Author: lvc-admin

Categories
Technology Stocks

JD is seeing signs of Bottoming Out, Downgrading 2022 Estimates

Business Strategy & 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 has increased from 21% in 2016 to 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 two to three 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, the investment into community group purchase and JD logistics, and the higher mix of lower-margin supermarket category will hold back some of the margin gains. Starting in April 2017, the logistics business became an independent business unit that opens 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, the gross profit margin shall improvement. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.

Financial Strengths: 

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 generate positive FCFF at CNY 8.1 billion in 2020. JD has not paid dividends. JD.com has invested heavily in fulfilment infrastructure and technology in recent years, leading to concerns about its free cash flow profile and margin improvement story. The 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 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 headcounts. 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: 

  • JD.com’s nationwide distribution network and fulfilment capacity will be extremely difficult for competitors to replicate. 
  • As its first-party business gains scale, cost advantage will lead to lower sourcing costs and higher margin.
  • 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 Description: 

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 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
LICs LICs

Market Selloff Affects Franklin Resources’ Flows and AUM; Lowering Fair value Estimate to $29

Business Strategy & Outlook: 

A confluence of several issues—poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel—has made it increasingly difficult for active asset managers to generate organic growth, leaving them more dependent on market gains to increase their assets under management. While there will always be room for active management, think the advantage for getting and maintaining placement on platforms will go to managers that have greater scale, established brands, solid long-term performance, and reasonable fees. As such, it’s been big proponents of consolidation among the U.S.-based asset managers the past several years, with firms expected to pursue scale as a means of offsetting the impact of fee and margin compression (driven by the growth of low-cost passive products). However, a combination of narrow-moat Franklin Resources with no-moat Legg Mason was not even on the radar; it is believed both firms were more likely acquirers of smaller asset managers as opposed to either one being an acquisition target. 

The combined firm closed out April 2022 with $1.456 trillion in managed assets, composed primarily of equity (32%), fixed-income (39%), multi-asset/balanced (10%) funds, alternatives (15%) and money market funds (4%), giving it the size and scale necessary to be competitive. The new Franklin provides investment management services to retail (52% of managed assets), institutional (46%) and high-net-worth (2%) clients and is one of the more global firms of the U.S.-based asset managers with more than 35% of its AUM invested in global/international strategies and 25% of managed assets sourced from clients domiciled outside the U.S. While the Legg Mason deal to keep margins from deteriorating in the face of industrywide fee compression and rising costs (necessary to improve investment performance and enhance product distribution), near-term organic growth will struggle to stay positive, albeit better than the solidly negative growth profile for a stand-alone Franklin Resources.

Financial Strengths:

Franklin entered fiscal 2022 with $3.2 billion in principal debt (including debt issued/acquired as part of the Legg Mason deal): $300 million of 2.8% notes due September2022, $250 million of 3.95% notes due July 2024, $400 million of 2.85% notes due March 2025, $450 million of 4.75% notes due March 2026, $850 million of 1.6% notes due October 2030, $550 million of 5.625% notes due January 2044, and $350 million of 2.95% notes due August 2051. At the end of March 2022, the firm had $5.8 billion in cash and investments on its books. More than half of thesetypes of assets have traditionally been held overseas, with as much as one third of that half used to meet regulator capital requirements, seed capital for new funds, or supplyfunding for acquisitions. Assuming Franklin closes out the year and, it will enter fiscal 2023 with a debt/total capital ratio of around 22%, interest coverage of around 20 times, and a debt/EBITDA ratio of 1.5 times. Franklin has generally returned excess capital to shareholders as share repurchases and dividends. During the past 10 fiscal years, the firm repurchased $7.4 billion of common stock and paid out $7.1 billion as dividends(including special dividends). While Franklin’s current payout ratio of 30%-35% is lower than the 40% average payout (when excluding special dividends) during the past five years, and only low-single-digit annual increases in the dividend until the integration of the Legg Mason deal is well behind it. As for share repurchases, Franklin spent $208 million, $219 million, and $755 million buying back 7.3 million, 9.0 million, and 24.6 million shares, respectively, during fiscal 2021, 2020, and 2019. Given the likelihood that Franklin may decide to pay off some of its debt as it comes due the next several years, and it isn’t expect to see a large level of share repurchases in the near term.

Bulls Say:

  • Franklin Resources is one of the 20 largest U.S.-based asset managers, with more than two thirds of its AUM sourced from domestic clients. It is also the fifth- largest global manager of cross-border funds.
  • The purchase of Legg Mason has lifted Franklin’s AUM to around $1.5 trillion, hoisting it into the second- largest tier of U.S.-based asset managers, which includes firms like Pimco, Capital Group, and J.P. Morgan Asset Management.
  • Franklin maintains thousands of active financial advisor relationships worldwide and has close to 1,000 institutional client relationships.

Company Description: 

Franklin Resources provides investment services for individual and institutional investors. At the end of April 2022, Franklin had $1.456 trillion in managed assets, composed primarily of equity (32%), fixed-income (39%), multi-asset/balanced (10%) funds, alternatives (15%) and money market funds (4%). Distribution tends to be weighted more toward retail investors (52% of AUM) investors, as opposed to institutional (46%) and high-net-worth (2%) clients. Franklin is also one of the more global firms of the U.S.-based asset managers, with more than 35% of its AUM invested in global/international strategies and 25% of managed assets sourced from clients domiciled outside the United States.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Synopsys Outperforms With IP Sales Leading the Way Amid Rising Technical Complexity; FVE Up to $334

Business Strategy & Outlook:   

Synopsys provides electronic design automation (EDA) software, intellectual property (IP), and software integrity (SI) products that are critical to the semiconductor chip design process. As secular trends toward artificial intelligence, 5G communications, autonomous vehicles, and cloud computing, among others, accelerate, Synopsys will benefit from both the rising complexity of chip designs and the advancing digitalization of various end markets. The narrow-moat Synopsys has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform amid a growing semiconductor landscape. Synopsys’ products are transformational in enabling increasingly complex integrated circuit (IC) and system-on-chip (SoC) design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Synopsys is the largest player in the EDA space, and specifically in digital design as well. With a larger digital exposure, and it is discovered that Synopsys privy to higher growth vectors and as a result expect growth greater than that of top competitor Cadence. Outside of core EDA, Synopsys’ IP and SI businesses as benefiting from industry trends. As systems companies increasingly design their own differentiated silicon in-house, and Synopsys to benefit as its customer base expands beyond traditional semiconductor designers. This trend in achieving technological differentiation through chip customization to support IP adoption, as leveraging IP blocks for standardized components allows for significant time and resource savings and reallocation to differentiating components. Further, given the rising complexity of chip design, rising cost of failure, and increasing importance of software security, Synopsys’ growing SI business presents an important point of differentiation for the company. Reflecting the mission criticality of EDA tools, Synopsys exhibits negligible churn, with customer retention consistently at approximately 100%, and has relationships with all major chip design companies in the United States.

Financial Strengths:  

Synopsys is in a very healthy financial position. As of January 2022, Synopsys had $1.1 billion in cash and cash equivalents versus $24 million in debt. The firm repaid its $75 million outstanding term loan balance in 2021 and is now solely liable for a 12-year credit agreement of approximately $33 million in aggregate, of which about $24 million is outstanding as of January 2022. Approximately 90% of Synopsys’ revenue is of a recurring nature, given that the firm primarily sells time-based licenses. Synopsys’ average license length is approximately three years, with periodic software updates delivered throughout the license’s term ensuring continual access to Synopsys’ evolving technology. The ratable revenue of time-based licenses tends to smooth returns compared with utilizing a perpetual license model, allowing for better visibility into the future of the business. Synopsys is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows. Free cash flow margin has grown from 21% in fiscal 2017 to 33% in fiscal 2021, and return on invested capital is increasingly widening its spread above cost of capital. 

Bulls Say:  

  • Secular tailwinds in chip design such as 5G, Internet of Things, AI, and others should increase demand for EDA tools and support growth for Synopsys.
  • The growing Software Integrity business enables a larger TAM for Synopsys and addresses expanding demand for real-time identification of security vulnerabilities across the entire software development lifecycle.
  • Synopsys provides mission-critical EDA software, having relationships with all major domestic chip designers and retention rates of approximately 100%.

Company Description: 

Synopsys is a provider of electronic design automation (EDA) software, intellectual property (IP), and software integrity (SI) products. EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. The firm’s growing SI business allows customers to continuously manage and test the code base for security and quality. Synopsys’ comprehensive portfolio is benefiting from a mutual convergence of semiconductor companies moving up-stack toward systems-like companies, and systems companies moving down-stack toward in-house chip design. The resulting expansion in EDA customers alongside secular digitalization of various end markets benefits EDA vendors like Synopsys.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks Shares

Activewear Is a Growth Category, but Under Armour Lacks a Competitive Edge

Business Strategy & Outlook

The Under Armour as lacking an economic moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, Under Armour’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, its North America sales have not grown over the past five years as it restructured and demand for performance gear, Under Armour’s primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, the long-term benefits for Under Armour will be limited as compared with global brands wide-moat Nike and narrow-moat Adidas. A Under Armour has fallen behind on innovation and its product is not sufficiently differentiated.

Under Armour has recently had problems in both its direct-to-consumer and wholesale businesses. Although sales through its direct-to-consumer channels increased to $2.3 billion in 2021 from $1.5 billion in 2016 (calendar years), Nike and others have experienced much greater direct-to-consumer growth in this period. Under Armour has opened its own stores as wholesale distribution has slowed, but 90% of them in North America are off-price. Still, its direct-to-consumer revenue will rise to 61% of total revenue in fiscal 2032 from 42% in its last fiscal year. This should allow Under Armour to have better control over its brand, but one cannot see evidence that it allows for premium pricing and see it as a defensive move. The Under Armour’s international segment will produce growth over the long term, but the firm faces significant competition from global and native operators with established brands and distribution networks. According to Euromonitor, the combined sportswear markets in Asia-Pacific and Western Europe were about $160 billion in 2021, greater than North America’s roughly $140 billion. As Under Armour generates only about 30% of its revenue in Europe and Asia-Pacific, it has room for growth, but it lacks strong retail partnerships and brand recognition.

Financial Strengths

The Under Armour has enough liquidity to get through COVID-19 even as the effects have not fully passed. Prior to the crisis, the firm’s long-term debt consisted only of $593 million in 3.25% senior unsecured notes that mature in 2026. Then, in May 2020, Under Armour completed an offering of $500 million in 1.5% convertible senior notes that mature in 2024. However, as this additional funding has proven to be unnecessary, the firm has already paid down more than 80% of this convertible debt. Even after these debt repayments, at the end of March 2022, the firm had $1 billion in cash and $1.1 billion in borrowing capacity under its revolver. Thus, the Under Armour to operate in a net cash position for the foreseeable future. Under Armour’s free cash flow to equity has recovered from the pandemic impact, totaling about $850 million over the past two fiscal years. The forecast about $5.6 billion in free cash flow generation over the next decade. Although the firm does not pay dividends, it recently authorized its first share buyback program. The firm repurchased $300 million in shares in February 2022, and the forecast another $20 million in buybacks in fiscal 2023. Moreover, Under Armour’s restructuring has reduced base operating expenses by about $200 million, and the forecast its capital expenditures will remain low at about 2% of sales. The firm may use some of its free cash flow for acquisitions, but one cannot forecast acquisitions due to the uncertainty concerning timing and size. Although its growth has been largely organic, the firm acquired three fitness apps for a combined $710 million in past years as part of a strategy that has been mostly abandoned. It has also made some smaller investments, such as an investment of $39.2 million in its Japanese licensee, Dome, in 2018 to raise its ownership stake to 29.5%. Under Armour later had to write down this investment because of restructuring at Dome.

Bulls Say

  • Under Armour quickly became no-moat Kohl’s second biggest brand after its introduction in 2017. This partnership allows Under Armour to reach more female customers. Kohl’s is expanding shelf space for activewear. 
  • Under Armour’s restructuring has produced an average annual savings of $200 million. The firm can reinvest these savings into marketing and international expansion while improving its operating margins.
  • Under Armour could gain shelf space and distribution as Nike has reduced or eliminated shipments to some major sportswear retailers.

Company Description

Under Armour develops, markets, and distributes athletic apparel, footwear, and accessories in North America and other territories. Consumers of its apparel include professional and amateur athletes, sponsored college and professional teams, and people with active lifestyles. The company sells merchandise through wholesale and direct-to-consumer channels, including e-commerce and more than 400 total global factory house and brand house stores. Under Armour also operates a digital fitness app called MapMyFitness. The Baltimore-based company was founded in 1996.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

Sempra Could See Additional LNG Opportunities but Focus Should Remain on Utilities

Business Strategy & Outlook

Sempra Energy’s investment opportunities at its regulated utilities in California and Texas will remain the primary growth driver. California’s regulatory environment has remained constructive for Sempra, as its emphasis on distribution-related safety and reliability infrastructure upgrades aligns well with the state’s regulatory priorities. Sempra has received constructive regulatory treatment in the state. The company’s most recent outcome positions the California utilities to grow rate base 9% annually at SDG&E and 12% at SoCalGas, supported by a combined $21 billion of capital investment during the next five years. The state’s regulatory environment will be put to a test during a busy regulatory calendar in the state. Both of Sempra’s subsidiaries in the state filed cost of capital proceedings for 2023-25. Additionally, the company will soon file a general rate case proposal with regulators to determine revenue in 2024-27. Overall, the constructive outcomes.

Sempra’s Texas subsidiaries’ transmission assets should continue to benefit from Texas’ aggressive wind generation build-out. Management continues to identify capital investment opportunities in the state. The expected $17.0 billion capital investment for 2022-26 to address economic development, customer growth, and grid hardening and expansion. Sempra’s natural gas infrastructure businesses should be able to capitalize on the increasing demand for natural gas. Management is moving forward on developing its LNG portfolio, including its ECA LNG export facility. Sempra management limits the risk with LNG development by entering into long-term contracts with creditworthy counterparties, many of which also become equity owners. Management has effectively recycled capital to fund its growing capital plan. Sempra Energy recently sold a 20% noncontrolling interest in Sempra Infrastructure Partners to KKR, which houses LNG, natural gas infrastructure, and Mexican renewable energy and transmission assets. In December, Sempra announced that it would sell an additional 10% ownership to Abu Dhabi Investment Authority. Both transactions were at what one can consider very attractive valuations.

Financial Strengths

The Sempra to maintain a balance sheet with about mid-50% debt through 2026, in line with most regulated utilities. Small equity issuances will help fund the company’s investment plans. With the Cameron LNG export facility completed, Sempra is also considering pursuing incremental large-scale development of other export facilities in its infrastructure portfolio. Any of Sempra’s incremental capital expenditures for the facility would likely be mostly project-financed with equity contributions from LNG off takers. The debt/EBITDA to be below 5.0 times through 2026. With robust capital expenditure plans and ongoing development of its unregulated business, the company to continue borrowing at both the utility and parent levels in the next few years. EBITDA/interest coverage should remain solid, averaging above 5 times through 2026 in the forecast. Sempra’s liquidity remains strong. Sempra’s liquidity position and cash flow generation should give investors’ confidence that it can maintain and grow its dividend.

Bulls Say

  • Opportunities for rate base growth at Sempra’s utilities are above average, and California and Texas regulation generally allows timely recovery of capital expenditures and a dynamic cost of capital.
  • As an early and large investor in the Mexican energy sector, Sempra could see an outsize share of new development projects under market deregulation.
  • Sempra’s LNG terminals and pipeline give investors exposure to a growing market for natural gas in the U.S. and Mexico.

Company Description

Sempra Energy serves one of the largest utility customer bases in the United States. It distributes natural gas and electricity in Southern California and owns 80% of Oncor, a transmission and distribution business in Texas. SoCalGas and San Diego Gas & Electric distribute gas to more than 20

million customers, while Oncor serves more than 10 million Texas customers. The firm’s other affiliates own and operate liquefied natural gas facilities in North America and infrastructure in 

Mexico.

(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

Massive Opportunity for Sea but Path to Profitability Remains Difficult to Navigate

Business Strategy & Outlook

The Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. Per Euromonitor, Shopee has 30% share of its main market, Indonesia, and it estimated about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process, it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, one cannot see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, the growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

The massive potential for Sea is evident as e-commerce is 7%-8% of overall retail sales in Southeast Asia, compared with 22% for China. It forecasted a 23% five-year compound annual growth rate for the digital economy in the region. China’s e-commerce is expected to grow 11% in the same period. Given the robust macro backdrop, this should provide a conducive landscape for Shopee to succeed. Despite a massive opportunity, Shopee remains vulnerable to increased sales and marketing expenses and low switching costs. Other platforms can offer the same products with subsidies to consumers who are cost-conscious. This also implies the possibility of new competitors in e-commerce in the region that can replicate the same strategy. Given the lack of differentiation for Shopee, one can see further heavy subsidies in order to ward off threats and maintain market share, which could be impossible to continue in the long term in the pursuit of profitability. The company has indicated a goal for Shopee to be cash flow positive by 2025, but this could be a challenge without clear key advantages.

Financial Strengths

One cannot believe that Sea has any financial issues outside of the concerns about heavy cash burn. It has cash and short-term investments of USD 11.7 billion against only USD 3.3 billion total debt as of the end of 2021. Short-term liquidity is not an issue as the firm has USD 286 million of short-term debt and its current ratio is 2 times. The main concern is that the cash balance could erode quickly if sales and marketing and research and development expenses continue at this rate. In 2021, cash (excluding stock-based compensation and depreciation) operating expenses were USD 5.0 billion, which implies that Sea should be able to withstand cash burn for at least two years in a worst-case scenario where it generates zero revenue. It would not surprise us if Sea raises additional capital in order to have more of a cash buffer, but one cannot believe this poses any risk for now should the company become profitable. Outside of cash burn concerns, there are no red flags concerning leverage nor interest expenses.

Bulls Say

  • Sea could maintain its leading market share as Southeast Asia e-commerce expands without having to sacrifice profitability through increased sales and marketing spending.
  • Garena could find another hit game that increases bookings in addition to Free Fire. Also, India could rescind its sanctions on Free Fire
  • SeaMoney could increase its market share above its current 3% and become the one of the preferred payment options in Southeast Asia.

Company Description

Sea operates Southeast Asia’s largest e-commerce company, Shopee, in terms of gross merchandise value and number of transactions. Sea started as a gaming business, Garena, but in 2015 expanded into e-commerce, which is now the main growth driver. Shopee is a hybrid C2C and B2C marketplace platform operating in eight core markets. Indonesia accounts for 35% of GMV, with the rest split mainly among Taiwan, Vietnam, Thailand, Malaysia, and the Philippines. For Garena, Free Fire was the most downloaded game in January 2022 and accounted for 74% of gaming revenue in 2021. Sea’s third business, SeaMoney, facilitates e-wallet payments on Shopee and offline and provides other digital financial services such as credit lending.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Ritchie Bros. Puts a Spotlight on its Services Business at its Investor Day

Digital tablet display the stock market data

Business Strategy & Outlook

Ritchie Bros. provides auction and marketplace services for used heavy equipment. The company’s strong auction liquidity attracts both buyers and sellers to its network. The Ritchie Bros. will continue to be one of the top players in the asset disposition market. The network effects present in its business have consistently delivered higher average selling prices for consignors (or sellers) and provided buyers a wide range of equipment to choose from. For both parties, Ritchie Bros. drives significant amount of value, which has allowed it to monetize its network effects and develop a strong competitive positioning.

Ritchie Bros.’ strategy going forward is to move its business from being primarily transaction based to more solutions based. It has developed digital solutions that range from inventory management solutions for buyers to market intelligence tools for sellers. The company is also pushing to provide more services to customers, such as equipment inspections, storage, and advertising, in addition to asset valuation services. While these services have the potential to drive higher profitability, the it will be challenging to drive adoption rates higher in the near term. Customers will need to be convinced of the value that add-on services can bring to their buying or selling experience.  The company has exposure to attractive tailwinds in the near term. Construction equipment makes up more than half of the equipment sold through Ritchie Bros., with the balance in transportation and agriculture equipment. The near term looks bright for each of these markets, meaning Ritchie Bros. will likely see increased activity on its marketplace. In economic upturns, equipment owners often opt to sell their older equipment to buy newer ones. Ritchie Bros. also benefits when markets are pressured, and equipment owners look to increase their liquidity levels through asset disposals (such as bankruptcies). The used equipment supply will continue to loosen in the near term and lead to greater auction liquidity for Ritchie Bros.

Financial Strengths

Ritchie Bros.’ total debt at the end of 2021 stood at $1.7 billion, which equates to a net debt/adjusted EBITDA ratio of 4. The company issued new debt (over $900 million) in 2021 to fund its acquisition of Euro Auctions, however, the company intends to issue redemption notices on the new debt, given its decision to discontinue the deal. Historically, the company’s total debt has ranged between $100 million-$250 million. In 2016, Ritchie Bros.’ total debt rose to $619 million (up from $110 million in 2015) after it issued notes with a principal of $500 million (due in 2025) to partially fund its acquisition of Iron Planet. The company can generate $400 million in free cash flow in the midcycle year, supporting its ability to bring debt levels down.

Ritchie Bros. also provides financial services to its customers by matching them with lenders (it receives a fee for acting as broker). Management has expressed interest in expanding its financial services to get access to assets that will likely be sold through bankruptcies. The Ritchie Bros. will work to leverage its partnership with Gordon Brothers, an investment firm focused on working with businesses dealing with insolvency issues. By using its excess capital, Ritchie Bros. can potentially bring additional assets to its marketplace to be sold off, but this is more of a long-term opportunity rather than an immediate value driver. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of 2021 stood at $326 million on its balance sheet. One can also find comfort in its ability to tap into available lines of credit to meet any short-term needs. The company has access to $525 million in credit facilities. It maintains a strong financial position with a clean balance sheet.

Bulls Say

  • Increasing construction activity could lead equipment owners to buy new machines and sell their used equipment through Ritchie Bros.’ auctions, substantially boosting its revenue growth.
  • Equipment owners may feel more comfortable putting their machines up for sale as the economic environment improves, strengthening Ritchie Bros.’ auction liquidity.
  • Ritchie Bros.’ success operating in a fully online environment during the pandemic might convince more buyers to leave other machinery-focused websites for its auctions, which could boost the company’s profitability.

Company Description

Ritchie Bros. operates the world’s leading marketplace for heavy equipment. The company started as a live auctioneer of industrial equipment, since then it has greatly expanded its operations to include the sale of construction, agricultural, oilfield, and transportation equipment. Ritchie Bros. operates over 40 live auction sites in more than 12 countries, along with online marketplaces, including iron Planet, Marketplace-E, and GovPlanet. Its agricultural auctions are frequently much smaller venues and can include liquidations of single farms. The company holds over 300 auctions yearly and sells over $5 billion worth of equipment.

(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

A less Uncertain Future for Australian Banks, particularly on the Downside

Business Strategy & Outlook:  

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand. The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. The banks greater investment into specialist credit teams across areas such as agriculture, health, education, franchising, as well as business banking centres, sets the bank apart. This ultimately led to a better understanding of the customers’ requirements, faster turnaround times, and higher approval rates. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers. While risks directly related to COVID-19 have abated, wage pressures, labour, and supply chain challenges, and high inflation pose challenges as the cash rate increases. The main current influences on earnings growth are modest credit growth and widening margins as the banks reprice lending rates in a rising cash rate environment. Operating expenses will continue to rise as the bank invests to capture growth opportunities, this despite productivity improvements being realised. After enjoying super low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020. It is expected a return to midcycle levels around 0.18% in fiscal 2025. The MLC wealth divestment completed in May 2021 after reaching an agreement with IOOF for AUD 1.44 billion as the bank simplifies and refocuses on its core banking operations.

Financial Strengths: 

National Australia Bank is in good financial health, with common equity Tier 1 of 12.5% above the regulator’s 10.5% benchmark as at March 31, 2022. The bank slashed the fiscal 2020 dividend to AUD 60 cents per share on both lower earnings a reduced dividend payout ratio. The payout shall average 70% of earnings before notable items over the next five years, in line with the target range of 65%-75% introduced in 2020. National Australia Bank completed a AUD 2.5 billion buyback announced in July 2021, announcing an additional AUD 2.5 billion buyback in March 2022. Assuming completion of the second share buyback and the acquisition of Citigroup’s Australian consumer business, the bank should remain above its 10.75% to 11.25% target range.

Bulls Say: 

  • Management focus is on the successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth.
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from the rebound in demand for business credit.
  • NAB has the ability to achieve significant cost savings and drive operational efficiency improvements.

Company Description:

National Australia Bank is the most business-focused of the four major banks, holding the largest share of business loans and the number-three spot in home loans. National Australia Bank is currently the third-largest bank by market capitalisation, with the franchise covering consumer, small business, corporate, and institutional sectors. Under the UBank brand the bank also owns one of Australia’s largest digital-only banks. Offshore operations in New Zealand round out the group.

(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
Shares Small Cap

Waiting to Hear Seven’s Voice on Capital Management

The Japan Finance and market, Data Chart.

Business Strategy & Outlook: 

Seven, which generates the majority of its earnings through Seven Network’s free-to-air TV and broadcast video on demand units, offers exposure to the AUD 3.8 billion total Australian television advertising market. It is a media segment that has remained largely flat during the past 10 years, after consistently enjoying growth of about 6% in the preceding decade. The slowing growth has been caused by proliferating digital media alternatives, rapidly changing entertainment consumption habits, and increasing high-speed broadband adoption. Indeed, the structural headwinds have been such that the free-to-air television industry’s share of the Australian total advertising pie has slumped from more than 35% in the mid-2000s to just over 20% now, as advertisers follow eyeballs to digital media platforms. 

Within this mature industry, Seven Network commands the number-one or two position, with a 38%-40% rating and revenue share of the commercial metropolitan free-to-air television market. Its library of extensive sports and general entertainment programming has aided in the rise of these share metrics in recent years. Seven Network can maintain revenue shares at the 38.0% level on a long-term, midcycle basis. The key investment consideration comes down to Seven Network’s EBIT margin outlook. This is important in the face of increasing competition for viewers (from proliferating new digital entertainment options) and for content (from digital upstarts and incumbent television broadcasters). The group’s exposure to the even more structurally challenged print media industry is another key issue facing investors in Seven West Media. Earnings from the newspaper division have slumped from almost AUD 140 million in fiscal 2011 to AUD 28 million in fiscal 2021. However, combined profits from the print media business now account for less than 10% of the group’s total.

Financial Strengths:

The strong progress in balance sheet repair in recent years has vaporised the key concern regarding the group’s financial position. This is reflected in company’s net debt/EBITDA forecast of 0.8 by the end of fiscal 2022.

Bulls Say:  

  • Seven West Media commands a strong position in the Australian free-to-air television industry, with leading ratings and revenue shares.
  • The unique antisiphoning regime in Australia ensures that Seven Network will continue to have a stronghold on marquee live sports programming, such as the Australian Football League, cricket, and other sports events of national importance. 
  • Seven Network creates and produces about 70% of its television programming (excluding sports), far more than its peers, allowing the company to capture much of the content value chain in proliferating media channels.

Company Description: 

Seven West Media operates Seven Network, a free-to-air television network spread across five capital cities, as well as in regional Queensland. It also owns most of the newspapers circulating in Western Australia (including the monopoly Perth title called West Australian Newspapers), as well as the country’s second-largest magazine publishing group (Pacific Magazines). In the Australian online space, it operates broadcast on demand, or BVOD, service called 7plus.

(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

MyState Uncertainty Rating upgraded to Medium

Business Strategy & Outlook:  

MyState Ltd is one of Australia’s smallest listed banks, commanding a tiny 0.26% of the mortgage market. A key point of difference though is MyState’s large exposure to housing, and in particular, owner occupied and low loan/value ratio loans. Housing loans make up around 95% of MyState’s total loan book, in comparison to roughly 65% (on average) for the major banks. This contributes to the bank’s sound credit quality, with the lowest arrears and bad debts in the industry. Due to its size, MyState struggles to generate comparable margins to the majors, mainly due to its much smaller customer base and higher funding and operating costs. 

The bank is focused on growing its loan book to increase scale, with its recent track record demonstrating its ability to grow both loans and deposits well above system. It is progressively expanding and diversifying its loan book outside Tasmania, utilizing mortgage brokers to grow in the Australian eastern states. However, with MyState continuously repricing mortgage rates to win customers, solid loan growth has not been matched by income growth. As a result, return on equity has averaged 9% to 10% over the last five years. Digitisation, marketing and operational efficiency remain the key areas of focus. Technological advancements will continue to be integrated into daily operations to keep cost growth down and enhance customer experiences. MyState’s cost/income ratio should improve over time as it leverages increasing scale, have more automated systems and processes and rationalizes the branch network. MyState is banking on digitization and marketing for continued customer growth; but these initiatives as “must-dos” to keep up with competition, rather than differentiating factors to drive significant growth in loans or deposits. There is scope for MyState to grow its loan book further, given its low penetration in Australia’s eastern seaboard.

Financial Strengths: 

The bank is in sound financial health, with comfortable regulatory capital levels (total capital ratio of 13.8% and common equity Tier 1 ratio of 11.6% as at December 2021). MyState’s board has set a minimum total capital ratio of 12.5%. The capital structure and solid balance sheet provide comfort that it can manage a potential increase in mortgage loan losses. Customer deposits roughly represent two thirds of total funding requirements. Access to residential mortgage-backed securitization funding is supporting the wholesale funding requirement. However, ongoing access to RMBS markets is dependent on changing, and at times unpredictable, capital market conditions. MyState has approximately 13% of its funding from securitization, a relatively high exposure to RMBS markets compared with its larger peers.

Bulls Say:  

  • Low credit costs associated with mortgages provides more consistent earnings in comparison to larger more diversified lenders.
  • Customer deposits provide 75% of funding, helping reduce demand for more expensive wholesale funding.
  • The bank is increasing its loan book above system with increasing broker channel distribution, leading improved geographic diversification and scale.

Company Description:

MyState Limited is a Tasmania-based financial company that provides banking, trustee, and funds management services. The company generates the vast majority of its profit from its banking business, which provides a range of financial services including home and personal loans, credit and debit cards, and other financial products. Home loans account for the vast majority of its loan book. The funds management segment provides trustee and funds management services through the subsidiary TPT Wealth.

(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.