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Dividend Stocks

Looking beyond the current plan, Ameren has its sight set on nearly $28 billion of additional investment opportunities

Business Strategy and Outlook 

Ameren is a regulated utility that operates in Illinois and Missouri, two historically challenging regulatory jurisdictions that are rapidly improving. With improving rate regulation come significant investment opportunities, supporting the company’s five-year $17.3 billion capital investment plan. Looking beyond the current plan, Ameren has its sights set on nearly $28 billion of additional investment opportunities for the following five years, providing a long runway of growth for the company. Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent years-long efforts resulted in increased investment opportunities across the territory, a stark change from the past. Numerous trackers are in place for fuel adjustments, pension, and tax positions. These mechanisms are attributes of a constructive regulatory environment. Recent legislation allows utilities to securitize the remaining liabilities associated with Ameren’s coal plants, potentially allowing earlier-than-planned coal plant retirements and faster renewable energy growth.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating nearly half of its investment plan to Missouri. Projects will focus on renewable energy, upgrading aging and underperforming assets, and employing smart grids and connected grid services. Regulation in Illinois is set to change. While performance-based ratemaking, in which allowed returns on equity are 580 basis points above the average 30-year U.S. Treasury yield, was constructive, the drop-in interest rates led to some of the lowest allowed returns among its peers. New legislation allows utilities to opt in for a four-year rate plan beginning in 2024. Under the multi year plan, utilities are able to true-up earned returns to their allowed returns and continue sales decoupling. Performance metrics, both incentives and penalties, are given in a range of 20-60 basis points. The new rate structure could produce higher allowed returns in Illinois.

Financial Strength

Ameren will invest $17.3 billion of capital between 2022 and 2026.It is expected the company to issue debt and equity in line with its current capital structure and refinance its debt as it comes due. Ameren increased the dividend 10% in 2021. Future dividend growth to be more in line with earnings growth. Ameren has tended to be at the lower end of its 55%-70% dividend payout target. Ameren’s current financial health is sound. The firm’s 58% debt/capitalization ratio is in line with its utility peers. Interest coverage is healthy at over 6.0 times, and current debt/EBITDA is over 5.0.

Bulls Say’s:

  • Ameren’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive above-average rate base and earnings growth for the next several years. 
  • Ameren’s regulatory relationships have improved significantly in Missouri.
  • Ameren’s management team has proved to be best in-class operators, having diligently worked to improve regulatory relationships and execute on substantial growth projects.

Company Profile 

Ameren owns rate-regulated generation, transmission, and distribution networks that deliver electricity and natural gas in Missouri and Illinois. It serves 2.4 million electricity customers and more than 900,000 natural gas customers.

(Source: Morningstar)

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

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

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

Evergy’s Growth Based on Regional Clean Energy Buildout

Business Strategy & Outlook:   

Evergy formed in June 2018 when Great Plains Energy and Westar Energy completed their merger after two years spent working through the regulatory approval process in Kansas and Missouri. With the integration complete and a new management team in place, Evergy is working to improve historically challenging regulation and invest in clean energy. Regulatory negotiations in Missouri during the second half of 2022 will test how much the state’s ratemaking framework has improved in recent years. Despite recent changes, still consider Missouri’s rate regulation less constructive than most other states. Evergy must secure constructive regulatory outcomes in Missouri and Kansas to support growth plans that include $11 billion of capital investment during the next five years, primarily to replace aging coal plants with renewable energy. New legislation in Missouri should allow Evergy to securitize the remaining book value of coal plants as they retire in the coming years, improving cash flow and reducing equity needs. 

Kansas, which represents about half of Evergy’s total asset base, has a more constructive regulatory environment than Missouri. Kansas regulators have supported renewable energy investment for many years. Evergy also benefits from favorable federal regulation for its electric transmission assets, which could top 15% of its asset base in the coming years. Unlike other utilities that are pursuing investments outside their regulated-rate structure, Evergy management said it plans to direct all of Evergy’s growth capital to its regulated utilities at least through 2025. Senior leadership has extensive experience at companies with unregulated power businesses, and management wouldn’t be surprised if Evergy directs some capital investment outside of the utilities, perhaps with a partner. Evergy raised the dividend 6% during the two years following the merger and raised it 7% for 2022 to $2.29 per share annualized. Company expects the dividend to grow in line with earnings for the foreseeable future.

Financial Strengths:  

Evergy had an equity-heavy balance sheet following the all-stock combination of Westar and Great Plains. However, the company repurchased over 45 million shares following the merger for about $2.6 billion and has issued nearly $3 billion of net new debt, bringing its leverage in line with peers’. Company expects Evergy will continue financing a large share of its capital investments with debt such that debt/total capital remains near 55%. Following the merger, the board raised the dividend 6.3% in late 2019, 5.9% in late 2020, and 7% in late 2021. Management’s payout ratio target is 60%-70% of operating earnings, in line with most other regulated utilities. It has forecasted 6% dividend increases for at least the next four years, in line with earnings growth.

Bulls Say: 

  • The annual dividend increases to average 6% over the next four years, in line with earnings growth. 
  • Evergy’s operating cost savings during the last few years are helping offset some of the customer bill increases related to its capital investments. 
  • Recent legislation has improved the regulatory framework in Missouri, home to one third of Evergy’s rate base. This should reduce regulatory lag.

Company Description:  

Evergy is a regulated electric utility serving eastern Kansas and western Missouri. Major operating subsidiaries include Evergy Metro, Evergy Kansas Central, Evergy Missouri West, and Evergy Transmission Co. The utility has a combined rate base of approximately $16 billion, about half in Kansas and the rest split between Missouri and federal jurisdiction. Evergy is one of the largest wind energy suppliers in the U.S. 

(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

Soaring Refiner Margins Launch No-Moat Viva’s Q2 2022

Business Strategy & Outlook:    

Viva, along with Ampol, BP and Mobil, is a rare breed of vertically integrated Australian refined fuel supplier. The Australian downstream petroleum industry runs from sourcing, transporting and storing crude oil, refining that crude into marketable products or directly sourcing imported refined product, and then transporting refined products for sale to retail and commercial customers. Refined products are mostly used in the transport sector, including commercial and private motoring, aviation, marine, and other transport demand. The Australian market equates to approximately 60 billion liters of product, with road use the largest segment at over 50%, followed by aviation at 14% and industry at 12%. Coronavirus notwithstanding, volumes in the Australian fuels market grow at close to rates in GDP, with solid increases in diesel and jet fuel consumption offsetting a slow decline in petrol. 

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier, delivering over 14.5 billion liters of refined product annually or approximately 24% of national requirement. Viva can be described as vertically integrated because it refines, supplies and markets fuel to customers. Few companies refine fuel locally with much of Australia’s refining capacity shut in recent decades, unable to compete with Asian mega-refineries. There are only four refineries remaining including Viva’s Geelong in Victoria. Geelong converts imported and locally sourced crude oil into gasoline, diesel, jet fuel and lubricants. These are then distributed, along with directly imported products, into the retail channel via supply channels. The Geelong refinery is one of the most complex in the country due to its greater ability to produce higher value products. Against the relatively sanguine outlook for the refined fuels industry, there are a number of concerns. These include the potential for heightened competition, driving lower margins given the entrance of new players. Further, investing in older and far smaller refineries than Asian mega-cousins is a potential money pit.

Financial Strengths:  

At end December 2021, Viva had net debt of just AUD 95 million, excluding operating leases. Gearing (ND/(ND+E)) is modest at 4% and net debt/EBITDA a negligible 0.2. The balance sheet is in great shape to fund investments in new businesses. The strong status is despite returning AUD 680 million in after-tax Viva Energy REIT sale proceeds in full to shareholders in 2020 and making a AUD 100 million capital return in 2021. Forecasted solid free cash flows in the foreseeable future, growing to over AUD 400 million by 2023, which should comfortably support Viva’s target dividend payout ratio of between 50% and 70% of underlying distributable NPAT.

Bulls Say: 

  • Viva boasts significant refined fuel distribution, supplying around 24% of Australia’s national requirement; second only to Ampol.
  • Australia’s fuel demand continues to grow at low single digits as population growth and rising aviation use offset increasing vehicle fuel efficiency gains.
  • While not sufficient to warrant awarding an economic moat, Viva’s pipeline and terminal infrastructure furnish competitive advantages–notably the efficient scale with its jet fuel pipeline supplying Sydney Airport.

Company Description:

Viva is Australia’s second-largest vertically integrated refined transport fuel supplier. Viva is rated as the second-most-significant pipeline owner, and at approximately 1,155 locations, Viva supplies the third-largest number of retail sites in Australia behind Ampol at approximately 1,985 and BP at 1,400. Vitol bought Shell’s Australian downstream operations in 2014, and renamed them Viva Energy. Viva subsequently bought Shell’s Australian aviation operations and a 50% investment in Liberty Oil. In 2016, Viva sold (and leased back) a portfolio of its retail sites to Viva Energy REIT and listed Viva Energy REIT on the ASX. It has since sold its entire REIT stake for AUD 734 million.

(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

Raising Interest Rates, Slowing Economic Growth, and Weaker Prices Soften BlueScope Steel’s Outlook

Business Strategy & Outlook:    

BlueScope’s strategy appropriately plays to its strengths and attempts to neutralize its weaknesses within its portfolio of legacy assets. Steel manufacturers produce largely undifferentiated products and have limited pricing power. Maintainable competitive advantage is typically generated by being the lowest cost provider. BlueScope’s Australian business operates at a relatively high cost and struggles to compete in highly competitive export markets. North Star is significantly more entrenched and operates toward the low end of the cost curve. 

Over the past decade, BlueScope sensibly restructured Australian operations away from commodity export markets where the relatively high cost of production places it at a competitive disadvantage. The Australian operations are now tailored to the domestic market with a focus on shifting its sales mix to its value-add metal coated and painted product brands. The group’s Ohio-based North Star operations are the business’ crown-jewel. North Star specializes in the production of hot rolled coil for the U.S. domestic market and utilizes highly efficient electric arc furnaces which can produce at a lower per unit cost than blast furnace competitors. BlueScope has gradually expanded production capacity at North Star over time to maximize the value of its operations. BlueScope is taking appropriate actions to manage its environmental, social, and governance risks. BlueScope is proactively investing in technologies to limit the carbon intensity of its steelmaking operations and has committed to a net zero emissions target by 2050.

Financial Strengths:  

BlueScope has a strong balance sheet. As at the end of the first half of fiscal 2022, BlueScope’s net cash position was approximately AUD 700 million (including operating leases) and had approximately AUD 2.7 billion in undrawn debt facilities. BlueScope’s balance sheet will be put to work over the next few years to fund a range of initiatives across Port Kembla, North Star, the U.S. buildings segment, and acquiring the coil coatings business from Cornerstone Building Brands. BlueScope is also strategically investing in sustainability programs associated with its commitment to net zero emissions by 2050. Longer term, BlueScope is targeting a relatively conservative net debt position of around AUD 400 million with at least 50% of free cash flows distributed to shareholders in the form of dividends and share buybacks.

Bulls Say: 

  • Supply side reform in China will reduce industry overcapacity and act to boost steelmaking spreads and operating margins relative to depressed levels in the early 2010s.
  • The strength of Australia’s residential construction market will aid in shifting the Australian segment’s sales mix to value-added products in the near term.
  • Fiscal stimulus programs enacted during the coronavirus pandemic will support demand for steel products over the near term.

Company Description: 

BlueScope is an Australian-based steelmaking firm with five steel related business units. The Australian Steel Products segment mainly specializes in a range of high-value coated and painted flat steel products for the domestic market. North Star is the group’s U.S. mini-mill specializing in the production of hot rolled coil for the U.S. construction and automotive sectors. Building Products Asia and North America comprise operations across Southeast Asia, China, India, and the U.S. West Coast involved in metal-coating, painting, and roll-forming. New Zealand Steel and the Pacific Islands business has steel operations across New Zealand and the Pacific. The Buildings North America segment specializes in nonresidential buildings, including materials manufacturing and support services.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Shares Small Cap

Zip Shares Still Cheap After Walking Away from Sezzle, But Its Fundamentals Are Getting Murkier

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. ZipPay finances up to AUD 1,000, and ZipMoney 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. Meanwhile, Zip Business provides unsecured loans of up to AUD 500,000 to small and midsize enterprises.

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 Quad Pay materially boosts its growth prospects. It also operates in the U.K., 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 crypto trading, credit reporting, and savings accounts. For merchant partners, Zip invests in co-marketing to help them acquire new customers. Zip has strong earnings prospects, but 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, 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.

Financial Strengths:
While credit stress is creeping up, Zip remains overall in reasonable financial health. As of March 2022, the net bad debt ratio for its core ANZ business sits at 3.40% of receivables, while arrears are at 2.29%. But as a reprieve, Zip’s current financial position would be bolstered by: 1) its March equity raise; and 2) avoiding absorbing Sezzle’s net losses. Its debt/capital ratio is 56%, while the ratio of equity/receivables has improved to 52% in fiscal 2021 from 8.1% in fiscal 2017. Zip’s bad debts should stay manageable in a major credit event. Unlike some peers, Zip conducts a greater degree of background check before onboarding customers, such as collecting bank statements and pulling in information from a credit bureau. Soft credit checks are similarly performed when onboarding new customers overseas. This helps compensate for the fact that its receivables are higher-risk due to them having longer repayment periods and higher transaction value (notably for Zip Money) or it having a Pay Anywhere model. Its installment businesses have shorter turnover periods and lower transaction values, meaning it can know much earlier (relative to credit cards) if customers have trouble making payments and can therefore amend its risk controls accordingly. Most its Australian receivables are funded by its asset-based securitization program, with undrawn facilities totaling AUD 401.9 million as of March 2022. It also has USD 168.1 million and AUD 119.5 million of undrawn facilities to fund U.S and Zip Business’ receivables, respectively.

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.
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 Quad Pay, 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, Quad Pay (Zip U.S.), and PayFlex–do not charge interest based on outstanding balances. Around 60%-70% of Zip Pay’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

Cohen & Steers Continues to Be Affected by Equity Market Selloff; FVE Lowered to $80 per Share

Business Strategy & Outlook

While the combination of rising interest rates and an equity market selloff has had an impact on Cohen & Steers’ levels of assets under management, they are cautiously optimistic about the firm over the near to medium term. Cohen & Steers came into 2022 with a record $106.6 billion in managed assets, split among its U.S. real estate (47% of total AUM), global/international real estate (18%), global listed infrastructure (8%), and preferred securities (25%) offerings. But market losses and meager flows during the first half of the year had left the company with $87.9 billion in managed assets at the end of June. So far, market losses are having a bigger impact on AUM than flows, with Cohen & Steers reporting a 12.3% (16.0%) market loss for its managed assets during the second quarter (first half) of 2022. This was better than the Morningstar Global Markets REIT TR Index, which was down 15.6% (20.0%) during the same time frame. Part of this is likely due to the firm garnering just two thirds of its total AUM from real estate investment funds, and some can also be attributed to active management.

While REITs have generally performed well during periods of rising long-term interest rates (based on studies done by NAREIT over the years), the current tightening cycle is a push by the Fed to fight inflation, which has been hitting levels not seen since the early 1980s. Rising rates and inflation can hinder external growth efforts for REITs (as acquisitions become less accretive) and pressure existing tenants, as well as provide investors with a less risky yield alternative in fixed-income securities (leading to outflows). It looks like most of Cohen & Steers’ investors are not running for the exits, though, as flows have been relatively flattish year to date. The firm’s institutional clients tend to be first to reallocate (and generally well in advance of Fed actions), so the fact they’ve not pulled out too aggressively is a positive. The Standard & Poor’s separation of real estate-related companies from the financial services sector has forced many institutional investors to maintain exposure to REITs, adding some stability to Cohen & Steers’ managed assets.

Financial Strengths

Cohen & Steers has not had any debt on its books since 2005. Based on what to be conservative long-term estimates for profitability and cash flows, the company is unlikely to need to tap the credit markets to fund its operations during the five-year projection period. Over the past 10 calendar years, Cohen & Steers has returned more than $1.1 billion to shareholders as dividends (utilizing both regular quarterly dividends and special one-time dividends to pay out capital) and around $130 million to shareholders via share repurchases (net of share issuances). Going forward, the firm will return just over half of its expected annual free cash flow (of around $270 million on average) to shareholders as dividends, with the rest spent on share repurchases or other investments (including seed capital for new products). At the end of March 2022, the firm had $115 million in cash and cash equivalents (including $30 million in U.S. Treasury securities) and $255 million in investments (including $63 million in seed capital) on its books.

Bulls Say

  • Cohen & Steers’ long record of successful REIT investing has allowed it to tap into demand for alternatives that offer diversification away from more traditional stock and bond offerings. 
  • The firm’s funds are entrenched in the broker/dealer market, and the company also garners close to half of its AUM from institutional clients, providing it with a relatively stable base of assets. 
  • At the end of March 2022, Cohen & Steers had $2.33 in cash and equivalents per share on hand, which could be used to fund a special dividend, a strategic acquisition, or to increase share repurchases.

Company Description

Cohen & Steers is a niche asset manager concentrating on real estate securities. The firm invests mainly in the equity shares of real estate investment trusts, with holdings in domestic and international real estate securities accounting for close to two thirds of its $87.9 billion in managed assets at the end of June 2022. Cohen & Steers also manages portfolios dedicated to preferred securities, utilities stocks, and other high-yield offerings. It expects to balance distribution among its closed-end mutual funds, open-end mutual funds, and institutional accounts over time. During the March quarter of 2022, the company garnered 40% (26%) of its managed assets (base management fees) from institutional clients, 47% (55%) from open-end funds, and 13% (19%) from closed-end funds.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Assa Abloy has significant growth potential as it benefits from structural changes

Business Strategy & Outlook

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. An industrywide shift toward software-driven products, expanding functionality, and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader. If the spectrum of today’s locks were defined by a basic mechanical lock on one end and a software-controlled locking system on the other end, Assa Abloy’s product portfolio would be heavily weighted toward the latter. Advances in the past decade have expanded the functionality of lock systems to enable ever more precise access parameters, as well as enhanced identification of lock system users. For example, a building administrator would be able to provide a registered visitor with temporary access to a computer for a specified two-hour window on a particular day.

Technological improvements are shortening the upgrade cycle for locks, as customers are eager to implement new security-enhancing features. The shift toward software-driven locks will continue over the long term, with the company’s global technologies division forging the path. The division is experiencing good initial success in selling virtual keys, typically issued on a temporary basis to mobile phones. Asia and other emerging markets lag in locking solutions, with under penetration of electromechanical locks, such as those linked to a keycard reader. Pent-up demand in the region, combined with strategic acquisitions, fueled a fivefold increase in Assa Abloy’s Asia-Pacific revenue over the past decade, with organic revenue growth averaging 5% from 2005 to 2013 (before China’s property bust). For buildings with multiple daily users, there are obvious benefits from upgrading to more sophisticated systems that can track and limit building access. Asia and other emerging markets offer a long runway of demand for Assa Abloy’s products.

Financial Strengths

At the end of March 2022, the company’s net debt/EBITDA ratio was less than 2 times. Looking to the medium term, total debt maturities from 2023 to 2026 are around SEK 13 billion out of around SEK 25 billion in gross debt. Given the forecast for roughly SEK 16 billion in annual free cash flow, which would enable the company to pay down gross debt, in theory, in about two years.

Bulls Say

  • As the global leader in locking solutions, Assa Abloy is best positioned to capture the spoils from a secular shift toward integrated lock and other building systems.
  • The growing contribution of software-driven products should strengthen Assa Abloy’s margins and returns, as well as the stickiness of customer relationships, in the medium term. 
  • Accelerated adoption of electromechanical, digital, or smart locks should ease Assa Abloy’s path toward achieving its target of 5% organic growth over the business cycle.

Company Description

Assa Abloy has the world’s largest installed base of locks, protecting some of the most security-sensitive buildings, including the European Parliament in Brussels. Three fourths of its revenue come from government and commercial customers. The company’s product base is centered on electromechanical locks, which require identification to unlock with a keycard, biometric scan, or PIN. Assa Abloy’s products are sold directly to security systems integrators, locksmiths, hardware stores, and original equipment manufacturers

(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

Strong Demand Should Drive Self-Storage Fundamentals in Near Term; Relaunching PSA with $326 FVE

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook

Public Storage acquires, develops, owns, and operates self-storage facilities, which offer storage spaces—of varying sizes and features—on a monthly lease for personal and business use. The company also has a lucrative insurance business that offers products to cover losses for the goods in self-storage facilities. The company’s strategy is to own and operate self-storage facilities within a 3-5-mile radius of densely populated urban centers and invest aggressively in enhancing its coverage, scale, brand, operating efficiency, and technology platform. Self-Storage is a highly fragmented industry with the five largest players owning 19% (including 9% by Public Storage) of US inventory, with the remaining 81% being owned by regional operators. Self-Storage outperformed all other real estate asset classes during the global financial crisis and is considered a recession-resilient sector as the demand for it is partially driven by transitions and difficult life events. 

The industry has experienced tremendous growth in the last several years, and the further societal shifts fueling that growth for years to come, albeit at a more modest pace. The traditional self-storage uses like downsizing, moving, adding space, change in household, etc. are being supplemented by additional demand drivers like growing adoption rate, urbanization, decluttering trend, increasing business demand, migration, population growth, and lower home affordability. Pandemic-related disruptions, the work-from-home dynamic, strong economic recovery, and a vibrant housing market have resulted in historically high occupancy rates and strong rental growth for the sector. The fundamentals like rental growth and occupancy levels to normalize in the medium term from the current elevated levels as additional supply hits the markets and pandemic-related demand fizzles. In the long run, the larger players in the industry keep gaining market share on the back of scale benefits and access to low-cost capital.

Financial Strengths

Public Storage’s balance sheet has long been the gold standard among real estate investment trusts—light on debt and heavy on progressively cheaper preferred stock, with a good portion of acquisitions and facility developments fueled directly with cash flow from operations. The company had $7.5 billion of debt, $4.3 billion in preferred equity and $0.9 billion of cash resulting in $10.9 billion in net debt and preferred equity as of the end of first quarter of 2022. The company had a trailing twelve-month EBITDA of $2.7 billion resulting in a Net Debt & Preferred Equity/EBITDA ratio of 4.0 times. Management has set the long-term target for Net Debt & Preferred Equity/EBITDA ratio at 4-5 times. Management has been prudent in utilizing the low interest rate environment to achieve savings through refinancing both debt and preferred shares over the years. The weighted average interest rate on the company’s debt was 1.70% and the weighted average rate for preferred equity was 4.5% resulting in the overall cost of debt and preferred equity of 2.7%. The maturity schedule of the company’s debt shows that the maturities are adequately spread. The fixed charge coverage ratio which is a ratio of EBITDA divided by all fixed expenses (including interest expenses & preferred dividends) was 9.1 times as of the end of Q1 2022. As a real estate investment trust, Public Storage is required to pay out at least 90% of its income as dividends to shareholders. The FFO payout ratio which is a ratio of dividends to funds from operations was reported at 62.0% for the year 2021. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities. The company can probably use slightly higher leverage to fund its capital structure given its relatively low leverage, high cash flow generation capacity, and the recession resilient characteristics of the industry

Bulls Say

  • Public Storage’s commanding lead in supply-restricted West Coast markets leads to consistent revenue growth. 
  • Public Storage’s industry-leading balance sheet leaves room for low-cost consolidation opportunities in a fragmented market. 
  • Pandemic-fueled changes like work from home, decluttering, migration, etc. have persisted and have created more demand for self-storage facilities leading to historically high occupancy rates and strong rental growth.

Company Description

Public Storage is the largest owner of self-storage facilities in the US with more than 2,800 self-storage facilities in 39 states and approximately 200 million square feet of rentable space. Through equity interests, it also has exposure to the European self-storage market through Shurgard Self Storage and to an additional 28 million net rentable square feet of industrial space in the United States through PS Business Parks.

(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

Extra Space Storage Inc has a lucrative insurance business and a strategically important third-party management business

Business Strategy & Outlook

Extra Space Storage acquires, owns, and operates self-storage facilities, which offer storage spaces of varying sizes and features on a monthly lease, for personal and business use. The company also has a lucrative insurance business and a strategically important third-party management business. The company’s strategy is to invest in enhancing the coverage, scale, brand, and operating efficiency of its self-storage facilities that are located within a 3-5-mile radius of densely populated, high-income urban centers. Extra Space’s owned portfolio is the second biggest in the U.S., and its third-party management business is the largest in the country which has enabled it to expand its geographic footprint, data sophistication, and scale with little capital investment.

Self-storage is a highly fragmented industry with the five largest players owning 19% (including 5% by Extra Space Storage) of U.S. inventory, with the remaining 81% being owned by regional operators. Self-Storage outperformed all other real estate asset classes during the global financial crisis and is considered a recession-resilient sector as the demand for it is partially driven by transitions and difficult life events. The industry has experienced tremendous growth in the past several years, and the further societal shifts fueling that growth for years to come, albeit at a more modest pace. The traditional self-storage uses like downsizing, moving, adding space, and so on are being supplemented by additional demand drivers like growing adoption rates, urbanization, decluttering trends, increasing business demand, migration, population growth, and lower home affordability. Pandemic-related disruptions, strong economic recovery, and a vibrant housing market have resulted in historically high occupancy rates and strong rental growth. The self-storage fundamentals normalize in the medium term from the current elevated levels as additional supply hits the markets and pandemic-related demand fizzles. In the long run, the larger players in the industry keep gaining market share on the back of scale benefits and access to low-cost capital.

Financial Strengths

After decreasing the fair value estimate for Extra Space Storage to $167 from $185 after taking a fresh look at the company. The updated fair value estimate implies a forward 2022 fund from operations multiple of 21 times. The estimate of Extra Space Storage’s long-term weighted average cost of capital is 7.3%, and an enterprise value/EBITDA multiple of 22.4. In base case, the company’s portfolio will continue to thrive off strong fundamentals in the short term as customer demand drives excellent occupancy statistics and strong rental rate growth. The tenant insurance and third-party management business continues to grow at a healthy rate. One cannot think that management can increase prices indefinitely at the current rate as the low cost of building and the largely undifferentiated nature of self-storage facilities allows supply to enter the market. The national delivery volume for self-storage facilities peaked in 2019, but the existing supply pipeline remains strong at an estimated 8.9% of existing inventory. In the long run, the self-storage market cools down, resulting in occupancy rates and rental growth normalizing.

Bulls Say

  • Extra Space’s third-party management business serves not only as a capital-light revenue stream, but also as an acquisition pipeline, ensuring future growth. 
  • Extra Space Storage’s strong balance sheet leaves room for low-cost consolidation opportunities in a fragmented market. 
  • Pandemic-fueled changes like work from home, decluttering, migration, and so on have persisted and have created more demand for self-storage facilities, leading to historically high occupancy rates and strong rental growth.

Company Description

Extra Space Storage is a fully integrated real estate investment trust that owns, operates, and manages almost 2,100 self-storage properties in 41 states, with over 160 million net rentable square feet of storage space. Of these properties, approximately one half is wholly owned, while some facilities are owned through joint ventures and others are owned by third parties and managed by Extra Space Storage in exchange for a management fee.

(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

Hannover Re a Rare Moat in Reinsurance

Business Strategy & Outlook:   

Hannover Re is a property and casualty, and life and health reinsurer with property and casualty contributing a little over two thirds of the company’s profits to shareholders. Hannover Re has slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving deep expertise in niche areas. While this may sound a bit wooly, some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. Company conceptualizes this through lenses of decision-making and responsibility. Whereas in other reinsurance firms, underwriters may need to defer back to a head of risk or perhaps even the c-suit, underwriters at Hannover Re have more authority and a better line of sight. Furthermore, it is anticipated that this leads to stronger client relationships because underwriters are client-facing and thus renewals a reiterative negotiation, with Hannover Re’s underwriters in the position to directly negotiate and discuss client needs without the need for constant deferral. This drives stronger retention rates, thereby lowering commissions and acquisition costs. 

In addition to the culture of excellence in underwriting with a proven reputation for expertise in specialist lines, Hannover Re benefits from an expense advantage and these two benefits are aligned. For example, with deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies. As the business has the institutional capacity to absorb this internally with regard to its frontline, coupled with the lower levels of internal referrals outlined, Hannover Re supports more premium per employee than other comparable. The outcome of this is tangible with the business benefiting from at least a 1 percentage point expense-ratio advantage.

Financial Strengths:  

Hannover Re has a sound balance sheet. It has one of the better balance sheets among the companies in European reinsurance coverage. While debt to equity is a little higher than the company would like to see at 36.8%, the debt to us looks quite clean because there is no hidden debt within equity. The maturity of the debt is relatively long-dated with the closest maturity arising in over five years. Overall, coupon rates are low and so the combination of the two is encouraging. Further recent debt issues have carried similar rates of interest.

Bulls Say: 

  • Hannover Re has a strong culture of expertise and experience in specialist underwriting. 
  • Hannover Re is a cost leader with one of the lowest proportional amounts spent on administrative expenses. 
  • Hannover Re focuses on organic growth rather than acquisitions. This comes through in its lean structure, lower expenses, and approach to capital management.

Company Description:  

Hannover Re is a German-based reinsurance company with a strong reputation in writing specialist lines of reinsurance and a low-cost operating model. The business and its management team are highly disciplined, rarely ever acquiring and favoring a strategy of special dividends over committing to buybacks when looking to return excess capital to shareholders. Company also finds the business innovative in finding alternative and unearthed profit sources.

(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.