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Categories
Dividend Stocks

CMS Expands Its Investment In Renewable Energy And Carbon Emissions Reductions Based On State Policy Support

Business Strategy and Outlook

CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS’ work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan. 

With regulatory and political backing, CMS plans more than $14 billion of investment the next five years and could add to that as it receives regulatory backing for new projects. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years. Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive regulatory decisions. CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s 10-year integrated resource plan framework. Regulators are expected to approve CMS’ 10-year integrated resource plan settlement. If CMS can keep rate increases modest by controlling operating costs, continued regulatory support is anticipated and could even add as much as $5 billion of investment on top of its current plan. 

CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire the Palisades nuclear plant and all of its coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strength

Although CMS has trimmed its balance sheet substantially, its 65% consolidated debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. CMS has reduced its near-term financing risk with opportunistic refinancings. CMS is expected to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth. 

CMS’ consolidated returns on equity are projected to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favorable bond markets to extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that ultimately could end up reducing CMS’ allowed returns, customer rates and earnings.

Apart from financing the large Covert power plant acquisition in 2023, CMS is not expected to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. The $930 million aftertax cash proceeds from the EnerBank sale are anticipated to offset new equity needs through 2024. With constructive regulation, CMS will be able to use its operating cash flow to fund most of its investment plan during the next five years.

Bulls Say’s

  • Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth. 
  • CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow. 
  • CMS’ board has more than doubled the dividend since 2011. 7% annual dividend increases are anticipated going forward even if the payout ratio remains above management’s 60% target.

Company Profile 

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.9 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021.

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

CMS’ Long-Term Resource Plan Settlement, Usage Growth Support Earnings Outlook

Business Strategy & Outlook

CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS’ work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan.

With regulatory and political backing, CMS plans more than $14 billion of investment the next five years and could add to that as it receives regulatory backing for new projects. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years.

Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive regulatory decisions. CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s 10-year integrated resource plan framework. The regulators to approve CMS’ 10-year integrated resource plan settlement. If CMS can keep rate increases modest by controlling operating costs, it will continue to get regulatory support and could even add as much as $5 billion of investment on top of its current plan. CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire the Palisades nuclear plant and all of its coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strengths

Although CMS has trimmed its balance sheet substantially, its 65% consolidated debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. CMS has reduced its near-term financing risk with opportunistic refinancing. The CMS to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth. The CMS’ consolidated returns on equity to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favorable bond markets to extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that ultimately could end up reducing CMS’ allowed returns, customer rates and earnings. Apart from financing the large Covert power plant acquisition in 2023, it doesn’t expect that CMS to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. We expect the $930 million after-tax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, we expect CMS will be able to use its operating cash flow to fund most of its investment plan during the next five years.

Bulls Say

  • Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth.
  • CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow
  • CMS’ board has more than doubled the dividend since 2011 and 7% annual dividend increases going forward even if the payout ratio remains above management’s 60% target.

Company Description

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.9 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021.

(Source: Morningstar)

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

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

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

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

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

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

No Meaningful Surprises in ITT’s First-Quarter Print as We Maintain FVE; Shares Cheap

Business Strategy & Outlook

As per the predication the positive outlook for ITT on its best-performing segment, motion technologies, or MT. MT traditionally outpaces market growth by 700 to 1,000 basis points, a trend expect to continue. And while industrial process, or IP, remains a price-competitive business, management should be commended for improving its adjusted segment operating margins to the midteens, despite a very difficult operating environment. Both IP and ITT’s connect and control technologies segment, or CCT, should increasingly create shareholder value as management furthers lean improvements.

Within MT, the most bullish on brake pads, which still present a robust growth opportunity in the medium-term. Their potentially positive impact on intrinsic value, given MT’s sales exposure. The positive MT growth drivers include a strong secular trend away from copper and other metal brakes, market preference for smoother, noise-damping brakes, and demand for increased safety leading to additional adoption of ceramics. These dynamics play to ITT’s strength in material science development. Rising installations of disc brakes, which demonstrate superior braking efficiency, are another tailwind. These forces will drive aftermarket growth, particularly as vehicle production rates increase throughout the explicit forecast. Innovations like the smart pad have the potential to directly interface with a vehicle’s control unit and provide drivers a wealth of data, including enhanced diagnostics of noise and vibration, real-time braking torque and pressure data, and sensor readings during adverse weather patterns. And MT’s wealth of competitive advantages positions it strongly in the transition toward electric vehicles on the original equipment side, even as the aftermarket will be a slow, but long-term headwind on the aftermarket side.

Finally, aerospace and defense constitute about 47% of CCT’s sales mix. While defense is tied to elevated defense budgets in the near term, ITT is well positioned in the commercial aerospace
recovery. Even with near-term challenges, the both IP and CCT can raise its adjusted operating margins to between 19% and 20% over the long term.

Financial Strengths

ITT is on solid financial footing and the firm a moderate credit risk rating. The following a transaction on June 30, 2021, ITT no longer has any obligation with respect to pending and future asbestos claims. The ringfencing this liability was an excellent move on the part of management, since it removed both uncertainty and headline risk.

Using a punitive methodology (incorporating all interest-bearing obligations and calls on capital), ITT
consistently runs a net cash positive position. Therefore, no one is overly concerned about whether ITT can service its current obligations.

Bulls Say

Solutions like copper-free and smart brake pads will help ITT win content on additional and existing platforms, and its material science expertise should help with wins in the electrical vehicle original equipment segment.

CEO Luca Savi will bring the same focus and drive operational efficiency to both IP and CCT as he did in MT; long-term, both IP and CCT can deliver 20% segment operating margins.

An unleveraged balance sheet gives the company room to make value-accretive acquisitions.

Company Description

ITT is a diversified industrial conglomerate with nearly $3 billion in sales. After the spinoffs of Xylem and Exelis in 2011, the company’s products primarily include brake pads, shock absorbers, pumps, valves, connectors, and switches. Its customers include original-equipment and Tier 1 manufacturers as well as aftermarket customers. ITT uses a network of approximately 700 independent distributors, which accounts for about one third of overall revenue. Nearly three fourths of the company’s sales are made in North America and Europe. ITT’s primary end markets include automotive, rail, oil and gas, aerospace and defense, chemical, mining, and general industrial.

(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
Small Cap

BLD on a pro forma basis is expected to have net debt of less than $400m

Investment Thesis

  • Near-term outlook remains uncertain in Australia with higher costs and supply chain constraints.
  • BLD is a much cleaner business operations following several divestments, which increased focus. 
  • Boral is expected to benefit from proposed infrastructure projects.   
  • Better realization of price increases, whilst volumes remain solid. 
  • Focused on the Australian market. 
  • Proceeds from divestments could be returned to shareholders. 
  • Large cornerstone shareholder – Seven Group Holdings (owns approx. 70%) – may provide shareholder turnover stability

Key Risks

  • Increase Concentrated earnings, focused on just the Australian Construction market. 
  • Indirect and direct effect of coronavirus on operations.
  • Potential delays to infrastructure assets leading to a volume gap in the market. 
  • Cost pressures continue to exceed price increases. 
  • Unfavorable weather impacts. 
  • BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives

Key Highlights

BLD’s 1H22 results were impacted by Covid-19 related construction shutdowns and adverse wet weather. 1H22 revenue from continuing operations of $1.5bn was up +1% YoY driven by activity in detached house, A&A and RHS&B. However, operating earnings of $78m declined -23% YoY, with EBIT margin declining -100bps to 5.8%, due to $33m impact from Covid-19 lockdowns and expenses (energy + other costs). $22m from the cost out program (Transformation program) provided some offset. Maintain Neutral recommendation given the stock trades on a healthy forward PE-multiple of 24x, which we believe adequately reflects BLD’s leverage to the Australian infrastructure spend, further capital returns potential and cost outs supporting earnings (Transformation program). Further, BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives.  

  • 1H22 results summary – continuing operations. (1) Revenue of $1.5bn was up +1% (or up +3% on a comparable basis), driven by activity in detached house, A&A (alterations & additions) and RHS&B (roads, highways, subdivisions & bridges) and despite there being disruptions from lockdowns. The Company did see solid volumes in concrete (up +1%) and quarries (up +4%). Further, management noted that concrete like-for-like prices were steady and up +2% in quarries. (2) Operating earnings (EBIT) of $78m were down -23% (with EBIT margin declining to 5.8% from 6.8%), which was largely driven by the impact from Covid-19 related construction shutdowns (which adversely impacted earnings by $33m) and expenses (energy + other costs). Partially providing some buffer to EBIT was higher volume (up $22m) and $22m from the cost out program (Transformation program), which includes the $24m of cost inflation. (3) Operating cash flow from operations of $86m was down -22%, reflecting lower EBITDA performance due to construction shutdowns
  • Capital return of $2.72 per share. Given the completion of disposal of BLD’s North American Building Products and Fly Ash, and Australian Building Products businesses (Timber and Roofing & Masonry) for more than $4bn, the Company will return $3bn surplus capital to shareholders via a $2.65 capital reduction and 7cps unfranked dividend.
  • Capital structure. Following the divestments of its non-core assets and expected capital return to shareholders, BLD on a pro forma basis is expected to have net debt of less than $400m. Management is targeting net debt of $900m to $1.1bn (including leases) and leverage (net debt / EBITDA) of 2 – 2.5x.
  • FY22 outlook comments. Management did not provide overly specific guidance but noted the following: (1) 2H22 revenue is expected to be above 1H22, driven by out-of-cycle national price increases effective Jan/Feb 2022. However, this is expected to offset the impact of higher energy costs, which will remain a headwind in 2H22. (2) No construction shutdowns in 2H22 ($33m impact in 1H22) are expected to be offset by typical 2H seasonality due to 6 fewer trading days.   

Company Profile 

Boral Ltd (BLD) is the largest integrated construction materials company in Australia, producing and selling a broad range of construction materials including quarry products, cement, concrete, asphalt and recycled materials. The Company has a portfolio of assets consisting of upstream and downstream assets. BLD employs approximately 10,300 employees and contractors and has 367 construction materials sites across Australia.

 (Source: BanyanTree)

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

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

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

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

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

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

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

Categories
Small Cap

The company’s platform reach should grow as Sabre continues to revitalize its technology

Business Strategy and Outlook

Despite material near-term travel demand headwinds driven by the coronavirus, it is anticipated Sabre to maintain its position in global distribution systems over the next several years, driven by a leading network of airline content and travel agency customers as well as its solid position in technology solutions for these carriers and agents. Sabre’s roughly 40% GDS transaction share is the second-largest of the three companies (behind narrow-moat Amadeus and ahead of privately held Travelport) that together control nearly 100% of market volume. Sabre is also a leader in providing technology solutions to travel suppliers. 

Sabre’s GDS enjoys a network advantage, which is the source of its narrow-moat rating. As more supplier content (predominantly airline content) is added, more travel agents use the platform, and as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book. Also, the company’s platform reach should grow as Sabre continues to revitalize its technology and looks to expand with low-cost carriers and in countries where it previously had only minimal penetration, which are also markets with higher yields than the consolidated North American region. 

Replicating the company’s GDS platform would entail aggregating and connecting content from several hundred airlines to a platform that is also connected to travel agents, which requires significant costs and time. Although it is seen for GDS aggregation, processing, and back-office advantages as substantial, technology architectures like that of eTraveli (set to be acquired by narrow-moat Booking Holdings in early 2022), enable end users to access not only GDS content but supply from competing platforms, which could take some volume from companies like Sabre. Also, GDS faces some risk of larger carriers making direct connections with larger agencies, although it is likely for these relationships to be the exception rather than the rule and for Sabre to still be the aggregating platform in either case.

Financial Strength

Although Sabre’s balance sheet is leveraged, it has shored up its liquidity profile and has enough runway to operate at zero revenue into 2023. Sabre has achieved this profile by eliminating $275 million in costs, tapping its $400 million revolver, raising debt and equity, and selling its AirCentre business for $393 million (closed in the first quarter of 2022) Sabre’s financial health was tested in 2020, as lower demand from COVID-19 and higher incremental investment into new markets and the cloud, caused its near-term net debt/adjusted EBITDA to breach covenants (which are currently suspended given the material impact of COVID-19). While Sabre’s net debt/adjusted EBITDA ended 2019 at 3.1 times, it turned negative in 2020 and 2021, it is anticipated the ratio will improve to 6.7 times in 2023. Sabre is seen reaching this leverage ratio despite temporarily halting dividends and repurchases in 2020 and through 2023, cutting costs, and extending near-term debt maturities out three years, resulting in no material debt due until 2024, when $1.8 billion is scheduled to mature. Also, it is held Sabre’s strong competitive positioning and free cash flow generation during more normal environments will afford it flexibility to work with banking partners in the near term. It is alleged Sabre to payout 45%-50% of its earnings in dividends in 2024-31, after temporarily suspending dividends in early 2020. EBIT/interest coverage was 2.3 times in 2019 and is expected to surpass that level by 2024. It is forecasted free cash flow generation of $1.5 billion during 2022-26.

Bulls Say’s

  • The company’s GDS network hosts content from all airlines and is used by many travel agents, resulting in a large industry share. Replicating the GDS network involves meaningful time and costs. 
  • The network advantage is supported by Sabre’s platform revitalization to next-generation cloud technology, which drives innovation, reliability, and cost efficiencies. 
  • The business model is predominantly driven by transaction volume and not pricing, leading to less cyclical volatility.

Company Profile 

Sabre holds the number-two share of global distribution system air bookings (40.9% as of the end of 2020 versus 38.8% in 2019; 2021 booking share was not provided). The travel solutions segment represented 89% of total 2021 revenue, split between distribution (two thirds of segment sales) and airline IT solutions (one third) revenue. The company also has a growing hotel IT solutions division (11% of revenue). Transaction fees, which are mostly tied to volume and not price, account for the bulk of sales and profits 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Commodities Trading Ideas & Charts

FVEs Raised for Miners on Higher Commodity Prices Driven by Economic Recovery and Supply Constraints

Business Strategy & Outlook:  

Newcrest has no moat despite a history of low-cost production and long mine life. Returns have improved post the expensive acquisition of Lihir, but are likely to remain below the company’s cost of capital for the foreseeable future. Newcrest accounts for less than 3% of global mine production and is a price taker. Gold is increasingly the plaything of investors and subject to swings in sentiment. In 2001, gold consumption for jewelry and technology accounted for 91% of global demand, but in 2020 this had fallen to 38% as a result of increased investor demand and weaker gold consumption. There is also uncertainty around exploration success and the cost to buy or develop new mines, which are an important part of Newcrest’s future value. Operations are focused on the Asia-Pacific region, with production split roughly evenly between Australia and Papua New Guinea, or PNG, with a smaller contribution from the Americas. The company is a long-established low-cost producer, save a cost spike in 2013, which subsequently abated. Current management was installed in 2014 and brought a focus on cost efficiency, capital discipline and optimisation. Under Sandeep Biswas, Newcrest has been a much more reliable producer and has delivered incremental improvements at its operations, boosting throughput and lowering unit costs, particularly at Lihir and Cadia. Copper is a secondary product, contributing approximately 15% of revenue in fiscal 2019, but it is likely to rise over time. It represents approximately 40% of the in-ground value of Newcrest’s reserves and resources. Newcrest has a solid exploration record. Excluding acquired Lihir ounces, gold equivalent reserves increased from 3.4 million ounces in 1992 to 78 million ounces in December 2017, while resources increased from 8.5 million ounces to 144 million ounces. Gold equivalent resources were added at less than AUD 20 per ounce. Reserves at the end of 2020 were 49 million ounces of gold and 6.8 million metric tons of copper.

Financial Strengths: 

The company’s balance sheet is sound. The company ended June 2021 with modest net cash of USD 0.2 billion. The net debt to grow to end fiscal 2022 to about USD 1.5 billion with the acquisition of Pretium Resources and elevated capital expenditure at Cadia, Lihir and with the development of Havieron and Red Chris. However, despite the increase, the balance sheet is still sound. The forecasted debt/EBITDA to peak slightly to around 0.7 in fiscal 2022 before declining gradually through the forecasted period. Newcrest has long-dated corporate bonds totaling USD 1.65 billion. The bonds mature in fiscal2030, 2042, and 2050 with maturities of USD 650 million, USD 500 million, and USD 500 million, respectively. At the end of fiscal 2021, the company had USD 1.8 billion of cash and USD 1.6 billion of undrawn debt.

Bulls Say: 

  • Gold companies can behave countercyclically. They provide a hedge to inflation risk and tend to offer some benefit in times of market uncertainty. Gold can gain from continued money printing and/or if there is a flight to safety.
  • Newcrest’s reserves are massive and mine life is long, offering leverage to upwards movements in the gold price.
  • Newcrest owns several world-scale deposits in Cadia, Telfer, Lihir, and Wafi-Golpu. Large deposits typically bring significant exploration upside and expansion options.

Company Description:

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are predominantly in Australia and Papua New Guinea, with a smaller mine in Canada. Cash costs are below the industry average, underpinned by improvements at Lihir and Cadia. Newcrest is one of the larger global gold producers but accounts for less than 3% of total supply. Gold mining is relatively fragmented.

(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

It is going to be challenging for Spirit to expand content on existing aircraft platforms organically

Business Strategy and Outlook

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, and structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue. It is likely Spirit will need significant additional inorganic growth to achieve its goals. 

Spirit AeroSystems was spun out of Boeing in 2005 and the company remains the sole-source supplier for the majority of the airframe content on the 737 and 787 programs. Spirit is particularly exposed to Boeing’s 737 program, which generally accounts for roughly half of the company’s revenue. Boeing retained all of the intellectual property when it spun out the company. It is alleged that the lack of intellectual property and these long-term supply agreements prevent Spirit from fully monetizing its sole-source supplier position. 

Spirit became an Airbus supplier in 2006 with the acquisition of BAE Aerostructures and has inorganically expanded content on Airbus products in recent years. It’s held in positivity: Spirit’s revenue diversification because it reduces the firm’s product concentration risk. It is probable that the firm will hold off from inorganic growth, as Spirit has taken substantial debt to fund unprofitable operations during the COVID-19 pandemic and will have few capital allocation options other than deleveraging during an aerospace recovery. It is believed that it will be challenging for Spirit to expand content on existing aircraft platforms organically.

Financial Strength

Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company had $1.5 billion of cash on the balance sheet and about $3.8 billion of debt at the end of 2021, and access to another $950 million of debt if it so needs. It is held roughly slightly below breakeven cash flow in 2022, and that the firm will be able to meet its goal of removing $1 billion of debt off its balance sheet in the three-year period leading to 2023. It is projected that Spirit will focus on deleveraging post-pandemic. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Based on projections, it is regarded that the firm will be able to cover the debt maturities in cash, but it is likely the 2025 obligations will be the most difficult for the firm to cover. It is alleged that managing the debt maturity schedule will be the paramount issue Spirit faces in an aerospace recovery, and that shareholder remuneration will likely be a secondary focus for the firm.

Bulls Say’s

  • Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier. 
  • Spirit has restructured to become more efficient when aircraft manufacturing recovers. 
  • Spirit is diversifying its customer base, which is likely to make it less susceptible to customer specific risk.

Company Profile 

Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s revenue. 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Majority Owner Hochtief to Bid AUD 22 in Tilt for Full Control of Cimic

Business Strategy & Outlook: 

Cimic has developed the ability, reputation, and balance sheet strength to undertake numerous large-scale contract mining and construction projects simultaneously and in different countries. Few companies, apart from Cimic, in the domestic contract mining and construction market have the reputation, skill, knowledge, or capability to undertake challenging megascale mining and infrastructure projects. But excess returns of the recent past look to be a function of the China-driven commodities boom. Traditionally, Cimic’s annual operating revenue is split 60%-65% engineering and construction work, 20%-25% contract mining and 10%-15% services and property development work. Cimic’s contract mining business is highly capital-intensive but inherently lower risk than construction. Domestic and international mining contracts are normally schedule-of-rates style, with Cimic assuming risk on productivity and volumes. 

Cimic lowers operating risk on contract mining work by mainly undertaking open-cut mining at coal and iron ore sites with quality deposits for large resource companies. However, competition can be fierce for new contract mining work and renewals. Despite relatively stable cash flows, the consequences of problems at a few large-scale construction projects can negatively affect the company’s overall operating cash flow and earnings. Large domestic infrastructure construction projects are predominantly fixed-price/fixed-time contracts, or alliance style with shared risk. Cimic’s project tenders incorporate a theoretical profit margin (pretax, overheads and depreciation) of at least 10%, providing a margin of safety. However, in fiscal 2011, Cimic incurred a net loss, primarily as a result of large losses on just two major infrastructure construction projects and at the company’s Middle East construction joint venture. Cimic exited the Middle East in early 2020, wearing AUD 700 million in post-tax financial guarantees. Cimic has numerous large-scale mining, infrastructure and service projects in Australia and internationally. Transparency on individual contracts/projects is low, feeding in to high uncertainty rating.

Financial Strengths: 

Cimic is in strong financial health. The company finished December 2021 with AUD 502 million in net debt, leverage (ND/(ND+E)) of 32% and net debt to EBITDA a comfortable 0.6. The company sold a 50% stake in its Thiess mining contracting business to the U.K.’s Elliot in 2020, the transaction generating AUD 2.1 billion net cash proceeds. Cimic’s capital intensity is tempered with exposure to the equipment heavy mining contracting sector lessened. This should enhance the rate of cash conversion in future. In addition to the cash proceeds, the Thiess sell down reduces Cimic’s lease liability balance by approximately AUD 500 million. Net operating cash flow exceeded AUD 1.0 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years. But net operating cash flow fell to AUD 927 million in 2019, not helped by one-off BIC Contracting exit costs in the Middle East and has been negative through to June 2021 due to COVID-19 and unwind in factoring. Traditionally, the company has a strong balance sheet and cash flow, which provides the necessary flexibility to tender for large infrastructure and mining contract projects. The cashflow to turn positive as the economy exits from COVID-19.

Bulls Say:  

  • Cimic is the dominant infrastructure construction and mining services company in Australia and competes against only a small number of companies. Cimic holds AUD 36 billion of work in hand and a reasonably positive outlook. 
  • Cimic has a solid long-term reputation for complex project design, execution and delivery.
  • Cimic’s new approach is to focus on risk management including tender accuracy, risk identification, satisfactory time allowance, adequate pricing risk and exact project delivery.

Company Description:

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 79% of Cimic.

(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

Recent acquisitions in the business position Scotts to take advantage of growing demand from states where cannabis has been recently legalized

Business Strategy and Outlook

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products aimed at helping consumers grow and maintain their lawns. The U.S. consumer segment, which consists of lawn and gardening products, generated 65% of total revenue in fiscal 2021. Scotts has generated healthy margins on its products through effective branding, which allows it to maintain favorable product positioning and shelf space in the largest mass-market and home improvement retailers. Scotts has also been able to charge a premium over competitors because of its strong brand equity. While actual product differentiation in the industry is limited, consumers have been willing to pay up for Scotts’ products. 

Future demand for gardening products will depend on growth in the housing industry. It is alleged housing starts to average 1.5 million per year through 2030. While housing starts alone should increase demand for gardening products, it is held some secular trends that will offset the growth. Living-preference shifts to smaller lots and urban centers should result in less need for gardening products. Additionally, a greater proportion of gardening products will be sold online. Currently, the vast majority of sales occur at brick-and-mortar retail. Even if Scotts increases its online sales presence, it may lose some pricing power as many products in the gardening industry shift away from brick-and-mortar retailers to online platforms, where Scotts will likely face more lower-priced competition. 

The Hawthorne segment, which includes indoor gardening, hydroponics, and lighting equipment, contributed a little under 30% of revenue in fiscal 2021. Its growth is closely tied to the legalization of cannabis in the U.S., as its products are frequently used by licensed growers. Recent acquisitions in the business should position Scotts to take advantage of growing demand from states where cannabis has been recently legalized. The majority of U.S. consumer sales typically come from Home Depot and Lowe’s. However, this should decline as a percentage of companywide revenue as the Hawthorne segment grows.

Financial Strength

Scotts Miracle-Gro currently has elevated leverage. As of March 31, calculation for net debt/adjusted EBITDA was nearly 5 times, well above with management’s long-term target leverage of 3.5 times. However, the company built up inventory in both the U.S. consumer and Hawthorne businesses in anticipation of improving volumes in the second half of the fiscal year. As the company works down its inventory and uses the cash to repay debt, it is noticed there are no issues with its current financial position. Further, as the Hawthorne business continues to recover from the current industry oversupply, it is alleged for EBITDA growth will resume and leverage ratios will fall back to management’s targets. Over the last five years, dividends grew at an average mid-single-digit rate. Management has indicated that it intends to continue raising the dividend, and Scotts should have the free cash flow to do so. Management uses additional free cash flow to either repurchase shares or pay a special dividend. For example, in 2020, Scotts paid a $5 per share special dividend.

Bulls Say’s

  • U.S. household formation growth will drive demand for gardening products. As the market leader in consumer gardening products, Scotts will benefit from the secular housing trend. 
  • Consumer behavior has changed as a result of COVID-19, with more consumers engaging in gardening as an activity. As the largest player in the consumer gardening market, Scotts will benefit from this change. 
  • The emerging cannabis industry represents a lucrative opportunity for Scotts, which is well positioned to capture this segment of the market.

Company Profile 

Scotts Miracle-Gro is the largest provider of gardening and lawncare products in the United States. The majority of the company’s sales are to large retailers that include Home Depot, Lowe’s, and Walmart. Scotts Miracle-Gro can sell its products at a higher price point than its competition because of a well-recognized portfolio of brands that include Miracle-Gro, Roundup, Ortho, Tomcat, and Scotts. Scotts is also the leading supplier of cannabis-growing equipment in North America through its Hawthorne business. 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Bio-Techne Buoyed by Growing Demand for Cell and Gene Therapies, Long-Term Goals on Track

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Business Strategy & Outlook

Bio-Techne is a market leader in proteins for the pharma, biotech, academic, and diagnostic markets and maintains strong market positioning in antibodies and testing controls for diagnostic partners. The firm’s market leadership in proteins has not come at the expense of pricing, and Bio-Techne is often the highest-priced provider of proteins and antibodies. Bio-Techne is likely to capitalize on current high growth of biologics in the 6%-8% range, which have been outpacing the mid-single-digit growth of traditional small molecules. Cell and gene therapies require protein inputs, and Bio-Techne’s reputation for quality in a market with few regulatory quality minimums help Bio-Techne win new business despite relatively robust competition. To have long-term success, Bio-Techne needs to maintain a dominant position in proteins, and at the same time expand its presence in genomics, without compromising on quality standards across the firm’s large protein

portfolio.

Bio-Techne’s strategy involves prioritizing top line growth with manufacturing capacity investment and large-scale customer deals, while complementing organic growth with meaningful

acquisitions. The company is heavily focused on gaining a foothold in genomics, and has seen some early success with Applied Cell Diagnostics’ RNA-ish and Exosome’s liquid biopsy ExoDx, two technologies that are in the process of being scaled to the market after being acquired within the last five years.

Though the coronavirus pandemic initially depressed sales, with lab closures early in 2020 and uncertainty on academic research funding, Bio-Techne has also seen some upside. The firm offers

direct-to-home liquid biopsy tests and has seen high demand for proteins used for COVID-19 vaccines and treatments. The recent approval of the ExoDx biopsy was well-timed, given that the test

can be sent directly to a patient’s home for urine collection following approval from a telehealth doctor. While the ongoing pandemic has been a net negative, expanded capacity of COVID-19 testing and high demand for protein inputs have mostly offset temporary headwinds of lab shutdowns and research cuts.

Financial Strengths 

Bio-Techne has solid financial strength. Though leverage had temporarily increased from acquisitions, and debt/adjusted EBITDA reached a multiyear high of 2.25 times in 2019, Bio-Techne now has net debt leverage of about zero. Barring any large acquisitions, leverage to remain well below 2.0 times over the coming years. Bio-Techne’s healthy interest coverage ratio also indicates an appropriate level of debt, with the firm maintaining an operating income/interest expense ratio in the high-single digits, with the ratio ending 2020 at around 15 times. The interest coverage well above 20 times over the next five years. Bio-Techne’s primary source of funding for acquisition activity is a $600 million revolving credit facility, established in August 2018. This credit facility can be extended to an additional $200 million, and the company also took out a term loan of $250 million, with both facilities set to mature in August 2023. As of year-end 2020, Bio-Techne had $344 million of long-term debt, split between the term loan and revolving facility. The additional lending capacity of the credit agreement gives Bio-Techne an appropriate level of flexibility to make capital allocation decisions, and lenders appear to have high confidence in the firm’s ability to pay interest and principal on the debt, with the credit agreement allowing for a maximum interest rate of 75 basis points over Libor for standard lending.

Bio-Techne has generated good levels of operating cash, with consistent operating cash flow above $120 million in each of the last nine years, and the cash flow averaging $442 million in the next five years. We also expect free cash flow to average $353 million over that period.

Bulls Say

  • While private payers currently do not cover the ExoDx biopsy test, getting reimbursement approvals along with expanded indications could allow for product revenue upward of $100 million, compared with under $50 million currently.
  • Bio-Techne is set to benefit from high market growth of biologics, which require protein inputs, and regulatory approvals of biosimilars could be an additional tailwind for protein growth.
  • Funding for academic health research through the National Institutes of Health could increase in a post pandemic world, and could offset state budget cuts in academia.

Company Description

Based in Minnesota, Bio-Techne is a life sciences manufacturer supplying consumables and instruments for the pharma, biotech, academic, and diagnostic markets. The company reports in two segments, protein sciences (75% of revenue), and diagnostics and genomics (25%). The protein-focused segment makes equipment and associated consumables for protein characterization and analysis and sells antibodies for research and clinical purposes. In diagnostics, Bio-Techne provides controls and calibrators for diagnostic manufacturers and has a portfolio of diagnostic oncology assays. The United States accounts for about 55% of revenue, and the firm also has operations in EMEA (20% of sales), the U.K. (5%), and APAC (15%), with the rest of the world accounting for the remaining 5%.

(Source: Morningstar)

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