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Categories
Global stocks

Zip’s Share Price Encapsulates Much Downside While Its Positives Are Being Overlooked

Business Strategy & Outlook: 

Zip’s focus is on maximizing its addressable market. Its business is more diversified than single-product buy now, pay later, or BNPL, players, with varieties in financing options, transaction limits, and repayment schedules. Customers enjoy simple sign-up and checkouts, high acceptance by retailers and flexible financing solutions to help better manage their cash flows. Merchant partners may benefit from increased conversion rates, basket sizes, and transaction frequencies. Zip has a revolving credit business in Australia. Core products are ZipPay, which finances up to AUD 1,000; and ZipMoney, which finances AUD 1,000 and above. It also boasts a broader merchant base including retail, home, electronics, health, auto, and travel. Around 70% of revenue is derived from customers, mainly from account fees and interest. Zip adopts an installment financing model overseas, helping it scale up faster and keep up with competition in the underpenetrated global BNPL landscape. The acquisition of U.S. based QuadPay materially boosts its growth prospects. It also operates in Canada, Europe, Mexico, and the Middle East. Zip enhances customer stickiness via ongoing product add-ons. It has a Pay Anywhere function that lets users transact at a wide variety of avenues without being confined to merchant partners. Users also benefit from promotional offers, cash-back deals, or free credits. Newer features include enhanced rewards programs, product protection insurance, or physical cards. For merchant partners, Zip invests in co-marketing to help them acquire new customers. Zip has strong earnings prospects, but it is believed its margins will be increasingly under pressure and it will not achieve the same penetration and transaction frequency overseas as it had domestically. While it benefits from the growth of e-commerce and increasing preference for more convenient/cheaper forms of financing, it is anticipated heightened competition to its products. The capital-intensive domestic business cannot scale up as quickly, its fee structure potentially creates friction for customers, and its product offering in the U.S lacks clear differentiation. 

Risk and Uncertainty: 

Zip is at risk of a large spike in bad debts. Both the long-dated nature of its revolving credit business and Pay Anywhere feature increases credit risk, as this results in Zip lacking control or information of its customers’ spending habits. With Zip potentially financing consumers with lower tolerance of credit stress and the fact that BNPL financing can lead to overcommitment in spending, it could see a substantial rise in hardship claims or non repayments and may have to write off a material portion of its receivables during a major credit event. Any regulation that alters the relationship between users and Zip could reduce the appeal of its product, lead to consumers opting for cheaper financing options, or lower signup rates and transaction frequency. This ties to product governance—a key ESG risk—where BNPL is at core credit, but are marketed as budgeting or lead generation tools. While low credit losses have to date helped blunt regulatory attacks, the potential for customers to use BNPL to spend excessively and fall into financial stress could necessitate more regulation. Material risks include the potential banning of no-surcharge rules applied by BNPL firms, or if BNPL is regulated to the same extent as traditional credit. Zip also needs external funding to support its receivables growth. Any dislocation in capital markets or an inability to meet hefty growth expectations could result in it being unable to obtain financing when required or having to secure funding at unfavorable terms. 

Bulls Say:

  • Zip is well placed to continue growing its transaction volume, given its variety in financing options and retailer base, as well as its Pay Anywhere model which provides a greater avenue to spend using its products. 
  • Zip benefits from an accelerated shift to e-commerce, increased adoption of cashless payments, and a growing need among merchants for effective marketing amid a challenging retail backdrop. 
  • It is thought Zip faces lower regulatory risks than its BNPL rivals, as it already conducts a greater degree of background checks and ZipMoney is already regulated by the National Credit Act. 

Company Description:

Zip is a diversified finance provider, offering consumer financing via a line of credit (via ZipPay and ZipMoney) and installment-based finance (via QuadPay, Spotii, Twisto, and PayFlex); as well as lending to small to midsize enterprises (via Zip Business). Zip’s fortunes are largely tied to the buy now, pay later, or BNPL, industry. Most of its products–ZipPay, QuadPay (Zip U.S.), and PayFlex–do not charge interest based on outstanding balances. Around 60%-70% of ZipPay’s/Zip Money’s revenue is derived from customers, mainly via account fees and interest. Meanwhile, its installment businesses primarily generate revenue by receiving a margin from merchants, which compensates it for accepting all nonpayment risk and for encouraging consumers to transact more frequently.

(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

ACCC Hangs Up on TPG-Telstra Regional Deal

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy & Outlook: 

TPG Telecom is grappling with structural changes in the Australian telecommunications industry. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, impacting its consumer broadband margins. TPG Telecom’s price-leader strategy still sees the company delivering solid subscriber and market share performance. Product bundling has also become a key segment in the market, with all players using broadband as a lead-in product and cross-selling voice, mobile, pay-TV, and digital streaming services. The ownership of submarine cable between Australia and Guam offers the group broader cost advantages. Pricing is mainly a function of demand and supply, available capacity, and the length of cable. Economies of scale play a large part in pricing where costs are measured on per unit of volume. A longer cable results in increased material and maintenance costs, meaning cost per unit is higher. Cables with large capacity reduce costs per unit, as costs such as fixed construction and rollout costs are spread across a larger base. A sharp price decline in international traffic remains a risk. Contracts are structured in typical 15-year leases, providing some certainty in revenue. Clients are allocated a fixed bandwidth and have the right to on-sell capacity. The 2020 merger with Vodafone Australia (the third-ranked mobile player in the country) is one way TPG Telecom is trying to limit the impact of the NBN. Mobile offers a critical strategic path to future-proof the group in the face of onslaught from the NBN. The government entity is already wreaking havoc on the narrow-moat-rated group’s retail fixed-line broadband and could even potentially impact the lucrative enterprise segment

Risk and Uncertainty: 

The strategic imperative of the combination is clear, not only in ensuring a clear mobile pathway for TPG in an increasingly mobile-centric world, but as a route to bypass the National Broadband Network’s debilitating economics longer term. However, the merged entity is not without risks. It is expected that synergy benefits could take time to realise, with elimination of duplicated costs, benefits from leveraging each other’s infrastructure and economies of scale easier done on a spreadsheet than in the dynamic real world. More importantly, the nimble, entrepreneurial modus operandi of TPG (previously ruled with an iron fist by executive chairman David Teoh) does not mesh neatly with the traditional “corporate” customs of Vodafone Australia (presided over by Inaki Berroeta, who is the managing director and CEO of the merged entity). This view was vindicated by the sudden resignation of Chairman David Teoh from the board in March 2021. In terms of ESG risks, data privacy and security are the biggest issues facing TPG Telecom. The company receives, stores, and processes large volumes of sensitive customer data. This triggers exposure to data privacy and security breaches, which may result in regulatory actions, litigation, public scrutiny or loss of customer trust. It is seen that the probability of significant and prolonged breaches in these areas as less than 25%. If a breach does occur, limited materiality to the fair value estimate for TPG Telecom, as rectification response would be swift. Investments in network integrity and cybersecurity are also being stepped up post the merger between TPG Telecom and Vodafone Australia.

Bulls Say:

  • Cross-selling opportunities remain for both consumer and corporate markets. 
  • The merger with Vodafone Australia increases the scale of the combined entity and allow it to better compete against Telstra and Optus in the Australian market. 
  • Further rollout of its fibre network also boosts growth, while incremental cost from an additional user is small. 

Company Description:

TPG Telecom is Australia’s third-largest integrated telecom services provider. It offers broadband, telephony, mobile and networking solutions catering to all market segments (consumer, small business, corporate and wholesale, government). The group has grown significantly since 2008, both via organic growth and acquisitions, and in July 2020 merged with Vodafone Australia. It owns an extensive stable of infrastructure assets. 

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks

Strong Outlook for CRISPR Therapeutics’ Gene Editing Technology, $119 FVE, Shares Undervalued

Business Strategy & Outlook: 

CRISPR Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. The company’s proprietary platform specializes in Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases. CRISPR’s emerging technology has led to a new class of therapies, which are well suited for targeting rare diseases or other disorders that are caused by genetic mutations. CRISPR/Cas9 works by having CRISPR (pieces of DNA sequences) guide Cas9 (an enzyme that can cut and edit DNA) to edit, alter, or repair genes. It is believed the company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available. CRISPR Therapeutics currently has no approved drugs and a largely early-stage pipeline, so awarding the company an economic moat is refrained. CRISPR Therapeutics is focused on developing and commercializing novel therapies to treat severe, genetic diseases and currently possesses a sizable, yet mostly early-stage pipeline. Its lead candidate, CTX001, is being developed in collaboration with narrow-moat Vertex Pharmaceuticals for the treatment of transfusion-dependent beta-thalassemia (TDT) and sickle cell disease (SCD). CRISPR Therapeutics and Vertex plan to file for regulatory approval by the end of 2022. The rest of CRISPR Therapeutics’ pipeline is either in early (Phase 1) or pre-clinical stages of development. While CRISPR Therapeutics does not currently have approved products, the company provides long-term investors with pure play exposure to gene editing

Risk and Uncertainty: 

There is significant uncertainty related to regulatory approvals for the company’s early-stage pipeline candidates and a range of potential outcomes. Product governance is an ESG risk for CRISPR Therapeutics, as failure to adhere to extensive regulations can lead to expensive recalls, increased regulatory scrutiny, and lawsuits from affected customers. Additionally, lawsuits related to patent rights and potential patent infringements are another risk. It is anticipated gene editing companies like CRISPR Therapeutics will operate under cross licensing agreements with the Broad Institute as many of the gene editing technology platforms are interrelated. Access to basic services is another ESG risk the company will face if its drugs receive approval since its sales will depend on reimbursements from third-party payers, such as Medicaid or Medicare, private insurers, and national healthcare systems. Attempts by governments to contain healthcare costs could result in pricing pressure and lead to reduced profit margins. 

Bulls Say:

  • Partnerships allow CRISPR Therapeutics to receive milestones and economic benefits from drug candidate progression while offsetting some of the clinical development costs. 
  • CRISPR Therapeutics’ CRISPR/Cas9 platform has the potential to develop highly efficacious and potentially curative treatments for rare, genetic diseases with high unmet needs, which will likely lead to pricing power. 
  • It is viewed the company’s pipeline as possessing strengthening intangible assets and assign it a positive moat trend

Company Description:

CRISPR Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 stands for Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/CRISPR-associated protein 9 (Cas9), which is a revolutionary technology for precisely altering specific sequences of genomic DNA. The company is focused on using this technology to treat genetically defined diseases. CRISPR’s most advanced pipeline candidate, CTX001, is in collaboration with Vertex Pharmaceuticals and targets sickle cell disease and transfusion-dependent beta-thalassemia, which have high unmet medical needs. The company is progressing additional gene editing programs for immuno-oncology, as well as a stem cell-derived therapy for the treatment of Type 1 diabetes.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks

Despite Recent Litigation Headwinds on Zantac, GSK Remains Well Positioned for Earnings Growth

Business Strategy & Outlook: 

As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat, in our opinion. The magnitude of GSK’s reach is evidenced by a product portfolio that spans several therapeutic classes. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. We expect GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade. On the pipeline front, GSK has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and immune system, with genetic data to help develop the next generation of drugs. The benefits of these strategies are showing up in GSK’s early-stage drugs. We expect this focus will improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers. From  a geographic standpoint, GSK is strategically branching out from developed markets into emerging markets. Its vaccine segment positions the firm well in these price-sensitive markets. While this strategy is likely to create some challenges, like the potential legal violations that arose in early 2013 in China, we believe the fast-growing emerging markets will help support long-term growth and diversify cash flows beyond developed markets. GSK’s decision to divest its consumer business will likely unlock value over the long run. GSK divested its consumer group (called Haleon) in July 2022. Given the strong valuations of consumer healthcare companies, we expect this unit will yield a stronger valuation than what is implied within the GSK structure before the divestment.

Risk and Uncertainty: 

Like all drug companies, GSK faces risks of drug delays or nonapprovals from regulatory agencies, an increasingly aggressive generic industry, and competition in the pharmaceutical industry. Overall, we assign GSK a Morningstar Uncertainty Rating of Medium, given all the diversification the company has across its platforms offsetting the variable outcomes for drug development and competitive challenges to the firms’ leading products. Our Uncertainty Rating for GSK is not materially affected by environmental, social, and governance risks, although we see access to basic services (tied to drug pricing) as the biggest ESG risk that the firm needs to manage. GSK generates close to one half of total sales from U.S. prescription drug sales, so additional major pricing reforms could weigh on sales and margins. Additionally, we assume a more than 50% probability of GSK seeing future costs related to product governance ESG risks (such as off-label marketing or litigation related to side effects) and model base case annual legal costs at 2% of non-GAAP net income (at the midrange relative to peers based on GSK’s product portfolio having average exposure to future potential litigation). As part of these costs, we have factored in litigation expenses for the increasingly concerning Zantac litigation

Bulls Say:

  • Partnerships allow CRISPR Therapeutics to receive milestones and economic benefits from drug candidate progression while offsetting some of the clinical development costs. 
  • CRISPR Therapeutics’ CRISPR/Cas9 platform has the potential to develop highly efficacious and potentially curative treatments for rare, genetic diseases with high unmet needs, which will likely lead to pricing power. 
  • It is viewed the company’s pipeline as possessing strengthening intangible assets and assign it a positive moat trend

Company Description:

CRISPR Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 stands for Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/CRISPR-associated protein 9 (Cas9), which is a revolutionary technology for precisely altering specific sequences of genomic DNA. The company is focused on using this technology to treat genetically defined diseases. CRISPR’s most advanced pipeline candidate, CTX001, is in collaboration with Vertex Pharmaceuticals and targets sickle cell disease and transfusion-dependent beta-thalassemia, which have high unmet medical needs. The company is progressing additional gene editing programs for immuno-oncology, as well as a stem cell-derived therapy for the treatment of Type 1 diabetes.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks

Consumer Products Derailed Hasbro’s Holiday Season, Business Currently in Transition CRI

Business Strategy & Outlook: 

Hasbro continues to hold a leadership position in the nearly $40 billion domestic toy industry (NPD), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, factors that have been enhanced with the 2019 tie-up of Entertainment One (EOne). Additionally, production capabilities support Hasbro’s multimedia presence, as does Discovery Family, a joint venture with Discovery that brings Hasbro’s brands to television, bolstering the firm’s brand blueprint strategy. Furthermore, Hasbro has historically dominated the big-screen arena, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). It is believed Hasbro and the toy industry have a decent runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of small, strategic players that fit into Hasbro’s portfolio (most recently D&D Beyond).  Hasbro’s moat is rated as narrow, as a market leader with a differentiated niche in the entertainment space. It also has robust exposure to games through the Wizards of the Coast line, where peers have failed to erode share given the loyal history of players in the category. However, strong returns on invested capital that Hasbro can generate will continue to attract competition, which will force it to continuously innovate to maintain its leadership position, resulting in elevated development costs. However, it is not believed that investments to protect the brands will hurt cash flow potential, as cash flow rises from catalysts like strong film launches, new licences, and expense leverage (with a $250 million-$300 million cost savings initiative underway through 2025). This will allow investors to be rewarded through rising dividends (4% yield) and a share-buyback program, along with a return to 2-2.5 times forecast debt/EBITDA by the end of 2023.

Risk and Uncertainty: 

A number of risks may affect Hasbro’s enterprise value. First, customer concentration raises the risk that changes to ordering patterns could affect profits. Its top three channels for distribution (Walmart, Target, and Amazon) accounted for nearly 32% of sales in 2021. Cooperation among retailers could affect the amount of promotional spending demanded and hamper Hasbro’s margin. Additionally, the ecommerce avenue (comprising more than $1 billion in sales) remains a key channel for the distribution model. While Hasbro has risen to become a top toy seller on Amazon, a concern that remains is that as Amazon represents a larger part of the total mix of sales, it could change the profitability profile of Hasbro over time, depending on concessions the toy maker may have to offer. Over the near term, Hasbro still faces risks around COVID-19 (supply chain and production delays if closures ensue). New toy marketers can incorporate and attempt to take share from Hasbro. Although trademarks exist on Hasbro’s brands, there aren’t structural barriers to prevent a competitor from developing a new toy or capturing a licensing relationship with a partner. It is believed Hasbro is in a slightly protected position, as its sheer size allows it to allocate significant capital to marketing, a luxury likely not available to a new market entrant. This leads some licensing partners to pair up with leading players in the industry that have already proven partnership success through the performance of its existing licensing contracts. Also, while Hasbro faces some environmental, social, and governance risks, it is not expected any particular issue to be material, and as such, exposure to these concerns doesn’t influence the fair value estimate. The most likely risk stems from weak product governance, which could lead to quality and safety issues, something that is not seen as imminent in the prognosis. 

Bulls Say:

  • Opportunities exist from entertainment, bolstered by the Discovery Family network, EOne, and film tie ins, supporting demand growth.
  • Stock ownership is compelling for income investors. The firm has a 4% yield and has paid out around $1.7 billion in dividends in the past five years. The dividend payout ratio should remain around 40% over the long term as free cash flow rises
  • The firm enjoys a stable expense base and should be able to leverage operating margins to around 19% as higher margin games become a larger percentage of the total mix.

Company Description:

Hasbro is a branded play company providing children and families around the world with entertainment offerings based on a world-class brand portfolio. From toys and games to television programming, motion pictures, and a licensing program, Hasbro reaches customers by leveraging its well-known brands such as Transformers, Nerf, and Magic: The Gathering. Ownership stakes in Discovery Family, which offers programming around Hasbro brands, and owned production capabilities from Entertainment One help bolster Hasbro’s multichannel presence. The firm acquired Entertainment One in 2019, bolting on popular properties like Peppa Pig and PJ Masks, and has plans to tie up with Dungeons & Dragons Beyond in 2022, offering the firm access 10 million digital tabletop players

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks

Intellia Therapeutics’ Gene Editing Technology Looks Promising; FVE $85, Shares Undervalued

Business Strategy & Outlook: 

Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. Intellia’s technology platform specializes in Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases. CRISPR/Cas9 has created a new class of medicines, which are well suited for targeting rare diseases or other disorders that are caused by genetic mutations. CRISPR/Cas9 works by having CRISPR (pieces of DNA sequences) guide Cas9 (an enzyme that can cut and edit DNA) to edit, alter, or repair genes. Intellia is utilizing this gene knockout approach to remove unwanted proteins using its proprietary lipid nanoparticle delivery system. Intellia has leveraged its expertise in CRISPR/Cas9 gene editing to advance a pipeline of in vivo and ex vivo therapies for diseases with high unmet medical needs. It is believed that the company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available. Intellia currently has no approved drugs and a largely early stage pipeline.

Risk and Uncertainty: 

A significant uncertainty related to regulatory approvals for the company’s early-stage pipeline candidates and a range of potential outcomes. Product governance is an ESG risk for Intellia, as failure to adhere to extensive regulations can lead to expensive recalls, increased regulatory scrutiny, and lawsuits from affected customers. Additionally, lawsuits related to patent rights and potential patent infringements are another risk. It is anticipated gene editing companies like Intellia will operate under cross licensing agreements with the Broad Institute as many of the gene editing technology platforms are interrelated. Access to basic services is another ESG risk the company will face if its drugs receive approval since its sales will depend on reimbursements from third-party payers, such as Medicaid or Medicare, private insurers, and national healthcare systems. Attempts by governments to contain healthcare costs could result in pricing pressure and lead to reduced profit margins.

Bulls Say:

  • Intellia’s partnerships allow it to receive milestones and economic benefits from drug candidate progression while offsetting some of the clinical development costs. 
  • Intellia’s CRISPR/Cas9 platform has the potential to develop highly efficacious and curative treatments for rare, genetic diseases with high unmet needs, which will likely lead to pricing power if approved. 
  • The company’s pipeline is viewed as possessing strengthening intangible assets and assign it a positive moat trend.

Company Description:

Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 stands for Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/CRISPR-associated protein 9 (Cas9), which is a revolutionary technology for precisely altering specific sequences of genomic DNA. Intellia is focused on using this technology to treat genetically defined diseases. It’s evaluating multiple gene editing approaches using in vivo and ex vivo therapies to address diseases with high unmet medical needs, including ATTR amyloidosis, hereditary angioedema, sickle cell disease, and immuno-oncology. Intellia has formed collaborations with several companies to advance its pipeline, including narrow moat Regeneron and wide-moat Novarti

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks

Circling Back on CIBC After Q4 Earnings; Lowering Fair Value Estimates to CAD 73/USD 54

Business Strategy & Outlook: 

Canadian Imperial Bank of Commerce is the fifth-largest bank in Canada by assets and one of six that collectively hold almost 90% of the nation’s banking deposits. CIBC is more Canadian-focused than some of its more international peers, although this is changing after the acquisition of PrivateBancorp. The bank plans to eventually have up to 25% of revenue coming from the U.S. Despite having one of the larger domestic branch networks, CIBC’s products haven’t typically had top share in Canada, though the bank had made significant strides in multiple categories for years starting in 2011, as the bank increased share in multiple categories and increased product numbers per customer. This improvement has admittedly slowed down recently. CIBC has encountered its own issues over the years, including multibillion-dollar write-downs in the aftermath of the global financial crisis. The bank had hit its stride since 2011, improving consumer satisfaction ratings, re-optimizing branches, improving internal processes, and expanding wealth operations. The bank is also seeing improved growth from its U.S. operations, which now contribute over 20% to earnings.

Risk and Uncertainty: 

Canadian banks face two primary risks: macroeconomic risks and risks related to future acquisitions. Canada has some of the highest median housing prices/annual median household income ratios in several of its major housing markets, and mortgage debt levels have consistently increased for more than a decade. While low interest rates have kept debt servicing ratios under control, this puts the economy in a riskier position as rates rise. The leverage of the Canadian consumer as a risk, as they have slowly leveraged up for more than a decade. CIBC has the largest relative exposure to the domestic real estate market in Canada; however, it is viewed as a manageable risk for the bank. While there are uncertainties related to consumer debt levels and the mortgage market, it is viewed as a threat to future growth and not an existential risk to Canada’s banking system. Further, the Canadian banking system has historically been one of the more stable systems in the world, and the system is designed to protect industry profit levels and maintain this stability and promote economic stability. From an ESG perspective, commercial banks are expected to have strong product governance. Predatory or discriminatory lending practices are examples of poor product governance, and this can affect certain banks at times. It is viewed by most product governance and social risks as manageable and incorporates a steady level of operational expenses related to compliance and litigation in some models. Outside of the rare, headline-grabbing scandals, social risks are not seen as having a material effect on valuation. Banks also lend to certain sectors which can come under more scrutiny at times, like gun manufacturers, or energy, for example. Commercial banks do not directly have a large environmental footprint and governance practices are in line with most companies. 

Bulls Say:

  • CIBC has significantly improved multiple measures of core banking performance, such as customer perception surveys, promoter scores, and products per a customer. The bank is now operating at a higher level. 
  • CIBC is more Canadian-focused than most of its peers. Its consolidated returns on tangible equity remain some of the highest in the industry.
  • The government has kept the Canadian market attractive by placing barriers to entry, protecting high returns, and the government will continue to attempt to keep the housing market under control, limiting any future hits to profitability.

Company Description:

Canadian Imperial Bank of Commerce is Canada’s fifth largest bank, operating three business segments: retail and business banking, wealth management, and capital markets. It serves approximately 11 million personal banking and business customers, primarily in Canada.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

Megaport Is Making Significant Strides Toward Profitability Without Sacrificing Sales Growth

Business Strategy & Outlook: 

Demand for software-defined networks, or SDNs, like Megaport offers should grow tremendously in coming years, as enterprises increasingly use cloud services, often with multiple cloud providers. Enterprises typically need to connect their private equipment to cloud partners, and data often needs to be transferred between cloud providers. Software-defined networks allow enterprises to quickly provision capacity through an online portal and flexibly adjust capacity to meet their current needs. Megaport’s growth has been driven both by adding new customers at high rate while also seeing customers use its services more. The firm has averaged more than 20% average annual customer growth the past three years while still seeing services per customer and revenue per service grow, despite the higher base. The trend is expected to continue as customers continue to increase their reliance on multiple cloud providers and become more aware of Megaport’s alternative to traditional connectivity options. Megaport enables firms to locate equipment in fewer data centers and connect remotely with an alternative to traditional telecom connections (which can be inflexible and expensive) and the public internet (which is less reliable and secure). 

Risk and Uncertainty: 

The biggest risk, is that numerous companies would eventually be able to provide similar services, leading to a lack of pricing power and inability to earn attractive returns. Currently, Megaport has a bigger footprint than its rivals. It has a global presence in more data centers than competitors, and it has a relationship with all the biggest cloud providers, which is thought to be key to attracting customers. Against that backdrop, Megaport has seen revenue grow rapidly and margins improve substantially over each of the five years since the company’s initial public offering. The firm’s current market valuation implies the trend will continue, but if competitors can close the gap and offer comparable connections to customers, Megaport might have to compete more on price. In addition to the threat from copycat firms, Megaport could be susceptible to traditional network providers that own infrastructure and have historically met enterprises’ network needs. With existing ownership of the same types of assets that Megaport must lease and existing relationships with many of the cloud providers, data centers, and enterprises that support Megaport’s business, they would be well positioned to enter the market if the opportunity is enticing. Megaport’s biggest ESG risk is that of a data or security breach, given the firm is entrusted with and handles such high volumes of sensitive data. The financial and reputational damage that could result from a severe security breach could be devastating.

Bulls Say:

  • The rise in data usage, the need to access data, and the use of cloud providers leaves many more firms needing network services. Megaport’s software-defined network is a better solution than the expensive and stodgy traditional networks. 
  • Partnerships with data center firms, telecom companies, and networking firms like Cisco and VMware support Megaport’s business and give it an advantage over other startup SDNs. 
  • Operating leverage is taking hold and puts Megaport on the cusp of becoming very profitable while it is maintaining high sales growth.

Company Description:

Megaport is a software-defined network service provider that allows enterprise customers to connect between data centers. At the end of fiscal-year 2021, Megaport was connected to 423 data centers in more than 130 cities throughout North America, Europe, Asia, and Australia. Most of the firm’s customer connections are to cloud service providers, like Amazon Web Services or Microsoft Azure, but Megaport also enables customers to connect between their own equipment in different locations and to internet exchanges. With a softwaredefined, rather than traditional, network, customers have flexibility to adjust connection needs almost instantaneously through a self-serve online portal without long-term commitments.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks

Recovery Is Underway at Lendlease and the Business Is Transforming

Business Strategy & Outlook: 

Lendlease is a diversified global property developer, landlord, property manager, fund manager, and builder on a range of development projects, funds, and completed properties around the world. Interests have included apartments, offices, retail property, aged care facilities, retirement and military accommodation, roads, and rail tunnels. The group is evolving on numerous fronts: selling noncore businesses; seeking better returns on capital; accelerating its development pipeline; and shifting focus outside its homebase of Australia. Lendlease sold its risky engineering business in calendar 2020, though it retained liability for three engineering/ construction projects–two practically complete, and one complex project (Melbourne Metro) with several years to run. Lendlease found a buyer for its engineering services business after two years of marketing, and the price was respectable. Once this exit is complete Lendlease’s project mix will predominantly comprise residential and commercial property developments. The group’s ongoing business comprises three segments: development, investments and construction. Much growth isn’t expected in construction earnings, that business is primarily to preserve scale and construction expertise in support of Lendlease’s development business. The investments division houses a wide range of businesses including, military housing, property asset management and funds management. It is expected that the latter two business lines to grow substantially as Lendlease sells stakes in its development projects. This is a trade-off, relinquishing potential development profits in return for lower risk management fees, performance fees, and capital to accelerate its development pipeline. Lendlease’s history is in Australia and is is expected it to continue to pursue projects there, but it is expected earnings over the next two decades will rotate toward its offshore development pipeline in the United States, Europe, and to a lesser extent Asia

Risk and Uncertainty: 

Despite selling its engineering and services businesses, Lendlease retains risks on the Melbourne Metro project. A base case is that existing provisions will cover future costs, but risk remains through to completion by circa 2026. Lendlease’s remaining business is opaque, but becoming more transparent. The bulk of the value of the company is in multi-decade urbanisation projects, where end values and margins cannot be accurately estimated until the projects are substantially completed. Even if Lendlease knew what revenues and margins are likely to be, contract terms are largely confidential. Projects face political, social and environmental risk, given they involve redeveloping large tracts of inner urban land, in collaboration with local municipalities, land owners and other stakeholders. These ESG issues contribute to a High Uncertainty Rating. Development risks include rising interest rates, a decline in secular demand for offices and apartments, or mis-pricing of contracts by Lendlease. A risk for the investment segment is that demand from institutions wanes, prompting outflows from Lendlease funds. Investors may fear rising rates, or limited upside with rates near the zero-bound. Changes to pension, tax or investment regulations could cause institutions to move away from illiquid assets. There was a taste of that risk in Australia in 2020 when the government allowed individuals in financial hardship to make superannuation withdrawals amid the COVID-19 crisis. That saw industry super funds saddled with illiquid property assets as they sold liquid assets to fund redemption requests. Lendlease experienced redemptions from its retail property funds due to headwinds for that asset class, and its possible that these headwinds could spread to office and apartment assets. 

Bulls Say:

  • Lendlease has a huge development pipeline. Contract terms are confidential, but look to have been struck on attractive terms. 
  • The balance sheet is in good shape, which should help Lendlease to accelerate its huge development pipeline. 
  • Government balance sheets are strained, yet authorities appear to want to promote economic activity via construction. Lendlease is well positioned to participate, because of its near shovel-ready projects and capable management. 

Company Description:

Lendlease’s ongoing business comprises three segments: development, investments, and construction. Development accounted for more than half of EBITDA in 2020, and the future pipeline is so large it cannot be funded from its own balance sheet. The group is selling projects stakes to its funds management clients. This sacrifices development profit, in return for management fees, reduced risk, and capital to accelerate its development pipeline. Construction generates large revenues but slim margins. This business is retained to preserve expertise and scale for the development business. Lendlease sold its engineering and services business during the pandemic, but retains some risks, notably the Melbourne Metro project which has years to run

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

John Brookes Outage Limits Fourth-Quarter Production for No-Moat Santos

Young female explaining new idea to her colleague in creative office.

Business Strategy & Outlook: 

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial selldowns bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia’s largest coal seam gas producers and continues to prove additional reserves. It is the country’s largest domestic gas supplier. Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 mmboe, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs. A degree of confidence can be drawn from project partners. U.S. energy supermajor ExxonMobil, the world’s largest publicly traded oil and gas company, is 42% owner and the operator of the PNG LNG project. The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia’s national oil and gas company and the world’s second-largest LNG exporter. French energy major Total is the world’s fifth-largest publicly traded oil and gas company, and Korea’s Kogas is the world’s largest buyer of LNG. Santos is in good company. Overall, a happier future for Santos is observed  now that excess debt levels are addressed, aided via improved margins and earnings driven by Gladstone and PNG LNG. The company increasingly enjoys export pricing on its gas. In addition to Santos’ Gladstone LNG, several other third-party east-coast LNG projects conspire to drive domestic gas prices higher. As the largest domestic gas supplier, Santos can expect significant bang for its buck, with limited additional capital or operating cost required to capture enhanced prices. The group production profile is simplified with increased certainty in project life. 

Risk and Uncertainty: 

Material ESG exposures create additional risk for E&P investors. In this industry, the most significant exposures are greenhouse gas emissions (both from extraction operations and downstream consumption), and other emissions, effluents, and waste (primarily oil spills). In addition to the reputational threat, these issues could force climate-conscious consumers away from fossil fuels in greater numbers, resulting in long-term demand erosion. Climate concerns could also trigger regulatory interventions, such as fracking bans, drilling permit suspensions, and perhaps even direct taxes on carbon emissions, already in place in some jurisdictions. These ESG risks are based largely on industry risks that are already incorporated into base-case analysis. And natural gas is the predominant value driver for Australian E&Ps like Santos. Natural gas is less carbon-intensive than coal or oil, and stands to benefit from efforts to minimize emissions, at least in the medium term. This is because renewables like wind and solar, while growing rapidly, can’t hope to entirely meet global energy requirements for decades, if ever. Santos’ balance sheet is sound. Moderate leverage (ND/E) of 21% and maintenance of strong net operating cash flow is reassuring. Santos’ debt covenants have adequate headroom and are not under threat even at low oil prices. The weighted average term to maturity is around 5.5 years, with less than 23% due by 2023. Net debt/EBITDA at end June 2022 was 0.6. It is not expected the metric to deteriorate much, even including planned development project expenditure. On the investment side, Santos’ performance is rated as fair. The company let itself down on the capital-allocation side due to cost overruns associated with building the USD 18.5 billion Gladstone LNG project. Returns consequently worsened to low-single digits over the past eight years, well below its cost of capital. Some of this is due to Gladstone being built with expansion in mind, and any future growth will be somewhat more capital-efficient than for the current two LNG trains. Santos could probably expand to three trains, subject to securing natural gas feed and LNG offtake, with cost savings coming on the capital side from better utilization of existing tankage, wharfage, and surrounding infrastructure

Bulls Say:

  • Santos is a beneficiary of continued global economic growth and increased demand for energy. Aside from coal, gas has been the fastest-growing primary energy segment globally. The traded gas segment is still expanding faster.
  • Santos is in a strong position, with 1.7 billion barrels of oil equivalent proven and probable reserves, predominantly gas, conveniently located on the doorstep of key Asian markets. 
  • Gas has about half the carbon intensity of coal, and stands to gain market share in the generation segment and elsewhere as carbon taxes are rolled out. Bears Say Mark Taylor, Senior Equity Analyst, 19 Jan 2023 
  • Santos committed to substantial LNG capital expenditures, which will see the balance sheet geared in the medium term. 
  • Much of the company’s perceived value is in coal seam gas to LNG projects that are yet to reach full capacity. 
  • Landholder opposition to coal seam gas development could hinder production growth.

Company Description:

Santos was founded in 1954. The company’s name is an acronym for South Australia Northern Territory Oil Search. The first Cooper Basin gas discovery came in 1963, with initial supplies in 1969. Santos became a major enterprise, though over-reliance on the Cooper Basin, along with the Moomba field’s inexorable decline, saw it struggle to maintain relevance in the first decade of the 21st century. However, the stage was set for a renaissance via conversion of coal seam gas into LNG in Queensland and conventional gas to LNG in PNG

(Source: Morningstar)

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