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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.

Categories
Dividend Stocks

Ageas is lacking clear direction and a proven strategy

Business Strategy and Outlook 

Ageas is lacking clear direction and a proven strategy. Ageas is present in Belgium, U.K., continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business’ asset management, you are essentially left with a business that has six divisions. Insurance is a complex set of products and the historical approach has been one of diversification. However, it can be seen within primary insurers and in particular multilines, with increasing diversification these businesses can lack specific expertise and master none. This approach to diversification is highly important in the reinsurance business. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. It can be found within this and in particular in smaller multilines, is this diversification leads to a dilution of expertise and thus reduces firms’ dominance in their chosen fields.

This strategy of greater diversification unwinds. For example, Prudential has been separated into three distinct geographical businesses that focus purely on life insurance products that are most relevant in each of these locales. Given the strength of the management team and dominance of the respective primary product in each of these regions, in the long term this strategy will not be one that prevails. Aegon is a company that has long-lost the investment community on its strategic direction and rationale. This business is now focusing on just three markets and has also started to trim its portfolio to one that focusses on the accumulation side. Aviva is another business that suffered from the diversification cloud. However, it is now only focusing on three end-markets with force; this has been well received via shareholder distributions. Ageas is to take a similar stand.

Financial Strength

Ageas has quite a high amount of debt on its balance sheet relative to the amount of capital that shareholders own. While the interest Ageas pays on this debt is quite low, the fluctuation of the value in the RNPI and the high value of associates means the quality of Ageas’ balance sheet isn’t high. Furthermore, cash seems to be a little low and Ageas management have discussed either a buyback or eyeing more mergers and acquisitions. Buybacks unless the business is looking to buy into more of its existing partnerships within its Asian operations. Ageas runs its own reinsurance division is not likeable. This is only for its nonlife sales and the rationale provided by management is this diversification frees up capital for investment and distributions to shareholders. Ageas doesn’t have deep expertise here, and while the lines in nonlife that it underwrites are standard, it would be much more sensible to leave this to the experts and focus on what it knows. This would provide more comfort in anticipation of an extreme event, so that Ageas’ balance sheet was fully equipped to handle it. The majority of Ageas’ financial investments are held in government debt. However, there is around EUR 4.1 billion in available for-sale unrealised gains. Then there are the nearly EUR 13.4 billion in loans, a little over EUR 10.8 billion is unsecured. It doesn’t appear to be a particularly tidy, secure or strong balance sheet.

Bulls Say’s

  • It can be sensed that operationally this is not such a bad business. However, with the scant disclosures on operations there’s a little way of knowing. 
  • In Asia Ageas seems to go from strength to strength. Now it is investing more here though, it is hesitant on Chinese reinsurance allocation. 
  • By and large a decent looking fixed-income portfolio. However, it is less keen on the level of unsecured loans.

Company Profile 

Ageas is a life and nonlife insurance company that derives most of its income from life and savings, mostly from Belgium and is headquartered in Brussels. Ageas is essentially the result of the failed bid for ABN Amro by Banco Santander; Fortis; Royal Bank of Scotland. The capital requirements placed on these banks as a result of the acquisition combined with severe write-downs on its collateralised debt obligations in the case of Fortis left the business requiring capital. Understandably, a less successful capital raising that took place the GLOBAL financial crisis wasn’t enough and the bank, Fortis, had to be sold and nationalised. What remained was Fortis Insurance, which in 2010 was renamed to Ageas.

 (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
Global stocks

Wolters’ legacy print business, which is declining at a high-single-digit rate each year, has proved to be a drag on the overall business

Business Strategy and Outlook 

Wolters Kluwer has over the past decade or so undergone a wholesale reorganization of its business, taking it from being the leading print publisher of professional information materials to being one of the largest players in the potentially much larger digital information services space. This change has come at a cost, however, with the company spending over EUR 2 billion on net acquisitions over the period in order to position itself better in the digital information services market. Wolters’ legacy print business, which is declining at a high-single-digit rate each year, has proved to be a drag on the overall business, with organic revenue growth improving to 4.3% in 2019, the highest level in over a decade, while the proportion of print revenue fell to a new low of 9% in 2020.

The inflection point for Wolters Kluwer has now been reached, with print revenue now at a single-digit contribution to group revenue, down from 52% in 2004. With print revenue now posing less of a drag on the group, and the company’s more scalable elements gaining traction with clients, the organic revenue growth should increase linearly, albeit modestly from here. Recurring revenue across the group has also increased materially and currently stands at 80% of total revenue for 2020, increasing the stability and predictability of the underlying revenue base. These factors have also resulted in material improvements in operating margins across key verticals. Examples of this can be seen in core products such as UpToDate in the clinical solutions business, which is currently growing at double-digit rates, driving operating margins in the health business to all-time highs. As the company moves up the value chain in the information services it offers to clients, further enhancement to margins across a variety of business activities is eminently possible. However, there are inherent risks in Wolters’ strategy, as the company has moved from a print publishing business with relatively few competitive pressures to a digital information business in which it must keep innovating to stay ahead of existing and new competitors.

Financial Strength

Wolters Kluwer’s net debt/EBITDA ratio is 1.9 times, very much at the lower end of its historical range and comfortably below its 2.5 times long-term target. This is broadly in line with the industry average and it would be considered reasonable, particularly given the relative stability in the company’s revenue base. Wolters is broadly diversified (by geography and business lines) and has made significant progress increasing its recurring revenue streams, which now stand at 80% of total revenue. The company’s debt maturities are long-term-weighted, with only around 20% of its total debt maturing in the next two years. Wolters primarily returns its excess capital to shareholders via a progressive dividend policy, with a payout ratio averaging close to 50% over the past decade. Given the lack of large acquisitions and the strong cash flow, the company has also been active in buying back shares over the past few years.

Bulls Say’s

  • Wolters serves professionals in highly specialized niches, in which it generally holds a number-one or number-two market position. 
  • Digital is more scalable than physical distribution, so the mix shift toward software solutions will help the firm to reduce expenses and expand margins. 
  • Wolters serves numerous niches where there are few reputable alternatives, and pricing tends to be more rational among the major players as a result.

Company Profile 

Wolters Kluwer is a Europe-listed global information services company. It operates across four distinct business segments serving a wide array of clients: health (26% of 2020 sales), tax and accounting (31%), legal and regulatory (23%), and governance, risk, and compliance (20%). Within these divisions, Wolters aims to be the industry leader in a variety of niche, higher-value services

 (Source: MorningStar)

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

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

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

Biogen has strong human genetic validation for its neurology pipeline

Business Strategy and Outlook 

Biogen’s specialty-market-focused drug portfolio and novel, neurology-focused pipeline create a wide economic moat. Biogen’s strategy has its roots in the 2003 merger of Biogen (multiple sclerosis drug Avonex) and Idec (cancer drug Rituxan). While Rituxan is succumbing to biosimilar competition, Biogen is expanding its neurology portfolio beyond MS, including blockbuster neuromuscular disease drug Spinraza and several promising drugs behind Aduhelm in Alzheimer’s disease. n MS, Avonex and longer-acting Plegridy still generate nearly $2 billion in annual sales and remain the leading MS interferon drugs. Biogen’s MS antibody Tysabri also sees $2 billion in annual sales due to its high efficacy. Oral MS drug Tecfidera peaked above $4 billion in sales in 2019, but U.S. generics drastically cut into sales in 2021 after entry in 2020. The new oral therapy Vumerity offers improved GI tolerability but will only partly offset this headwind. While pricing power and demand for Biogen’s injectable MS portfolio are eroding in the face of new competition, Biogen receives substantial royalties on the biggest new competitor, Roche’s Ocrevus, which helps offset pressure on older MS drugs.

Outside of MS, Biogen has strong human genetic validation for its neurology pipeline. Spinal muscular atrophy drug Spinraza (partnered with Ionis) is a $2 billion drug, although competition from Novartis (gene therapy Zolgensma) and Roche (oral drug Evrysdi) are beginning to erode sales. While Aduhelm was approved in the U.S. in June 2021, skepticism surrounding the launch and lack of Medicare coverage have made the drug a commercial failure. That said, Biogen and Eisai’s lecanemab (data fall 2022) could have more definitive data. While there is significant uncertainty surrounding Biogen’s Alzheimer’s pipeline, the market also underestimates Biogen’s remaining pipeline, which includes a continuing partnership with Ionis (including tau-targeting Alzheimer’s drug BIIB080) and drug candidates to treat conditions including stroke, depression, Parkinson’s, pain, and ALS.

Financial Strength

Biogen’s year-end 2021 cash and marketable securities balance ($4.7 billion) and free cash flow will help fund future repurchases and allow the firm flexibility on future acquisitions. Most maturities for Biogen’s $7.3 billion in long-term debt are well into the future, with only $1 billion in debt due before 2025. Historically, Biogen has focused on returning excess cash to shareholders via buybacks, but its limited acquisition and collaboration record is strong and more tuck-in acquisitions going forward. Of the $15 billion in free cash flow generated in 2006-15, Biogen spent the vast majority of this cash on repurchases, with an average repurchase price over 2006-15 of $87 per share.

Bulls Say’s

  • Biogen leads the $20 billion global MS market with Avonex, Plegridy, Tysabri, and Tecfidera, and the launch of Vumerity partly protects Tecfidera sales from generic headwinds in the U.S. 
  • Biogen receives royalties and profit share from Roche on MS drug Ocrevus and cancer therapies Rituxan and Gazyva, boosting Biogen’s profitability. 
  • Biogen’s neurology portfolio outside of MS, including Spinraza in SMA, should help diversify revenue and boost sales growth.

Company Profile 

Biogen and Idec merged in 2003, combining forces to market Biogen’s multiple sclerosis drug Avonex and Idec’s cancer drug Rituxan. Today, Rituxan and next-generation antibody Gazyva are marketed via a collaboration with Roche. Biogen also markets novel MS drugs Plegridy, Tysabri, Tecfidera, and Vumerity. In Japan, Biogen’s MS portfolio is co-promoted by Eisai. Hemophilia therapies Eloctate and Alprolix (partnered with SOBI) were spun off as part of Bioverativ in 2017. Biogen has several drug candidates in phase 3 trials in neurology and neurodegenerative diseases and has launched Spinraza with partner Ionis. Aduhelm was approved as the firm’s first Alzheimer’s disease therapy in June 2021.

 (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

ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace

Business Strategy and Outlook

ASML is the leader in photolithography equipment for semiconductor manufacturers. It is to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography and the uncertainty concerning the long-term extent of EUV insertion has sufficiently diminished to justify a wide moat rating. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. A photomask is a flat, transparent quartz plate containing the microscopic circuit pattern. The latest technological advances in this field allow chipmakers to pursue Moore’s law and continually increase the number of transistors on the same area of silicon. Lithography tools account for a significant portion of chipmakers’ capital expenditures, with EUV platforms exceeding $150 million in price. ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace, while competitors like Nikon and Canon do not have the scale or resources to compete at the cutting-edge. Traditional immersion lithography approached its limits years ago, and chip makers adopted non litho workarounds, such as multiple patterning that uses advanced etch and deposition tools from other equipment firms.

To continue pursuing Moore’s law, chipmakers will require EUV lithography tools. EUV uses lower-wavelength light (13.5-nm versus 193-nm for current immersion tools) and simplifies the process flow (3 to 6 times cycle time reduction as a result of fewer steps and 15% to 50% cost reduction compared with multiple patterning schemes). The top three customers of the firm (Intel, Samsung, and Taiwan Semiconductor) committed to help fund a portion of research and development for EUV technologies and acquired an aggregate 23% minority equity stake in ASML in 2012 (though these stakes have come down over time). EUV industrialization in high-volume semiconductor production is now a reality, with the technology having been implemented for a few process steps at certain 7-nanometer process nodes at TSMC and Samsung and more meaningfully in each foundry’s 5-nm process technologies.

Financial Strength

ASML has a strong financial position. At the end of 2021, the company had EUR 7.6 billion in cash, cash equivalents, and short-term investments and EUR 4.1 billion in long-term debt on its balance sheet. This debt position is not an issue given ASML’s typical cash generation. The firm typically holds a significant cash position, which is appropriate given the cyclical nature of the semiconductor equipment industry. During downturns, the cash cushion allows ASML to continue investing heavily in research and development in order to maintain its cutting-edge technology position. This is especially critical in the highly arcane wafer fabrication equipment market, where companies that failed to stay at the technological forefront have seen their competitive positions erode in the past, though ASML’s dominance in lithography is unlikely to be challenged by Nikon or Canon. ASML generally returns excess cash to shareholders via annual dividend payments and share buybacks. At the end of 2021, ASML doubled its annual dividend to EUR 5.50. In July 2021, the firm announced a new share buyback program for 2021 to 2023 of up to EUR 9 billion.

Bulls Say’s

  • ASML is the market leader in photolithography, an integral part of chip manufacturing, and is pioneering EUV lithography for the next wave of Moore’s law. 
  • The extensive technical expertise needed to develop lithography tools, which are highly complex and play a critical role in enabling Moore’s law, serves as a major barrier to entry. 
  • ASML has focused on operational efficiency in recent years to improve profitability throughout the industry cycle.

Company Profile 

Founded in 1984 and based in the Netherlands, ASML is the leader in photolithography systems used in the manufacturing of semiconductors. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. The latest technological advances in this segment allow chipmakers to continually increase the number of transistors on the same area of silicon, with lithography historically representing a meaningful portion of the cost of making cutting-edge chips. Chipmakers require next-generation EUV lithography tools from ASML to continue past the 5-nanometer process node. ASML’s products are used at every major semiconductor manufacturer, including Intel, Samsung, and TSMC.

(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.