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Categories
Global stocks

UCB transformed from a hybrid pharma firm into a pure-play biopharmaceutical company

Business Strategy & Outlook

UCB emerged as a major biopharmaceutical player in the 1990s with the development of blockbuster drugs Zyrtec and Keppra. Throughout the 1990s and early 2000s, UCB transformed from a hybrid pharma/chemical firm into a pure-play biopharmaceutical company by shedding its packaging, film, and chemical businesses. Acquisitions of Celltech (2004) and Schwarz Pharma (2006) strengthened the biopharmaceutical pipeline, bringing in late-stage assets that would eventually be approved as Cimzia (immunology), Vimpat (epilepsy), and Neupro (Parkinson’s disease). These key products helped offset the impact of Zyrtec and Keppra patent losses, and the company has continued to shape its expertise in immunology and central nervous system disorders. 

UCB’s current portfolio faces key patent losses over the next 10 years, but successful pipeline development could help the firm fill the gaps. Among UCB’s central nervous system therapies, the epilepsy drugs Vimpat and Briviact to be strong contributors until key patent expirations in 2022 and 2026, respectively. In immunology, the steady growth for Cimzia until its 2024 patent loss. Through UCB’s acquisition of Zogenix, it gained Fintepla, an oral solution for patients suffering from Dravet Syndrome and Lennox-Gastaut Syndrome, two severe forms of epilepsy. UCB received approval in the EU and Great Britain in August 2021 for Bimzelx, a drug targeting IL-17A and IL-17F for the treatment of moderate to severe plaque psoriasis. It has subsequently received approval in Japan, Canada, and Australia. It could reach the U.S. market by 2024. The immunology landscape is fairly crowded, but Bimzelx could carve out a slice of the market. The potential for label expansions into psoriatic arthritis and other immunology indications. Additionally, UCB has two other later-stage candidates in complement-mediated disorders, with rozanolixizumab and zilucoplan (through the Ra Pharma acquisition announced in 2019). The complement-mediated disorders landscape is also somewhat crowded, with many competitors vying to displace Alexion’s (since acquired by AstraZeneca) dominant position.

Financial Strengths

The UCB is in good financial health, with solid earnings and cash flow generation. UCB has deleveraged over the years, and it ended 2021 with about EUR 860 million in net debt on its balance sheet. Year-end cash and equivalents totaled nearly EUR 1.3 billion. The firm has historically relied on acquisitions to fill gaps left by patent losses and in late 2019 agreed to acquire Ra Pharmaceuticals for about EUR 2 billion, net of cash acquired. The large purchase was mostly financed with new debt, but one cannot have any concerns about the company meeting its financial obligations. In early 2022, UCB acquired Zogenix for EUR 1.7 billion. This acquisition is financed through a combination of cash and a new term loan. The acquisition of Zogenix brought Fintepla into UCB’s portfolio. Fintepla is an FDA-approved oral solution for patients suffering from Dravet Syndrome and Lennox-Gastaut Syndrome, two severe forms of epilepsy. This acquisition will be earnings accretive from 2023 onwards.

Bulls Say

  • The immunology market presents a massive market opportunity for Cimzia and newer drug Bimzelx. 
  • UCB has taken steps to build out the pipeline in attractive therapeutic areas, such as complement mediated disorders. 
  • UCB should be able to leverage its commercial expertise to sell pipeline candidate bimekizumab, approved as Bimzelx outside the U.S. and on track for U.S. approval in 2024.

Company Description

UCB is a Belgium-based biopharma firm focused on the development of novel therapies for the treatment of central nervous system and immunologic diseases. Historically, revenue was derived from allergy medicine Zyrtec and epilepsy drug Keppra, which have both lost patent protection. The firm’s key products are Cimzia (immunology), Vimpat (epilepsy), Neupro (Parkinson’s disease and restless leg syndrome), Briviact (epilepsy), Bimzelx (psoriasis), Evenity (osteoporosis), Nayzilam (cluster seizures), and Fintepla (Dravet Syndrome and Lennox-Gastaut Syndrome).

(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

UCB SATwilio has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform

Young woman trading stock market by touching.

Business Strategy and Outlook 

Twilio is a cloud-based communication-platform-as-a-service, or CPaaS, company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows developers to embed messaging, voice, and video functionality into other applications. Twilio has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform. In a go-to-market model that focuses on empowering developers to utilize the APIs to rapidly build and deploy solutions, Twilio has been able to expand into use-cases that would be difficult to penetrate otherwise. For common use cases, Twilio has developed applications, like Flex Contact Center, which combine various channel APIs into a unified interface to create use-case-specific solutions.

Twilio’s platform as an incrementally value-additive technology stack, with each layer of the stack building on top of and enhancing the prior. The foundational components of the stack are the Super Network, a global network of connections to carriers that provides efficient communication routing, and the Segment Customer Data Platform, which collects first-party data to assemble customer profiles that inform and optimize customer engagement. The communication channel APIs are deployed through the Programmable Communications Cloud and then are combined and expanded into application platforms in the Engagement Cloud to offer higher level functionality for specific use-cases. It can be viewed this full stack as best-in-breed in the CPaaS space, enabling deeply integrated, sticky communication solutions. Twilio has stellar customer metrics, with churn consistently below 5% and net dollar expansion in excess of 130% in recent years. Twilio’s market opportunity to be significant as the communications industry is still early in its transition to software-based communications. Twilio to lead the charge in the CPaaS space by continuing to gain share from legacy communication vendors and expanding into greenfield markets.

Financial Strength

Twilio’s financial position is sound. Revenue is growing rapidly, and the company is beginning to scale, while the balance sheet is in good shape. As of December 2021, the firm had cash and short-term investments of $5.4 billion and a debt balance of $986 million. In March 2021, Twilio issued $1.0 billion of senior notes, consisting of $500 million of 3.625% notes due 2029, and $500 million of 3.875% notes due 2031. In June 2021, the company redeemed its prior convertible notes, due March 2023, in their entirety. Since raising approximately $150 million in its IPO in 2016, Twilio has completed several secondary offerings, recently announcing a $1.8 billion offering of its Class A common stock in 2021. Twilio has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. Twilio does not pay a dividend, nor repurchase stock, and for a young company in a relatively nascent industry, it is appropriate that it focuses capital allocation on reinvestments for growth.

Bulls Say’s

  • The addition of SI partnerships and solution APIs should lead to increasing success in winning enterprise customers, which not only offer a greater lifetime value, but also tend to be stickier customers. 
  • Twilio has stellar user retention metrics, with churn consistently below 5% and net dollar retention north of 130% in recent years. 
  • As Twilio focuses on developing more solution APIs and growth shifts from usage-based messaging to SaaS-like priced solutions, there should be a natural uptick in both gross margins and recurring revenue.

Company Profile 

Twilio is a cloud-based communication platform-as-a-service company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows software developers to integrate messaging, voice, and video functionality into new or existing business applications. The company leverages its Super Network, Twilio’s global network of carrier relationships, to facilitate high speed cost-optimized global messaging and voice-based communications.

 (Source: MorningStar)

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

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

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Tesco Is the Best- Positioned Grocer in the Coverage

Business Strategy & Outlook:
Tesco, the largest grocery retailer in the United Kingdom in terms of sales and store network, has successfully completed an ambitious turnaround. It has seen one of the worst times in its history over the past decade, including an accounting controversy in 2014 and a subsequent decline in profits and growth owing to the advent of discounters in the U.K. food retail business. The firm is largely focused on enhancing the in-store experience, providing new own-brand products (entry-level and fresh produce), and re-evaluating supplier connections (smaller base and longer-term partnerships). The turnaround strategy focused on the company’s core strengths: food size and well-documented purchasing power.

Tesco’s ability to better control supplier-related cost inflation, along with its superior cost-saving measures, has enabled it to not only balance competition challenges, but also boost margins and price position (via the Aldi Price Match plan) relative to its competitors. The concerted efforts of management to convert these scale advantages into profitable expansion were fruitful. In the future, the group shall generate more normalized levels of profitability, albeit below historical standards. Tesco outperforms most of its Big Four competitors (Sainsbury’s, Asda, and Morrisons) on key indicators like grocery volume, like-for-like sales growth, and large-store sales growth, proving that its approach is succeeding. Tesco’s Booker is the major food distributor in the U.K., with a presence in both the retail (Symbol and Independent) and catering industries. This is consistent with the company’s long-term strategy to increase scale by consolidating its supplier base and indirectly increase food sales through Booker’s overlap in the food sector.

Financial Strengths:
Tesco is in solid financial condition. At the end of fiscal 2022, net debt/adjusted EBITDA (including operating leases) was 3 times. The operating lease liability is around GBP 7.5 billion, and the net pension shortfall is negligible. The dividend was reintroduced in fiscal 2018 (expected around GBX 11 per share for fiscal 2023) after being suspended when earnings dropped in 2015. Management has also implemented stricter financial discipline, enhanced working capital, and ceased the battle for space. Dividends might expand in parallel with underlying EPS growth at a payout ratio of 50% over the next five years (from slightly less than GBX 10 per share to about GBX 14 by 2027). Given the sector’s low growth prospects and Tesco’s established presence, the grocer to is able to finance its development and store maintenance with capital expenditures below 2.0% of sales. Tesco generates free cash flow at a rate that is significantly higher than the industry average, as a result of the recent improvement in profitability. Free cash flow to the firm is expected to account for close to 3% of sales on average through fiscal 2027. In recent years, Tesco has repositioned its operations, including withdrawing from less lucrative areas, which has helped reduce its debt. It also owns property, worth about GBP 22 billion at the end of fiscal 2022, which could be shed to generate cash if needed, though it has been doing the opposite recently by acquiring more stores to rid itself of inflation.

Bulls Say:
As the largest grocer in the U.K. in both the online and offline channels with almost 100% coverage and a network of more than 3,500 stores, Tesco should be able to use its scale to drive results in ways subscale peers cannot.
An early mover in the online channel, Tesco not only holds a dominant market position (35% online grocery share) but also operates profitably on an EBIT level, thanks to scale.
Management is successfully repositioning the business in terms of pricing, in-store experience, and operating efficiencies.

Company Description:
Tesco is one of the largest food retailers in the world, operating thousands of stores in the United Kingdom, Ireland, and Europe. It recently sold its Asia operation. According to Kantar, Tesco is the market leader in the U.K. with a share around 27%, roughly double that of Asda and Sainsbury’s. Tesco operates a core supermarket business in addition to convenience and neighborhood outlets. With a 35% digital market share in the U.K., the company holds a dominant position online. Tesco gained exposure to the cash-and-carry and out-of-home delivering industries with the landmark GBP 4 billion acquisition of Booker in 2018.

(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

Raymond James’ bank will also receive a boost from rising interest rates

Global network and financial technology concept.

Business Strategy & Outlook

Raymond James’ revenue and earnings will hold up better over the near to medium term compared with more pure-play investment banks, thanks to a combination of acquisitions, interest rates, and a relatively large wealth-management business. Over 80% of Raymond James’ net revenue comes from relatively more stable wealth management, asset management, and traditional banking, with usually less than 20% coming from capital markets. 2021 capital markets revenue was abnormally high and will likely continue to reset lower over the next year or so. Given Raymond James’ relatively lower proportion of capital markets revenue, its company wide revenue should hold up better than many other firms’. Raymond James’ bank will also receive a boost from rising interest rates. The company as a whole will benefit from multiple acquisitions, such as Charles Stanley, TriState Capital, and SumRidge Partners. The company’s banking segment experienced quite a bit of pressure over the previous two years, but the future looks bright. Net interest margins compressed by more than 100 basis points to less than 2% in 2021, as benchmark interest rates fell and much of the bank’s assets were variable rate. Additionally, the allowance for loan losses has increased to about 1.2% of loans in early 2022 from 1% in 2019. The company’s banking operations in recent years contributed around 40% of operating income, but that has fallen to less than 20% in some recent quarters.

Expectations are that the U.S. Federal Reserve will increase the federal-funds rate to over 3% by the end of 2022, which will boost the yield on Raymond James’ variable-rate loans. Additionally, the acquisition of TriState Capital has increased the company’s banking operations by about 30%. Loan-loss charge-offs may tick up over the next year or two, but the company’s existing allowance for loan losses should be sufficient, so Raymond James’ banking segment will regain its place as a material driver of earnings.

Financial Strengths

Raymond James is in fine financial health. At the end of its fiscal 2021, the company had $2 billion of senior notes payable compared with $8.3 billion of equity. It doesn’t have any senior notes coming due until 2024. The company has total leverage of about 7.5 times, representing a combination of the bank, which is leveraged 14 times, and the brokerage operation. These leverage ratios are reasonable, given the profile of the company. Raymond James also has quite a bit of cash on its balance sheet. Typically around $500 million is housed at the parent company with upward of another $1 billion of parent company cash that is housed in Raymond James’ own bank or lent to its other businesses.

Bulls Say

  • Additional acquisitions can provide some lift to earnings if the macro environment falters. 
  • The company may have a greater opportunity to recruit advisors as it fills holes in its geographic footprint and offers both employee and independent advisor affiliation options. Recent advisor headcount growth and the Alex. Brown brand may portend superior advisor recruitment. 
  • Net interest income and earnings will meaningfully rise with interest rates.

Company Description

Raymond James Financial is a financial holding company whose major operations include wealth management, investment banking, asset management, and commercial banking. The company has more than 14,000 employees and supports more than 5,000 independent contractor financial advisors across the United States, Canada, and the United Kingdom. Approximately 90% of the company’s revenue is from the U.S. and 70% is from the company’s wealth-management segment.

(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

The strategic rationale for Ipsen’s divestment is to have a greater focus on its faster growing specialty care segment

Business Strategy & Outlook

Ipsen is a global biotechnology company headquartered in France that develops and commercializes medicines across three therapeutic areas: oncology, neuroscience, and rare diseases. Ipsen was founded in 1929 as a consumer healthcare company focused on prescription-based products for digestive disorders and neurological disorders. Ipsen has a global footprint and sells more than 25 drugs in 115 countries, with a direct commercial presence in 34 countries. Over the past nearly 100 years, the company has shifted its focus to its specialty care segment, which comprised 92% of its 2021 revenue. In early 2022, Ipsen announced the divestment of its consumer healthcare segment, which accounted for 8% of 2021 revenue. The strategic rationale for Ipsen’s divestment is to have a greater focus on its faster growing specialty care segment.

Approaching declines in economic profits due to Ipsen’s leading product, Somatuline, facing generic competition in Europe and the United States contributes to the negative moat trend rating. Somatuline accounted for 42% of total sales in 2021, and it will decline to 25% of sales in 2025 due to generic competition impacting sales. Growth from Ipsen’s other marketed products, which have patents that extend until the early to mid-2030s, will somewhat offset the negative impact from generic entry. However, patent expirations for Somatuline and generics gaining market share will likely nevertheless dampen returns by the end of the ten-year explicit forecast period. Thanks to Ipsen’s strong balance sheet, the company is well-positioned to continue funding its internal research and development efforts in addition to external innovation opportunities over the next decade in order to diversify its portfolio. Although the company’s advanced drug candidates are either in the filing stage or Phase 3 with relatively high probabilities of approval due to promising trial data, there is still a degree of uncertainty associated with Ipsen’s clinical and commercial success with these drugs.

Financial Strengths

Ipsen is in decent financial health, and the business continues to continue providing a steady stream of cash. Ipsen made a strategic decision to divest its consumer healthcare segment for EUR 350 million to Mayoly Spindler. This was a strong financial decision since the consumer healthcare segment only accounted for 8% of total revenue in 2021. The management will use the proceeds from the divestment to further expand and diversify its faster-growing specialty care segment. The management team has a history of returning cash to shareholders in the form of dividends. Over the past several years, management has paid a dividend between EUR 0.85 and EUR 1.00 to shareholders. Ipsen announced its 2022 dividend increased by 20% to EUR 1.20. The Ipsen’s shareholder distributions, as mixed as many other biotechnology companies under the coverage, do not pay dividends. The Ipsen’s revenue growth will be constrained by generic competition, so it may better serve long-term investors to reinvest in the company’s pipeline candidates instead of distributing dividends.

Bulls Say

  • Ipsen has a sound financial structure and strong cash generation, which allows it to further develop and expand its pipeline. 
  • Ipsen has a strong and diversified portfolio spanning three key therapeutic areas: oncology, neuroscience, and rare diseases. 
  • The divestment of the consumer healthcare segment allows Ipsen to have an even greater focus on its faster-growing specialty care segment.

Company Description

Ipsen is a global biotechnology company headquartered in France that develops and commercializes medicines across three therapeutic areas: oncology, neuroscience, and rare diseases. Ipsen was founded in 1929 as a consumer healthcare company focused on prescription-based products for digestive disorders and neurological disorders. Over the past nearly 100 years, Ipsen has shifted its focus to specialty care, which comprises the vast majority of its total revenue. In February 2022, Ipsen announced the divestment of its consumer healthcare business, which accounted for 8% of 2021 revenue. Ipsen has a large global footprint and sells more than 25 drugs in 115 countries.

(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
Funds Funds

Bennelong ex-20 Australian Equities Fund: Has a track record of adding value by outperforming the market over the long-term

Fund Objective

The Fund’s objective is to grow the value of your investment over the long term via a combination of capital growth and income, by investing in a diversified portfolio of primarily Australian shares, providing a total return that exceeds the S&P/ASX 300 Accumulation Index by 4% per annum after fees (measured on a rolling three-year basis). 

Fund Strategy

The portfolio comprises securities purchased primarily from, but not limited to, the S&P/ASX 300 Index (but excluding those securities in the S&P/ASX 20 Index). The Fund may invest in securities expected to be listed on the ASX except those expected to be included in the S&P/ASX 20 Index upon listing. The Fund may also invest in securities listed, or expected to be listed, on other exchanges where such securities relate to ASX-listed securities. Derivative instruments may be used to replicate underlying positions on a temporary basis and hedge market and company-specific risks. The Fund cannot purchase securities that are in the S&P/ASX 20 Index. However, when a security that is held within the Fund moves into the S&P/ASX 20 Index, that security may continue to be held for so long as deemed appropriate. The investment team will use its discretion in selling down that security, having regard to the best interests of unitholders. In this way, the Fund may hold securities in the S&P/ASX 20 Index from time to time.

Portfolio Performance

Investment Team:

The BAEP investment team consists of eight investment professionals:

  1. Mark East: Chief Investment Officer and Portfolio Manager 
  2. Keith Hwang: Director, Quantitative Research 
  3. Neale Goldstone-Morris: Senior Investment Analyst, Strategy 
  4. Kieran Sisson: Senior Investment Analyst 
  5. Doug Macphillamy: Senior Investment Analyst 
  6. Brad Clibborn: Senior Investment Analyst 
  7. Jack Briggs: Senior Investment Analyst 
  8. Todd Briggs: Investment Analyst 

In the last two years, there has been one hire Doug Macphillamy: Senior Investment Analyst and one departure Julian Beaumont.

BAEP operates under a flat organisational structure with all team members contributing to the investment decision making process. This model has been deliberately adopted to ensure a collaborative effort and avoid a hierarchical structure. Collectively, the investment team has experience in portfolio management; fundamental, macroeconomic, strategy & quantitative research and analysis, and in trading & execution. There is a series of constant checks, balances and back-ups in the business and investment process which support its structure. Mark East (CIO) has the final say on portfolio construction and ultimately accountability/responsibility. The portfolio manager is supported by the extensive resourcing within the broader BAEP investment team. Keith Hwang has primary responsibility for trading and execution, with Kieran Sisson acting as back-up.

About Fund:

Bennelong ex-20 Australian Equities Fund’s objective is to outperform the S&P/ASX 300 Accumulation Index excluding the portion of return attributed to the S&P/ASX 20 Leaders Index, by 4% per annum after fees on a rolling 3-year basis. The Fund invests primarily in Australian shares with high quality business models, strong growth, and underestimated earnings momentum and prospects.

(Source: Banyantree, investmentcentre)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Victrex is a Global Leader in High-Performance Plastics

Business Strategy & Outlook:    

U.K.-based Victrex is the creator of and dominant market leader in polyetheretherketone, or PEEK, a lightweight ultra-high-performance plastic that suits the most demanding applications in transportation, oil and gas, and electronics. It serves these industrial markets through its industrials segment, which accounts for around 80% of sales. The company has broadened applications of PEEK to healthcare, notably implantable spinal fusion cages. Healthcare sales are housed in the medical segment, which contributes the other 20% of sales, but has higher margins than the industrial business. Total market demand for PEEK is small, currently around 6,000 metric tons per year. Victrex has succeeded in its efforts to expand the market for PEEK, as evidenced by mid-single-digit volume growth at the company over the past decade. The market for PEEK has plenty of room to grow by capturing increasing demand for metal-replacement products. Indeed, Victrex believes annual demand for PEEK could ultimately grow to 80,000 metric tons, a reasonable view given that the market size for many specialty polymers is 2-3 times larger. 

While PEEK has been off-patent for many years, competition has been benign with only a handful of suppliers entering the market. Competitive dynamics are evolving slowly. Solvay made a significant capacity expansion a few years ago, but this is the only company that has made real inroads into the market. There is room for both Victrex and Solvay to be major players without serious price competition. The company’s strategy is shifting to prioritize moving downstream into semi finished and finished products and specialty applications, in order to capture a larger portion of profits in the value chain. Currently, these products account for about 30% of sales. Victrex’s pipeline of downstream products under development could easily double current sales, but a material impact on group profit is probably several years away.

Financial Strengths: 

Victrex is in excellent financial health. The balance sheet is managed very conservatively–possibly too conservatively—with no debt and significant working capital. However, this is a strategic decision to ensure customers have strong faith in the security of PEEK supply, because Victrex has historically been the only major producer. At fiscal end-2021, Victrex had a GBP 96 million net cash position. In addition, the pension deficit is modest. Liquidity is enhanced by a GBP 40 million committed bank facility, which was unused at fiscal end-2021.

Bulls Say: 

  • Victrex is making progress moving downstream in the PEEK value chain, which should help protect margins as the upstream business becomes more competitive.
  • The company has several GBP 50 million sales opportunities in its medical development pipeline, which should invigorate segment growth in the long term.
  • Given the company’s significant free cash flow and shareholder-friendly capital-allocation policies, investors have the potential to realize extra returns through special dividends.

Company Description:  

Victrex is a British specialty chemicals company whose business is based predominantly on manufacturing and creating solutions using polyetheretherketone, or PEEK, an ultra-high-performance lightweight plastic. Around 40% of sales are generated in Europe, with Asia and the Americas contributing 30% each. The business has two segments. The industrial segment targets transportation, energy, electronics, and manufacturing, while the medical segment provides healthcare solutions for the implantable device markets.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Musk Parting from Twitter Purchase, but Twitter Remains Attractive; FVE Downs to $47

Young woman trading stock market by touching.

Business Strategy & Outlook:   

Twitter has captured the attention of nearly 200 million daily active users, including prominent celebrities and public figures worldwide. Its access to, and interactions around, real-time information and content create value for its users and for advertisers. While Twitter user growth has accelerated since 2018, a potential slowdown remains a concern. Slower user growth could make higher user monetization more difficult as advertisers may allocate a bit more toward other platforms such as Snap, which has a faster-growing user base. Twitter might have carved out an economic moat. Twitter is an open distribution platform for (and a conversational one around) short-form text, image, and video content. Its users can access real-time information regarding a wide array of topics or news events. They can also share information and content, interact with content, and express their reactions to other Twitter users. These types of interactions allow Twitter to compile more data about its users, which is then licensed and/or utilized by Twitter and advertisers to launch online brands and targeted ads. 

While Twitter remains one of the main real-time online content distribution platforms, its user base is smaller than other social networks such as Facebook (including Instagram) and Snap’s Snapchat. As such, Twitter is not benefiting from increased spending on mobile and online video advertising as much as its peers. Product enhancements such as the Explore tab may have helped increase initial user engagement and improve user retention, but the firm’s potential network effect is weakening as its user base shrinks in size relative to rivals, which could lead to generating less data and drive advertisers to spend more on other platforms. However, Twitter has introduced some subscription products which could lessen dependence on ad revenue.

Financial Strengths:  

Twitter has a strong balance sheet with net cash of $5.9 billion. The firm generates cash from operations, and expects it to generate free cash flow going forward. Twitter’s free cash flow to equity/revenue ratio averaged 18% over the past three years, and they projected this ratio to improve to over 26% in 2025.

Bulls Say: 

  • Growth in ad revenue per user remains strong at Twitter, more than offsetting the deceleration in user growth. 
  • Agreements with various professional sports leagues provide a platform for interaction and conversation about the games, which may attract more premium content providers to use the Twitter platform. 
  • Investments in product enhancements and video content could return the monthly active user growth rate to the double digits.

Company Description:  

Twitter is an open distribution platform for and a conversational platform around short-form text (a maximum of 280 characters), image, and video content. Its users can create different social networks based on their interests, thereby creating an interest graph. Many prominent celebrities and public figures have Twitter accounts. Twitter generates revenue from advertising (90%) and licensing the user data that it compiles (10%). (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

OGE Energy completed its long transition to a fully regulated utility in 2021

Business Strategy & Outlook

OGE Energy completed its long transition to a fully regulated utility in 2021 when it divested its midstream energy business through a swap transaction with Energy Transfer. Typical utilities investors should be more comfortable with OGE now that it has no direct exposure to energy commodity markets. OGE’s elimination of its midstream energy exposure along with improving regulation at its core Oklahoma operations puts it on track to produce more stable, growing earnings in 2022 and beyond than it has in many years. OGE management has said it plans on selling the 95 million limited partner units of Energy Transfer worth some $950 million acquired as part of the deal for OGE’s Enable. OGE had formed Enable with two other firms in 2013, contributing all its interstate pipelines and field services business. The OGE will realize after-tax proceeds exceeding $500 million that it can use to fund its planned growth investments at the electric utility.

Improving rate regulation in Oklahoma is a key part of OGE’s growth plan. In 2020, subsidiary Oklahoma Gas & Electric proposed an $810 million grid modernization plan that includes a rate tracker cost recovery mechanism. A settlement established a partial rate tracker with the remainder of the investments recovered in a general rate case. The modified framework reduces regulatory lag and will improve cash flow available for dividends and growth. In 2019, the Oklahoma Corporation Commission approved a settlement for environmental upgrades at the Sooner coal-fired plant and natural gas conversions of coal units at the Muskogee coal plant. OG&E had been seeking approval for these investments for a decade. Exiting the midstream business will reduce earnings and will increase the payout ratio on OGE’s common dividend to over 85% by as per estimates. Even though the earnings grow 6% annually, the dividend likely will grow around 2% during the next four years until OGE’s payout ratio reaches the mid-70% range.

Financial Strengths

Between 2022 and 2025, the OGE will invest nearly $4 billion in its utility. The company should be able to finance these investments with cash flow from utility operations, proceeds from the sale of its Energy Transfer units, and roughly $600 million of additional debt. One cannot foresee any material equity issuances in the next five years. The company has maintained a conservative capital structure, and one doesn’t expect a sizable shift in that strategy once it exits its Energy Transfer position and issues securitized debt to cover its excess fuel costs related to Winter Storm Uri in February 2021. The OGE’s dividend growth slowed after losing the earnings and cash distributions from Enable following the Energy Transfer transaction. Cash distributions from Enable helped OGE average 10% annual dividend growth since forming Enable in 2013. However, a large drop in energy prices and the economic impact of COVID-19 led Enable to cut its distribution by 50% in 2020. Less cash flow from Enable required OGE’s board to slow dividend increases to 6.2% in 2019, 3.9% in 2020, and 2% in 2021. Without the Enable earnings expected OGE’s payout ratio will climb above 80% for several years. The dividend increases will average 2% annually for the next few years until the payout ratio falls to within management’s 65%-70% target.

Bulls Say

  • OGE is making progress improving Oklahoma regulation so that it can execute its growth investment plan without creating a drag on its return on equity. 
  • Although the expected dividend increases too slow to about 2% annually, investors still should benefit from growing earnings and minimal equity needs. 
  • The economy in OG&E’s service territory is healthy and annual customer growth is again exceeding 2%, higher than most electric utilities.

Company Description

OGE Energy is a holding company for Oklahoma Gas & Electric, a regulated utility offering electricity generation, transmission, and distribution to more than 800,000 customers in Oklahoma and western Arkansas. In December 2021, OGE closed a merger between Enable Midstream Partners and Energy Transfer. This resulted in OGE acquiring 95.4 million limited partner units of Energy Transfer in return for its 25.5% limited partner interest in Enable, a midstream services company it created in 2013.

(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

Fair market value laws in several states support Essential’s water business acquisition strategy.

Business Strategy & Outlook

For more than 50 years, Essential Utilities–formerly Aqua America–was one of the few pure-play water utilities in the United States. But its $4.3 billion acquisition of Peoples Gas in March 2020 made the company nearly 50% larger and diversified its earnings mix. The gas business contributes about one third of earnings on a normalized basis. Essential’s gas and water utility earnings are mostly rate regulated. The management prioritizes infrastructure investments and paying a robust dividend, like most other utilities. The Essential’s earnings to grow 8% annually during the next five years due to its water system acquisition opportunities. This is among the highest growth rates in the U.S. utilities sector. Although efficiency savings have reduced retail water use for several decades, Essential has been able to grow earnings and the dividend by replacing and upgrading infrastructure that is decades old. The Essential to grow by acquiring small, typically municipal-owned water systems. In the U.S., 85% of the population is served by a municipal water utility, offering a long runway of acquisition growth opportunities.

Similarly, they expect little natural gas usage growth at Peoples Gas, which had been owned by a private equity group. But the gas business still should produce steady earnings growth as Essential replaces and upgrades the system infrastructure. Fair market value laws in several states support Essential’s water business acquisition strategy. These laws require Essential to pay municipalities at least the assessed value of the system it acquires and allow Essential to add these assets to rate base at the assessed value rather than historical cost. The municipalities benefit by ensuring they get fair prices, and Essential shareholders benefit by ensuring the company doesn’t overpay for growth. In many cases, these deals are immediately value-accretive. Recent FMV legislation in Kentucky and West Virginia opens acquisition opportunities near areas Essential already serves.

Financial Strengths

Essential maintains a capital structure in line with its regulatory allowed capital structure for ratemaking purposes and leverage metrics in line with high investment-grade credit ratings. One cannot expect that to change. The Essential to issue new debt to fund growth investments and acquisitions in the coming years. One cannot expect any material new equity needs after the company raised $300 million in 2021. With constructive regulation, The Essential will be able to use its cash flow to fund most of its equity investment needs during the next five years. Essential has paid an annual dividend since 1945 and increased it at least 5% for each of the last 25 years. The Essential will be able to continue growing the dividend at this rate or higher for the foreseeable future while staying below management’s 65% maximum payout ratio threshold.

Bulls Say

  • Constructive regulation allows Essential to raise rates through surcharges or rate cases to reduce regulatory lag and enhance cash flow available to pay the dividend and invest in growth projects. 
  • Fair market valuation state laws allow Essential to make municipal water utility acquisitions immediately value-accretive for shareholders. 
  • Essential has raised its dividend 31 times in the last 30 years, including 29 consecutive increases of more than 5%.

Company Description

Essential Utilities is a Pennsylvania-based holding company for U.S. water, wastewater, and natural gas distribution utilities. The company’s water business serves 3 million people in eight states. Nearly three fourths of its water earnings come from Pennsylvania, primarily suburban Philadelphia. It also has a small market-based water business that provides water and water services to third parties, notably natural gas producers. Its $4.3 billion Peoples Gas acquisition that closed in March 2020 adds 750,000 gas distribution customers in Pennsylvania, West Virginia, and Kentucky.

(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.