Author: lvc-admin

High brand equity enabling scale and barriers to entry provide Winnebago with a narrow economic moat.

Post author By lvc-admin
Post date June 30, 2022
No Comments on High brand equity enabling scale and barriers to entry provide Winnebago with a narrow economic moat.

Business Strategy & Outlook

Winnebago, which reinvented itself under CEO Mike Happe with the November 2016 acquisition of high-end towable maker Grand Design, sees itself as a leading outdoor lifestyle firm. It now has a marine segment with Chris-Craft and Barletta. Towable is an area the company had long wanted to grow in but had remained very small since acquiring Sunnybrook in 2011. Winnebago’s North American towable share is 12%, up from under 2% before Grand Design, so a long growth runway if it can keep chipping into Thor’s and Forest River’s roughly 80% combined share. In fiscal 2021, towable were about 55% of total revenue compared with just 9% in fiscal 2016. High brand equity enabling scale and barriers to entry provide Winnebago with a narrow economic moat.

Leadership sees opportunities to improve Winnebago’s operations with an intense focus on strategic planning to be faster to market with new products in new segments such as off-roading and lower price points (but not the cheapest in a segment). Models are no longer cloned, which should help dealer profitability, and product will be positioned around a good, better, best framework. A unit is now not manufactured until it has an order, which should mean little to no discounting. Acquisitions in the $700 billion-plus outdoor activity market also play a role, but only for high-end firms such as Grand Design, Chris-Craft, Newmar, and Barletta. Industry data shows that 11.2 million U.S. households owned a RV in 2020, up from 6.9 million in 2001. 60% of first-time campers are under age 40 and have a household income of $100,000 or more versus 29% for all campers. 82% of new campers since the pandemic have children and Hispanic and Black consumers were 25% of all campers in 2020, up from 8% in 2012, so Winnebago has plenty of runway with a wide consumer base if it executes right. The Winnebago’s brand equity gives it a good shot at capitalizing on these trends. The pandemic-induced outdoor lifestyle boom has also given the company a $3.6 billion RV backlog at third quarter fiscal 2022, up from about $400 million at the end of fiscal 2019.

Financial Strengths

The balance sheet lacks the massive legacy costs that burden some other manufacturers because Winnebago’s workforce is not unionized. Winnebago’s untapped $192.5 million credit line, good through Oct. 22, 2024, coupled with about $238 million of cash should get the firm through nearly any challenge. A 9% increase in the dividend in summer 2020, despite the pandemic at the time, is a good sign of financial health, as is a 50% increase announced in August 2021. Winnebago’s balance sheet had been free of long-term debt since the mid-1990s. As having no debt limits the downside to equity investors, but new leadership was exploring whether to add debt and did so in fiscal 2017 with $353 million to fund part of the consideration to buy Grand Design. Debt as of May 28 totaled $600 million, before a $49.1 million convertible note discount and $9.4 million of debt issuance costs, and consists of $300 million of 1.5% 2025 unsecured senior convertible notes issued to buy Newmar (along with the company issuing 2 million shares of stock to the seller at $46.29) and $300 million of 2028 6.25% senior secured bonds. The convertible notes are not callable, can be converted any time starting Oct. 1, 2024, and have a conversion price of $63.73 per share. The target range for net debt/adjusted EBITDA is 0.9-1.5 times, but management is willing to leverage up to 3.0 times to make an acquisition. Net debt/adjusted EBITDA was 0.6 times at the end of third quarter fiscal 2022. Winnebago has no significant pension obligations and stopped paying retiree healthcare in 2017. The Winnebago to be comfortably free cash flow positive in the long term. One would prefer that it repurchase its shares only when they’re cheap and buybacks be done at a minimum to offset dilution from stock option issuance. Acquisitions and other growth investments are a priority over buybacks.

Bulls Say

The Grand Design acquisition materially raised Winnebago’s operating margin, and Newmar could do the same.

The company’s strong balance sheet provides financial strength and flexibility to withstand cyclical downturns.

Because RV consumers are relatively affluent, rising gas prices would probably not hinder a consumer’s ability to purchase a motor home. A 2016 study by travel consulting firm PKF Consulting found that for a family of four, gas prices would have to exceed $12 a gallon to make RV travel more expensive than other forms of travel.

Company Description

Winnebago Industries manufactures Class A, B, and C motor homes along with towable, customized specialty vehicles, boats, and parts. Headquartered in Eden Prairie, Minnesota, Winnebago has been producing recreational vehicles since 1958. Revenue was about $3.6 billion in fiscal 2021. Winnebago expanded into towable in 2011 with the acquisition of Sunnybrook and acquired Grand Design in November 2016. Towable made up 85% of the firm’s RV unit volume, up from 31% in fiscal 2016. The company’s total RV unit volume was 71,015 in fiscal 2021. Winnebago expanded into boating in 2018 with the purchase of Chris-Craft, bought premium motor home maker Newmar in November 2019, and bought Barletta pontoon boats in August 2021.

(Source: Morningstar)

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

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

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

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

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.

Tags Street Talks

Dividend Stocks

NIB is incentivised to help bring down industry claims to improve affordability and support participation rates

Post author By lvc-admin
Post date June 30, 2022
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Business Strategy and Outlook

NIB Holdings is Australia’s fourth-largest provider of private health insurance. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, and distributes travel insurance internationally. NIB has consistently grown its share of the market over the last five years. The insurer is expected to continue spending a larger share of expenses on marketing than peers, which lifts profit and adds scale. This further strengthens the group’s future prospects and competitive position. Smaller players with lower margins do not have the financial headroom to engage in marketing (advertising, commissions to brokers, bonus offers) at the same level as NIB, nor can they support white-label offerings. NIB offers white label solutions for Suncorp Group and Qantas. As one of the larger players, NIB is also incentivised to help bring down industry claims to improve affordability and support participation rates. While there are no factors in any material benefit in earnings, NIB seeks to use membership data and industry expertise to prevent illness and personalise treatment.

Despite larger players generating respectable returns on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation or at least a pullback in marketing expenses and policyholder acquisition costs. In this scenario, NIB could acquire smaller, less-profitable insurers to grow share, lower costs, and strengthen the competitive position relative to suppliers, or simply retain share while pulling back on marketing and acquisition spend to support margins. NIB made two acquisitions to grow its travel insurance offering, with the rationale to diversify revenue outside of private health insurance, add exposure and scale in an industry expected to experience long-term growth, and leverage its claims management capability and existing distribution channels.

Financial Strength

NIB Holdings is in sound financial health. Cash flow generation from operations is typically strong, and the firm might pay dividends in the upper half of its current 60% to 70% target dividend payout range. As at Dec. 31, 2021, NIB had AUD 234 million in debt and a gearing ratio of 25% (debt/capital), within its long-term target gearing ratio of 30%. Since acquiring World Nomads Group in 2015, NIB has held a similar level of gearing to its target ratio. Given low claims volatility in health insurance, this level of debt is manageable and forecast gearing to remain steady at current levels. Investment assets of AUD 1.1 billion were allocated 39% cash, 40% to fixed income, 17% to equities, and 4% to property and other assets as at Dec. 31, 2021.

Bulls Say’s

Industry growth is tied to a steadily increasing population, ageing demographics and rise in healthcare spending.

The symbiotic relationship of private hospital operators, and buyer power over general practitioners, is a key strength of NIB’s business model.

NIB is a large insurer of international visitors and Australia could become even more popular after handling COVID-19 better than most countries.

Company Profile

NIB Holdings is Australia’s fourth-largest health fund. It is a national provider of private health insurance, life insurance, travel insurance, and related healthcare services, with a growing presence in New Zealand. Approximately 54% of the population is covered by private health insurance because of taxation benefits, shorter wait times, a choice of doctor and hospital, and cover of ancillary health services.

(Source: MorningStar)

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

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

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

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Dividend Stocks

Most of Swatch’s brands benefit from a cost advantage through scale and a higher degree of production automation.

Post author By lvc-admin
Post date June 30, 2022
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Business Strategy & Outlook

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultra luxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch’s brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, a lack of control over distribution (around 70% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which can be damaging for brands with long-shelf-life products.

The recent strong supply response from Swatch and its competitors to Chinese demand points to a lack of supply discipline. The supply discipline is one of the important moat-supporting factors for luxury brands, as it helps to preserve the brand exclusivity perception and ensure high returns on capital. The expect Swatch Group’s sales to grow at a 4.3% pace over the long term (versus low -single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet and Blancpain, high-single-digit growth for jewelry brand Harry Winston and flat revenue for low-end watches (Tissot, Swatch, Mido, Hamilton and so on).

Financial Strengths

Swatch is in a strong financial position with CHF 2.5 billion in net cash at the end of 2020, with minimal financial debt and around CHF 2.6 billion in cash and marketable securities on the balance sheet. Further, over one third of inventories of Swatch Group, or over CHF 2.1 billion by value, are in precious metals and stones, recorded both in raw materials and as part of finished and semi finished goods. It is well-positioned to weather the COVID-19 crisis. Given the industry’s cyclicality, the financial prudence is appropriate. Cash flow improvement in future through operating leverage on fixed costs, cost discipline in the company—and especially within underperforming brands—and lower investment levels as productive and retail capacity has been built out in the past upcycle years. The free cash flow margin at around 10%, approximately in line with 2020-21 levels, as the investment cycle rolls over. They expect Swatch to remain mostly equity financed with low financial leverage.

Bulls Say

Around three quarters of Swatch’s revenue and higher share of profits are from higher-end watch and jewelry brands, not directly affected by smartwatch competition.

Harry Winston, among the few global brands in luxury jewelry, a niche with especially high entry barriers, offers growth and margin expansion potential.

Swatch is increasingly taking action to tackle costs in low-end brands and limit gray market channels for high-end brands.

Company Description

Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in mid range Swiss watches), and Swatch. Swatch group employs over 31,000 people, half of them in Switzerland. The Swatch Group makes about 28% of its sales from Omega, 18% from ultra luxury brands, 20% from Longines, 12% from Tissot, and 4% from Swatch. The Omega and Longines to be the group’s most profitable brands.

(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.

Tags Top Stocks

Funds Funds

Magellan Global Fund Open Class: Investment process focuses on high quality, liquid companies

Post author By lvc-admin
Post date June 30, 2022
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Investment Objective

The investment objectives of the Fund are to achieve attractive risk-adjusted returns over the medium to long-term, while reducing the risk of permanent capital loss.

Investment Process

The investment objective of the strategy is two-fold:

Achieve attractive risk adjusted returns over the medium to long-term (translates to 9% p.a. net of fees long-term target)
Minimise the risk of permanent capital loss (downside protection)

The Magellan Global Fund aims to invest in ‘outstanding companies’ at attractive prices, while also managing investment risk through a comprehensive understanding of the macroeconomic and broader environment. ‘Outstanding’ in this context refers to companies that are able to “sustainably exploit competitive advantages in order to continually earn returns on capital that are materially in excess of their cost of capital.” As such, the Fund is not deterred by companies that may be perceived as trading expensively (e.g. at high multiples), so long as their underlying businesses are outstanding, and share prices are assessed to be trading at a discount to intrinsic value.

The investment team assesses each stock via five quality criteria (economic moat, re-investment potential, business risks, agency risks, and ESG factors). This analysis reduces the universe to around 300 stocks which then undergo detailed bottom-up analysis. The team discusses the results to determine stocks that will be recommended to the investment committee. Investments will need to have a margin of safety (discount to intrinsic value) to enter the portfolio.

The stringent quality criteria result in a concentration in global franchises, information technology, global infrastructure and niche financial services companies. Analysts build discounted cash flow models to determine the intrinsic value of each company. A “conviction scoring matrix” is also used to ensure that each company is consistently evaluated both relative to peers and on a standalone basis.

Portfolio

Investment Team

In February 2022, CIO and Lead Portfolio Manager Hamish Douglass took, effective immediately, a medical leave of absence for personal reasons and mental health issues. It is important to note, the Company does expect Mr Douglass to return in due course when he is healthy to return.

In June 2022, the Manager announced that Mr. Douglass will cease to be a permanent member of Magellan’s staff on 15 June 2022 and will commence the consultancy role on 1 October 2022. Mr. Douglass will be available to the investment team, as required by them, to share his insights including his views on macroeconomic and geo-political matters.

In the interim, Chris Mackay (Magellan’s co-founder) will step in and oversee the portfolio management of Magellan’s global equity retail funds and global equity institutional mandates. Chris is a highly experienced Portfolio Manager with a solid track record in global equities. Further, Nikki Thomas has re-joined Magellan as a Co-portfolio manager of Magellan’s global equity strategies. Nikki was due to commence in March however due to this announcement, she agreed to start 7th February. Nikki is a highly regarded Portfolio Manager with over 20 years of experience in the management of global equity portfolios. Nikki was instrumental in the development of the Magellan investment team’s processes in 2006, and she has a deep knowledge of Magellan’s investment universe. Her experience and relationships with investment advisers and consultants will add further depth to the investment team. Chris Mackay will be working with Deputy CIO Dom Giuliano, Nikki Thomas, Arvid Streimann and Chris Wheldon in respect of the co-management of the global equity and high conviction retail funds and institutional mandates.

Fund Performance and Positioning

About Fund:

The Magellan Global Fund (Unhedged) is a concentrated, currency unhedged, benchmark unaware international equities strategy that typically contains 20-40 stocks. The objectives are capital preservation and reduction of downside volatility risk, while having a minimum return objective of 9% p.a. (net of fees).

(Source: Banyantree)

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.

Tags Australian Market, Top Stories

Dividend Stocks

Mercury is Primed for Growth on Recovering Generation, Acquisitions and Development

Post author By lvc-admin
Post date June 30, 2022
No Comments on Mercury is Primed for Growth on Recovering Generation, Acquisitions and Development

Business Strategy & Outlook:

Mercury is one of New Zealand’s leading producers of electricity, accounting for more than 15% of the country’s total generation. The firm enjoys a good retail presence with Mercury Energy being the largest supplier of electricity in the key Auckland region, with an estimated market share of 40%. Mercury currently operates in a favorable environment dominated by four electricity producers. Barring regulatory change, the four major players will continue to generate favorable returns on invested capital in the long run. Mercury possesses strong competitive advantages and deserves a narrow economic moat rating. Installed capacity from the firm’s hydro and geothermal generation is equivalent to about 6800 gigawatt hours, or GWh, of annual production. The firm is building its first wind farm, with full completion in late 2021 increasing average annual generation to around 7640 GWh.

The generation business is significantly hedged by the supply of electricity to residential and industrial customers, with the added ability to alter output, should weather conditions change. For instance, when wholesale prices are low, Mercury can opt to reduce hydro output if it is more cost-effective to purchase electricity for its retail business than to produce it, though its ability to do so is limited by relatively small lake storage. The firm is affected during a dry year because of lower hydro output, which comprises about 60% of generation in normal years. Its geothermal power plants and hedging to some extent alleviate dry-year risk and provide stability to the firm’s revenue and earnings. Nationwide electricity demand has been soft because of a combination of economic weakness and more efficient energy consumption by households and businesses. Retail markets have been challenging, owing to intense competition from both incumbent gentailers and pure-play energy retailers.

Financial Strengths:

Mercury is in sound financial health. Gearing (as measured by debt/capital) was 26% in June 2021. Net debt/EBITDA was 2.9 times in fiscal 2021, a little higher than most peers. But earnings growth and the underwritten dividend reinvestment plan should reduce net debt/EBITDA back to 2.5 times in 2023. The likely debt-funded acquisition of Trustpower’s retail division should cause credit metrics to deteriorate a little further but remain comfortable. Maintenance capital expenditure in 2022 should be about NZD 70 million. Growth capital expenditure is picking up with the commitment to build the Turitea wind farm. Other growth investments are possible. Management is committed to paying dividends based on a payout ratio of 70%-85% of free cash flow, but the potential for further special dividends has diminished because of increased growth expenditure. Should the firm have surplus free cash flows after funding growth projects, it might opt for share buybacks.

Bulls Say:

Mercury is a low-cost provider of electricity attributed to its significant renewable assets.
The company has a strong retail electricity brand, especially in the key Auckland region.
A strong free cash flow is expected to support dividend growth and investment in Tilt Renewables and other growth opportunities.

Company Description:

Mercury NZ (formerly Mighty River Power) generates more than 15% of New Zealand’s electricity and is one of the four major electricity generators and suppliers in the country. All electricity is now generated from renewable sources, which makes it one of the lowest-cost providers of electricity. The company operates nine hydro stations and five geothermal power plants, all located in the North Island. Mercury sells electricity to residential and commercial customers and has the largest share of the key Auckland market.

(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.

Tags Top Stories

Technology Stocks

SKF’s core market is treading water from a growth perspective

Post author By lvc-admin
Post date June 28, 2022
No Comments on SKF’s core market is treading water from a growth perspective

Business Strategy and Outlook

SKF’s core market is treading water from a growth perspective, and management’s plan for faster top-line growth to double revenue by “2030” is fairly high level in its outline and therefore difficult for investors to assess. SKF has deep engineering expertise and a leading position in ball bearings; however, growth from new market opportunities will still take time and investment. Of the high-level opportunities presented by the company, ceramic ball bearings for the electric vehicle market is one of the most promising. The market for EVs will expand over time, as the adoption is supported by regulators and consumers alike. Therefore, SKF’s ceramic bearing solution should yield positive results once EV take-up accelerates. Pricing power along with cost flexibility thanks to the adoption of robotics and other automation has enabled to SKF to weather its mostly procyclical end markets. However, the estimate is around 10% of its revenue is favoured by structural tailwinds. First, it has exposure to renewables through wind turbines and other “clean tech” end markets, which currently contribute around 9% of revenue. Second, it has an emerging connected services business, with contracts at less than 1% of revenue. However, the services offer a promising growth outlook and also welcome recurring revenue for SKF. Across capital goods companies, connected services have seen good customer take-up rates due to the productivity gains from preventative maintenance, and the same is expected for SKF’s connected services.

SKF provides its customers with measurable operational cost savings versus competitor bearings, which it can accomplish by designing its ball bearings on an application-specific basis. As one of the two largest industrial bearings suppliers, along with Schaeffler, it draws on its more than 100 years of experience in industrial application design to lower energy costs and extend the length of time between maintenance breaks. Customers are willing to pay a premium for this engineering and often sign supply contracts, as work stoppages are very costly for customers running processes for hours at a time or even on a continuous basis

Financial Strength

SKF ended the first quarter of 2022 with a moderate level of debt on its balance sheet and net debt/EBITDA of 1.2 times. This is an appropriate level for a company with mostly cyclical demand. Based on the free cash flow forecasts, if necessary, the company could pay down its gross debt balance within four years.

Bulls Say’s

SKF’s restructuring program and working-capital management program should boost medium-term cash flows and provide mid-single-digit earnings growth.

As a major supplier of ball bearings for wind turbines, the company is a beneficiary of renewables growth.

The lagging automotive division should see a marked improvement in the short term from restructuring efforts and EV growth

Company Profile

SKF’s history goes back to the first major patents in ball bearings: In 1907, SKF was the first to patent the self-aligning ball bearing, which is easily recognisable today. Along with Schaeffler, it is one of the top two global ball bearing suppliers, followed by Timken, NSK, NTN, and JTEK. Combined, these six companies supply about 60% of the world’s ball bearings. The company is based in Sweden and has a global manufacturing footprint of 108 sites and 17,000 global distributor locations. SKF operates under two segments: industrial, which has a fairly fragmented customer base, and automotive, which is the opposite, with a concentrated customer base that includes the likes of Tesla.

(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.

Tags Street Talks

Technology Stocks

DaVita stands to benefit from the continued growth in the ESRD population and it is even pursuing integrated care models to gain a bigger piece of the treatment pie

Business Strategy and Outlook

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, DaVita’s long-term prospects as solid. Once COVID-19 concerns dissipate, it is expected DaVita to get back to more normalized growth trends driven primarily by ESRD trends. The low- to mid-single-digit revenue growth is likely for DaVita in the long run based on the continued expansion of the U.S. dialysis patient population, mild revenue per treatment growth, and ongoing international expansion. These expectations include ongoing expansion of at-home treatments and DaVita can even benefit from extending the at-home treatment stage for patients, despite its clinic infrastructure. At-home patients still have relationships with clinics and are more likely to continue working and, in turn, remain on more profitable commercial insurance plans for a more substantial part of the 33 months where that is possible before Medicare automatically takes the lead on reimbursement for ESRD treatments.

Eventually, most ESRD patients will need in-clinic therapy, too, unless they receive a kidney transplant. Of note, supply and demand for transplants remain greatly mismatched with the average wait list time around four years. But if those dynamics change, DaVita may even be able to benefit, as it has invested in early-stage initiatives to improve transplants. And in general, DaVita stands to benefit from the continued growth in the ESRD population however they are treated, and it is even pursuing integrated care models to gain a bigger piece of the treatment pie in the long run. With these factors in mind, management has highlighted mid-single-digit operating income and high-single-digit to low-double-digit earnings per share growth targets from 2021 to 2025, which is roughly in line during that period, as well.

Financial Strength

Like many healthcare services providers, DaVita operates with significant leverage, especially when considering lease obligations. After recapitalizing its balance sheet and repurchasing shares following the 2019 sale of DaVita Medical Group, DaVita owed $8.9 billion of debt and held $1.2 billion of cash and short-term investments as of September 2021, or in the middle of its net leverage target range of 3.0 to 3.5 times. Its operating lease obligations of $3.1 billion add another turn, roughly, to leverage. After refinancing many of its obligations, DaVita’s maturity schedule appears easily manageable, though, with big maturities in 2024 ($1.4 billion) and 2026 ($2.6 billion) but limited maturities otherwise. During that time frame, DaVita is to generate at least $1 billion annually of free cash flow, so the company could handle those maturities as they come due through internal means. However, given the firm’s large share repurchase plans, DaVita will seek to refinance its obligations coming due. After $2.4 billion of share repurchases in 2019, the company made another $1.4 billion of share repurchases in 2020 and $0.9 billion of repurchases through September 2021. The company anticipates making significant share repurchases going forward to boost its adjusted EPS growth (8% to 14% goal from 2021 to 2025) above its operating income prospects (3% to 7% goal from 2021 to 2025). It had $1.0 billion remaining on its share repurchase authorization as of September 2021

Bulls Say’s

Excluding recent COVID-19-mortality challenges, the ESRD patient population to grow at a healthy rate in the U.S. and around the globe for the long run, which should benefit DaVita.

DaVita enjoys top-tier status in the essential dialysis business, and there are no competitive dynamics to negatively affect that attractive position anytime soon.

While growing at-home care could change its business model a bit, DaVita could also benefit from ESRD patients being able to continue working and staying on commercial insurance plans.

Company Profile

DaVita is the largest provider of dialysis services in the United States, boasting market share that eclipses 35% when measured by both patients and clinics. The firm operates over 3,100 facilities worldwide, mostly in the U.S., and treats over 240,000 patients globally each year. Government payers dominate U.S. dialysis reimbursement. DaVita receives approximately 69% of U.S. sales at government (primarily Medicare) reimbursement rates, with the remaining 31% coming from commercial insurers. However, while commercial insurers represented only about 10% of the U.S. patients treated, they represent nearly all of the profits generated by DaVita in the U.S. dialysis business.

(Source: MorningStar)

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

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Dexcom’s strength in innovation puts the company on firm footing.

Post author By lvc-admin
Post date June 28, 2022
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The Japan Finance and market, Data Chart.

Business Strategy & Outlook

Dexcom enjoys a well-established track record for introducing the most precise sensors for use in its continuous glucose monitors. On the strength of its technology, Dexcom has captured an impressive slice of this CGM market, but a recent wave of innovation in the diabetes device market has intensified competitive pressure. Nonetheless, Dexcom has done a credible job of adapting and fending off competition from Abbott and Medtronic. Dexcom has finally begun to make progress in penetrating the Type 2 market, in addition to long dominating the Type 1 market, where CGM penetration has been estimated around 35%. The establishing reimbursement for Type 2 patients can be challenging, but payers have been steadily joining the bandwagon. Dexcom should benefit as these the reimbursement pieces fall into place.

Both Abbott and Medtronic have introduced meaningful innovation in this realm that the offers patients’ new alternatives. Abbott’s FreeStyle Libre Flash is significantly more user-friendly and is aggressively priced. The product has made substantial inroads with the Type 2 population. Medtronic’s next-gen 780g insulin pump automates much of the insulin delivery and comes with its own integrated CGM. These competitive features could peel some Dexcom users away on the margins. However, one has been impressed with how Dexcom was able to incorporate some of the most attractive Libre features–no-stick calibration, longer sensor life–in its G6 product. The new G7 CGM builds on those strengths. The Dexcom’s strength in innovation puts the company on firm footing. First, the precision of its CGM remains materially better than competitive products. Second, Dexcom’s next-gen, one-piece G7 should be significantly lower-cost, which offers flexibility for improving cost structure. The firm has also moved more aggressively into the pharmacy channel to enhance patient access and take advantage of greater volume upside. Finally, Dexcom’s alliances with Tandem, Insulate, Livongo (now part of Teledoc), and Eli Lilly provide opportunities for the firm to remain tightly woven into most new diabetes technologies.

Financial Strengths

Dexcom has been cash flow positive for since 2014 and more recently moved into positive earnings territory. While revenue has grown very quickly, research and development expenses and selling, general, and administrative costs have grown significantly as well, sometimes outpacing revenue growth, during the early phases of commercialization. However, the firm turned the corner in 2019, and it will post meaningful profits through the explicit forecast period. Historically, Dexcom has funded its operating losses through additional capital raises over the years or through convertible debt. As of December 2020, Dexcom had two lots of convertible senior notes, which mature in 2023 and 2025. The debt is partially intended to support Dexcom’s efforts to expand, including building out the company’s manufacturing footprint. The $850 million in convertible debt due in 2023 are already in the money at the initial conversion price of $41.07 per share. Most recently, the firm issued $1.21 billion more in convertible debt due in 2025, partially to redeem convertible debt due in 2022, and these notes have an initial conversion rate that is equivalent to $150.11 per share. Dexcom also issued 1.8 million shares in 2018 to raise funds to pay for a hefty collaborate R&D fee.

Bulls Say

Dexcom’s next-gen G7 product should be significantly less expensive, offer a thinner profile, and faster warm-up time than G6.

Medicare’s decision to reimburse for the G6 is a favorable development for Dexcom, as private payers often use Medicare as the benchmark for reimbursement policies.

Dexcom’s initiative with Verily offers the potential to apply tech expertise in data analytics with data intensive health management for type 2 diabetic patients. This partnership could put Dexcom a step ahead of rivals.

Company Description

Dexcom designs and commercializes continuous glucose monitoring systems for diabetics. CGM systems serve as an alternative to the traditional blood glucose meter process, and the company is evolving its CGM systems to include the disposable sensor and the durable receiver.

(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.

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Suncorp Sale or Demerger of the Bank Could Make Sense, Depending on Price

Post author By lvc-admin
Post date June 28, 2022
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Business Strategy & Outlook

Suncorp is a well-capitalised financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons, and Terri Scheer. In New Zealand, key brands include Vero, AA Insurance, and Asteron Life. Some brands are specific to certain states, but at a group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia. The group’s exposure to the Queensland market, where large natural peril events have tended to be larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events.

Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounting for more than half of total lending. Suncorp Bank’s smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors. While there are potential benefits to the bancassurance model, such as better customer insights versus stand-alone insurance peers, and better cross-selling opportunities, they have not delivered a material tangible improvement in earnings, returns, or switching costs. Selling home insurance to borrowers is the lowest hanging fruit, with recent improvements to give the group a single customer view likely to make the process smoother. Similar to its peers, Suncorp is focused on enhancing the digital offering to ensure simpler and faster quotes, claim processing, and to ensure the large insurer remains competitive on price. In response to changes in the way customers engage with their insurer, with less human contact and the expectation of being able to access services at anytime, productivity improvements remain a priority.

Financial Strengths

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, net debt/EBITDA is expected to remain below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion. Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet is expected to remain strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say

Premium increases stick without an equal rise in claims and rising rates lift yields on fixed income, together lifting underlying profitability and dividends.

A benign claims environment with a lower incidence of major catastrophes would considerably boost underwriting profits.

Risk management has been improved, and productivity initiatives are expected to deliver greater cost efficiencies.

Company Description

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance 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.

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Five9 Is a Growing Force in the Cloud Contact Center Space

Post author By lvc-admin
Post date June 28, 2022
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Business Strategy & Outlook

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. A long growth runway and significant market opportunity is anticipated but no-moat Five9 is expected to require a high degree of investment activity moving forward as it squares off against larger competitors. Five9’s Virtual Contact Center, or VCC, platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist capabilities, and workflow automation. VCC is expected to become increasingly critical for enabling omnichannel interactions amid a secular acceleration of digital-first customer engagement.

With only 15% to 20% of contact center agents in the cloud, the residual opportunity around uncaptured communication data is significant. The increasing automation of contact center labor also presents an additional opportunity for Five9 and expect the firm’s rapidly growing AI and automation portfolio to enable both scale and efficiency gains for customers’ call center operations. Attach rates for these solutions are rising within each tier of customers, and higher attach rates are observed in incrementally larger enterprises, a positive as the company advances its penetration within larger companies. Reflecting the high utility businesses derive from the firm’s offerings, Five9 reports a net retention rate in excess of 120%, reflecting strong growth within existing customers. Five9’s success in gathering new customers is also noted, principally driven by the migration of contact centers to the cloud. Nonetheless, the current positive outlook is tempered as heightening competition in the cloud contact center space is observed with the emergence of natively built CCaaS offerings from key competitors such as Zoom, Twilio, and Amazon.

Financial Strengths

Five9’s financial position is sound. As of March 2022, Five9 held $478 million in cash and short-term investments versus $738 million in debt. In May 2018, Five9 issued $259 million in 0.125% convertible senior notes, due 2023 and convertible at $40.82 per share. As of March 2022, approximately $2.3 million of the 2023 notes remained outstanding. In June 2020, Five9 issued an additional $748 million in 0.5% convertible senior notes, due 2025, convertible at $134.34 per share, and entirely outstanding as of March 2022. There are no any material concerns about Five9’s ability to repay this debt with existing cash and expected cash generation over the next several years. That said, it is possible the firm may need to access the capital markets, which will not present any significant challenges. Five9 has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company to build out the platform and enhance future growth prospects. Five9 has invested heavily in recent years, building a sophisticated AI and automation portfolio and building direct sales teams to help drive enterprise sales. Five9 does not pay a dividend, nor repurchase stock, and for a growing company within an increasingly competitive market, it is appropriate that the company focuses capital allocation on reinvestments for growth. Healthy growth in free cash flow is anticipated as industry tailwinds around digital transformations lead to long-term growth for Five9. Five9 has generated positive non-GAAP operating margins since 2017. As the company scales, non-GAAP operating margins are expected to reach into the low-20% range within five years, up from 14% in 2021. These positive results should translate to profitability on a GAAP basis by 2025.

Bulls Say

Five9 has strong user retention metrics, with net dollar retention above 120%.

As the firm continues to expand its growing AI and automation portfolio, Five9 should benefit as automation of contact center labor will enable a larger incremental market opportunity, and AI-based technology commands a higher ASP per seat.

Five9 has a large residual market opportunity, with only about 15% to 20% of contact center agents having moved to the cloud so far.

Company Description

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. The company’s Virtual Contact Center platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist technology, and workflow automation. Five9 also offers workforce optimization products that optimize call center efficiency through workforce management solutions, manage interaction quality, and track agent performance.

(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.

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