Author: lvc-admin

Tencent Music’s Long-Term Growth is Underpinned by Continuing Increase in Subscribers

Post author By lvc-admin
Post date May 25, 2022
No Comments on Tencent Music’s Long-Term Growth is Underpinned by Continuing Increase in Subscribers

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Business Strategy & Outlook:

With over 600 million monthly active users, or MAU, Tencent Music Entertainment, or TME, is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 60% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making. A low subscriber-to-user ratio in the mid-teen percentages offers a long runway for paying user growth in music streaming. With platforms putting more content, such as popular songs, behind the paywall, more users would subscribe, and fuel top-line growth. Potential revenue growth also comes from advertising, where the firm’s investments into long-form audio are likely to open up more ad inventory. Even though social entertainment (mainly video live streaming) contributes most of the firm’s revenue, still there will be minimal growth ahead given competition from Douyin and Kuaishou.

With China’s antitrust laws putting an end to TME’s exclusive music copyright agreements, more competition is anticipated for users. Its peer Cloud Music is aiming to bridge the content gap by signing with previously inaccessible labels. Despite competitive headwinds, TME will remain the largest platform for music streaming, benefiting primarily from network effect and intangible assets that maintain user engagement and stickiness. The subscription prices are unlikely to go lower because: 1) competitors are making losses and have little incentive for price competition; and 2) Chinese streaming platforms offer almost the lowest prices worldwide, so more discounts will be less effective in attracting users. Some margin upside is expected for Tencent Music as growing subscription revenue brings more cost leverage. Unlike developed markets, the supply side of music in China is more fragmented, with just 30% of licensing from top five labels. As licensors sell their content on a mostly fixed cost basis, TME is well-positioned to see margin expansion as revenue grows.

Financial Strengths:

TME is financially sound. As of the end of 2021, the firm was sitting on a net cash position of CNY 22 billion, more than three times that of peer Cloud Music. Despite some near-term industry challenges, the firm is expected to generate positive free cash flows over the next years. Taking advantage of the low interest environment, the company issued a total of USD 800 million (CNY 5 billion) senior unsecured notes at below 2% interest in 2020. The debt/equity ratio is running at a manageable 30%, and debt/EBITDA is maintained below 1.5 times as at the end of 2021. The firm shall maintain this capital structure. Given positive free cash flow assumptions, the firm can easily fulfill its debt obligations while simultaneously funding future investment initiatives. The business has been generating positive free cash flows since 2016. In 2021, it generated a free cash flow of CNY 3.5 billion. This is significantly better than peer Cloud Music, who will be burning through cash for the next couple of years. TME is expected to remain cash flow positive over the next five years.

Bulls Say:

Compared with Spotify, TME has plenty of room for subscriber growth that should come about as it moves more music content behind the paywall.
TME piggybacks off Tencent’s billion-plus user network. This relationship allows for better retention of users while attracting new ones.
By investing in independent artists and long-form audio, TME could better manage content cost over the long term.

Company Description:

TME is the largest online music service provider in China. It was founded in 2016 with the business combination of QQ Music (founded in 2005), Kuwo Music (founded in 2005) and Kugou Music (founded in 2004) streaming platforms. Tencent is the largest shareholder of TME with over 50% shares and over 90% voting rights held. TME also provides social entertainment services, including music live audio/video broadcasts and online concert services through the three platforms mentioned above, and online karaoke through an independent platform WeSing.

(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.

Tags Street Talks

Technology Stocks

Envestnet’s Wealth Solutions Had Secular Growth but Margin Expansion Has Been Lackluster

Post author By lvc-admin
Post date May 25, 2022
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Business Strategy & Outlook:

Envestnet was founded in 1999 to offer independent advisors access to a comprehensive wealth-management platform. The firm’s founder, the late Jud Bergman, recognized two major trends in the industry. The first was the move away from the wirehouse firms. The second was the move from a commission-based toward a fee-based model. Wealth solutions represents about 75% of the firm’s net revenue.About half of this consists of asset-based fees with the fee rate dependent on the level of services provided. The factors such as product mix, new client onboardings, and switches from an asset-based to subscription model can affect the fee rate. The other half of wealth solutions include the Tamarac platform geared toward registered investment advisors, subscription software to enterprises, recently acquired financial planning software MoneyGuidePro, and professional services.

Tamarac’s popularity with RIAs has been a strong driver of growth. In 2015, Envestnet acquired Yodlee, which makes up the firm’s data and analytics segment. Yodlee’s revenue consists of its core data aggregation, alternative data to asset managers, and analytics to advisory firms. This segment is less moaty, as Yodlee faces competition from Plaid and MX Technologies as well as many alternative data providers. Following Visa’s announced (but ultimately nixed) acquisition of Plaid at a high, media reports have indicated that Envestnet is looking to sell Yodlee. For now, Envestnet is comfortable keeping Yodlee in its product portfolio. Envestnet believes marketplace exchanges can add to growth. In 2019, the company launched an insurance exchange with six national carriers to connect an advisor’s clients with annuity products. In addition to the insurance exchange, Envestnet launched Advisor Credit Exchange to help advisors address the lending needs of their clients. Envestnet is also focusing on growing asset-based revenue by providing value-added services such as impact portfolios, direct indexing, and tax overlays

Financial Strengths:

Envestnet’s financial strength is sound. The company has used leverage for acquisitions. As of Dec. 31, 2021, Envestnet has approximately $429 million of cash and $849 million in convertible debt. This equates to a net leverage ratio of about 1.6 times EBITDA. While it’s true that the firm’s wealth solutions segment contains asset-based revenue, net of direct asset-based cost of revenue, these fees are less than 40% of the firm’s revenue. In addition, it is estimated that 40% of Envestnet’s AUM/A are not in equities. And given the fact that most of Envestnet’s remaining revenue is essentially recurring, with the company’s debt levels.

Bulls Say:

Envestnet has leading market share, and its product suite offers greater breadth than competitors.
Envestnet could pursue strategic alternatives with Yodlee.
Envestnet should continue to benefit from the trend of advisors leaving wire house firms to start their own practices and the shift from commission-based to fee- based advice.

Company Description:

Envestnet provides wealth-management technology and solutions to registered investment advisors, banks, broker/dealers, and other firms. Its Tamarac platform provides trading, rebalancing, portfolio accounting, performance reporting, and client relationship management software to high-end RIAs. Envestnet’s portfolio management consultants provide research services and consulting services to assist advisors, including vetted third-party managed account products. In November 2015, Envestnet acquired Yodlee, a provider of data aggregation.

(Source: Morningstar)

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

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

Tags Recommendations

Dividend Stocks

Operational Challenges Hinder International Paper’s Ability to Capitalize on Strong Box Demand

Post author By lvc-admin
Post date May 25, 2022
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Business Strategy & Outlook

International Paper manufactures packaging products and cellulose fibers. It accounts for roughly one third of the North American corrugated packaging market. Though it has operations in Brazil, Russia, India, and China, more than three fourths of its sales come from North America. A decade of consolidation in the corrugated packaging industry has allowed International Paper to raise prices and boost margins, but increased competitive intensity and rising input costs have weighed on profitability in recent years.

In International Paper’s largest segment, industrial packaging, the company manufactures containerboard. Roughly 80% of the company’s containerboard production is sent to International Paper’s box plants where it is converted into corrugated packaging. The remaining 20% is sold on the open market to local or regional box manufactures. This packaging is used in a variety of end markets, including food and beverage, e-commerce, paper products, and other goods. Corrugated boxes provide a strong yet lightweight packaging option that is cost-effective. This dynamic has made corrugated boxes a favorite in the packaging industry and is used in many different end markets. Roughly 85% of the sales in industrial packaging are in the United States. The cellulose fibers segment produces fluff, market, and specialty pulps. Fluff pulp is used to produce absorbent products such as baby diapers while market pulp is used to manufacture tissue and paper products. Fluff and specialty pulps account for about 80% of the cellulose segment. In 2021, International Paper spun off its printing paper segment, now known as Sylvamo. International Paper initially kept a 19.9% ownership stake in Sylvamo but has since sold roughly half its position in the company. IP’s management team has stated that they intend to monetize their remaining position in Sylvamo soon. International Paper also received a one-time dividend of $1.4 billion, which Sylvamo funded with debt. Following the completion of the spinoff, International Paper is primarily a containerboard business with some fluff pulp assets.

Financial Strengths

The international Paper has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. Following the spinoff of the firm’s paper business, International Paper reduced its debt by $2.5 billion to shore up up its financial position and maintain its investment-grade credit rating. International Paper now has a net debt/EBITDA of roughly 1.6, down from 4.0 in 2016. Historically, International Paper has made acquisitions in both the industrial packaging and cellulose fibers industry. The any future acquisitions would be small as both industries are highly consolidated, with International Paper having the largest share in both markets. International Paper has roughly $5 billion of outstanding debt with staggered maturities through 2048. International Paper has ample liquidity, with over $1 billion of cash on hand and no outstanding borrowings on a $1.5 billion credit facility. International Paper has a history of strong free cash flow generation, and the firm to maintain its sound capital structure.

Bulls Say

After a decade of adjusting its business model to improve profitability, International Paper will enjoy solid returns as it now operates primarily as a containerboard company.

International Paper, WestRock and Packaging Corp. of America will remain disciplined in taking economic downtime when needed in order to safeguard prices.

International Paper’s exposure to emerging markets will provide excellent opportunities for growth in the coming years.

Company Description

International Paper manufactures packaging products and cellulose fibers. It accounts for roughly one third of the North American corrugated packaging market. Though it has operations in Brazil, Russia, India, and China, more than three fourths of its sales come from North America. International Paper serves a variety of end markets, including industrial, consumer products, and manufacturing.

(Source: Morningstar)

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

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

Tags Top Stories

Global stocks

While Estee Lauder Is Affected by China’s COVID-19 Restrictions, Disruption Should Be Short-Lived

Post author By lvc-admin
Post date May 25, 2022
No Comments on While Estee Lauder Is Affected by China’s COVID-19 Restrictions, Disruption Should Be Short-Lived

Business Strategy & Outlook

The Estee Lauder has earned a wide moat, based on its valuable portfolio of global leading brands, its preferred status with its channel partners in department stores, specialty beauty outlets, travel retail locations, and a scale-based cost advantage.

Although the pandemic is presenting challenges for Estee and its peers, one can be optimistic about its competitive position and long-term strategy. Estee has made significant investments in omnichannel, marketing, and innovations that are helping the firm recover briskly from the pandemic and the subsequent inflation and supply chain disruptions. The firm’s growth opportunities should persist over the long term as emerging markets (a third of sales) still spend significantly less than developed markets on prestige beauty. Per Euromonitor, average annual per capita spend on prestige beauty in 2021 was $104 in the U.S., $114 in South Korea, $22 in China, $6 in Brazil, and $1 in India. Estee also has significant opportunity to expand its brands geographically. This opportunity is particularly pronounced in the context of its brand reach, as nearly all of its 30 brands are sold in the U.S., but only 15 have launched in China, 10 in India, and nine in Brazil.

Despite its solid competitive standing, Estee isn’t immune to headwinds. Even prior to COVID-19, Estee had been struggling with its large exposure to global department stores as the channel faces declining traffic from consumers shifting their purchases to other outlets. However, the firm has been proactively diversifying its channel reach, developing a strong presence in e-commerce (28% of sales) and specialty beauty. In the next few years, Estee will accelerate these efforts with the implementation of its post-COVID-19 business acceleration plan. This will result in the closure of 10%-15% of freestanding stores and some unproductive department store counters, elimination of 3.5% of jobs, and realigning of the distribution network, resulting in annual savings of $300 million-$400 million, a portion of which will be reinvested in e-commerce, omnichannel, and digital marketing capabilities.

Financial Strengths

Estee Lauder has traditionally carried a very low level of debt. Net debt to adjusted EBITDA has consistently remained less than one (averaging 0.2 times over the past 10 years), and this metric to remain low, with Estee holding more cash than debt on average over the next five years. As such, EBITDA interest coverage has been more than sufficient, averaging 16 times over the past three years, and to average 31 times over the next five years. The Estee has ample liquidity to weather disruptions from the pandemic and its aftershocks, with $6.3 billion in cash and available liquidity as of March. The firm’s stated and demonstrated priorities for its robust generation of free cash flow to the firm (midteen percentage of sales over the 10-year forecast, versus high single digits on average the past three years due to the pandemic) are to invest in organic growth, acquire compelling businesses should the opportunity arise, and return cash to shareholders. The Estee to average 4%-5% of revenue toward capital expenditures each year, in line with historical averages. In an effort to conserve cash during the pandemic, Estee suspended the June 2020 dividend (which conserved $170 million), reinstated it the following quarter at the previous $0.48, and has since increased it to $0.60. Over the long term, dividends will grow 13% annually, generally in line with earnings growth, maintaining a 30%-40% payout ratio. No one can modeling unannounced acquisitions as the timing and magnitude is very difficult to predict. Instead, the model excess cash is used to repurchase shares (1%-2% of outstanding shares annually, or about $1.5 billion-$2.5 billion, about double the average directed toward buybacks each year since fiscal 2015), which as prudent when shares trade below the assessment of its intrinsic val

Bulls Say

The firm has many available levers for growth, given the rise of the global middle class, China’s beauty consumption expanding from skincare into makeup, fragrance and haircare, and geographic expansion opportunities for the firm’s portfolio of strong brands.

Estee Lauder, as a prestige beauty pure play, is best positioned to benefit from consumers trading up from mass to prestige, which is occurring across the globe.

Estee Lauder is aggressively investing in the more profitable e-commerce channel, adapting to evolving consumer preferences, while simultaneously enhancing its margins

Company Description

Estee Lauder is the world leader in the global prestige beauty market, participating across skincare (59% of fiscal 2021 sales), makeup (26%), fragrance (12%), and haircare (3%) categories, with popular brands such as Estee Lauder, Clinique, MAC, La Mer, Jo Malone, Aveda, Bobbi Brown, Too Faced, Origins, Dr. Jart+, and The Ordinary. The firm operates in 150 countries, with 23% of fiscal 2021 revenue stemming from the Americas, 43% from Europe, the Middle East and Africa, and 34% from Asia-Pacific. The company sells its products through department stores, travel retail, multibrand specialty beauty stores, brand-dedicated freestanding stores, e-commerce, salons/spas, and perfumeries.

(Source: Morningstar)

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

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

Tags US Market

Technology Stocks

No-Moat Orica’s First-Half Earnings Improve but Inflation and Freight Weight

Post author By lvc-admin
Post date May 25, 2022
No Comments on No-Moat Orica’s First-Half Earnings Improve but Inflation and Freight Weight

Business Strategy and Outlook

Orica has expanded its mining services business around a leading global market share in explosives. Earnings are leveraged to mining volume and commodity prices. The Australian explosives duopoly affords relatively high margins and returns; however, these are coming under pressure as Orica’s more lucrative three- to four-year contracts mature and are replaced with longer-duration and lower-margin contracts. Orica benefits from resources development activity in Latin America, South Africa, and Russia. Non-Australian explosives usage also depends on construction demand, which is somewhat less cyclical. Orica has grown its explosives business by both organic and acquisitive means. In fiscal 2006 it bought the European, Middle Eastern, African, Asian, and Latin American businesses of Dyno Nobel, which helped provide scale and lower costs. This was followed by divestment of a 70% interest in fertiliser business Incitec Pivot. In fiscal 2007, Orica expanded capacity at its Queensland ammonium nitrate plant and increased capacity at Kooragang Island, New South Wales. An ammonium nitrate plant in Bontang, Indonesia started production in 2012, and there were plans to double capacity at Kooragang Island, but timing will depend on market demand. Orica also participates in an ammonium-nitrate plant joint venture in the Pilbara iron ore region in Western Australia.

Orica’s Australian explosives market share is an estimated 55%-60%, with the remainder largely held by peer Incitec Pivot. The Incitec Pivot’s Moranbah, Queensland, plant is included in this estimate. In the U.S., the explosives industry is a concentrated market. Orica has a well-established presence with an estimated market share of 30%-35%. The key competitors are Dyno Nobel (owned by Incitec Pivot), which has similar market share, and Austin Powder. The key markets for explosives in the U.S. are coal and metals mining, as well as construction and quarrying. A focus on higher shareholder returns has improved with investment options subjected to disciplined returns criteria. Orica will not invest in new plant unless an 18% return on net assets can be achieved.

Financial Strength

First-half fiscal 2022 cash conversion fell to just 66% with a sharp increase in working capital leading to negative net operating cash flow of AUD 158 million. The cash outflow saw net debt rise to AUD 1.65 billion versus AUD 1.52 billion at end December 2021. Leverage (ND/(ND+E) increased to 38% from 35% and net debt/EBITDA (based on annualised first-half metrics) is at 2.3. While somewhat high, this remains within company targets and all else equal sub-1.0 net debt/EBITDA is expected by as soon as fiscal 2025. There remains significant headroom to gearing covenants of 57.5% and average drawn debt tenor of 4.7 years is healthy. But in the meantime the leveraged balance sheet bears consideration in any investment decision and contributes to the high fair value uncertainty.

Orica has AUD 1.7 billion in available liquidity, limited near-term refinancing requirements and headroom to covenants of 57.50% gearing at 2.0 times interest cover. But covenants could be rapidly tested in a circumstance where customers can’t pay and Orica says some customers have been unable to process payments due to physical lockdowns. Despite this, Orica hasn’t identified issues with debtors’ ability to pay otherwise.

Bulls Say’s

Orica is a global leader in explosives and part of a duopoly in Australia. It is leveraged to ongoing regional resources demand driven by the industrialisation and urbanisation of China and India.
The intensity of explosives and chemicals used in mining is increasing as ore grades decline and strip ratios increase.
There are a number of organic growth opportunities available to the Orica, particularly the expansion of ammonium nitrate capacity and explosives production.

Company Profile

Orica is a leading global manufacturer and supplier of chemicals and explosives, primarily to the mining industry. It has operations in 50 countries across six continents. Mining services is the lone growth engine now that the chemicals business has been sold. Orica has an approximate 28% share of the global commercial explosives market. It provided resins, steel bolts, and other products for underground mining and tunnelling though this business is now sold. It also supplies chemicals such as sodium cyanide to the mining industry

(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.

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.

Tags Top Stocks

Commodities Trading Ideas & Charts

Initiating Coverage of Bloom Energy With No-Moat Rating, $15 FVE

Post author By lvc-admin
Post date May 25, 2022
No Comments on Initiating Coverage of Bloom Energy With No-Moat Rating, $15 FVE

Business Strategy & Outlook

Bloom Energy’s core product is its Bloom Energy Server, a distributed solution to meet commercial and industrial customers’ 24/7 power needs. Customer use cases vary, but typically prioritize reliability and emission reduction, and to a lesser extent cost savings. Bloom’s Energy Server is based on solid oxide fuel cell, or SOFC, technology and runs on natural gas, biogas, or hydrogen. Natural gas has historically been the dominant fuel, but one can expect greater emphasis on biogas and hydrogen in coming years. In comparison with other fuel cell companies, Bloom’s SOFC technology is best suited for stationary power applications.

Bloom’s growth strategy for its Energy Server product is to continually lower the cost of its product to allow for a broader customer base to adopt its solution. Historically, the vast majority of Bloom’s sales have come from four to five American states and South Korea. The company is looking to broaden its appeal both domestically and internationally. In order to achieve this, the company must lower the cost of its product, at which it has been successful over time. The cost of Bloom’s Energy Server has declined from approximately $6,000 per kilowatt at the time of its IPO in 2018 to below $2,500 in 2021 and the company expects roughly 10% per year cost reduction declines in the years ahead.

Bloom added to its product portfolio in 2021 with the introduction of its solid oxide electrolyzer for producing hydrogen. Many fuel cell providers such as Bloom have entered the electrolyzer market given synergies between fuel cell and electrolyze technology. Bloom expects to have a few pilot projects in 2022 before expecting broader commercial sales in 2023 and beyond. In contrast to competing electrolyze technologies that are expected to pair with renewable electricity, the Bloom’s solid oxide technology as best suited for nuclear-pairing applications. In the longer term, the company is also working on adapting its fuel cell technology for the marine end market. The high power needs of the marine industry could align well with solid oxide fuel cells, but view this opportunity as long-dated (late this decade).

Financial Strengths

The Bloom’s financial strength as fair. Current debt outstanding totals approximately $500 million and consists of both recourse and nonrecourse issuances. Recourse debt is composed primarily of $230 million of 2.5% convertible notes due August 2025 and $70 million of 10.25% senior secured notes due March 2027. Nonrecourse debt totals $235 million and pertains to Bloom’s power purchase agreement financing structures. In addition, the company has roughly $460 million of financing obligations associated with sale leaseback financing structures. Given the company’s limited size, one cannot believe further increases in recourse debt would be prudent. Bloom’s financial strength is supported by an additional $250 million equity commitment from SK Eco plant, which it must invest by December 2023 at a minimum share price of $23. The operating cash flow to remain negative in 2022 before turning modestly positive in 2023 as sales growth drives operating leverage. Future capital requirements consist largely of working capital and an expansion of the company’s manufacturing operations. The company has a 1-gigawatt expansion of capacity underway in Fremont, California, and plans to add 1 gigawatt every two to three years based on current expectations.

Bulls Say

Bloom is a first-mover within the baseload distributed generation market.

Bloom has made strides in extending the life of its fuel cells, which should improve its service margins in coming years.

Bloom entry into the electrolyze market provides a large addressable market to leverage its technology.

Company Description

Bloom Energy designs, manufactures, sells, and installs solid-oxide fuel cell systems (“Energy Servers”) for on-site power generation. Bloom Energy Servers are fuel-flexible and can use natural gas, biogas, and hydrogen to create 24/7 electricity for stationary applications. In 2021, the company announced plans to leverage its technology and enter the electrolyze market. Bloom primarily sells its systems in the United States and South Korea.

(Source: Morningstar)

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

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

Tags Commodities, Energy

Global stocks

MGM Resorts has expanded its room share in Macao to 8% from 3% with its Cotai property

Post author By lvc-admin
Post date May 25, 2022
No Comments on MGM Resorts has expanded its room share in Macao to 8% from 3% with its Cotai property

Business Strategy and Outlook

No-moat MGM Resorts is facing material near-term headwinds from China’s zero-tolerance COVID-19 policy as well as elevated operational risk in Macao from government oversight of VIP play. Still, MGM has a healthy liquidity profile to see it through this turmoil and remains positioned for the attractive long-term growth opportunities in Macao (22% of prepandemic 2019 EBITDAR), U.S. sports betting, and Japan (accounting for an estimated 10% of 2027 EBITDAR, the first year of likely operation). It can be seen a solid Macao industry visitation over the next 10 years, as key infrastructure projects that alleviate Macao’s congested traffic (Pac On terminal expansion and Hong Kong Bridge in 2018, light-rail transit at the end of 2019, and reclaimed land in 2020-25) come on line, which will expand the region’s constrained carrying capacity and add attractions, thereby driving higher visitation and spending levels. As MGM holds one of only six gaming licenses, it stands to benefit from this growth. Further, MGM Resorts has expanded its room share in Macao to 8% from 3% with its Cotai property, which opened in February 2018. That said, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government.

In the U.S. (78% of prepandemic 2019 EBITDA), MGM’s casinos are positioned to benefit from a multi-billion-dollar sports betting market, generating an estimated mid-single-digit percentage of the company’s 2024 sales. That said, the U.S. doesn’t offer the long-term growth potential or regulatory barriers of Macao; thus, it’s not believed that the region contributes a moat to MGM. Still, there have been very minimal industry supply additions this decade, and this should support solid industry Strip occupancy, which stood at around 90% in prepandemic 2019.

It is expected MGM to be awarded one of only two urban gaming licenses in Japan, with a resort opening in 2027, generating attractive returns on invested capital in the teens.

Financial Strength

MGM entered 2020 in its strongest financial health of the past 10 years. This was illustrated by its 3.7 times debt/adjusted EBITDA in 2019 versus 13 times and 5.7 times in 2010 and 2015, respectively. It was also buoyed by MGM having recently exited an investment cycle, where the company spent $1.6 billion on average annually during 2015-19 to construct and renovate U.S. and Macao resorts versus the $271 million it spent on capital expenditure in 2020. It is believed that MGM has sufficient liquidity to remain a going concern even with zero revenue for a few years. The recent sales of underlying casino assets (such as Bellagio in November 2019, Circus Circus in December 2019, MGM Grand/Mandalay Bay in February 2020, and the scheduled sale of Mirage in 2022) provided it with cash, helping it shore up its liquidity profile. Also, MGM received $4.4 billion in cash for its ownership in MGM Growth Properties, which was acquired by Vici in the first half of 2022. The firm has taken further action to lift its liquidity profile by reining in expenses, tapping its $1.5 billion credit facility (which has since been paid and reissued at $1.675 million), suspending dividends and repurchases (which have since been reinstated), and raising debt. MGM has $1 billion of debt scheduled to mature in 2022.

Bulls Say’s

It is expected that MGM be awarded one of only two urban Japanese gaming concessions due to its strong experience operating leading resorts in Las Vegas and its successful record of working with partners.

MGM is positioned to participate in Macao’s longterm growth opportunity (22% of prepandemic 2019 EBITDAR) and has seen its room share expand (to 8% from 3%) with the opening of its Cotai casino in February 2018.

MGM’s U.S. properties are positioned to benefit from the expansion of the multi-billion-dollar domestic sports betting market.

Company Profile

MGM Resorts is the largest resort operator on the Las Vegas Strip with 35,000 guest rooms and suites, representing about one fourth of all units in the market. The company’s Vegas properties include MGM Grand, Mandalay Bay, Mirage, Luxor, New York-New York, and CityCenter. The Strip contributed approximately 49% of total EBITDAR in the prepandemic year of 2019. MGM also owns U.S. regional assets, which represented 29% of 2019 EBITDAR.It is estimated MGM’s U.S. sports and iGaming operations are currently a mid-single-digit percentage of its total revenue. The company also operates the 56%-owned MGM Macau casinos with a new property that opened on the Cotai Strip in early 2018. Further, also its is expected that MGM will open a resort in Japan in 2027.

(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.

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.

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Technology Stocks

Cisco’s Demand Metrics Look Solid, but Supply Chain Challenges Can Inhibit Near-Term Growth

Post author By lvc-admin
Post date May 24, 2022
No Comments on Cisco’s Demand Metrics Look Solid, but Supply Chain Challenges Can Inhibit Near-Term Growth

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy and Outlook

The networking equipment behemoth Cisco continues to execute on its strategic focus of increasing recurring revenue via selling software and services to supplement its hardware products. Software and services were more than half of fiscal 2020 revenue, up from 43% in fiscal 2017. Cisco embracing software from hardware disaggregation, and even selling networking chips, can help keep demand for its solutions high although some customers rely on cloud-based resources or generic hardware. Cisco’s plan is assessed as the correct direction for maintainable growth and believe the firm’s strategic shifts through organic developments and acquisitions, keep Cisco as mainstay in today’s networks. The company is the dominant supplier of switches, routers, cybersecurity, and complementary networking products. Cisco’s products are mission critical for network performance, stability, and security. Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends, and Cisco is considered as the only one-stop-shop networking vendor. Cisco is deemed uniquely positioned to interweave complimentary necessities, like networking and security, together to provide comprehensive solutions for clients.

Despite Cisco’s commanding position in switches and routers, IT professionals are increasingly shifting computer workloads to the cloud, in turn buying less data center hardware. Alongside changing its product offerings, Cisco is moving product sales toward subscription-based offerings, which is considered the preferred method of consumption for cloud-based resources. Cisco is rolling this sales model to additional products, with customers looking to purchase bundles with analytics and security. Cisco is evolving its portfolio at a more rapid rate to stay ahead of trends in areas such as switching, communications, cybersecurity management, software-defined wide-area networking, and analytics. Cisco is expected to continue looking to acquisitions to bolster its capabilities in these areas to offset pressure in maturing market segments.

Financial Strength

Cisco is considered a financially healthy company. With a fiscal 2021 debt/capital ratio of 22%, abundant free cash flow generation, and expected on-time debt payments, there are no fiscal concerns. The company could safely lever back up to fund development projects, acquisitions, and shareholder returns if needed. Cisco has continually exceeded its commitment to return at least 50% of free cash flow, calculated as cash from operating activities minus capital expenditures, to shareholders. Cisco initiated its share repurchase program in 2001, has increased the authorization over time, had about $8 billion remaining at the end of fiscal 2021, with no termination date. Cisco is expected to opportunistically look to purchase shares. Cisco has recurrently raised its dividend year over year, and modest annual increases are forecasted. Even after shareholder returns and debt repayments, the company remains financially flexible with plenty of cash to support acquisitions and its large marketing and R&D expenditures. Growing recurring revenue will provide a steadier income stream, and strong operational and free cash flow generation is projected to continue in the future. Cisco is expected to manage its growing war chest with future cash deployments into strategic developments and acquisitions.

Bulls Say’s

Cisco’s one-stop-shop ecosystem, from switches to data analytics, should remain valued as more networking customers migrate to hybrid clouds.
Despite the rise of public clouds, Cisco should continue to grow its customer base via hybrid cloud and software offerings.
The expected rapid proliferation of devices to hit networks should drive customer demand for Cisco products. Cisco’s hardware is considered essential for access points, routing, and switching while software is crucial for analytics, security, and intent-based networking.

Company Profile

Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The secure, agile networks business contains switching, routing, and wireless solutions. The hybrid work division has products for collaboration and contact center needs. The end-to-end security group has products spanning a variety of threat prevention necessities. The internet for the future division has routed optical networks, silicon, and optics. Optimized application experiences offer solutions such as full stack observability. Services are Cisco’s technical support and advanced services offerings. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.

(Source: MorningStar)

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

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

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Global stocks

Weaker Consumer Pinches Revolve’s Near-Term Sales Prospects; Firm’s Long-Term Narrative Compelling

Post author By lvc-admin
Post date May 24, 2022
No Comments on Weaker Consumer Pinches Revolve’s Near-Term Sales Prospects; Firm’s Long-Term Narrative Compelling

Business Strategy and Outlook

The Revolve Group has carved out an interesting competitive niche in the attainable luxury category, leaning heavily into the strengths of the e-commerce channel–breadth of selection, scalability, and ubiquity of access–to reach a mobile-first, millennial and Gen Z audience across its online properties. With approximately 50,000 stock-keeping units (SKUs) sitting on its Revolve and Forward (luxury) marketplaces at any given time, and with 900 new styles launching weekly, the firm has positioned itself as an “online source for discovery and inspiration,” capturing almost 40% of apparel wallet share among its base of 2.04 million active buyers as of the first quarter of 2022. The firm’s strategy is viewed positively, with an ongoing shift toward mobile and e-commerce channels figuring to provide meaningful growth tailwinds in the near to medium term. Roughly 65% of Revolve’s sales came through mobile devices in 2021, more than double the volume of U.S. e-commerce retail sales in aggregate (35%), while e-commerce penetration continues its inexorable rise in the U.S., seeing apparel category sales approach a 40% online mix in 2021.

Revolve maintains a handful of growth levers that should allow it to capture more than its fair share of industry growth. The addition of beauty, athleisure, and casualwear sales layers, snowballing momentum from the nascent loyalty program, and a growing international business represent the lowest hanging fruit. Growth remains the top priority, with Revolve estimating just 3% penetration among its target demographic in the U.S., and return on advertising spending continues to look alluring. Further, a growing mix of private-label fare should drive moderate near-term gross margin expansion, as the retailer surgically rebuilds inventory around its 24 proprietary brands after pulling back amid pandemic concerns.

Finally, considering management’s openness about its pursuit of a tuck-in brand acquisition, the pursuit of a strong label in underpenetrated offerings like luxury, beauty, or menswear could bolster the firm’s competitive position and help capture incremental wallet share.

Financial Strength

Revolve’s financial strength is assessed as sound. The firm has generated positive operating cash flows in each of the last four years and maintained a $271 million cash and equivalents balance as of the end of the first quarter of 2022. Given the firm’s early stage in its growth cycle, the decision to eschew secured debt and the restrictions it bears is viewed as both prudent and consistent with firms across the coverage in similar stages of their respective lifecycles. With a net cash position and minimal interest cost, management is effectively unencumbered in its pursuit of strategic M&A, internal investment opportunities, and, down the line, shareholder distributions. These opportunities, in the order outlined above, represent the allocative priorities of the firm in the near to medium term.

With a highly cash generative model, averaging 9.5% free cash flow to sales over the next five years, shareholder pressure for distributions is expected to build at approximately the same time that the firm encounters a step-down in sales growth, most likely in the mid-2020s. While the forecast anticipates share repurchases and the initiation of a cash dividend as early as 2023 and 2024, respectively, this horizon could be pushed backwards by a brand acquisition (purportedly high on management’s wish list) and would require an amendment to the outstanding credit facility, in the case of the latter.

As growth slows, the preferable course of action would be for the firm to add leverage to optimize its capital structure and flag modest conflict of interest to that effect – management controls more than 90% of voting power through its Class B shares, and studies suggest that owners tend to assume less than optimal leverage, attributable to a combination of wealth concentration and risk aversion. Any impact on valuation to that effect would fall in the latter half of the decade but remains worth monitoring longer-term.

Bulls Say’s

Revolve offers attractive exposure to a quickly growing e-commerce apparel segment, representing one of only a handful of profitable pure-play online only stores.
Increasing private-label fare should provide a nearterm boost to gross margin performance and can be used to fill holes in the marketplace’s product assortment as the firm continues its category expansion.
The loyalty program should see better traction as in person events return, offering an attractive vehicle to gain wallet share and encourage cross-shopping Revolve and Forward marketplace properties. .

Company Profile

The Revolve Group is an emerging e-commerce retailer, selling women’s dresses, handbags, shoes, beauty products, and incidentals across its marketplace properties, Revolve and Forward. The platform is built to suit the “next generation customer,” emphasizing mobile commerce, influencer marketing, and occupying an aspirational but attainable luxury niche. With $891 million in 2021 sales, the firm sits outside the top 20 apparel retailers (by sales) in the U.S. but has consistently generated top-line growth north of 20%-25% as the industry continues to favor digital channels. The firm generates approximately 20% of sales from private-label offerings, while focusing on building an inventory of unique products from emerging fashion brands with less than $10 million in annual sales.

(Source: MorningStar)

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

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

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.

Tags US Market

Dividend Stocks

GQG Partners Initiation: Strong Momentum And Upside Not Priced In

Post author By lvc-admin
Post date May 24, 2022
No Comments on GQG Partners Initiation: Strong Momentum And Upside Not Priced In

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Business Strategy & Outlook

GQG is a boutique manager of listed equities. As of April 2022, GQG manages USD 90 billion for institutional, wholesale and sub advised clients. GQG manages global, U.S., ex-U.S., and emerging market equities. The firm has a blended investment style: It is willing to pay up for quality growth companies, but also holds stocks trading at lower valuation multiples. GQG’s portfolios are concentrated and don’t resemble their benchmarks. Its strategies tend to outperform more during downturns than in bull markets. The firm is in the early innings of expanding out of its core U.S. market. GQG is growing its distribution in Australia, Canada, and the Middle East. It is particularly focused on exploiting the growth of Australia’s superannuation system. It also intends to grow its number of wholesale and subadvised mandates. More than 75% of FUM is U.S.-centred, and less-sticky institutional and subadvised money.

Management prioritises organic growth over acquisitions. Rather than proliferating its offerings, GQG would sell new products only when its research efforts can be leveraged, with minimal incremental investment. For example, its concentrated global strategy is a subset of its global equity offering. The firm deliberately undercuts competitors on pricing and boasts below-average fees. Ongoing inflows and compounding of FUM is expected to drive earnings growth. A strong track record, expanding distribution and growing publicity beyond the U.S. are likely to support new business wins. There is ample capacity for the firm to onboard more clients as it mainly invests in large caps. Having bottom-quartile fees means GQG is well-positioned to withstand industry wide fee compression relative to other active managers. Moreover, there is still room for operating margins to expand as GQG’s expense needs—including remuneration—are not tied to revenue. However, investors should brace for periods of uneven performance given GQG’s portfolio and product concentration. The lack of product variety means GQG has limited levers to stem net outflows. GQG remains highly reliant on co-founder Rajiv Jain, so the group has much to lose if it cannot retain his services.

Financial Strengths

GQG’s strong financial health is underpinned by its conservative balance sheet with no debt and a healthy cash balance. Operations are funded by operating cash flows. Its 2021 initial public offering was a sell-down, with the proceeds raised mainly used to pay Rajiv Jain, Tim Carver, Pacific Current Group and internal employees. The firm has no intention (nor a need) to drawdown debt to fund its operating activities. Consistent earnings, strong cash flow conversion, and a strong balance sheet support GQG’s high dividend payout ratio target of between 85%-95% of distributable earnings (net income after tax plus tax benefit resulting from amortisation of the deferred tax asset). High dividend payouts are a key feature of the capital-light asset-management sector, delivering attractive shareholder returns while maintaining comfortable balance sheet settings. Notwithstanding the high payout ratio, GQG’s cash on balance sheet is projected to grow, enabling attractive dividends despite possible earnings volatility.

Bulls Say

GQG’s enviable performance track record is supportive of further mandate wins.
The firm is better placed than most active managers to withstand fee compression thanks to its highly competitive fee structure.
There is further room for GQG to grow earnings. Penetration in certain strategy categories remain low, and it’s in the early innings of distributing outside the U.S. Its sheer scale of FUM means that earnings can grow from just compounding market returns.

Company Description

Established in 2016, GQG Partners Inc. is a global boutique asset management firm focused on active equity portfolios. The company offers investment advisory and portfolio management services. GQG Partners manages money for investors around the world. They include pension funds, sovereign funds, wealth management firms, and other financial institutions. Headquartered in Fort Lauderdale, Florida, GQG also has operations in New York, Seattle, London, Sydney, and other locations.

(Source: Morningstar)

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

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

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