Author: lvc-admin

Categories
Technology Stocks

ABC saw 1H22 revenue increase +8% YoY driven primarily by strong construction

Investment Thesis:

  • Trading on 2-Yr forward blended PE-multiple of 11.0x and dividend yield of 6.0% represents good value at these levels.
  • Macro conditions remain uncertain in key regions. 
  • Strong pipeline of infrastructure projects over the next 2 years is a positive but timing and execution is a risk.
  • Solid balance sheet position provides some flexibility to the Company to pursue growth.
  • Leading positions as a lime producer, concrete products producer and cement and clinker supplier.
  • Outlook for lime looks relatively positive with higher infrastructure projects and resource sector activity
  • Cost-out and vertical integration (cement) programs expected to deliver cost benefits that exceed cost headwinds of $10m in FY21. 

Key Risks:

  • Softer sales volume than expected. 
  • Loss of market share to competitors or imports and pressure on pricing. 
  • Softer than expected pricing increases. 
  • Higher than expected energy prices. 
  • Execution risk in relation to Company’s cost-out and vertical integration strategies.
  • Deterioration of A$ relative to other currencies. 
  • Unfavorable weather impacts. 

Key Highlights:  

  • Management did not provide any quantitative guidance, however, expects; Growth in underlying earnings for 2H22, driven by increased contributions from cement, concrete, aggregates, masonry, JV’s and recent business acquisitions.
  • Demand for products from the residential, infrastructure, commercial and mining sectors to remain strong in 2H22.
  • Further out-of-cycle price increases to help actively manage inflationary pressures, with pricing traction key to the ability to deliver.
  • Strong demand for cement despite building and project completion timelines being extended due to materials and labour shortages.
  • Lime volumes staying stable in 2H22 vs 1H22, however, lime pricing improving with new customers seeking reliable domestic supply due to supply chain disruptions experienced by importers.
  • Strong demand for concrete and aggregates to the end of the year, and if weather abates in NSW, will be buoyed by the commencement of delayed projects and flood recovery works, however, softness in retail spending to impact masonry demand, with increased interest rates impacting household discretionary spend.
  • FY22 capex investment (excluding business acquisitions) of ~$300m, including circa 40% for the Kwinana Upgrade project.
  • Proceeds of >$20m for FY22 from land sales for Rosehill and Kewdale.
  • Gross cost savings of circa $10m for FY22. 
  • Capital management. Net debt increased +34.5% YoY to $553.9m, representing a leverage ratio of 2x underlying EBITDA (vs 1.5x in pcp) and gearing of 43.2% (up +990bps), both towards the top-end of company’s credit metrics target range, however, well within banking covenants.
  • Return on Funds Employed (ROFE) declined -170bps YoY to 9.3%, well below pre-tax WACC of 11.4%, with management expecting long-term ROFE improvement coming from Kwinana Upgrade project cost savings, development of downstream land investments, ongoing cost-outs and low-cost gas supply.
  • The Board declared a fully franked interim dividend of 5cps, down -9.1% YoY and representing a payout ratio of 70.6% of underlying earnings (excluding property profits), within the Board’s target range of 65-75%. 
  • Inflation eating into margins. Despite the cost reduction program delivering $7.5m in gross savings for 1H22, ongoing cost headwinds in areas including pallets, shipping, labour, power, fuel and raw material prices, continued to eat into margins with EBITDA margin declining – 110bps YoY to 16.6%, as product repricing continues to lag cost inflation. 

Company Description:

Adbri Ltd (ABC) is an Australia listed construction materials and liming producing company. ABC is Australia’s leading (1) lime producer in the minerals processing industry; (2) concrete products producer; and (3) cement and clinker importer. ABC is Australia’s number two cement and clinker supplier to the Australian construction industry and number four concrete and aggregates producer. 

(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.

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

AGL’s FY22 underlying NPAT declined -58% YoY primarily due to coal plant outages

Investment Thesis:

  • Energy margins bottom out and could potentially start to improve (higher customer and volume numbers).
  • Strong cash flow business which provided flexibility to deploy cash in growth opportunities and capital management. 
  • On-going focus on costs and digitalization should support margins. 
  • Potential capital management initiatives (e.g., buyback).
  • Demerger into AGL Australia and Accel may unlock shareholder value.
  • Potential favorable changes to the regulatory environment.
  • Potential M&A – AGL has already received a takeover bid at $7.50 per share which was rejected by the AGL Board. 

Key Risks:

  • Competitive pressures leading to margin erosion. 
  • Cost pressure and fuel supply issues lead to margin erosion. 
  • Increase in supply leading to depressed prices.
  • Regulatory risk (policy uncertainty), such recent regulation in electricity markets [ Victorian Default Offer (VDO) and Default Market Offer (DMO)].
  • Unscheduled shutdowns impacting earnings. 

Key Highlights:

  • Underlying EBITDA declined -27% YoY to $1.22bn and underlying NPAT declined -58% YoY to $225m, reflecting the expected step down in Trading and Origination Electricity earnings due to lower realized contracted and wholesale customer prices, increased costs of capacity to cover periods of peak electricity demand, absence of the Loy Yang Unit 2 insurance proceeds recognized in FY21, increased residential solar volumes and margin compression via customer switching.
  • Net cash from operations declined -2% YoY to $1.227bn with lower underlying EBITDA partially offset by a strong working capital outcome which saw cash conversion improve +27% YoY to 123%, however, management warned of a hit to cash conversion rate in FY23.
  • Capital management. Strong balance sheet with net debt declining -11.2% to $2,662m, reducing gearing by -590bps to 29.2%, giving company significant headroom to debt covenant of gearing <50%.
  • Board declared a final unfranked dividend of 10cps, equating to total FY22 dividends of 26cps, down -65% YoY and equating to a payout ratio of 75% vs 87% pcp.
  • Opex savings target exceeded. The Company saw opex (excluding D&A) decline -7.6% YoY as management delivered FY22 recurring savings of ~$158m (vs target of $150m), including initial benefits from structural review and reduction in corporate costs. However, management warned that it expects a small step up in operating costs for FY23, albeit being lower than CPI after adjusting for the non-recurring benefits in FY22.
  • Outlook. Management announced it will provide FY23 guidance in late-September in conjunction with the initial outcomes of the review of strategic direction, however, expects FY23 earnings to remain resilient amidst the current challenging in the energy industry and market conditions, underscored by the strength of AGL’s large and diversified customer base, low-cost baseload generation position supported by strong fuel supply arrangements, robust risk management, with prudent margin management ensuring retail strength and stability in a highly volatile market, with the Company largely hedged for FY23 and well positioned from FY24 to benefit from sustained higher wholesale electricity pricing (Refer to Figure 4 for forward pricing curve) as historical hedge positions progressively roll-off. 

Company Description:

AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.

(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.

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

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

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

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

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

Categories
Commodities

(AKE) reported positive FY22 results despite the ongoing impacts of Covid-19

Investment Thesis:

  • Strong and solid fundamentals with robust lithium demand and prices to persist. As expected, lithium demand growth to support pricing and be driven by: (1) long lead times for lithium mines and hence potential short-term supply constraints; and (2) growth in new electric vehicle and hybrid vehicle sales especially in China. 
  • High quality assets operated by a solid management team with appropriate expertise. 
  • Expansion of Olaroz is expected to significantly increase capacity of lithium carbonate, resulting in strong cash flow generation. 
  • Improving production and operational efficiency at Mt Cattlin in the short term should result in significant cash flow generation. 
  • Development of Sal de Vida, as the asset could add more than $3.40 per share to AKE’s value.
  • Development of the James Bay lithium pegmatite project in the long term.
  • Solid balance sheet. 

Key Risks:

  • Commodity price volatility. There is no formal market for lithium with the pricing of lithium products determined by private negotiation between producer and end user. 
  • AUD/USD movement. Prices for lithium products are denominated in US dollars, so earnings translation into Australian dollars can be affected by wide fluctuations US/A$ cross rate. 
  • Adverse weather impacts. The Company’s projects are located in areas that can be subjected to severe weather events such as snow falls, which may adversely impact the company’s operations and earnings. Lack of exploration success. Despite AKE already successfully identifying resources and reserves, geological complexities may arise that may inhibit the future inclusion of further resources and reserves.
  • Metal processing issues. Any issues with the metallurgical processing equipment may impact the company’s earnings.
  • Stability of government policy. Whilst the political climate where AKE assets are based are currently stable, to remain cognizant of any changes especially nationalization of assets and increased taxes. Moreover, the VAT refund received by AKE.
  • Execution risk/processing issues. Any issues with the pond’s system, processing or execution risks may impact the company’s earnings. 

Key Highlights:

  • Relative to the pcp and in US$: Despite the ongoing impacts of Covid-19, revenue of $769.8m was driven by record annual production volumes and operating profits at Mt Cattlin and Olaroz, improved and higher prices, strong cost control, and the merger with Galaxy Resources. Olaroz contributed $292.8m, whilst Mt Cattlin (in 10-months), added $451.9m in revenue.
  • Mt Cattlin saw record revenue from sales of 200,715 dry metric tons (dmt) of spodumene concentrate at an average price of $2,221/tone CIF2 for the period from 25 August 2021. Gross cash margin of 80%.
  • AKE achieved record revenue from Olaroz, up +341% to $293m on sales of 12,512 tons of lithium carbonate with average pricing increasing by 370% to $23,398/t FOB4. The gross profit margin was 82%.
  • EBITDAIX of $513.1m and consolidated NPAT of $337.2m (versus net loss of $89.5m in FY21). NPAT includes one off charges of $12.8m for Galaxy acquisition costs, an inventory uplift on purchase price allocation related to the merger of $12.4m, $13.4m related to amortization of customer contracts due to purchase price allocation, gains of $32.0m from financial instruments, and foreign exchange losses of $9.6m. Net finance costs were $13.8m.
  • Net assets increased to $3,081m as at FY22- end (vs $725m at FY21-end) including cash balances of $664m (vs $258m in FY21). The increase in net assets and cash of $2,356m and $406m was due to the Galaxy merger transaction.
  • Management highlighted strong cash generation and existing cash balance is expected to fully fund development projects. Total capex totalled $261.4m (vs $97.6m in FY21) and the Mizuho Stage 1 and Pre-export loan facilities were reduced by ~$33.7m.
  • Development Highlights. Olaroz Stage 2 reached over 91% completion and first production remains anticipated for late 2H CY22. Management stated, “successful completion of this project will deliver material new production from H2 FY23 onwards”.
  • Construction of the Naraha lithium hydroxide plant in Japan was completed, with first production expected in early 4Q CY22. Management expects that once product qualification is complete, this plant will provide AKE with exposure to the high value lithium hydroxide market. 
  • Construction at Sal de Vida began in January 2022, with first production expected by 2H CY23.
  • Feasibility Study and Maiden Ore Reserve for James Bay was released in December 2021. 

Company Description:

Allkem Ltd (AKE), was formed following the merger of ASX-listed lithium AKE operates as a specialty lithium chemicals company with lithium brine and borax operations in Argentina, a hard-rock lithium operation in Australia and a lithium hydroxide conversion facility in Japan. 

(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.

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

SoFi has used a mixture of internal development and external partnerships to rapidly expand the services offered to its clients

Business Strategy & Outlook

SoFi targets young, high-income individuals who may be underserved by traditional full-service banks. The company is purely digital and engages with its clients exclusively through its mobile app and website. Unlike existing digital banks, which generally have limited product offerings, SoFi offers a full suite of financial services and products that includes everything from student loans to estate planning. The intent is that this will allow its customers to structure the entirety of their finances around SoFi, and the company’s reward structures are designed to encourage its clients to do so. By acting as a one-stop shop for its customers’ finances, SoFi intends to create powerful cross-selling advantages that will reduce its cost of acquisition and give it a competitive advantage. In order to meet this goal, SoFi has used a mixture of internal development and external partnerships to rapidly expand the services offered to its clients. The use of partnerships has allowed SoFi to build out its product offerings with impressive speed, transforming SoFi from being a student and personal loan company into a one-stop shop for financial services in just a few years.

While SoFi has offered its clients banking services for some time, the company itself has only recently become a true bank. Having successfully gained a national banking charter in early 2022, SoFi is now able to retain deposits into its SoFi Money accounts and use them to support its lending operations. Prior to SoFi obtaining a charter, deposits into these accounts were swept out to SoFi’s partner banks, leaving SoFi to finance its lending arms entirely though external financing. Access to these lower-costs funds will give SoFi the opportunity to drive net interest income growth as the firm leans into its unique model for digital banking. Since receiving its charter, SoFi’s deposit base and loan book have grown rapidly, with total deposits reaching over $4.9 billion at the end of September 2022 from just over $1 billion at the end of March 2022. SoFi’s success in deposit gathering has supported significant net interest income growth, helping to offset the negative impact of student loan forbearance.

Financial Strengths

With a strong balance sheet and modest credit risk from its lending operations, SoFi is in a good financial position. During its SPAC merger, SoFi raised $1.2 billion through PIPE financing, which came in addition to the $800 million in liquidity that the company acquired during the SPAC merger itself. At the end of September 2022, the firm had over $1.1 billion in unrestricted cash and investment securities, giving it ample financial resources. SoFi does not pay a dividend or make any kind of shareholder returns. This is expected given where SoFi is in its corporate life cycle. SoFi will not commit itself to making dividend payment or to repurchase shares at any point in the immediate future as the company is far more likely to reinvest any excess capital into its business. Additionally, the company’s financial reserves should be more than sufficient to cover any credit losses it may experience. SoFi either sells or securitizes the loans it originates. While historically SoFi has retained some of the securitizations it has made, recently the company has moved away from this practice and many of the loans it has on its books are “float” from its lending business. In other words, loans that have been made but not yet sold through. Because these loans are recently originated, SoFi experiences limited credit losses, and the company’s write-off expense is low relative to the size of its balance sheet. With low credit losses and substantial financial assets at its disposal SoFi is in a good position financially and should have plenty of flexibility to invest in its business as it sees fit. While SoFi is unprofitable and will likely remain so for the near future, the firm is in a good financial position to withstand future losses.

Bulls Say

  • SoFi has managed to rapidly launch an impressive array of products and services, and the company remains the only firm offering a digital full-service model.
  • SoFi has enjoyed rapid growth driven by the introduction of new products and broader adoption of digital banking.
  • The company’s acquisition of Galileo was likely a major win as the number of accounts using Galileo’s platform has risen sharply since the purchase.

Company Description

SoFi is a financial services company that was founded in 2011 and is currently based in San Francisco. Initially known for its student loan refinancing business, the company has expanded its product offerings to include personal loans, credit cards, mortgages, investment accounts, banking services, and financial planning. The company intends to be a one-stop shop for its clients’ finances and operates solely through its mobile app and website. Through its acquisition of Galileo in 2020 the company also offers payment and account services for debit cards and digital banking.

(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

Deere has exposure to end markets with attractive tailwinds

Business Strategy & Outlook

Deere offers customers an extensive portfolio of agriculture and construction products. It will continue to be the leader in the agriculture industry and one of the top players in construction. For over a century, the company has been the pre-eminent manufacturer of mission-critical agricultural equipment, which has led to its place as one of the world’s most valuable brands. Deere’s strong brand is underpinned by its high-quality, extremely durable, and efficient products. Customers in developed markets also value Deere’s ability to reduce the total cost of ownership. The company’s strategy focuses on delivering a comprehensive solution for farmers. Deere’s innovative products target each phase of the production process, which includes field preparation, planting and seeding, applying chemicals, and harvesting. The company also embeds technology in its products, from guidance systems to seed placement and customized spraying applications. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Deere and its dealers provide, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed.

Deere has exposure to end markets with attractive tailwinds. In agriculture, demand for corn and soybeans will be strong in the near term, largely due to robust demand from China and tight global supplies. On the construction side, the company will benefit from the $1.2 trillion infrastructure deal in the U.S. The country’s roads are in poor condition, which has led to pent-up road construction demand. Looking further out, the precision ag will be an incremental value driver for Deere. The company recently closed the precision ag loop (in terms of capabilities) with the introduction of its autonomous 8R tractor. The precision ag presents an over-$6 billion sales opportunity for the ag leader this decade.

Financial Strengths

Deere maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of fiscal 2022, coming in at 0.7. Total outstanding debt, including both short- and long-term debt, was nearly $10.6 billion. Deere’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of fiscal year-end 2022 stood at $3.7 billion on its industrial balance sheet. Deere’s ability to tap into available lines of credit to meet any short-term needs looks comfortable. Deere has access to $5.7 billion in credit facilities. Deere can generate solid free cash flow throughout the economic cycle. The company can generate $8 billion in free cash flow in the midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, management is determined to rationalize its footprint by reducing the number of facilities in mature markets. If successful, this will put Deere on much better footing from a cost perspective, further supporting its ability to return cash to shareholders. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $37 billion in fiscal 2022, along with $42 billion in finance receivables and $1 billion in cash. Deere enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

  • Higher crop prices encourage farmers to grow more crops and will lead to more farming equipment purchases, substantially boosting Deere’s revenue growth.
  • Deere will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand has eased, encouraging farmers to refresh their machine fleet.
  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, benefiting Deere.

Company Description

Deere is the world’s leading manufacturer of agricultural equipment, producing some of the most recognizable machines in the heavy machinery industry. The company is divided into four reportable segments: production and precision agriculture, small agriculture and turf, construction and forestry, and John Deere Capital. Its products are available through an extensive dealer network, which includes over 1,900 dealer locations in North America and approximately 3,700 locations globally. John Deere Capital provides retail financing for machinery to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Deere product sales.

(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

Cochlear Ltd (COH) reported strong 1H22 Results

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Investment Thesis

  • Attractive market dynamics – growing population requiring hearing aids, improving health in EM providing more access to devices such as hearing aids and relatively underpenetrated market. There remains a significant, unmet and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long‐term sustainable growth of COH.
  • Market leading positions globally.
  • Direct-to-consumer marketing expected to fast track market growth.
  • Best in class R&D program (significant dollar amount) leading to continual development of new products and upgrades to existing suite of products.
  • New product launches driving continued demand in all segments.
  • Attractive exposure to growth in China, India and more recently Japan.
  • Solid balance sheet position.
  • Potential benefit from Australian tax incentive. Subject to successful passage of legislation, the patent box tax regime for medical technology and biotechnology should encourage development of innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17%, with the concession applying from income years starting on or after 1 July 2022.

Key Risks

  • Product recall.
  • Sustained coronavirus outbreak which delays recommencement of hospital operations in China.
  • R&D programs fail to deliver innovative products.
  • Increase in competitive pressures.
  • Change in government reimbursement policy.
  • Adverse movements in AUD/USD.
  • Emerging market does not recoup – significant downside to earnings.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenue increased +12% to $815m driven by demand for sound processor upgrades and new acoustic implant products, despite Cochlear implant revenue continuing to be impacted by Covid‐related restrictions which caused lower overall operating theatre capacity. Cochlear implant units increased +7% to 18,598. 
  • Statutory net profit of $169m includes $12m in innovation fund gains after‐tax. Underlying net profit was up +26% to $158m, driven by strong sales growth and improved gross margin, with some benefit from lower‐than‐expected operating expenses. 
  • The Board declared an interim dividend of $1.55 per share, up +35% and equates to a payout of 65% of underlying net profit (up from 61% in the pcp). Management expects dividend payout to be around 70% for the full year, in line with the target payout. 
  • COH’s balance sheet remains strong with net cash of $506m and operating cash flows sufficient to fund investing activities and capex.
  • Cochlear implant units increased +7% to 18,598 units, driven by strong growth in emerging markets (up +30%), offsetting a decline in developed markets (down -2%). Revenue was up +2% to $457.9m, with a mix shift to the emerging markets. For developed markets, volumes were down -2%, but overall are tracking ahead of pre‐Covid levels with continuing variability in performance across countries in response to Covid. For the emerging markets, unit volumes overall increased around +30% with a strong recovery from Covid‐related surgery deferrals experienced across most countries. Surgeries in a few countries, including China, are trading above pre‐Covid levels. India and Brazil are recovering well although volumes are still materially below pre‐Covid levels. 
  • Revenue increased +21% to $256.5m, driven by a growing recipient base. Sound processor upgrade revenue saw a strong growth due to pent-up demand following the restricted access to clinics during Covid lockdowns. 
  • Revenue increased +40% to a record $100.9m, reflecting strong demand for new products and a recovery from Covid‐related surgery delays. The Cochlear Osia 2 System achieved CE Mark accreditation in 2H21 and is being rolled out across Western Europe in 1H22. The Cochlear Baha 6 Max Sound Processor was launched in 4Q21 and is driving strong demand for sound processor upgrades across all regions.

Company Description

Cochlear Ltd (COH) researches, develops and markets cochlear implant systems for hearing impaired people. COH’s hearing implant systems include Nucleus and Baha and are sold globally. COH has direct operations in 20 countries and 2,800 employees.

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

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

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate. Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

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

Categories
Commodities Trading Ideas & Charts

Dominion has accelerated its capital expenditure growth program

investment stockbroker risk analysis using multiple devices. Financial analysis using phone app and laptop. Market trading profit.

Business Strategy & Outlook

After exiting its oil and gas exploration and production business, selling and retiring its no-moat merchant generation, and selling its Questar assets, Dominion’s investors are left with a predominantly regulated utility, which has been in the best interests of investors. Like its peers, Dominion has accelerated its capital expenditure growth program. Over the next five years, management plans to invest $37 billion of growth capital, with nearly 90% focused on decarbonization. Favorable regulatory mechanisms mean that over 75% of Dominion’s investments are eligible for timely cost recovery from customers, reducing regulatory lag and improving free cash flow. In Virginia, the company’s most important jurisdiction, over 90% of its planned investments are eligible for rate riders at higher allowed returns on equity. 

Over the next 15 years, Dominion forecasts $73 billion of capital investment opportunities, including up to $21 billion for offshore wind farms in the U.S. Unlike other offshore wind projects, Dominion’s will be rate-regulated, mitigating investor risk for a project with greater execution risk than onshore renewable energy development. Investors must carefully watch for cost increases at its offshore project. While costs will rise for the project, there remains significant headroom for the $125 per megawatt hour allowed regulated cost cap. Costs over the cap would require regulatory approval. A recent settlement with key counterparties should help resolve a proposed capacity factor guarantee, if approved. Roughly 90% of earnings will be from regulated electric and gas utilities with constructive state regulation in Virginia, Utah, Ohio, and the Carolinas. The balance of earnings will come from contracted assets with long-term agreements with mostly investment-grade counterparties that provide steady, regulated-like returns. In November, management unexpectedly announced a strategic review of the company’s current business mix and capital allocation. Management did not indicate a potential outcome or direction of the review, creating what is unnecessary investor uncertainty.

Financial Strengths

Even with its large capital expenditure program, Dominion maintains a strong balance sheet and an investment grade credit rating. Dominion is to maintain a capital structure in line with regulatory requirements at its utility subsidiaries. Total debt/capital was 58% at year-end 2021, and it expects to remain below 60%. With $37 billion in expected growth capital expenditures over the next five years, Dominion will be a frequent debt issuer. Exclude $3 billion of growth capital from the estimate as management will look to mitigate customer bill impacts while potentially lengthening the trajectory of its capital investment program. Dominion’s debt maturity schedule is manageable, and Dominion will be able to refinance its debt as it comes due. Dominion surprised investors with a 33% dividend cut in late 2020 after the company abandoned the Atlantic Coast Pipeline and decided to exit its gas pipeline business. Its current 65% payout ratio is in line with peers, and 6% dividend is to grow. 

Bulls Say

  • Dominion’s dividend yield and earnings growth could deliver high-single-digit total annual returns for conservative investors for the foreseeable future. 
  • Growth capital investments focused on renewable energy and carbon reduction are estimated to be $73 billion over the next 15 years and should provide solid earnings and dividend growth for the foreseeable future. 
  • Public support for renewable energy and Virginia legislation has resulted in Dominion planning to build the largest wind farm in the U.S.

Company Description

Based in Richmond, Virginia, Dominion Energy is an integrated energy company with over 30 gigawatts of electric generation capacity and more than 90,000 miles of electric transmission and distribution lines. Dominion owns a liquefied natural gas export facility in Maryland and is constructing a 5.2 GW wind farm off the Virginia Beach coast.

(Source: Morningstar)

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies

Business Strategy & Outlook

Differentiating itself from peers big and small, ConocoPhillips has laid out a 10-year plan for restrained investment, steady growth, improving returns, and, importantly, returning cash to shareholders. Its strategy makes Conoco a compelling option in the energy sector, given its commitment to capital restraint and clear policy on return of cash to shareholders. Its low-cost portfolio gives it high return investment options to grow in a rising price environment while its strong financial position keeps the dividend safe in a downcycle. Central to its plan is a commitment to maintain capital spending at $8 billion on average annually while returning 30% of operating cash flow to shareholders per year through a three-tier capital return program consisting of buybacks, an ordinary annual dividend, and a variable component. Through high-grading and cost improvements, the company has reduced the oil price necessary to earn a 10% return on produced resources in its plan to $28/ barrel.

Its growth plan rests largely on its unconventional assets, specifically its Permian position, which became the company’s largest position with the acquisition of Concho Resources. Permian resources constitute over half of the planned produced resources in the 10-year plan. ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies. Conoco further tilted its portfolio to U.S. unconventional by acquiring Shell’s Permian shale assets in a highly accretive deal. While the company holds acreage in the Bakken and Eagle Ford, production growth in both these regions will likely be limited. Outside of the U.S. unconventional portfolio, volumes will remain flat with growth in Alaska and Canada offsetting declines internationally. Growth in Canada will come from the Montney, where Conoco plans to leverage its unconventional experience. New volumes in Alaska will come from the Willow project, dependent on a clarified regulatory environment.

Financial Strengths

During the last year, debt has fallen from the peak levels realized after the oil price decline in 2020 and the Concho acquisition. Total debt amounted to $17.0 billion in the third quarter of 2022, implying a net debt/capital ratio of 26%. Management will likely continue to reduce gross debt during the next five years and may refinance high-coupon debt as part of debt restructuring, depending on cost, as it aims to maintain an A rated balance sheet. The debt/EBITDA is to remain at or below 1.0 throughout the remainder of the forecast. ConocoPhillips maintains its plans to differentiate itself by focusing on shareholder returns. While it still aims to return 30% of operating cash flow to shareholders, management instated a three-tier capital return program to preserve flexibility in anticipation of oil price volatility. The first tier consists of an ordinary dividend that Conoco plans to increase annually in line with the broader market. The second tier is share repurchases, while the third tier is a variable dividend that is staggered, resulting in eight cash distributions per year when declared. In, 2022, Conoco expects to return $15 billion to shareholders. Capital spending in 2022 is expected to be $8.1 billion. Guidance is for capital spending to remain at about $8 billion through 2024 and over $8 billion by 2031.

Bulls Say

  • Large positions in the Permian, Eagle Ford, and Bakken offer low-cost liquids growth with wider margins, lower risk, and higher returns than international operations. 
  • ConocoPhillips has reduced its capital requirements so it can maintain its production and pay its dividend at less than $40/barrel oil. U
  •  Over the long term, management does not plan to increase activity with oil prices, instead directing excess cash flow toward repurchases with a payout target of 30% of cash flow.

Company Description

ConocoPhillips is a U.S.-based independent exploration and production firm. In 2021, it produced 1.0 million barrels per day of oil and natural gas liquids and 3.2 billion cubic feet per day of natural gas, primarily from Alaska and the Lower 48 in the United States and Norway in Europe and several countries in Asia-Pacific and the Middle East. Proven reserves at year-end 2021 were 6.1 billion barrels of oil equivalent.

(Source: Morningstar)

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies

Business Strategy & Outlook

Differentiating itself from peers big and small, ConocoPhillips has laid out a 10-year plan for restrained investment, steady growth, improving returns, and, importantly, returning cash to shareholders. Its strategy makes Conoco a compelling option in the energy sector, given its commitment to capital restraint and clear policy on return of cash to shareholders. Its low-cost portfolio gives it high return investment options to grow in a rising price environment while its strong financial position keeps the dividend safe in a downcycle. Central to its plan is a commitment to maintain capital spending at $8 billion on average annually while returning 30% of operating cash flow to shareholders per year through a three-tier capital return program consisting of buybacks, an ordinary annual dividend, and a variable component. Through high-grading and cost improvements, the company has reduced the oil price necessary to earn a 10% return on produced resources in its plan to $28/ barrel.

Its growth plan rests largely on its unconventional assets, specifically its Permian position, which became the company’s largest position with the acquisition of Concho Resources. Permian resources constitute over half of the planned produced resources in the 10-year plan. ConocoPhillips stands to benefit from Concho’s expertise in the Permian while deriving $1 billion in synergies. Conoco further tilted its portfolio to U.S. unconventional by acquiring Shell’s Permian shale assets in a highly accretive deal. While the company holds acreage in the Bakken and Eagle Ford, production growth in both these regions will likely be limited. Outside of the U.S. unconventional portfolio, volumes will remain flat with growth in Alaska and Canada offsetting declines internationally. Growth in Canada will come from the Montney, where Conoco plans to leverage its unconventional experience. New volumes in Alaska will come from the Willow project, dependent on a clarified regulatory environment.

Financial Strengths

During the last year, debt has fallen from the peak levels realized after the oil price decline in 2020 and the Concho acquisition. Total debt amounted to $17.0 billion in the third quarter of 2022, implying a net debt/capital ratio of 26%. Management will likely continue to reduce gross debt during the next five years and may refinance high-coupon debt as part of debt restructuring, depending on cost, as it aims to maintain an A rated balance sheet. The debt/EBITDA is to remain at or below 1.0 throughout the remainder of the forecast. ConocoPhillips maintains its plans to differentiate itself by focusing on shareholder returns. While it still aims to return 30% of operating cash flow to shareholders, management instated a three-tier capital return program to preserve flexibility in anticipation of oil price volatility. The first tier consists of an ordinary dividend that Conoco plans to increase annually in line with the broader market. The second tier is share repurchases, while the third tier is a variable dividend that is staggered, resulting in eight cash distributions per year when declared. In, 2022, Conoco expects to return $15 billion to shareholders. Capital spending in 2022 is expected to be $8.1 billion. Guidance is for capital spending to remain at about $8 billion through 2024 and over $8 billion by 2031.

Bulls Say

  • Large positions in the Permian, Eagle Ford, and Bakken offer low-cost liquids growth with wider margins, lower risk, and higher returns than international operations. 
  • ConocoPhillips has reduced its capital requirements so it can maintain its production and pay its dividend at less than $40/barrel oil. U
  •  Over the long term, management does not plan to increase activity with oil prices, instead directing excess cash flow toward repurchases with a payout target of 30% of cash flow.

Company Description

ConocoPhillips is a U.S.-based independent exploration and production firm. In 2021, it produced 1.0 million barrels per day of oil and natural gas liquids and 3.2 billion cubic feet per day of natural gas, primarily from Alaska and the Lower 48 in the United States and Norway in Europe and several countries in Asia-Pacific and the Middle East. Proven reserves at year-end 2021 were 6.1 billion barrels of oil equivalent.

(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

PTM continued to struggle with outflows primarily due to weak absolute investment returns

Investment Thesis

  • Trades on an attractive dividend yield. 
  • PTM is in a position to attract net inflows as value-oriented strategies may make a sustained comeback.
  • Further pressure can be seen on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becomes more of the norm). 
  • Change in management or investment management team. 
  • Industry consolidation could benefit PTM (potential M&A target).

Key Risks

  • Any significant outperformance across funds. 
  • Kerr Neilson’s departure from the Board could be disruptive. 
  • Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation. 
  • There are earnings risks to the downside from pressures on fees. 
  • Emergence of industry funds who are building in-house capabilities. 
  • PTM’s investment style becomes out of favour.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Total revenue declined -26.4% y/y to $232.8m, as fee revenue decreased -6.1% y/y to $252.7m, with -7.2% y/y decline in management fees (excluding performance fees) amid -8.5% y/y decline in average FUM to $21.4bn, partially offset by +67.5% y/y increase in performance fees to $6.7m, primarily from absolute return mandates and Asia strategy driven largely by the benefit of downside protection provided by short positions, and the company incurred $20.4m unrealised losses on seed investments vs $46.7m profit in pcp. 
  • Expenses increased +4.7% y/y to $86.1m, primarily driven by +3.9% y/y increase in staff costs reflecting increase in share-based payment expenses due to additional deferred equity granted to employees, and +16.7% increase in business development expenses which included the launch of the Platinum Investment Bond product (and its direct to-market proposition) and associated new campaigns, the growth in social media advertising, and third-party distribution costs. 
  • Underlying NPAT, which excludes gains and losses on seed investments (net of tax), declined -10.9% y/y to $118.2m. 
  • FUM declined -22.6% y/y to $18.2bn, driven by negative investment performance of $2.2bn, net fund outflows of $2.2bn and the net distribution paid to investors of $0.9bn. 
  • The Board declared a fully franked final dividend of 7cps, down -42% y/y, equating to ~9.8% annualized yield, taking the full year dividend to fully franked 17cps, down -29% y/y. 
  • The Board extended its on-market share buyback for upto 10% of issued share capital for further period of upto 12-months, commencing from 4th October 2022, intending to buy shares should the Board determine that PTM’s share price is trading at a significant discount to its underlying value. 
  • International Fund delivered absolute performance of -5.9% during the year, outperforming the MSCI AC World Net Index ($A) by +210 bps, as negative impact by contrarian view on inflation/loss making tech/EM/commodities was more than offset by benefit of downside protection provided by short positions. However, the fund continues to underperform the benchmark by -380bps and -200bps on a 5-year and 10-year basis, respectively, while delivering outperformance of +440 bps (p.a.) since inception.
  •  Asia Fund delivered 1-year absolute return of -14.5%, however, outperformed benchmark by +360 bps, returning to outperformance of +230 bps, +200 bps and +410 bps (p.a.) over 5-year, 10-year and since inception basis.

Company Description

Platinum Asset Management (PTM) is an ASX-listed, Australian based fund manager which specializes in investing in international equities. PTM currently manages ~A$18.2bn.

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