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Categories
Global stocks Shares

A2M delivered a solid FY22 result which was ahead of consensus expectations

Investment Thesis

  • Management appears to be working through the inventory issues which have impacted the Company in the recent past.
  • Potential to win market share in Australia and China.
  • Growing consumer demand for health and well-being globally.
  • Demand growth in China for premium infant formula products.
  • Expansion into new priority markets, aided by the capabilities of Fonterra.
  • US expansion provides new markets + opportunities.
  • Key patents provide a barrier to entry.
  • Takeover target – the Company was the subject of a takeover bid in 2015.

Key Risks

  • Management fails to meet its revised FY21 guidance. 
  • Chinese demand is underperforming market expectations. 
  • Disruption to A2 milk supply. 
  • Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
  • Expiration of A2M’s intellectual property rights may weaken or be infringed by competitors.  Withdrawal of A2M product from international markets due to market share loss or lack of market penetration.

Key Highlights

  • FY22 results highlights. Relative to the pcp: 
  • Group net revenue was up +19.8% YoY to $1,443.7m, driven by solid growth in IMF (up +11.9% YoY) and the inclusion of MVM. Excluding MVM, group revenue was up +11.2% YoY. The Company also made good progress on rebalancing inventory in the 2H22 vs 1H22. China & Other Asia revenue was up +24.5% YoY on the back of strong execution in China, strong China label IMF consumer demand, pricing benefits and positive movement in forex. 
  • Gross profit was up +30.2% to $663.5m, with % GM up +370 bps to 46.0% versus pcp given the cycling of stock write-downs in pcp, higher pricing, lower trade spends and favourable forex. Partially by higher raw materials and logistics costs. 
  • Strong top line growth and gross margin improvement drove FY22 EBITDA higher by +59% to $196.2m. EBITDA margin expanded by +330bps, driven by margin expansion in both ANZ (up +590bps) and China & Other Asia (up +700 bps). Marketing costs of $230.0m were up +36.3% YoY to support A2M’s China strategy execution. 
  • NPAT (including non-controlling interest) was up +42.3% YoY to $114.7m and EPS of 16.5cps was up +51.8%. 
  • Balance sheet is solid with a net cash position of $816.5m.
  • On-market share buyback. On the back of improving market conditions and strong operating performance, the Board announced a capital return of $150m via an on-market share buyback. It is expected to start at the end of September and be carried out over next 12-months.

Company Description

The a2 Milk Company Limited (A2M) sells a2 brand milk and related products. The company owns intellectual property that enables the identification of cattle for the production of A1 protein free milk products. It also sources and supplies a2 brand milk in Australia, the UK and the US, exports a2 brand milk to China, and distributes and markets a2 brand milk and a2 Platinum brand infant nutrition products in Australia, New Zealand, and China.

(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

Mineral Resources Ltd through Lockyer Deep will get a unique opportunity to secure its own energy supply

Investment Thesis

  • Strong competitive position with the company being one of world’s top five lithium producers, Australia’s fifth largest iron ore producer, largest landholder of onshore gas acreage in the Perth and Carnarvon Basins and world’s largest crushing contractor. 
  • Strong and solid fundamentals with robust lithium and iron ore demand and prices to persist.
  • High quality assets operated by a solid management team with appropriate expertise. 
  • Strong track record since 2006 ASX listing with the company growing total assets 50x to $7.8bn (+30% p.a. growth), delivering 21% p.a. ROIC, generating $7.5bn in underlying EBITDA (+25% p.a. growth) and not undertaking any dilutive capital raise. 
  • Strong shareholder returns with the company delivering 31% p.a. total shareholder returns since 2006 including +20% p.a. dividend growth. 
  • Solid balance sheet. 
  • Improved efficiency amid successful restructuring of the company into four operating pillars, Mining Services, Iron Ore, Lithium and Energy, with each operating as a separate business under separate management. 

Key Risks

  • Commodity price volatility. 
  • Deterioration in global iron ore supply & demand equation.
  • Unfavorable movements in AUD/USD.
  • Adverse weather impacting operations and earnings.
  • Lack of exploration success.
  • Metal processing issues due to issues with the metallurgical processing equipment.
  • Production delay or unscheduled site shutdown.

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

  • Revenue declined -8% y/y to $3.42bn, with Iron Ore down – 35% y/y as record iron ore exports of 19.2Mt were more than offset by lower realised prices amid sharpest fall in iron ore price in history, Mining Services up +22% y/y driven by record production volumes of 274Mt (up +10% y/y) and strong business momentum with five new contracts awarded and three contracts renewed, and Lithium up +509% y/y driven by higher prices. 
  • Underlying EBITDA declined -46% y/y to $1bn, with earnings negatively impacted in 1H22 by the steep decline in iron ore prices and widening discounts before stabilising in 2H22, however, with record lithium prices, first earnings from conversion of Mt Marion spodumene concentrate into lithium hydroxide and record growth in the Mining Services division, 2H22 performance remained strong. Controllable underlying EBITDA was up +9% y/y (refer to Figure 2)
  •  Operating cash flow declined -79% y/y to $344m, impacted by an increase in working capital relating to the restart of Wodgina, the increase in lithium pricing causing receivables to increase, and first earnings from conversion of the company’s spodumene concentrate into lithium hydroxide. 
  • Capex increased +7% y/y to $800m with 54% being growth capex, 40% sustaining capex and 6% exploration. 

Company Description

Mineral Resources Ltd (MIN), based out of Perth is focused on contractor crushing, mining services, iron ore and lithium operations. The company is the world’s largest crushing contractor with crushing contracts with some of the world’s largest mining companies in iron ore, gold and lithium operations, as well as its own operating assets.

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

Intuit has launched matchmaking systems, for both its small-business and consumer customers

Business Strategy & Outlook

Intuit is the giant behind U.S. small-business accounting software QuickBooks and do-it-yourself U.S. tax software TurboTax. With TurboTax and QuickBooks online sales having eclipsed their respective desktop sales, Intuit has now transitioned into a cloud-first company. Consequently, this has enabled Intuit to leverage customer data to streamline the user experience across disparate products and to natively market its offerings, in turn supporting switching costs and a network effect, which already is the backbones of Intuit’s wide moat. Over the past several years, Intuit has continued to innovate. It has realized the insecurity customers have in accomplishing the consequential tasks of tax filing or business accounting on software alone. In turn, for both its small-business and consumer customers, Intuit has launched matchmaking systems. In accounting, that means matching small businesses with accountants, and in tax, that means adding a human review to the filing process. Both matchmaking mechanisms pose meaningful opportunities ahead, in the form of increased customer retention on both sides and getting exposure to the assisted tax market. Now that Intuit is starting to reap the benefits of playing matchmaker, next up is to take big bets on QuickBooks complements, such as creating an omnichannel sales platform for small businesses. While these buildouts will take time, such direction is a good one to keep propelling the QuickBooks network effect as customers continue to demand all-in-one software to run their businesses.

Intuit’s business is not immune to risk, which lies particularly in IRS tax-filing regulation as well as the risk of new entrants in the small-business accounting space. Still, such risks would only gradually chip away at Intuit’s accounting and tax dominance, given the force of its network effect and its financial health equipping Intuit with the ability to turn the tides.

Financial Strengths

Intuit is in good financial health considering its net cash cushion of $1.8 billion as of fiscal 2021 and debt/EBITDA of 0.7 times as of fiscal 2021. This leaves Intuit able to meet the future capital expenditures, acquisitions, repurchases, and dividends needed to uphold the business and keep shareholders happy. Specifically, capital expenditure is to remain near 1.3% of revenue over the next five years. Additionally, dividends are to increase year to year over the next five years by approximately $0.60 per share per year from 2022 to 2026. The company will continue to make acquisitions, averaging to roughly $100 million per year from fiscal 2023 to fiscal 2026, after $12 billion in acquisitions in fiscal 2022 from purchasing Mailchimp.

Bulls Say

  • Intuit’s tax revenue should climb at a healthy rate as the company’s solutions intersect with the assisted tax-filing base.
  • QuickBooks should continue to see revenue growth from Intuit’s growing ecosystem capabilities.
  • Operating expenses should decrease as a percentage of revenue as the company realizes synergies between links among once disparate offerings and benefits from scale.

Company Description

Intuit is a provider of small-business accounting software (QuickBooks), personal tax solutions (TurboTax), and professional tax offerings (Lacerte). Founded in the mid-1980s, Intuit controls the majority of U.S. market share for small-business accounting and DIY tax-filing software.

(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

Marvell is the leader in DPUs and PAM-4 optics and the clear second in enterprise and cloud Ethernet

Business Strategy & Outlook

Marvell Technology has emerged as a strong competitor in the networking chip market following a multiyear business shift to acquisitions, divestitures, and organic development to focus on high-growth cloud, 5G, and automotive markets. Between data processing units, or DPUs, optical interconnect, and Ethernet solutions, Marvell has one of the broadest networking silicon portfolios in the world, and it is primed to steal market share from incumbent Broadcom with bleeding-edge technology. Marvell has exited its low-margin legacy markets of consumer hard disk drives and Wi-Fi chipsets to focus on its networking portfolio and used the acquisitions of Cavium, Avera, Aquantia, Inphi, and Innovium to expand out of its enterprise market niche into the rapidly growing data center and 5G markets. Marvell is the leader in DPUs and PAM-4 optics and the clear second in enterprise and cloud Ethernet. Marvell will use a hefty research and development budget to keep up with heavyweights like Nvidia, Intel, and Broadcom and set up top-line growth over the next 10 years, but it is less certain about its ability to earn excess returns on its investment while doing so. The firm hasn’t carved out an economic moat yet and are waiting to see it prove an ability to achieve growth and margin expansion organically.

Marvell’s recent financial history has been choppy as a result of CEO Matt Murphy’s aggressive overhaul of the business’ focus. The reorganization is squarely in the firm’s rearview mirror now and forecast midteens sales growth and immense margin expansion over the next 10 years. The trends toward disaggregated networks and merchant silicon, as well as 5G and data center build outs, will be secular tailwinds for Marvell. The combination of 2021 acquisitions Inphi and Innovium under Marvell’s umbrella will create a dangerous combination to Broadcom in the high-performance switching arena and enable share gains. Marvell has the right portfolio to invest aggressively in organic growth, but don’t rule out further acquisitions to bolster its competitiveness and enter adjacent markets.

Financial Strengths

Marvell to focus on deleveraging with its free cash flow, though there are no more acquisitions. As of Jan. 29, 2022, the firm carried $614 million in cash and $4.5 billion in total debt—largely taken on to acquire Inphi. Despite taking on significant debt in fiscal 2022, Marvell closed the fiscal year within its debt-to-adjusted EBITDA target range, at 1.6 times. Marvell is to stay leveraged but to pay down debt as it matures. The firm’s free cash flow generation to ramp up toward $2 billion a year by fiscal 2026, up from $650 million in fiscal 2021, as it exacts material operating leverage with top-line growth. Marvell will prioritize maintaining its dividend and won’t have to deleverage to fund maturing notes. Marvell also has a $750 million revolver available if it encounters a sudden liquidity crunch.

Bulls Say

  • Marvell has best-of-breed data processing units and optical interconnect products that should allow it to benefit from the rapidly growing cloud and 5G markets.
  • The combination of Inphi and Innovium under the Marvell umbrella could give it a technological advantage to Broadcom in high-performance networking.
  • Marvell to exact significant operating leverage as it incorporates acquisitions and adds volume to the top line.

Company Description

Marvell Technology is a leading fabless chipmaker focused on networking and storage applications. Marvell serves the data center, carrier, enterprise, automotive, and consumer end markets with processors, optical interconnections, application-specific integrated circuits (ASICs), and merchant silicon for Ethernet applications. The firm is an active acquirer, with five large acquisitions since 2017 helping it pivot out of legacy consumer applications to focus on the cloud and 5G markets.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

Williams-Sonoma has set its sights on expanding its total addressable market outside of furniture

Business Strategy & Outlook

Williams-Sonoma has carved out a solid position in the $750 billion global home category and the $80 billion U.S. business-to-business 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 reached $10 billion in sales in 2026. 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, the company isn’t 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, narrow-moat Williams-Sonoma could deliver an average adjusted return on invested capital, including goodwill, averaging 30% over the forecast, well ahead of the 9% weighted average cost of capital estimate.

Financial Strengths

Williams-Sonoma is in fine financial health, with plenty of cash on hand, ending its third quarter with $113 million on its balance sheet. Given the strong free cash flow it has been able to generate, the firm will not 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 will 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 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). Williams-Sonoma has repurchased $841 million in shares in the first three quarters of fiscal 2022. 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, the firm is to average around 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 billion in free cash flow (cash from operations minus capital expenditures) over the next five years.

Bulls Say

  • Less discretionary categories such as cookware and small appliances offer some resilience 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 Description

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 (189) 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 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

CrowdStrike’s business model, much like its SaaS peers, is premised on landing clients and subsequently expanding the dollars they spend

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

Business Strategy & Outlook

CrowdStrike is a leader in endpoint security, a necessity that aids in protecting devices and networks, and its threat hunting and breach remediation services are topnotch. While nefarious threat actors are continually upping their attack methodology to create zero-day attacks and are using the rise in entities using cloud-based resources to their advantage, CrowdStrike developed a methodology to turn any entities’ weak-point into better protection for all of its clients. CrowdStrike’s cloud-delivered endpoint protection platform continuously ingests data from all of its installed agents to enhance its protection solutions while keeping all users up to date against the latest threats. CrowdStrike’s customer base, revenue, and margins will experience profound growth throughout the 2020s as customers update their endpoint and workload security requirements in a hybrid-cloud world. CrowdStrike’s endpoint protection platform melded the needs of next-generation antivirus, threat intelligence, endpoint detection and response, and other features like managed threat hunting into a consolidated management plan. The lightweight agents, installed on physical devices like servers and laptops, or in virtual machines and cloud environments, are continually improving through its cloud database algorithms, becoming more capable as more data is received. CrowdStrike’s solutions establish customer switching costs and its network effect makes changing vendors a challenge as clients rely on having the latest threat protection. Alongside a persistent talent shortage in cybersecurity and firms attempting to manage disparate toolsets for various parts of endpoint security, entities are challenged to stay secure in networking environments without distinct security perimeters. CrowdStrike’s experts supplement these overwhelmed or short-staffed teams, and the firm also offers breach remediation and proactive testing services. CrowdStrike is in the early stages of becoming a market mainstay as businesses and governments rapidly adopt cloud-based endpoint protection platforms.

Financial Strengths

CrowdStrike is a financially sound company that will be able to generate solid free cash flow and expand its margin profile throughout the 2020s. CrowdStrike had its initial public offering in June 2019 and has historically operated at a loss on a GAAP basis. CrowdStrike’s capital deployment efforts true to a land-and-expand strategy, whereby CrowdStrike initially has elevated sales and marketing expenses to gain a customer cohort before expanding its revenue per customer while lowering its operating costs per customer (on a revenue percentage basis). CrowdStrike can benefit from cross-selling and up-selling tangential products to its existing base and new clients, while also converting breach remediation service clients to be product customers. As of the end of fiscal 2022, CrowdStrike had $2.0 billion of cash, cash equivalents, and marketable securities and $740 million of debt. With a strong balance sheet and free cash flow generation, CrowdStrike is to pay its obligations on time.

Bulls Say

  • CrowdStrike’s innovative endpoint security solutions, delivered as a platform, are quickly attracting customers as clients want to consolidate their myriad legacy security tools. Its threat remediation services are a powerful tool in landing new subscription clients.
  • After landing a client, CrowdStrike can gain significant margin leverage via the cross-selling and up-selling of additional security modules.
  • Larger firms, with much longer operating track records versus CrowdStrike, have been adding endpoint security into their portfolios that can disrupt technology partnerships and go-to-market strategies.

Company Description

CrowdStrike Holdings provides cybersecurity products and services aimed at protecting organizations from cyberthreats. It offers cloud-delivered protection across endpoints, cloud workloads, identity and data, and threat intelligence, managed security services, IT operations management, threat hunting, identity protection, and log management. CrowdStrike went public in 2019 and serves customers worldwide.

(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

Huntington returned to the acquisition front in a big way in 2016 with the purchase of FirstMerit

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

Business Strategy & Outlook

Huntington Bancshares did not fare well in the aftermath of the financial crisis, largely because of the poorly timed acquisition of Sky Financial in 2007. Although it seemed a reasonable combination at the time with significant footprint overlap, the potential for considerable synergies turned into massive losses due to the subprime mortgage business and bad commercial loans. Under its new leader, Stephen Steinour, Huntington embarked on a strategy shift in 2010 that focused on delivering strong customer service to middle-market businesses and retail clients. The bank also took steps to improve its internal credit procedures and shore up its balance sheet. This strategy has been successful. Commercial and consumer relationships have grown, Huntington has been successful at expanding relationships across multiple product lines, and overall fee income has improved. In 2016, the bank stated that 47% of its commercial clients used four or more of its products or services, up from 22% in 2010, while 52% of retail customers used at least six or more services, up from 43% in 2013. Huntington returned to the acquisition front in a big way in 2016 with the purchase of FirstMerit. This added much-needed scale and efficiency while improving market share. After cutting over 40% of FirstMerit’s original cost base, Huntington sold its more expensive product set in new and underpenetrated markets. Growth in home lending in Chicago and growth from the RV/boat financing unit have been very strong, indicating that the merger worked. Meanwhile, Huntington’s auto financing franchise remains strong as ever. 

Since FirstMerit, Huntington has completed several bolt-on acquisitions, including HSE in 2018 and Capstone Partners in 2022 to help further build out their capital markets unit. Huntington also completed another sizable banking acquisition in 2021 with TCF Financial, in a classic cost-saving, market-overlap play. Beginning to get a true feel for more normalized financials following the acquisition. The initial impression is that the bank may struggle to reach its goal of 17%-plus returns on tangible common equity through the cycle.

Financial Strengths

Huntington is in solid financial health. The bank has been generating profits since 2010, with returns on tangible equity handily exceeding its 9% cost of capital. Huntington reported a common equity Tier 1 capital ratio of 9.3% as of September 2022, and given the bank’s moderate to low appetite for risk, this seems very reasonable to us

Bulls Say

  • A strong economy and higher rates are all positives for the banking sector and should propel revenue and profitability even higher. 
  • Huntington’s recent acquisitions have improved the bank’s scale and share, and more revenue growth could be right around the corner. 
  • Huntington has taken advantage of new markets and product sets from its acquisitions, growing fee income and taking some share along the way. This could continue, potentially allowing Huntington to grow revenue faster than peers.

Company Description

Huntington Bancshares is a regional bank holding company headquartered in Columbus, Ohio. The bank has a network of branches and ATMs across eight Midwestern states. Founded in 1866, Huntington National Bank and its affiliates provide consumer, small-business, commercial, treasury management, wealth management, brokerage, trust, and insurance services. Huntington also provides auto dealer, equipment finance, national settlement, and capital market services that extend beyond its core states.

(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

Hub has constructed intermodal and truck brokerage networks of sufficient scale to be attractive to customers

Graphic of investment stock market data analysis business

Business Strategy & Outlook

Hub Group is the second-largest intermodal marketing company and also ranks among the 20 largest asset-light truck brokers in terms of gross revenue. In its flagship intermodal division, Hub contracts with the Class I railroads for the line-haul movement of its owned containers. It operates the second-largest fleet in the industry, with exclusive access to more than 30,000 containers, and enjoys an approximate 10% market share. By gross revenue, J.B. Hunt is the largest intermodal marketing company, followed by Hub and the intermodal divisions of STG Logistics, Schneider National and Knight Swift. Hub has constructed intermodal and truck brokerage networks of sufficient scale to be attractive to customers (shippers) and suppliers, both of which benefit from using a larger intermediary. 

Sophisticated IT systems and market know-how enable customers to outsource intermodal shipping to an expert specialist, while Hub’s large volume of loads and significant control of containers make it an attractive customer to the Class I railroads. The company’s primary rail carriers are Norfolk Southern in the East and Union Pacific in the West. Rates in the competing truckload market corrected in 2019, pressuring intermodal value proposition relative to trucking, and initial pandemic disruption pressured container volume into early 2020. However, truckload capacity tightened drastically by mid-2020 (remaining scarce through most of 2022), while contract pricing soared across all modes and underlying intermodal demand jumped on heavy retail shipper restocking (intermodal cargo is mostly consumer goods). The onset of rail service shortfalls in second-half 2021 has throttled Hub’s container volume growth despite otherwise positive freight demand, but the firm is working diligently with the railroads and customers to minimize the issue. A growth across Hub’s intermodal can be seen, truck brokerage and dedicated operations will take a breather in 2023. That said, for intermodal 2.5%-3.0% normalized U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer-term, with 2.0%-2.5% pricing gains on average.

Financial Strengths

Hub Group’s balance sheet is healthy, and the firm is not overly leveraged. At the end of 2021, Hub held a manageable amount of debt, which is normally used to help finance equipment purchases (especially intermodal containers) as well as tuck-in acquisitions like the 2020 Nonstop Delivery deal. Total debt came in near $275 million in 2021. Debt/EBITDA stood at less than 1 times in 2021, versus 1 time in 2020 and a five-year average near 1.3 times. The firm held roughly $160 million in cash at year-end 2021 versus an approximate $125 million in 2020. Historically, Hub’s model generated decent free cash flow in years when it wasn’t acquiring intermodal containers. Overall, free cash flow averaged 2.5% of gross revenue over the past five years, with capital expenditures approximating 3% of sales. Capital expenditures will likely come in near 5% of sales in 2022 due in part to investment in additional intermodal containers to capitalize on growth opportunities. The 2017 acquisition of Estenson, which provides asset-based dedicated trucking services, incrementally moved Hub into the capital-intensive truckload shipping business, and the operation originally required meaningful investment in tractors to support fleet growth. Most of the firm’s logistics-segment operations, including last mile and truck brokerage, are asset light by nature.

Bulls Say

  • Contract pricing across the intermodal and truckload shipping sectors is likely to normalize in 2023 as capacity constraints diminish. 
  • Because of high inventory levels, retail customers’ trailer detention levels are abnormally high, contributing to network inefficiencies across Hunt’s.
  • In Hub’s core intermodal division, transportation costs and customer satisfaction depend heavily on the performance of partner Class I railroads, which have been grappling with labor-related network headwinds.

Company Description

Hub Group ranks among the largest asset light providers of rail intermodal service. Roughly 60% of revenue comes from Hub’s intermodal and transportation solutions division. ITS includes its flagship intermodal operations, which use the Class I rail carriers for the underlying line-haul movement of containers, as well as its dedicated truckload unit. Asset light truckload and LTL brokerage makes up around 20%. The remaining 20% reflects Hub’s logistics division, which provides outsourced transportation management, warehousing and fulfillment, and final mile delivery. Hub is somewhat acquisitive in that it often makes tuck-in acquisitions which expand its brokerage, logistics, and dedicated truckload offerings.

(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

Apartment Income has significantly streamlined its portfolio and strategy over the past decade

Elderly woman holding a small house in her hands

Business Strategy & Outlook

Apartment Income REIT has significantly slimmed down the portfolio of multifamily buildings it owns over the past decade to just its best assets. The company invests in metropolitan markets with solid demographic trends that allow the company to maintain high occupancies and pass along consistent rent increases. Demand for apartments depends on economic conditions in their markets like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers. Apartment Income’s portfolio is typically more suburban than its multifamily REIT peers, which has put it at a slight disadvantage over the past economic cycle but should favor growth in the company as millennials move from the urban centers out into the suburbs over the next few years. The company regularly recycles capital by selling noncore assets or markets and uses the proceeds to fuel targeted acquisitions with strong growth prospects, a strategy that has improved the company’s performance over the past few years. Apartment Income has significantly streamlined its portfolio and strategy over the past decade. 

While the company has decreased its portfolio from over 300 properties at the end of 2008 to 80 properties in the current portfolio, the company owns approximately the same number of assets over that time frame in the 8 markets it currently considers to be its core markets. The company’s exit from markets with lower growth prospects has increased the portfolio’s expected average growth. The company completed the sale of the last of its affordable living and asset management businesses in 2018, segments with limited growth prospects that the company has been trying to exit for years. In 2020, Apartment Income spun off its development pipeline and lease-up portfolio into its own company so that the remaining company could focus on the highest-quality assets. These efforts have brought Apartment Income’s portfolio closer to its peers in terms of both asset quality and market exposure. While the company still has a differentiated portfolio from its peers, it is to have similar internal and external growth opportunities.

Financial Strengths

Apartment Income is in decent financial shape from a liquidity and a solvency perspective. Debt maturities in the near term should be manageable through a combination of refinancing, asset sale proceeds, and free cash flow. The company should be able to access the capital markets when acquisition and development opportunities arise. 2023 net debt/EBITDA and EBITDA/interest to be roughly 7.2 and 3.8 times, respectively, both of which represent leverage levels higher than to see for the company. However, the company will generate solid EBITDA growth and maintain discipline in capital allocation decisions and should improve these leverage metrics over time. As a REIT, Apartment Income is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cash flow from operating activities, providing Apartment Income plenty of flexibility to make capital allocation and investment decisions. The company’s credit rating is to remain stable through steady rental income growth in its existing portfolio and the stabilization of the company’s current developments, which should allow the company to continue to access the debt market in combination with equity issuance and asset dispositions to fund its debt maturities, acquisitions, and new development activity.

Bulls Say

  • Apartment Income’s diversified portfolio of mainly suburban and infill assets should see less impact from supply, which is more concentrated in urban, luxury markets.
  • Positive demographic and economic trends will fuel strong demand for apartment rentals, including the millennial generation, which is beginning to move to the suburbs but still lack the necessary capital to purchase a home. 
  • While supply growth may be near a peak now, rising construction prices and higher lending standards will reduce construction starts and reduce supply growth in the future.

Company Description

Apartment Investment and Management Co. owns a portfolio of 84 apartment communities with over 26,000 units. The company focuses on owning large, high-quality properties in the urban and suburban submarkets of Boston, Denver, Los Angeles, Miami, Philadelphia, San Diego, San Francisco, and Washington, D.C.

(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

The Sinclair acquisition furthers HFs push into renewable diesel, adding a production facility and pre-treatment project

Business Strategy & Outlook

After the acquisition of Sinclair Oil, HollyFrontier, now HF Sinclair, is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses. Its refining footprint has grown to seven refineries totaling 678 mbd in total capacity, including the recently acquired Puget Sound refinery. The latter deal extends the company’s footprint to the West Coast, beyond its historical midcontinent and Rockies roots and into a more difficult refining market with less competitive advantages. However, the foothold in the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates. The Sinclair acquisition furthers HF’s push into renewable diesel, adding a production facility and pre-treatment project. Combined with HF’s existing projects (two RD units and a pre-treatment unit), it expects to produce 380 million gallons annually once complete in 2022. 

Adding Sinclair’s marketing group of over 300 distributors, 1,300 wholesale brand sites, and 2 billion gallons a year of branded sales adds a stable earnings stream HF previously lacked as a merchant refiner. In addition, it offers the ability to generate RINs whose high costs have put HF at a disadvantage in the recent past. HF had already begun to diversify its earnings when it acquired the Petro-Canada lubricants business, Red Giant Oil, and Sonneborn to diversify its earnings stream. It expects the segment to generate $250 million EBITDA annually while also serving as a platform for future growth. At the same time, HF’s MLP Holly Energy Partners acquired Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 mmbbl of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million-$80 million will increase HEP’s annual EBITDA to about $450 million while opening up future organic and external transaction growth opportunities.

Financial Strengths

HF Sinclair’s debt increased amid the difficult market conditions and acquisitions in the last few years. However, with completion of the Sinclair acquisition, net debt was only 16% at the end of the third quarter, including Holly Energy Partners’ debt, among the lowest of its peer group. To fund the Puget Sound acquisition with cash, management suspended the dividend but reinstated it in the first quarter 2022, earlier than expected. The Sinclair acquisition was done with equity. By first-quarter 2023, management planned to have returned $1 billion to shareholders through dividends and repurchases, but did so by third-quarter 2022 given the strong market conditions. It has already authorized another $1 billion in repurchases as part of its guidance of an ongoing 50% payout ratio of adjusted net income through dividends and repurchases. Capital spending doubled in 2021 to $1.2 billion primarily driven by planned investments in renewable diesel, with the remainder earmarked for refining and lubricants. Spending should fall in 2022 as renewable diesel projects are completed but increase slightly in 2023. Management has set the minimum cash balance target at $500 million.

Bulls Say

  • HF Sinclair stands to benefit from continued discount of light and heavy mid continent crude. Also, its Navajo refinery is well positioned to capitalize on growing Permian production. 
  • The Sinclair acquisition adds refining assets complementary to HF’s legacy footprint while adding a marketing business that its portfolio lacked, improving competitiveness. 
  • Investments in renewable diesel should deliver free cash flow and high returns while offering diversification from petroleum, reducing carbon intensity, and generating valuable RINs.

Company Description

HF Sinclair is an integrated petroleum refiner that owns and operates seven refineries serving the Rockies, midcontinent, Southwest, and Pacific Northwest, with a total crude oil throughput capacity of 678,000 barrels per day. It is investing to produce 380 million gallons of renewable diesel annually. It holds a marketing business with over 300 distributors and 1,300 wholesale branded sites across 30 states. It also has a 47% ownership stake in Holly Energy Partners, which owns and operates petroleum product pipelines and terminals principally in the southwestern US.

(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.

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