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Dividend Stocks

Allianz has Reported Strong Results on Nonoperating Items Other Than the Pimco Division

Business diagram on financial report with coins

Business Strategy and Outlook

While it is believed as Allianz is one of the best-run multiline insurance companies, life and health insurance is its main problematic business. Allianz has three main business units, nonlife insurance, life insurance, and asset management. The nonlife and life businesses contribute between 35% and 40% of operating profit, while asset management accounts for around 25%. In the nonlife business, Allianz sells motor, accident, property, general liability, travel insurance, and assistance services. From a reporting standpoint, nonlife is broken down into geographies: German-speaking countries and Central and Eastern Europe; Western and Southern Europe, including Asia-Pacific; Iberia and Latin America and Allianz Partners; global insurance lines and Anglo markets. Germany, Italy, and France dominate, but Allianz Partners, Allianz global corporate solutions, and reinsurance are also important.

Allianz Partners is a business-to-business-to-consumer segment selling travel insurance through airlines, tuition insurance through colleges or universities, event protection sold with sports or concert tickets, and assistance services that cover travel, medical, transportation, medical evacuation, prescription replacement and emergency legal referral. Allianz global corporate solutions provides insurance for companies that operate globally and writes program insurance across lines like property, motor, travel, and liability.

Geographically, life and health are driven by Germany, Italy, and France, but the United States is also important. By product line, the life and health division are broken into guaranteed savings and annuities; capital-efficient products; protection and health; and unit-linked without guarantees. The guaranteed savings and annuities business dominates, contributing well over one third of operating profit. And the dependence of life and health on guaranteed savings and annuities shows how reliant Germany is on guarantees within long-term savings. Allianz’s German weighted average guarantees are still some of the highest for the business

Financial Strength

Allianz’s balance sheet is good with debt/capital at a little over 21%

Bulls Say’s

  • Allianz has a strong asset-management business that includes Allianz Global Investors and Pimco. 
  • Allianz is a good underwriter of general insurance. 
  • Turnaround stories include Turkey and Global Corporate.

Company Profile 

Allianz is a global insurance group offering insurance and asset-management services. The insurance business is organised in two segments: property-casualty insurance, life and health insurance. Allianz is one of the largest asset managers in the world with its Pimco franchise

(Source: MorningStar)

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

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

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

Categories
Dividend Stocks

ANZ: The Board Declared an interim fully franked dividend of 72 cps

Investment Thesis:

  • ANZ is trading on an undemanding valuation, with 1.1x Price to Book (P/B) and dividend yield of 5.8%. 
  • All else being equal, ANZ is offering an attractive dividend yield on a 2-yr (6.1%) and 3-Yr (6.6%) view. 
  • Strong oligopoly position in Australia (along with three other major banks in CBA, NAB, WBC).
  • Strong management team and Board.
  • Macro environment to be both a tailwind and headwind – We expect a rising interest rates environment to be both positive and negative in that while it will enable banks to charge more for loans, it also could result in deterioration in asset quality, slower loan growth, as well as higher inflation and wage growth to be detrimental to costs expense.
  • Net interest margin (NIM) remains under pressure, but some offsetting tailwinds could see NIMs hold up better than market expectations.  
  • Strong capital position could lead to ongoing capital management initiatives.
  • Continued focus on cost could yield results which come in ahead of market expectations. 

Key Risks:

  • Any unexpected customer remediation provisions.
  • Loan deferrals turn into structurally impaired loans. 
  • Intense competition for already subdued credit growth.
  • Increase in bad and doubtful debts or increase in provisioning especially any Australian and institutional single exposure loan losses.
  • Funding pressure for deposits and wholesale funding.
  • Credit risk with potential default of mortgages, personal and business loans and credit cards.  
  • Potential changes to Australian Banking legislation.
  • Significant exposure to the Australian property market.
  • Operating costs come in below market expectations.

Key Highlights:

  • Statutory Profit after tax of $3,530m, up 10%. Cash Profit from continuing operations was $3,113m, down 3%.
  • Profit before credit impairments and tax was -7% weaker to $4,157m.
  • Cash Return on Equity was 10%, -18bps weaker than 10.2% in 2H21.
  • CET1 ratio decreased 81 basis points to 11.53% during the half but remains above the Australian Prudential Regulation Authority’s ‘Unquestionably Strong’ benchmark.
  • The Board declared an interim fully franked dividend of 72cps (which is flat relative to 2H21 or +2.9% or 2 cents increase on FY21 interim dividend), and consistent with its stated target Dividend Payout Ratio of between 60% and 65% (cash continuing, ex large/notables basis).
  • Total credit provision was a net release of $284m (individual provision charge of $87m was up +26% whilst collective provision release of -$371m was a significant difference from -$145m in 2H21).
  • Australia Retail and Commercial. Reported a +11% uplift in cash earnings to $1,986m driven by positive balance sheet momentum after ANZ increased home loan processing capacity by 30%, bringing assessment times in line with major peers.
  • NZ. ANZ reported a +2% increase in cash earnings to $787m as ANZ was able to grow home loans by 7% half-on-half, taking ANZ’s total home loan book in NZ to more than NZ$100bn and increasing market share by 28bps to 30.66%. ANZ maintained its position as New Zealand’s biggest fund manager and KiwiSaver provider managing over NZ$37bn in investments for more than 650,000 investors.
  • Institutional. This division saw disappointing results with a -23% decline in cash earnings to $730m. Interestingly ANZ executed first ever Australian bank issued AUD stablecoin (A$DC) payment through a public permissionless blockchain transaction for Victor Smorgon Group.

Company Description:

Australia and New Zealand Banking Group Ltd (ANZ) is one of the four major banking institutions in Australia with an international presence having activities in general banking, mortgage and instalment lending, life insurance, leasing, hire purchase and general finance.  In addition, ANZ operates in international and investment banking, investment and portfolio management and advisory services, nominee and custodian services, stock broking and executor and trustee services.

(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
Funds Funds

Vanguard Australian Shares Index Fund; Offers potential Long Term Capital Growth along with Dividend income and Franking Credits

Investment Objective

Vanguard Australian Shares Index Fund seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses and tax.

Investment Strategy and Investment Return Objective

The Fund seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses, and tax. The S&P/ASX 300 Index includes the large cap, mid cap and small cap components of the S&P/ASX index family. The Fund will hold all of the securities in the index most of the time, allowing for individual security weightings to vary marginally from the index from time to time. The Fund may invest in securities that have been removed from or are expected to be included in the index. The Fund may engage in securities lending. Securities lending is a common practice where holders of securities make short term loans of shares in return for a fee, to incrementally increase returns to investors.

Performance Return

About Fund:

Vanguard Investments Australia Ltd (“Vanguard”) is a wholly owned subsidiary of The Vanguard Group, Inc. The Vanguard Group, Inc. is one of the world’s largest global investment management companies, with more than AUD $8.6 trillion in assets under management as of 31 March 2020. In Australia, Vanguard has been serving financial advisers, retail clients and institutional investors for more than 20 years. Vanguard is the responsible entity of the Fund. As responsible entity, Vanguard is solely responsible for the management and administration of the Fund. Vanguard is also the investment manager for the Fund and has appointed other entities within the Vanguard group of companies to provide investment management related services to the Fund. Investors will be notified of any future change in the investment manager of the Fund and this PDS will be updated accordingly. 

(Source: https://www.vanguard.com.au/)

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
ETFs ETFs

VanEck Australian Equal Weight ETF – Aims to provide Investment Returns before Fees and Other Costs

Tile letter on red rack in word ETF (abbreviation of Exchange Traded Fund) on wood background

Investment Objective

MVW invests in a diversified portfolio of ASX-listed securities with the aim of providing investment returns before fees and other costs that track the performance of the MVIS Australia Equal Weight Index. The index is a pure-play rules-based index that combines benchmark with blue-chip characteristics by tracking the performance of the largest and most liquid ASX-listed companies across all sectors, including offshore companies which generate at least 50% of their revenues or assets from the Australian market. Companies in the Index are weighted equally.

Portfolio Analysis

Performance 

In the highly concentrated Australian equities market, equally weighting a portfolio delivers investors significantly improved diversification and reduced stock and sector concentration, resulting in superior investment outcomes compared to tracking a market capitalisation weighted index, such as the S&P/ASX 200 Accumulation Index (S&P/ASX 200). There is a large volume of academic and investment industry research that concludes equal weight outperforms market capitalisation for the following reasons:

• it provides exposure away from mega and larger caps to smaller cap with more growth potential; 

• it provides exposure to value stocks; and 

• it is an inherently contra trading strategy involving frequent rebalancing that takes profits from winners and increases exposure to losers to maintain equal weighting. The index MVW tracks, the MVIS Australia Equal Weight Index (MVW Index) has demonstrated long term outperformance compared to the S&P/ASX 200.

About Fund:

The VanEck Australian Equal Weight ETF invests in a diversified portfolio of ASX-listed securities with the aim of providing investment returns (before management costs) that closely track the returns of the MVIS Australia Equal Weight Index. The MVIS Australia Equal Weight Index is a pure-play index that includes the largest and most liquid ASX-listed companies, combining benchmark with blue-chip characteristics, purpose-built to capture the true performance of the Australian equities market, with real diversification across both securities and sectors. Individual Index components are determined using a stringent rules-based methodology focusing on liquidity, with a minimum of 25 holdings, weighted equally. The unique pure-play approach expands local exposure to include offshore companies with a listing in Australia which generate at least 50% of their revenues (or – where applicable – have at least 50% of their assets) in this market. An investment in the ETF carries risks associated with: financial markets generally, individual company management, industry sectors, fund operations and tracking an index.

(Source: https://www.vaneck.com.au/ )

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

Sage Making Further Progress Toward the Cloud

Business Strategy & Outlook

The emergence of cloud-based software in the early 2000s, along with the proliferation of smartphones and tablets and the emergence of software-as-a-service, or SaaS, business models, revolutionized the global software market. Established software providers, such as Sage Group, which historically sold on-premises software via perpetual software licenses, experienced an increase in competition and disruption of established business models. The small and medium enterprise, or SME, accounting software market experienced numerous new cloud-native SaaS providers, such as Xero, which have rapidly grown and won market share from incumbent providers.

Although Sage entered the 2000s as the largest global provider of SME accounting software, the company had grown via acquisition to become a disparate group with numerous products stretched over a large global footprint. This enabled companies, such as Xero, to enter Sage’s domestic U.K. market and rapidly grow, thanks to its modern product, simple and clear value proposition, and a nimble business model.

Sage initially struggled to transition into a cloud-based SaaS provider but finally seems to be making progress. Its acquisition of cloud native accounting software provider Intacct in 2017 was a key step on this journey, which quickly added a strong product and cloud native mindset to the group. The rationalization of the group, both from a geographical and product perspective, is also an ongoing important transition, which will strengthen the group for the new market environment. Sage is likely to experience profit margin compression in the short term as it reinvests into product development and sales and marketing to keep pace with cloud native SaaS providers. However, this should secure the company’s long-term future and eventual profit margin expansion. Despite strong competition, the company is protected by a switching cost based economic moat, and the transition of its customers to cloud based SaaS will protect the business in the long term. Sage’s asset-light business model should enable strong cash generation in the long term, which to underpin dividends and a strong balance sheet.

Financial Strengths

Sage is in good financial shape. As at March 31, 2021, Sage had net debt of GBP 650 million. This implied a net debt/EBITDA ratio of just 1.6 and an EBIT/interest coverage ratio of 14. Generally speaking, Sage’s asset-light business model and economic moat should enable strong cash flow generation, which should support dividend payments and maintain a strong balance sheet.

Bulls Say

  • Sage has a renewed focus toward its core cloud accounting software offering and intends to exit businesses and products that do not align to this strategy, optimizing its research and development as well as its sales and marketing strategies in the process.
  • Sage’s software-as-a-service business model has low capital investment requirements and predictable recurring earnings leading to strong free cash flow generation.
  • The acquisition and integration of Intacct into the Sage group is driving an innovative software culture.

Company Description

Sage Group Plc is a U.K. based provider of accounting and enterprise resource planning, or ERP, software, predominantly to customers in the U.S., Europe, and South Africa. The company was founded in 1981 and historically sold on-premises software products with perpetual software licenses. However, the company is transitioning toward fewer cloud connected and cloud native products, sold via software-as-a-service, or SaaS, contracts. Sage’s main cloud native products include Sage Business Cloud Accounting, for small businesses, and Sage Intacct, which Sage acquired in 2017, for medium-size businesses.

(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

Imperial’s Focused Approach Should Unlock Value

Business Strategy & Outlook

Stefan Bomhard has a new mantra for Imperial Brands: focus. The CEO unveiled a five-year strategic plan in 2021 that will concentrate investments both geographically and on emerging categories that

are likely to become the largest profit pools in the future.  The plan makes sense because it essentially recognizes Imperial’s place in the marketplace–it is a fast follower, rather than a leader,

in most markets, but a highly profitable one with strong cash flow generation potential that should drive returns to shareholders higher in the coming years.

The overarching shift in strategy seems to be that investment will focus on categories and geographies where Imperial has existing strengths, and where consumer demand is likely to be strong. In

the core cigarette business, for example, Imperial prioritizes five tobacco markets (U.S., U.K., Germany, Spain, and Australia) in which it holds significant share and which in aggregate represent

more than 70% of Imperial’s tobacco operating profit. The company has lost share in these markets (except the U.S.) for several years, and increased investments behind its key brands should help stabilize volume declines. Other markets, as well as the firm’s smaller brands, will be managed to maximize cash flow. In next generation products, Bomhard plans to diversify the big bet placed on vaping by exiting vaping markets in which it has not gained traction, in order to target its investments on more profitable

opportunities. In heated tobacco, it is shifting its geographic focus from Japan, where it has very limited share and distribution structure, to Europe, where it has pockets of large shares.

The Bomhard’s plan will unlock value. By making more consumer and capability-centric investments, we expect the financial performance of the company to improve. Imperial has already ceded first mover advantage to Philip Morris International, and the strategy to improve performance seems to depend on regaining share, rather than driving category growth. This is unlikely to come cheap and may require higher spending going forward.

Financial Strengths

With net debt/adjusted EBITDA standing at 2.2 times at the end of fiscal 2021, Imperial’s balance sheet is roughly in line with most peers, including PMI, although gearing is much lower than that of British American Tobacco. The company has deleveraged from its 2015 acquisitions of U.S. assets from Reynolds American and Lorillard, and now intends to maintain an investment-grade credit rating. Imperial’s presence in developed markets makes it a cash-generating machine, even more so since the U.S. acquisitions. The firm has been operating in recent years on a strongly negative cash conversion cycle, and cash conversion has been up there with the best-in-class performers across the global consumer staples space. The cash conversion (defined as operating cash flow divided by operating income) to run close to 100% over five-year explicit forecast period. Imperial remains on course to return to a more normalized leverage position of below 2.5 times net debt/adjusted EBITDA by 2022, the company’s stated leverage target.

 Management abandoned its medium-term guidance of 10% dividend growth in 2019, then went one step further in fiscal 2020 by cutting the second-half dividend by one third. With a payout ratio now below net income, the dividends to grow in line with earnings at a low- to mid-single-digit

rate. This is the right strategy because Imperial had been tying its own hands with the 10% growth guidance, at a time when financial flexibility is necessary to invest in long-term growth.

Bulls Say

  • The appointment of Simon Langelier, chairman of cannabis oil extract manufacturer PharamCielo, to the board of directors could open the door for Imperial to exploit more liberal legislation in the U.S.
  • Imperial generates some of the highest margins in the industry on its cigarette portfolio.
  • If plain packaging legislation spreads, Imperial, through its value portfolio, may be the manufacturer best positioned to benefit.

Company Description

Imperial Brands is the world’s fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2021 volume of 232 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories,

and it has a logistics platform in Western Europe, Altadis. Through acquisition, Imperial is the third-largest manufacturer in the U.S. and owns the Winston and blue brands.

(Source: Morningstar)

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

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

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

Transferring Coverage of Narrow-Moat Henkel; FVE Reduced to EUR 80

Business Strategy & Outlook

In January 2022, Henkel announced the decision to combine two of its business units (beauty care, and laundry and home care) into one consumer unit in an attempt to achieve more synergies in its customer and channel execution after years of subpar performance, especially in North America. While the operating an overall larger portfolio is important in driving customer management and limited upside in terms of growth as there is little marketing and innovation expertise to be shared between the units. Moreover, large competitors in the space are moving in the opposite direction, with Unilever for instance recently announcing that it would move from three divisions to five business groups, with each responsible for end-to-end strategy and execution.

Nonetheless, Henkel’s CEO Carsten Knobel updated the company’s midterm ambition following the announcement of the customer unit formation. The firm now targets midterm organic sales growth

of 3%-4%, up from 2%-4% previously, along with mid- to high-single-digit adjusted EPS growth at constant currencies, free cash flow expansion, and an adjusted EBIT margin of 16%. Notably,

this level of adjusted EBIT margin falls below the peak level of 18% achieved in 2018, signaling that management is recognizing that some of the recent higher investment in marketing and innovation

would not be temporary, with limited margin opportunities remaining. Given the firm’s track record, a 16% medium-term adjusted EBIT would imply an improvement in competitiveness in the consumer space, which one cannot see as likely at this time. That applies to the top line as well, and  the measures announced thus far do not warrant an increase in growth expectations. In order to hit its midterm ambitions, that more drastic portfolio decisions must be made, which should include further trimming of the brand portfolio, a clear plan to address the underperformance in North America and in the beauty care segment, as well as providing more clarity regarding the adhesives unit, which has been overlooked to some extent and unjustly punished for underperformance on the consumer side.

Financial Strengths

Henkel has a strong balance sheet, and it has historically been run with very conservative levels of leverage. Even at the time of the acquisition of the Sun Products corporation in 2016, which was financed with debt, debt/EBITDA only increased to about 1 time. It has remained fairly stable at around 1 time since then, with net debt/EBITDA declining, averaging around 0.5 times over the last 5 years,

significantly below large-cap consumer staples peers for which the average is closer to 2.0 times.

Acquisitions have declined in importance since the Sun Products purchase, but remain an integral part of management’s stated strategy. To this point, one of the reasons given for the formation of the Henkel Consumer Brands segment was to enable the company to step up its active portfolio management, both in terms of divestment or discontinuations of noncore brands and businesses, and by creating a stronger basis for acquisitions across the consumer space. The restructuring of the business will only be completed in 2023, so do not expect to see a massive transformative initiative until at least 2024. In the absence of acquisitions, however, Henkel is unlikely to need to raise capital, and even given the unambitious mid-single-digit estimate of EBITDA growth over five-year forecast period should ensure that the net debt/EBITDA ratio remains controlled for the foreseeable future, all else equal.

Bulls Say

  • The combination of the beauty care and the home care segments under one roof in the consumer segment should result in more rapid and material portfolio decisions.
  • Henkel offers plenty of balance sheet optionality and should be able to pursue targets ranging from bolt-on to transformative.
  • Henkel’s clear market leadership in adhesives technologies through its differentiated and customizable offering gives it a unique position to benefit from secular trends around lighter yet strong materials and energy efficiency.

Company Description

Two distinct customer groups comprise Henkel. The consumer segment (around 50% of consolidated 2021 sales) is laundry and home care, including the Persil and Purex laundry detergent brands, and beauty care, including the Schwarzkopf brand in hair care, and the Dial brand in hand soap. The

adhesives technologies segment makes up the remaining 50% of sales. Sales from Western Europe accounted for 30% of the firm’s consolidated total in 2021, while Asia-Pacific and North America accounted for 17% and 25%, respectively.

(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

Beyond Meat’s first-mover advantage will result in an enduring market leadership position

Business Strategy and Outlook

Beyond Meat is a pioneer in the plant-based meat, or PBM, industry, offering the first burger to look and taste like meat, although it was soon followed by Impossible Foods and many others. Given the rapidly changing marketplace, although it is too early to tell if Beyond’s first-mover advantage will result in an enduring market leadership position.

However, it is still optimistic on the prospects for the meat like PBM market. It is expected that a primary growth driver to be the 20% of consumers willing to adjust their habits to benefit the environment, as Beyond’s products emit 90% less greenhouse gases and require 93% less land, 99% less water, and 46% less energy to produce than their meat equivalents. The PBMs will be very successful abroad, in China and India in particular, the world’s two most populated countries, each with 1.4 billion people. The products offer a great solution for China, which does not have enough arable land to feed its huge population, and a great fit for India’s large vegetarian population. Both countries are highly amenable to the products, with surveys showing 96% of China’s and 94% of India’s populations are likely to try the products, compared with 75% of U.S. consumers. It’s expected the global PBM market will grow from $6 billion in 2021, according to Euromonitor, to $31 billion by 2031 (a 19% compound annual growth rate), as PBMs grow from 1.1% of the ground meat market to nearly 5%. The model Beyond’s market share is increasing from 8.4% in 2021 to 12% in 2031 as PBMs gain a larger share of the overall meat category and Beyond’s brand continues to win with consumers, given its strong performance in taste tests and ongoing R&D investments. Beyond is the global preferred supplier of McDonald’s McPlant patty (expected to launch in various countries in 2022-24) and will co-create products with Yum Brands to be used at KFC, Pizza Hut, and Taco Bell across the globe. It is expected that these deals will collectively result in over $200 million in incremental annual revenue by 2025, supporting $72 fair value estimate for Beyond Meat

Financial Strength

In March 2021, Beyond issued $1 billion in 0% coupon convertible notes that expire in 2027. This should provide adequate liquidity until the firm generates positive free cash flow, which is expected to occur in 2026. As of March 2022, Beyond held $548 million cash, which should be sufficient to meet its needs in 2022, specifically about $230 million to fund operations and $50 million in capital expenditures. However, if demand for Beyond’s products falls short of the forecast, or costs exceed the expectations, Beyond could opt to issue additional debt or shares, which could dilute current shareholders. It is continued to expect capital expenditures to be the primary use of cash, as the company will spend a significant portion of sales to build capacity in order to meet growing demand. But the level of investment should moderate from 2021, when Beyond invested $136 million (29% of sales) to build capacity ahead of product launches with McDonald’s and Yum Brands. In 2022 and beyond, it is expected that the capital investments between 6% and 8% of sales annually for the remainder of 10-year explicit forecast (still above the average for packaged food peers as the firm continues to expand capacity). The firm will not initiate a dividend over the next 10 years, but it is expected there will be sufficient cash on hand for moderate share repurchases, which is a model beginning in 2028. It can be viewed this as a prudent use of cash when shares trade below the assessment of its intrinsic value

Bulls Say’s

  • Plant-based meats should continue to gain share from traditional meat, driven by significant environmental benefits and consumers’ shift away from red meat. Beyond Meat should be a major beneficiary, given its first-mover advantage and strong performance in taste tests.
  • Europe and Asia represent large opportunities for Beyond, where consumers are more favourable to PBMs than in the U.S., and Impossible Foods is banned in Europe, as its products contain GMOs.
  • New deals with McDonald’s and Yum Brands should be material catalysts in 2022-24, representing over $200 million in sales

Company Profile

Beyond Meat is a provider of plant-based meats, such as burgers, sausage, ground beef, and chicken. Unlike other vegetarian products, Beyond Meat seeks to replicate the look, cook, and taste of meat, is targeted to omnivores and vegetarians alike, and is sold in the meat case. The products are widely available across the U.S. and Canada and in 83 additional countries as well. International revenue represented 31% of 2021 sales. The firm’s products are available in retail stores and the food-service channel. In 2019, before the pandemic struck, sales were evenly split between these two channels, although mix stood at 70% retail/30% food service in 2021.

(Source:MorningStar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Caesars has realized over $1 billion in combined revenue and cost synergies from its merger with Eldorado

Business Strategy and Outlook

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020), it is estimated Caesars holds more than a 10% revenue share of the domestic casino gaming market; this represents around 100% of the company’s total EBITDA. The acquisition roughly doubled the company’s U.S. portfolio to around 50 properties while lifting its loyalty membership to over 60 million from 55 million (loyalty stood at 65 million at the end of 2021). Caesars has realized over $1 billion in combined revenue and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on calculations. Despite this successful acquisition record, it’s d believe Las Vegas and other U.S. gaming regions contribute to a moat for Caesars. U.S. gaming demand is lower than in Asian regions like Macao and Singapore, where the propensity to gamble is much higher. Also, the 1,000 commercial and tribal casinos in the U.S. serve a total population of 330 million, well in excess of the 41 and 2 casinos found in Macao and Singapore, respectively, with Chinese and Singaporean populations of 1.4 billion and 5.9 million, respectively. Further, supply growth in U.S. gaming is increasing in 2021-23, with two resorts opening in Las Vegas that add a mid-single-digit percentage to market room supply. This compares with negligible additions in either Macao or Singapore, where it is seen there are no additional licenses for the foreseeable future.

Despite this successful acquisition record, it’s not believed that Las Vegas and other U.S. gaming regions contribute to a moat for Caesars. U.S. gaming demand is lower than in Asian regions like Macao and Singapore, where the propensity to gamble is much higher. Also, the 1,000 commercial and tribal casinos in the U.S. serve a total population of 330 million, well in excess of the 41 and 2 casinos found in Macao and Singapore, respectively, with Chinese and Singaporean populations of 1.4 billion and 5.9 million, respectively. Further, supply growth in U.S. gaming is increasing in 2021-23, with two resorts opening in Las Vegas that add a mid-single-digit percentage to market room supply. This compares with negligible additions in either Macao or Singapore, where there are no additional licenses for the foreseeable future.

Financial Strength

Caesars’ debt levels are elevated. In 2019, excluding financial lease obligations, legacy Caesars’ debt/adjusted EBITDA measured a hefty 7.8 times, while legacy Eldorado came in at 3.7 times. It is believed reasonable to include financial lease obligations in the long-debt responsibility of the combined companies (which merged in July 2020). Caesars’ debt/adjusted EBITDA can be seen reaching 8.5 times in 2022 and then 6.9 times in 2023 as global leisure and travel market demand continue to recover from the pandemic, aided by company cost and revenue synergies that is estimated to total over $1 billion. The $7.6 billion are in free cash flow (operating cash flow minus capital expenditures) and it is expected that in 2022-26 is focused on reducing debt levels and investing in the digital sports and iGaming markets, with share repurchases and dividends not occurring until 2025. Caesars has no meaningful debt maturity until 2024, when $4.8 billion is scheduled to come due. That said, EBIT interest coverage is on the thinner side, the forecasted ratio is at only 2.0 on average the next five years. 

Bulls Say’s

  • Caesars’ best-of-breed management stands to generate cost and revenue synergies from its merger with Eldorado. 
  • Caesars has the largest property (around 50 domestic casinos versus roughly 20 for MGM) and loyalty presence (65 million members versus MGM’s roughly high-30 million), which presents cross-selling opportunities. 
  • It can be seen that Caesars’ domestic properties are well positioned to benefit from the $6.2 billion U.S. sports betting revenue opportunity in 2024.

Company Profile 

Caesars Entertainment includes around 50 domestic gaming properties across Las Vegas (50% of 2021 EBITDAR before corporate and digital expenses) and regional (63%) markets. Additionally, the company hosts managed properties and digital assets, the latter of which produced material EBITDA losses in 2021. Caesars’ U.S. presence roughly doubled with the 2020 acquisition by Eldorado, which built its first casino in Reno, Nevada, in 1973 and expanded its presence through prior acquisitions to over 20 properties before merging with legacy Caesars. Caesars’ brands include Caesars, Harrah’s, Tropicana, Bally’s, Isle, and Flamingo. Also, the company owns the U.S. portion of William Hill (it plans to sell the international operation in 2022), a digital sports betting platform.

(Source: MorningStar)

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

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

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

Categories
Global stocks

JD’s Special Dividend Doesn’t Imply Long-Term Commitment to Recurring Dividend

Business Strategy and Outlook

JD.com has emerged as a leading disruptive force in China’s retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share increased from 21% in 2016 to an estimated 27% in 2020. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model. JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. JD is the largest retailer in China by revenue. Among listed Chinese peers, JD’s net product revenue in 2020 was 2-3 times higher than for Suning, the second-largest listed retailer. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. The increase in mix from higher-margin third-party platform business and efficiency of scale will also help lift margins. 

In the medium term, investment into community group purchase and JD logistics is anticipated, and the higher mix of lower-margin supermarket categories will hold back some of the margin gains. Starting in April 2017, the logistics business became an independent business unit that opened its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply chain management, integrated warehouse, and delivery services to penetrate into less developed areas. As the logistics business gains scale and reaches higher capacity utilization, gross profit margin improvement is projected. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.

Financial Strength

JD.com had a net cash position of CNY 135 billion at the end of 2020. Its free cash flow to the firm has continued to be positive at CNY 8.1 billion in 2020. JD has not paid dividends. JD.com has invested heavily in fulfillment infrastructure and technology in recent years, leading to concerns about its free cash flow profile and margin improvement story. Management will put more emphasis on growing revenue per user, expansion into lower-tier cities and the businesses’ profitability. Therefore, JD will not invest in new areas as aggressively as before, so JD will be able to maintain a positive non-GAAP net margin versus being unprofitable before. Its financial strength will improve in future. Most of the initial investments in the third-party logistics business have been carried out, and utilization of the warehouses has picked up. Its technology team is already in place without the need to add substantial head count. JD will also be cautious in its investment in the group-buying business and new retail, given a profitable business model has not been established in the market. JD has tried to improve its asset-heavy model by transferring a portfolio of warehouses to establish a CNY 10.9 billion logistics property core fund in partnership with the sovereign wealth fund of Singapore, GIC. JD will own 20% of the fund, lease back the logistics facilities, and receive management fees for managing the facilities. The deal will be completed in phases with the majority of them completed in 2019.

Bulls Say’s

  • JD.com’s nationwide distribution network and fulfillment capacity will be extremely difficult for competitors to replicate. 
  • The partnership with Tencent could allow JD.com to gain significant user traffic from Tencent’s dominant social-networking products in China. 
  • JD is now the largest supermarket in China; the high frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.

Company Profile 

JD.com is China’s second-largest e-commerce company after Alibaba in terms of gross merchandise volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses.

(Source: MorningStar)

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

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

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

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

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

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

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