio.

Bulls Say: 

  • Crown Castle is at the forefront of an industry transition toward small cells that will be necessary with 5G networks.
  • Carriers will have to continue investing heavily in their networks as mobile data usage continues increase by more than 30% each year in the U.S., and Internet of Things and video trends make that pace likely to continue.
  • Crown is virtually assured stable growth in its tower business. It holds long-term leases with contractual rent escalators, and its costs have similar certainty and are highly leverageable.

Company Description: 

Crown Castle International owns and leases roughly 40,000 cell towers in the United States. It also owns more than 85,000 route miles of fiber. It leases space on its towers to wireless service providers, which install equipment on the towers to support their wireless networks. The company’s fiber is primarily leased by wireless service providers to set up small-cell network infrastructure and by enterprises for their internal connection needs. Crown Castle’s towers and fiber are predominantly located in the largest U.S. cities. The company has a very concentrated customer base, with more than 70% of its revenue coming from the big three U.S. mobile carriers. Crown Castle operates as a real estate investment trust.

(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
ETFs ETFs

Vanguard Australian Shares index ETF: offers potential long-term capital growth along with dividend income and franking credits

Investment Objective

Vanguard Australian Shares Index ETF seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses and tax.

Investment Strategy and Investment Return Objective

The Vanguard Australian Shares Index ETF seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses, and tax. The S&P/ASX 300 Index was not created by, and is not managed by, a related body corporate of Vanguard. The Fund meets its investment objective by holding all of the securities in the S&P/ASX 300 Index (at most times) allowing for individual security weightings to vary marginally from the Index from time to time. The Fund may invest in securities that have been removed from or are expected to be included in the Index.

Portfolio Performance

About Fund:

The ETF provides low cost, broadly diversified exposure to Australian companies and property trusts listed on the Australian Securities Exchange. It also offers potential long-term capital growth along with dividend income and franking credits.

(Source: Vanguard, investmentcentre)

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

Burberry and its leather goods and apparel peers could make existing customers buy more through product innovation

Business Strategy and Outlook 

Burberry Group has transformed from an essentially licensed/wholesale business model with inconsistent regional product and brand presentation into a strong monobrand luxury player with a consistent message, good control over distribution, and a global presence. Burberry is the category leader in its trench coat business, enabling it to generate high operating margins in this category through scale and pricing power. It benefits from a high degree of control over distribution, which allows it to correct operational mistakes more quickly, showcase the brand at key locations in global capitals, avoid excessive discounting, and retain stronger negotiating clout with wholesale partners. Although prior-year retail expansion and rent inflation have weighed on margins, Burberry has built an excellent global platform from which to execute. As space expansion is essentially flat and new demand comes from existing stores and online platforms, operating margins and cash flows should be boosted.

Burberry was one of the first in the market to invest in digital front and back-office systems. It aggregates customer data across channels and regions, which helps it target marketing campaigns better and can act as an input in product development and merchandising. While demand for luxury products is linked to GDP growth and an increasing number of wealthy and middle-class people, Burberry and its leather goods and apparel peers could make existing customers buy more through product innovation. In the long run, growth should come from China, consumption should be supported by growing employment in high-wage sectors.

Financial Strength

Like many of its luxury peers, Burberry is in a strong financial position with net cash of GBP 1.2 billion as of the end of March 2022. Burberry is strongly positioned to weather the COVID-19-related crisis and potential demand slowdown through high inflation. Burberry is a cash-generative business and has historically funded growth investments from operating cash flows. Burberry will continue doing so and be able to reward shareholders through dividend and buybacks.

Bulls Say’s

  • Over the past 10 years, Burberry has built a strong global brand with control over its supply chain, distribution, and marketing. It also substantially reduced discounting, which should support the brand’s luxury image.
  • New designer collections have been positively received (full-price comparable sales up by double digits on 2019 level), which should boost performance once pandemic restrictions are removed. 
  • Cash flow margins should improve through operating expenditure leverage and capital expenditure reduction, as the brand returns to growth off the same store base.

Company Profile 

Burberry, a British luxury monobrand, which is more than 160 years old, is best known for its outerwear and signature plaid. It has a global presence with 29% of revenue generated in Europe, 46% in Asia, and 25% in North America. The Chinese are Burberry’s most important customers, accounting for more than 30% of sales. Apparel contributes about 63% of sales.

(Source: MorningStar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is 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

Wipro’s Profitability Bottoms Out in Q1 as Pipeline Stronger Than Ever

Business Strategy & Outlook:    

Wipro is a leading global IT services provider with the typical menu of offerings, from software implementation to digital transformation consulting to servicing entire business operations teams. Wipro merits a narrow economic moat rating, similar to many of its peers, as it benefits from switching costs and intangible assets, although it is benefiting from a cost advantage. While the company will likely struggle amid the COVID-19 pandemic, its stable moat trend will stay secure. Forays into the higher-value realm of industrial engineering will help ensure that Wipro does not miss out on substantial growth trends in the overall IT services industry. In many regards, there’s uncanny resemblance between Wipro and its Indian IT services competitors, Infosys and TCS, such as in its offerings, offshore leverage mix (near 75%), or attrition rates (near 15%). However, Wipro has pockets of solutions where it distinguishes itself. For instance, its robotic process automation services are considered to rank above all other peers according to several sources, including Forrester Research. 

Wipro isn’t unusual for being an IT services provider with switching costs and intangible assets. These are founded on the intense disruption that customers would experience when changing their IT services provider as well as Wipro’s specialized knowledge of the industry verticals it caters to and the distinct knowledge of its customers’ web of IT piping. But besides these two moat sources, Wipro benefits more from a cost advantage (only allotted to Indian IT services companies) based on its labor arbitrage model. While benefits from such a cost advantage will diminish over time as the gap between Indian wage growth and GDP growth in primary markets narrows, Wipro’s moat is secure as the company’s foray into higher-value offerings and increasingly automated solutions offsets this trend.

Financial Strengths:  

Wipro’s financial health is in good shape. Wipro\ had INR 350 billion in cash and cash equivalents as of March 2021 with debt totaling INR 83 billion. Wipro’s cash cushion will remain healthy, as free cash flow is expected to grow to INR 118 billion by fiscal 2026. This should allow for continued share buybacks and acquisitions. Share buybacks, forecasted over the next five years will average INR 50 billion each year. The forecasted acquisitions over the next four years following fiscal 2022 will average INR 9 billion each year. While the forecasted dividend increases over the near term, Wipro will have more than enough of a cash cushion to undergo any dividend raises as desired without needing to take on debt.

Bulls Say: 

  • Wipro could benefit from greater margin expansion than expected as more automated tech solutions decrease the variable costs associated with each incremental sale.
  • Wipro should profit from a wave of demand for more flexible IT infrastructures following the COVID-19 pandemic, as more companies seek to be prepared for similar events. 
  • As European firms become more comfortable with outsourcing their IT workloads offshore, Wipro should expand its market share in the growing geography.

Company Description: 

Wipro is a leading global IT services provider, with 175,000 employees. Based in Bengaluru, this India IT services firm leverages its offshore outsourcing model to derive over half of its revenue (57%) from North America. The company offers traditional IT services offerings: consulting, managed services, and cloud infrastructure services as well as business process outsourcing as a service.

(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.