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Shares Small Cap

Nanosonics’ Third Quarter Largely Consistent With its Second; Shares appear Modestly Overvalued

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

Business Strategy & Outlook:   

Nanosonics’ trophon solution for high-level disinfection, or HLD, of ultrasound probes has garnered substantial market share, as evidenced by penetration of over 75% in Australia and New Zealand and 40% in North America. The elevated growth over the next three years as Trophon continues to gain share in North America and launch in Japan, but high market penetration may be more challenging to achieve in developing economies, which may not be able to prioritise nuanced disinfection standards. Moreover, the device patent expires in 2025, leading to slower volume growth in the medium term. Nonetheless, Nanosonics has a razor-and-blade business model and the installed trophon base supports an ongoing revenue stream from high margin consumables. In 2021 consumables contributed 63% of group revenue. The consumables revenue stream as more secure as its protected from generic substitution until fiscal 2029, and forecast these sales climbing to over 70% of Trophon revenue over the next 10 years. 

Nanosonics primarily distributes via GE Healthcare, its partner across multiple geographies. Recently Nanosonics established a direct sales team in North America, adding to the operating cost base, however, it is expected to see expanding gross margins from this and increasing revenue contribution from consumables. The estimated consumables to roughly earn a gross margin of 85% and devices 65% by fiscal 2026. Outside of trophon, the company expects to launch a new product in flexible endoscope cleaning in 2023. Previously, management intimated the addressable market to be equivalent to trophon and there is greater awareness of the infection issue this product addresses. The broad assumptions of a similar roll-out pattern to trophon from fiscal 2024 onwards and equivalent margins. This supports the views that consolidated companys EBITDA margins will climb to 35% by fiscal 2031 versus 14% in fiscal 2021. The pipeline product contributes roughly 16% of the fair value.

Financial Strengths:  

Nanosonics is in a net cash position and free cash flow positive. The operating model does not require significant capital investment, with the key investments for growth stemming from ongoing R&D spending, building out a salesforce and working capital. Despite having 60-day terms from distribution partners, the current net investment in working capital runs at approximately 28% of revenue due to high inventory holding levels which average roughly 200 days in stock. The forecasted net investment in working capital to remain in line with historical figures, but note it is possible to elevate in the near term as inventory is built up prior to the new product launch and in the early roll-out phase. The company first posted a profit in fiscal 2016 and is yet to pay a dividend, nor it is expected in the future as it invests in underpenetrated markets and its pipeline product. However, the company has free cash flow positive and they forecast it to convert roughly 72% of net income into free cash flow in a typical year.

Bulls Say: 

  • Nanosonics is the market leader in automated HLD of ultrasound probes with significant further market penetration potential in most regions.
  • Establishing its direct distribution model should increase the gross margins achieved by Nanosonics once it reaches critical mass.
  • The company has reached a pivotal point where higher margin consumables dominate the revenue stream. This revenue stream is also protected by patents and the installed trophon device base.

Company Description:  

Nanosonics is a single-product company and its trophon device provides high-level disinfection, or HLD, of ultrasound probes used in semi-critical procedures. The patented technology uses low temperature sonically activated hydrogen peroxide mist that is suitable for probes sensitive to damage. Automated HLD is increasingly being adopted as the standard of care globally as it is superior in preventing cross-infection across patients. Nanosonics’ revenue is made up of capital sales of trophon units, ongoing consumables sales, and service revenue. At June 2021, there were 26,750 trophon units installed globally. Market penetration rates range from over 75% in Australia and New Zealand, roughly 40% in the United States to low-single-digit penetration in EMEA and elsewhere in Asia-Pacific.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Property

Buy One Get One Free; Mirvac Securities Are Cheap. Fair Value Uncertainty to Medium.

Business Strategy & Outlook:   

Mirvac securities take the form of a stapled security, comprising one share in the corporation and one unit in Mirvac Property Trust. About 80% of the group’s earnings come from a passive commercial property portfolio housed within Mirvac Property Trust. Earnings from the rent-collecting business are usually stable and predictable, while most of the remainder comes from a residential development business that can be lucrative but is also more cyclical. Mirvac’s REIT status results in low company tax because trusts pass income and tax liabilities through to the end investor. 

Mirvac pays slightly more tax than some pure passive real estate investment trusts, though, because of the development business within the Mirvac corporation Mirvac is gradually reweighting its business in several ways. It is allocating most of its capital toward passive rent collecting and is currently within its target of 85%-90% of capital invested there. Within that, it is allocating more to office and industrial, trimming retail exposure, and refocusing its retail portfolio on urban areas. On the development side, more houses are expected (via master-planned communities) and fewer apartments in Mirvac’s residential earnings in the coming years. It also has a higher weight to commercial property development, mainly in office. Within residential, it is rolling out some build-to-rent projects, though this business is only a small portion of the portfolio at present. The shift toward master-planned communities will diversify earnings. However, the build-to-rent business as a yet-to-be proven concept. It remains to be seen whether renters will accept institutions as landlords in Australia. Mirvac’s first project, LIV Indigo in Sydney, was 93% leased by December 2021. The concept looks viable with low interest rates and low yields on commercial property, and few build-to-rent rivals, but should those conditions reverse, other business lines may look more attractive.

Financial Strengths: 

Mirvac is in reasonable financial health, with gearing (net debt/assets) of 22%, based on its Dec. 31, 2021, accounts. This is at the low end of the group’s targeted range of 20%-30%. The group’s average cost of debt was 3.3% at its December 2021 results, and it might grind higher in the wake of interest-rate rises. Even so, the group’s weighted average debt maturity is about six years and the group has no major debt maturities until fiscal 2023. This gives it flexibility, which could come in handy in acquiring new sites for the residential land bank or office portfolio during any downturn. Gearing will rise based on further acquisitions and development, and asset devaluations in its commercial property portfolio (with retail under particular threat). However, Mirvac’s development pipeline is expected to be lower-risk, with projects at or near completion, and with mostly high levels of tenant commitments. This should prevent gearing rising excessively until the outlook for recovery from coronavirus is clearer. Caution is appropriate, given that the extended boom in property has pushed up asset prices, which could make gearing appear to be lower than it really is. Moreover, pressure on earnings is likely, and dividend cuts remain a risk if the group decides it needs to preserve cash.

Bulls Say: 

  • A resumption of inbound immigration should support the value of Mirvac’s assets and underpin the viability of major development projects that the group has in its pipeline.
  • Mirvac has been shifting toward industrial exposure, a sector that was less affected by the coronavirus, and could benefit as businesses seek to invest in local supply chains and e-commerce capabilities.
  • Demand could continue for quality real estate from the likes of pension funds, sovereign wealth funds, and other offshore investors, especially as the Australian economy has dealt with the coronavirus health crisis better than some, which could allow a faster resumption of business activity.

Company Description: 

Mirvac is one of Australia’s largest residential developers, particularly apartments. Residential development earnings are volatile, generating about a fifth of EBIT in fiscal 2019, despite only about 13% of the group’s invested capital being allocated there. There was a cyclical high and don’t expect development settlements to substantially exceed the 2019-20 high point in the next decade. About 80% of Mirvac’s earnings come from a predictable commercial property portfolio, more than half of which is office and another fourth in retail, a small industrial portfolio, and a fledgling build-to-rent residential portfolio. The company is allocating more capital to passive property ownership, and within that, trimming retail exposure and adding office, industrial, and residential.

(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

No Change To Our Fair Value Estimate For Royal Bank Of Canada After Second-Quarter Earnings

Business Strategy & Outlook:   

It is expected that Royal Bank of Canada will remain a steady player in its retail and commercial Canadian banking operations. It also remains a major player in global capital markets. It is expected that this segment will continue to be a strong contributor to net income, and if anything, capital markets have been countercyclical for the bank during the pandemic as earnings have soared for the unit. The wealth-management segment also earns strong returns on equity, and large inflows have led to a top market position. RBC remains a top asset manager and gatherer in Canada, and is also experiencing outsize growth from City National, where cross-selling and client integration efforts have gone well. The banks’ distribution networks are arguably the most dominant in Canada, and the bank has the largest amount of assets under management among the Canadian banks. 

 RBC’s growth strategy in the U.S. through City National, focusing on wealth and commercial clients. The company believes this is a much more focused strategy than its previous attempts at growth in the U.S., and it is paying dividends. We think the bank has additional room for outsize growth as CNB grows and as the bank invests in additional wealth and investment banking staff. With the initial COVID-19-driven downturn in the past, 2021 turned into a year of recovery in profitability and lower-than-expected credit costs. So far, 2022 is showing a continuation of the positive credit environment and rate hikes are going to help net interest income, but fee growth is starting to slow.

Financial Strengths:  

 Royal Bank of Canada is seen as being in a strong overall financial health and do not believe any potential future issues will be an existential risk to the bank. The Canadian housing market is worth monitoring, but from company’s point of view this is more of a risk to the future growth rather than a major credit risk. According to the company RBC’s reported common equity Tier 1 ratio of 13.2% as of April 2022 remains satisfactory, arguably even representing overcapitalization. The bank also maintains one of the highest credit ratings (along with Toronto Dominion) of the big six banks. With its dividend payout ratio generally at a manageable levels in the mid-40s in a normal year, it is expected that the capital generation will continue to provide growth in its capital position, leaving room for future acquisitions or increased capital return to shareholders.

Bulls Say: 

  • Royal Bank of Canada’s worldwide scope in capital markets and wealth management provides a powerful and diversified stream of revenue. The ETF partnership with BlackRock further solidifies RBC’s overall dominance in financial services. This should lead to outsize fee income versus peers. 
  • The strength in its Canadian banking business, where returns on equity exceed 30%, should continue for some time. 
  • RBC’s latest expansion into the U.S. high-net-worth and commercial banking space should provide additional high-margin growth for the bank.

Company Description:  

Royal Bank of Canada is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation’s banking deposits. The bank derives two thirds of its revenue from Canada, with the rest primarily coming from the United States. It has done an admirable job of expanding its nonbank lines of business, running efficient banking operations, and generating some of the best returns for shareholders in the industry. The company believes RBC should remain one of the dominant Canadian banks for years to come, even as a more difficult macro backdrop pressures earnings growth in the medium term.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Property

Remote Work Continues To Weigh On Office Recovery

Business Strategy & Outlook:   

The company’s strategy is to develop and own premier properties that maintain high occupancy rates and achieve premium rental rates through economic cycles in supply-constrained markets that have the strongest economic growth and investment characteristics for office real estate. Management has also outlined its policies on capital recycling to ensure continuous portfolio refreshment and value creation while maintaining a strong balance sheet and having adequate access to capital to take advantage of opportunistic situations. The company also welcomes management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients. 

The economic uncertainty emanating from pandemic recovery and the remote work dynamic has created a challenging environment for owners of office real estate. Employees are still hesitant in returning to the office as office utilization remains at approximately 45% of the pre-pandemic level. The national vacancy rate for office spaces was recorded at 17.5% in Q1 2022, which is roughly 500 basis points higher than pre-pandemic levels. The net absorption rate was marginally negative as of Q1 2022 and rental growth figures remain disappointing given the highly inflationary environment. Having said this, the company has seen an increasing number of companies requiring their employees to return to the office. In the long run, company believes that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths:  

Boston Properties is in sound financial health. The company’s share of debt which also includes its share of unconsolidated joint venture debt was $12.9 billion as of the end of the fourth quarter in 2021, resulting in a debt/EBITDAre ratio of 7.7 times. The current debt/EBITDAre ratio is probably on the higher side and is slightly above the company’s long-term average. However, company thinks that the figure should return to the industry average over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.40% and the weighted average maturity period was 6.6 years. The maturity schedule of the company’s debt shows that the maturities are adequately spread. Company believes

 that the leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed charge coverage ratio which is a ratio of EBITDAre divided by all fixed expenses (including interest expenses) was 2.8 times as of the end of 2021. As a real estate investment trust, Boston Properties is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 92.1% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and payout dividends

Bulls Say: 

  • Boston Properties owns premier properties in supply constrained cities which have favorable regional dynamics and strong growth prospects. Additionally, the life sciences portfolio of the company should benefit from the strong demand in the burgeoning sector.
  • The company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • Boston Properties’ balance sheet strength, its access to low-cost capital, and its development expertise allow it to pursue lucrative large-scale development projects that generate value for shareholders.

Company Description:  

Boston Properties develops, owns, and manages Class A office properties that are mainly concentrated in six markets–Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. It owns over 200 properties consisting of approximately 53 million rentable square feet of space. The company has positioned itself to benefit from the burgeoning life sciences sector as it owns approximately 4.6 million square feet of life sciences space and has an additional 5 million square feet of future development potential.

(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

Marqeta offers impressive growth, but Its reliance on block Is a Concern

Business Strategy & Outlook:   

Marqeta has recently enjoyed rapid revenue and volume growth that has led to improving margins, though the company is still unprofitable. Marqeta’s operating cost structure is mostly fixed, so higher processing volume on debit and credit cards issued on its platform naturally leads to better margins for the firm, creating a road map for profitability as volume grows. The Marqeta card-issuing platform provides its customers with the infrastructure and application programming interfaces, or APIs, needed to build and rapidly deploy innovative card payment systems without preexisting payment expertise. The unique capabilities and flexibility of Marqeta’s platform has allowed it to find success with fintech and technology companies, with buy now pay later firms and Block being the most notable. Marqeta continues to benefit from the high organic growth its customer base provides, and the transition to digital payments as digital card issuance and tokenization are among its strengths, with major firms like Citi and JPMorgan using its digital issuance technology. 

That said, Marqeta has a genuine problem with customer concentration. More than 80% of Marqeta’s revenue comes from its two largest customers, with Block alone accounting for around 65% of net revenue. This creates serious risk for Marqeta as either a loss of this relationship or a material deterioration in contract terms could have serious repercussions on Marqeta’s business model. Marqeta’s current agreement with Block lasts until 2024, giving Marqeta some breathing room, but the firm’s reliance on Block will be an ongoing concern as it is the company’s largest source of risk. In a more positive light, Marqeta has announced deals to create debit cards for Bill.com and Goldman Sachs’ Marcus—major wins for the company. It is also moving forward with plans to expand its international business and move into credit card issuance. While these efforts are still in their early stages, these plans along with its recent contract wins provides Marqeta with a potential road map to continue its rapid growth and address its concentration issues.

Financial Strengths:  

Marqeta is in a very strong financial position, particularly after raising $1.2 billion in its IPO. Marqeta ended March 2022 with over $1.6 billion in cash and investment securities on its balance sheet. With no long-term debt outstanding, this provides the company with ample financial resources to invest back into its business, without the need to raise more capital. Additionally, Marqeta’s business requires little investment capital, even as it grows rapidly. The company is first and foremost a financial technology firm, and requires very little physical assets. Marqeta also collects interchange revenue from merchants before paying its customers their share, meaning the company has low net working capital requirements due to its high accounts payable. In fact, the company generated positive cashflow from operations in 2021 and used less than $50 million in 2022. This places Marqeta in the position of having substantial financial assets but little to no cash burn. While the company expects Marqeta to remain unprofitable for the immediate future, it also sees little risk of financial strain given the strength of its balance sheet.

Bulls Say: 

  • Marqeta’s platform and open APIs for card issuance continue to attract large and sophisticated firms like Goldman Sachs’ Marcus and Google to its platform, highlighting the strength of its offerings.
  • Marqeta’s existing customer base includes disruptive firms like Square and Klarna, which provides Marqeta with strong organic growth from its existing user base.
  • Marqeta’s cost structure is mostly fixed, allowing the company to naturally expand its margins as volume grows.

Company Description:  

Headquartered in Oakland, California, and founded in 2010, Marqeta provides its clients with a card-issuing platform that offers the infrastructure and tools necessary to offer digital, physical, and tokenized payment options without the need for a traditional bank. The company’s open APIs are designed to allow third parties like DoorDash, Klarna, and Block to rapidly develop and deploy innovative card-based products and payment services without the need to develop the underlying technology. The company generates revenue primarily through processing and ATM fees for cards issued on its platform.

(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

As Shares Fall Amid Fiscal Fourth-Quarter Struggles, Canopy Pushes Back EBITDA Profitability to 2024

Business Strategy & Outlook

Canopy Growth grows and sells cannabis products primarily in Canada, which accounts for roughly 50% of sales. Non-THC product sales account for about 30%. Canadian recreational accounts for roughly 60% of cannabis sales. Although the medical market to shrink as consumers turn to the recreational market, and more than 10% average annual growth for the entire Canadian market through 2030, driven by the conversion of black-market consumers into the legal market and new cannabis consumers.

Canopy also exports medical cannabis globally. The global market looks lucrative, given higher prices and growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Canopy. Partially offsetting the global markets’ potential for Canadian producers are threats of future production from countries with cheaper labor— the single largest cost. However, many Canadian companies have pulled back expansion plans given ongoing cash burn. As per forecast around 15% average annual growth through 2030.

 Canopy has a standing deal to acquire Acreage Holdings, a U.S. multistate operator, immediately upon federal legalization. The Canopy paid a good price and acquired an attractive option for an accelerated entry into the U.S. Canopy also owns 27% of U.S. multistate operator Terraced on a fully diluted basis. These U.S. assets look far more attractive than the continued challenges in the Canadian market. The U.S. market is murky, with some states legalizing recreational or medical cannabis while it remains illegal federally. The federal law will be changed to recognize states’ choices on legality within their borders, which would trigger Canopy’s deals. Based on state-by-state analysis, the nearly 20% average annual growth for the U.S. recreational market and nearly 10% for the medical market through 2030. Constellation Brands owns 38.6% of Canopy with additional securities that could push ownership to 55.8%. The investment as supportive of developing branded cannabis consumer products while also providing a funding backstop and foothold into the U.S. non-THC market.

Financial Strengths

On one hand, Canopy Growth’s debt remains relatively low. At the end of the fourth quarter of fiscal 2022, the company had about CAD 1.5 billion of debt compared with a market capitalization of roughly CAD 2.5 billion. On the other hand, the company continues to burn cash, which pressures its financial health. However, management has been focused on reducing capital spending and rightsizing its overhead, minimizing the need for further outside capital. The company will generate positive adjusted EBITDA in fiscal 2025 and positive free cash flow in fiscal 2026. The company’s target of positive adjusted EBITDA in fiscal 2024 looks possible in the latter half of the year, but no one had anticipate losses for the sum of the year. In the latter 10-year forecast, we think the company will generate enough positive free cash flow to reduce its debt. Benefiting its financial health, Canopy has generally relied on equity to fund acquisitions and expansion. The company’s first major debt raise occurred as recently as its first quarter of fiscal 2019. The company will continue to rely on equity to fund capital needs, which is typical for growth companies such as Canopy to help alleviate potential pressure on its financial health. Constellation Brands as a major strategic investor also adds a stabilizing presence to Canopy’s financial health.

Bulls Say

  • Canopy Growth’s deal to acquire Acreage Holdings immediately upon U.S. federal legalization provides exposure to the largest potential cannabis market in the world.
  • Canopy Growth’s ownership of 27% of Terrascend gives it further optionality for the U.S. THC market.
  • The investment by Constellation Brands and partnerships with Martha Stewart and Snoop Dogg provide potential expansion opportunities into infused products and topicals. If successful, Constellation Brands may increase its ownership or try to acquire Canopy.

Company Description

Canopy Growth, headquartered in Smiths Falls, Canada, cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and Craft Grow. Although it primarily operates in Canada, Canopy has distribution and production licenses in more than a dozen countries to drive expansion in global medical cannabis and also holds an option to acquire Acreage Holdings upon U.S. federal cannabis legalization.

(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

Williams-Sonoma could deliver an average adjusted return on invested capital

Business Strategy and Outlook

Williams-Sonoma has carved out a solid position in the $750 billion global home category and the $80 billion U.S. B2B industry. It has historically launched most of its brands organically in underserved segments and its brand intangible asset has been the supporting factor in its top- and bottom-line growth. Its ability to drive repeat business relies on customer loyalty and smart marketing and merchandising and the firm has access to some of the best analytics in retail. This should help Williams-Sonoma outperform its competitors and grow its market share, aided by new category expansions. 

In recent years, Williams-Sonoma has set its sights on expanding its total addressable market outside of furniture and home furnishings, via B2B and marketplace efforts, categories with robust end markets that remain fragmented. These white-space business lines, along with faster growth from both franchise and the e-commerce channels (which accounted for 66% of 2021 sales) should help Williams-Sonoma near its $10 billion sales goal by 2024. 

Furthermore, the aforementioned categories have the ability to deliver better operating margins than the historical brick-and-mortar business (which is on track to decrease its store base by 25% between 2020 and 2025), allowing mix to offer a natural lift to profitability. Such efforts, along with lower costs from an improved supply chain (when COVID-19 constraints subside), better distribution network (from direct sourcing and furniture delivery operations), as well as higher productivity of its store fleet (as underperforming locations close and older leases are renegotiated) should allow for operating margins that are consistently at a midteens rate. Despite a solid competitive edge, it is not alleged that the company is insulated from the proliferation of e-commerce peers such as no-moat Wayfair pushing harder into the home furnishing space, bounding upside potential. Even with robust competition in the category, it is held narrow-moat Williams-Sonoma could deliver an average adjusted return on invested capital, including goodwill, averaging 30% over analysts’ forecast, well ahead of analysts’ 9% weighted average cost of capital estimate.

Financial Strength

Williams-Sonoma is in fine financial health, with plenty of cash on hand, ending its first quarter with $325 million on its balance sheet. Given the strong free cash flow it has been able to generate, it is unprobeable the firm will have to tap the equity or credit markets for liquidity anytime soon, and there is currently no long-term debt outstanding, liberating excess cash flow for a return to shareholders. Over the past five fiscal years, the company has produced cumulative free cash flow of $3.4 billion. Williams-Sonoma’s cash requirements are primarily for inventory, property, plant, and equipment, advertising and marketing, technology, share repurchases, and dividends, which is likely to mostly be funded by cash generated from operations. Free cash flow to equity has averaged about 10% of revenue during the past five years, which is likely to be decent for a company that can produce somewhat volatile results that are closely tied to the performance of the housing market. The company resumed share repurchases in the fourth quarter of 2020, and the board authorized a $1.5 billion share buyback program in March 2022, which should facilitate continued buybacks ahead (in fiscal 2021 the company repurchased $899 million in shares, well ahead of any other year in the past decade). Additionally, it pays a dividend of $0.78 per quarter, representing a payout that was raised 10% in March 2022, illustrating the board’s confidence in the strength of the underlying business. Over the next decade, it is projected, the firm to average 7%-8% EPS growth (increasing modestly faster than sales), bolstered by continued top-line growth, a favorable sales mix shift, and stringent cost controls. Williams-Sonoma is positioned to earn an average of around $1.1 billion in free cash flow (cash from operations minus capital expenditures) over the next five years.

Bulls Say’s

  • Less discretionary categories such as cookware and small appliances offer some resiliency amid macroeconomic cyclicality. Registries in categories such as wedding and baby offer a steady source of customers. 
  • The firm opened company-owned stores abroad in Australia in 2013 and has since expanded to the U.K. International opportunities (owned and franchised) could provide location and sales growth and elevated brand awareness. 
  • Around two thirds (or more) of sales has stemmed from the e-commerce channel in recent years, which helps minimize store expenses and maximize operating margins.

Company Profile 

With a wide retail and direct-to-consumer presence, Williams-Sonoma is a leader in the $300 billion domestic home category, focused on expanding its exposure in the B2B, marketplace, and franchise areas. Namesake Williams-Sonoma (175 stores) offers high-end cooking essentials, while Pottery Barn (188) provides casual home accessories. Brand extensions include Pottery Barn Kids (52) and PBteen. West Elm (121) is an emerging concept for young professionals, and Rejuvenation (9) offers lighting and house parts. Williams-Sonoma also has a business-to-business team that supports projects that range from residential to large-scale commercial. 

(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
Shares Small Cap

Kilroy Realty Corp: Vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022

Business Strategy and Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. It is also greeted, management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients.

Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers. 

The economic uncertainty emanating from pandemic recovery and the remote work dynamic have together created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022. The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains negative to marginally positive as of Q1 2022 and rental growth figures are disappointing especially given the inflationary environment. Having said this, it can be seen that an increasing number of companies requiring their employees to return to the office. In the long run, it is held that that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centrepiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strength

Kilroy Realty is in sound financial health. The company’s total debt was $4.1 billion as of the end of the first quarter in 2022, resulting in a debt/EBITDA ratio of 6.6 times. It can be pointed out that the debt/EBITDA ratio should trend lower over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.70% and the weighted average maturity period was 7.0 years. The maturity schedule of the company’s debt shows that there are no major debt maturities until the end of 2024 and the maturities are adequately spread. It can also be appreciated that the fact that in an increasing interest rate environment 100% of the company’s debt is fixed-rate debt. It is held that the leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest expenses), was 3.5 times and the interest coverage ratio was 8.4 times as of the end of the first quarter of 2022. As a real estate investment trust, Kilroy Realty is required to pay out at least 90% of its income as dividends to shareholders. The FAD pay-out ratio which is a ratio of dividends to funds available for distribution was reported at 67.0% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and pay-out dividends. The company is also in a comfortable position with respect to liquidity as it has a robust liquidity position of around $1.4 billion including the cash on the balance sheet and the revolving credit facility. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities.

Bulls Say’s

  • Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as wit is alleged that buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle. 
  • Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.

Company Profile 

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust. 

(Source: MorningStar)

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

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

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

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

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

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

Agilent Turns in Solid Fiscal Q2 Despite China Lockdown; Shares Still Mildly Rich

Business Strategy & Outlook

After its spin-out from Hewlett Packard in 1999 and its divestiture of the electronic measurement

business (Keysight Technologies) in November 2014, Agilent focuses on providing tools to analyze the

structural properties of various chemicals, molecules, and cells. Agilent is one of the leading providers of chromatography and mass spectrometry tools, which have applications in a variety of end markets,

including the healthcare, chemical, energy, food, and environmental fields. While healthcare-related

applications, including clinical diagnostics, remain Agilent’s largest end market, Agilent generates about

half of its sales from nonhealthcare fields. Agilent’s strategy revolves around placing analytical instruments and informatics with relevant customers and then providing related services and consumables such as chromatography columns and sample preparation tools, which account for the rest of Agilent’s sales. About half of Agilent’s sales recur naturally. However, even instrument sales can be relatively sticky at the end of the instrument’s life cycle, especially in the highly regulated pharmaceutical end market (about 35% of Agilent’s sales) and some of its other applications where intensive, time-consuming training is required to master the scientific analysis. Agilent aims to increase its exposure to these sticky customer relationships. Overall, the top-tier positions in most end markets, innovation, marketing operations, and ongoing cost controls should help Agilent grow revenue in the midsingle digits compounded annually and boost margins overall during the five-year forecast period. Overall, the double-digit earnings growth from Agilent, organically and with some share repurchases. While internal growth opportunities look solid, acquisitions should continue to boost its bottom-line growth prospects, as well.

Fair value and Profit Drivers

The rising fair value estimate to $115 per share from $107 to account primarily for cash flows generated in the past couple quarters and slightly higher profit expectations for 2022. The fair value implies a multiple of approximately 23 times fiscal 2022 expected earnings. After strong growth in the high teens on the top line and over 30% on the bottom line in fiscal 2021, Agilent’s growth trajectory to return to more normalized levels. Specifically, from fiscal 2021 to 2026, the expected 6% compound annual revenue growth, or within management’s 5% to 7% core revenue growth target. By end market from fiscal 2021 to 2026, Agilent’s growth to be led by biopharmaceuticals with 9% overall growth expected on strong biologic-related sales and solid growth in small molecules. The expect low- to mid-single-digit growth rates in Agilent’s other applied markets. On the bottom line, the adjusted EPS will rise roughly 11% compounded annually from fiscal 2021 to 2026, or well above sales growth primarily on margin expansion and share repurchases. The cost-control efforts to continue with the potential to improve margins primarily through expanding gross margins and control of the SG&A line. The expect share repurchase activities to account for about 200 basis points of Agilent’s annualized earnings growth prospects through 2026.

Bulls Say

  • Agilent’s innovation engine and cost control efforts have been on display through strong growth and margin expansion since spinning out its electronic measurement business Keysight in November 2014.
  • As a well-established leader in many of its core markets, regulatory concerns and customer familiarity with Agilent’s instrumentation and services can make market share gains for competitors difficult.
  • Agilent continues to increase its exposure to the sticky biopharmaceutical end market, including recent acquisitions in the emerging cell analysis field.

Company Description

Originally spun out of Hewlett-Packard in 1999, Agilent has evolved into a leading life sciences and diagnostics firm. Today, Agilent’s measurement technologies serve a broad base of customers with its three operating segments: life science and applied tools (45% of fiscal 2021 sales), cross lab (35% of sales consisting of consumables and services related to its life science and applied tools), and diagnostics and genomics (20%). Over half of its sales are generated from the biopharmaceutical, chemical, and energy end markets, but it also supports clinical lab, environmental, forensics, food, academic, and government-related organizations. The company is geographically diverse, with operations in the U.S. (34%) and China (20%) representing the largest country concentrations. 

(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

No-Moat ABF’s Fair Value Estimate reduced to GBX 2,200

Business Strategy & Outlook

Although the Associated British Foods’, or ABF’s, mass-apparel retail division– Primark–should deliver consistent growth through its expansion over the short term, supported by a reliable performance from the remaining largely commodified food divisions, the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to the no-moat rating.

Primark delivered a strong performance over the decade preceding the pandemic and to return to healthy growth rates in the short term. Its business model, which calls for low prices, high volumes, and large stores that offer an enjoyable shopping experience has proven popular with consumers and is likely to fare well in a period of significant cost of living challenges. Over the longer term, however, to see a gradual decline in like-for-like growth rates, and operating margins falling short of pre-pandemic heights. To increased competition, stemming largely from emerging digital-only players, and declining footfall on high streets as more retailers close down stores will hurt Primark’s model given the lack of an online business. These dynamics, along with the smaller store format planned as part of the expansion stand to reduce, Primark’s sales densities and consequently its operating leverage.

In its food businesses, ABF enjoys strong market positions across sugar, ingredients, and animal feed, however, a lack of differentiation for the bulk of the portfolio translates into single-digit operating margins and limited growth opportunities. Despite that, there are some pockets of growth that management is right to explore, such as specialized animal nutrition and an expansion into adjacent markets for its products, such as the alternative meat space for the yeast extracts.

The grocery unit produces food and beverage brands with little pricing power that do not occupy center-stage positions in supermarkets. Growth has been lagging the market, and the segment’s operating margin is significantly lower than that of larger, competitively advantaged consumer goods firms (10% versus midteens).

Fair value and Profit Drivers

The fair value estimate for Associated British Foods is GBX 2,200. The valuation implies a five-year top-line compounded annual growth rate of 6.5%, higher in the near term as Primark rebounds from the COVID-19 disruption. The margins to recover to pre-pandemic levels by the fiscal year 2023, but the steady-state operating margin of 8.8% does not imply an upside to historical averages. The looming competition in the mass apparel space and a gradual deterioration of Primark’s best-in-class operating leverage will impact the retail segment’s margin and limit its contribution to the group’s operating profit to 58% by 2026, consistent with the pre-pandemic share, despite its superior growth prospects. An important driver of the valuation is the assumption regarding the speed of expansion for the Primark chain. Management is targeting a total of 530 stores by September 2026, which implies a significant step up in the average number of store openings to around 30 per year starting with the fiscal year 2023, from an average of 19 over the decade leading up to the pandemic. Although the plan features smaller stores across the US and Iberia, it is overly ambitious given previous guidance misses. As per forecast of 500 stores by 2026 assumes an approximately 20% lower store and floorspace net addition, consistent with the historical under delivery. In the sugar business, the ABF to gradually step- up production to approach 3.5 million metric tons by fiscal 2026. The cost efficiencies due to higher volume production and capacity utilization will partially compensate for lower sugar prices, but the unit’s operating margin should still stay below historical highs to a more sustainable 7% level by 2026, which would translate into a normalized contribution of 8% of the group’s operating profits. In the other segments (agriculture, ingredients, and grocery), the moderate top-line growth (1%-3.5%) and marginal profitability improvements in the ingredients and agriculture segments driven by mix tailwinds as management gradually reposition the portfolio towards faster-growing, margin accretive segments such as specialty animal feed and enzymes.

Bulls Say

  • Primark is in the expansion phase and new store additions will likely drive earnings growth for years to come.
  • Given Primark’s rock-bottom prices and management’s commitment to maintaining price leadership, the retailer is well-positioned to navigate periods of high inflation and appeal to cash-strapped consumers.
  • ABF’s sugar segment is benefiting from Illovo’s strong profitability bedrock, the result of its growing downstream operations and strong regional and local market position.

Company Description

Associated British Foods is a diversified international retail, food, and ingredients group with 130,000 employees and operations in 50 countries across Europe, southern Africa, the Americas, Asia, and Australia. The group sells branded grocery products, grows and processes sugar, supplies farmers with crop input and animal feed, and runs the popular Primark clothing retail chain. It also supplies ingredients like bakers’ yeast, enzymes, lipids, and cereal specialties. Some 40% of sales are in the U.K., and Primark generates more than half of the firm’s operating profit.

(Source: Morningstar)

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