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Global stocks Shares

We Expect Avery Dennison Will Enjoy Another Year of Strong Growth in 2022

Business Strategy and Outlook

 Avery Dennison is the largest supplier of pressure-sensitive adhesive materials and passive radio frequency identifiers in the world. Rising consumer packaged goods penetration in emerging markets should add to label growth, while growth in omnichannel retailing will aid RFID sales at Avery Dennison.

Avery sells pressure-sensitive materials to a highly fragmented customer base that converts specialty film rolls into labels for companies such as Kraft Heinz or Amazon. The concentrated market positions of Avery and competitor UPM Reflactac give each bargaining power over their customers. The labels and graphics materials, or LGM, and industrial and healthcare materials, or IHM, segments account for roughly 74% of company revenue. They convert paper, vinyl, and adhesives into composite films that become shipping labels, automotive graphics, and special-use tapes and films. While demand for these products is stagnant in developed markets, and expect Avery’s large emerging market footprint (around 40% of revenue for these segments) to drive mid-single-digit revenue growth.

 Avery’s Retail Branding and Information Systems segment, or RBIS, makes up 26% of sales and produces a mixture of apparel graphics, product tags, and passive radio frequency identifiers or RFID. While RFID accounts for around 25% of the segment’s revenue, it has grown rapidly in recent years and has increasingly become the focus of Avery’s RBIS segment. RFID products are typically integrated into product tags in industries which have both a diverse inventory and where UPC scanning is cumbersome or labour-intensive, such as apparel. Avery’s recent strategy shift to focus on reducing both costs and prices of the technology in order to gain share demonstrates the commoditized nature of these products. Even so, and think Avery will at least be able to grow with the market, or between 15% and 20% per year. The remainder of segment revenue comes from the application and production of apparel graphics and tags. It is expected expect revenue growth of these end uses to remain mixed, dependent largely on shifting fashion preferences.

Financial Strength

Avery Dennison is in very good financial health. The company ended 2021 with net debt/EBITDA of roughly 2.2, which gives the firm room to manoeuvre with regard to additional acquisitions, opportunistic share buybacks, or to boost its dividend. This remains just below management’s target range of 2.3-2.6, aimed at preserving its BBB credit rating. Avery’s target range of debt remains manageable, and shouldn’t become a material burden even if economic conditions worsen. Thanks to the amount of business Avery derives from consumer staples, cash flows usually remain relatively stable throughout the economic cycle.

Bulls Say’s

  • Emerging-market adoption of consumer-packaged goods will provide a long runway for sales growth. 
  • As RFID technology becomes widely adopted, Avery’s growth should receive a hefty tailwind. 
  • Avery’s dominance in retail branding information systems should lead to widening segment margins

Company Profile 

Avery Dennison manufactures pressure-sensitive materials, merchandise tags, and labels. The company also runs a specialty converting business that produces radio-frequency identification inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for the majority of total sales.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Positive Flows Should Help Franklin Resources Navigate More Recent Market Volatility

Business Strategy and 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, or AUM. While we believe there will always be room for active management, we feel the advantage for getting and maintaining placement on platforms will go to those managers that have greater scale, established brands, solid long-term performance, and reasonable fees. 

However, have to admit that a combination of narrow-moat Franklin Resources with no-moat Legg Mason was not even on the radar-believing both firms were more likely acquirers of smaller asset managers as opposed to either one being an acquisition target.The new Franklin provides investment management services to retail (53% of managed assets), institutional (45%) 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 just over 25% of managed assets sourced from clients domiciled outside the U.S. 

Morningstar analysts expect 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 negative growth profile for a stand-alone Franklin).

Financial Strength 

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 September 2022, $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 December 2021, the firm had $5.9 billion in cash and investments on its books. More than half of these types of assets have traditionally been held overseas, with as much as one third of that half used to meet regulatory capital requirements, seed capital for new funds, or supply funding for acquisitions. Assuming Franklin closes out the year in line with our expectations, the firm will enter fiscal 2023 with a debt/total capital ratio of around 22%, interest coverage of more than 20 times, and a debt/EBITDA ratio (by our calculations) of 1.4 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, we expect only low-single digit annual increases in the dividend until the integration of the Legg Mason deal is well behind them. 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, we don’t expect see 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 more than $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 Profile

Franklin Resources provides investment services for individual and institutional investors. At the end of December 2021, Franklin had $1.578 trillion in managed assets, composed primarily of equity (36%), fixed-income (40%), multi-asset/balanced (10%) funds, alternatives (10%) and money market funds. Distribution tends to be weighted more toward retail investors (53% of AUM) investors, as opposed to institutional (45%) and high-net-worth (2%) clients. Franklin is also one of the more global firms of the U.S.-based asset managers we cover, with more than 35% of its AUM invested in global/international strategies and just over 25% of managed assets sourced from clients domiciled outside the United States.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Fortescue Metals (FMG) delivered robust 1H22 results along with Capital Management Initiatives

Investment Thesis 

  • Improving sales mix towards higher grade products should continue to narrow the price discount FMG achieves to the market benchmark Platts 62% CFR Index. 
  • Global stimulus measures – fiscal and monetary policies – are positive for global growth and FMG’s products. 
  • Capital management initiatives – increasing dividends, potential share buybacks given the strength of the balance sheet.
  • Strong cash flow generation.
  • Quality management team.
  • Continues to be on the lower end of the cost curve relative to peers; with ongoing focus on C1 cost reductions should be supportive of earnings.

Key Risks

  • Decline in iron ore prices.
  • Cost blowouts/ production disruptions.
  • Cost out strategy fails to yield results. 
  • Company fails to deliver on adequate capital management initiatives.
  • Potential for regulatory changes.
  • Vale SA supply comes back on market sooner than expected. 
  • Growth projects delayed. 

1H22 Results Highlights   Relative to the pcp: 

  • FMG delivered record half year iron ore shipments of 93.1m tonnes (mt), up +3%. Revenue of US$8.1bn declined -13% per cent on 1H21. Average revenue of US$96/dry metric tonne (dmt) represented a 70% realisation of the average Platts 62% CFR Index (1H22: US$114/dmt, 90% realisation). C1 cost of US$15.28/wet metric tonne (wmt) was up +20% due to price escalation of key input costs, including diesel, other consumables and labour rates, the integration of Eliwana as well as mine plan driven cost escalation. 
  • Underlying EBITDA of US$4.8bn, with an Underlying EBITDA margin of 59% (-28% lower versus 1H21: US$6.6bn, 71% margin). 
  • NPAT of US$2.8bn was -32% lower than pcp. EPS of US$0.90 (A$1.24) was -32% weaker. 
  • Net cashflow from operating activities of US$2.1bn after payment of the FY21 final tax instalment of US$915m. 
  • Capex of US$1.5bn, inclusive of US$589m investment in the Iron Bridge growth project and the Pilbara Energy Connect decarbonisation project. 
  • The Board declared a fully franked interim dividend of A$0.86 per share, down -41% relative to the pcp. It equates to 70% 1H22 NPAT, and is consistent with FMG’s capital allocation framework and stated intent to target the top end of the dividend policy to payout 50 to 80% of full year NPAT. 
  • FMG retained a strong balance sheet with net debt of US$1.7bn at 31 December 2021, inclusive of cash on hand of US$2.9bn. FMG’s credit metrics remain strong with gross debt to last 12 months EBITDA of 0.3x and gross gearing of 23% as at 31 December 2021.

Company Profile

Fortescue Metals Group Ltd (FMG) engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. It owns and operates the Chichester Hub that consists of the Cloudbreak and Christmas Creek mines located in the Chichester Ranges in the Pilbara, Western Australia; and the Solomon Hub comprising the Firetail and Kings Valley mines located in the Hamersley Ranges in the Pilbara, Western Australia. The Company was founded in 2003 and is based in East Perth, Australia.

 (Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Property

Continued Demand for Logistics Should Drive Growth for Prologis for Several Years

Business Strategy and Outlook:

Prologis leases distribution space to some of the nation’s top retailers, and its tenant list is the strongest in the business. The continued growth in e-commerce should provide a long growth runway for distribution and logistics facilities, especially given the large amount of space necessary to support online sales compared with brick-and-mortar retail. It is difficult for industrial REITs to earn moats since supply can quickly and easily enter key cities to negate supply and demand imbalances. The aggressive construction after the financial crisis brought significant new facilities on line, and it is expected that supply will continue to grow. Although demand outpaced newly added supply for several years, supply additions have increased sharply, and company is cautious that a slowdown in consumer spending could expose the asset class, increasing vacancies, as seen in the recent downturn.

With vacancy rates hovering around historic lows in the United States and Europe and average market rent rebounding significantly since 2012, the Prologis is in the best position to benefit from incremental demand. The company’s vast portfolio surpasses all other logistics REITs in size, predominantly along coastal markets, where it more than doubles its competition. There is an undeniable shift toward tech-savvy millennial consumers, who are more likely to skip the brick-and-mortar locations and spend more time on retail websites and utilize mobile purchasing. They are also more likely to return items, which adds to the space needed to fuel the growing e-commerce distribution industry. As retailers seek additional distribution facilities closer to population centers to accommodate this trend, Prologis will tap into its deep land bank to complete lucrative developments and drive value for shareholders.

Financial Strength:

Prologis’ balance sheet has improved over the past several years, and the firm’s financial position is considered to be more in line with industry-leading REITs. It is forecasted that 2022 debt/EBITDA to be 6.0 times. This level is reasonably maintainable, with the company having completed the Industrial Property Trust acquisition with cash. Additionally, improving operating performance should help Prologis maintain this metric going forward. 

As a REIT, Prologis is required to pay out at least 90% of its income as dividends to shareholders. The current dividend of $3.16 per share is more than comfortable for Prologis. In fact, it’s likely that the company will continue to tap into the debt markets as its main source of financing, given its healthy appetite for expensive developments and cheap access to capital. Management continually evaluates the portfolio and sells facilities as well as land, which allows the company to subsidize developments and not become overburdened with debt financing. It is estimated that dispositions will begin to

slow in the short term as supply continues to increase.

Bulls Says:

  • Prologis has the largest portfolio of quality facilities in place and is in the best position to capitalize on e- commerce demand.
  • Industrial property is the real estate subsector best positioned to weather the coronavirus outbreak- related storm.
  • Prologis has an enviable tenant list, which gives investors hope for expansion and a sense security in a downturn.

Company Profile:

Prologis was formed by the June 2011 merger of AMB Property and ProLogis Trust. The company develops, acquires, and operates over 900 million square feet of high-quality industrial and logistics facilities across the globe. The company is organized into four global divisions (Americas, Europe, Asia, and other Americas) and operates as a real estate investment trust.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Pact Group Holdings Ltd – The Board declared a 65% Franked Interim Dividend of 3.5cps, down -30%

Investment Thesis:

  • Solid market share in Australia and growing presence in Asia. Hence provides attractive exposure to both developed and emerging markets’ growth.
  • Valuation is fair on our forward estimates.  
  • Management appears to be less focused on acquired growth going forward, which means there is a less of a chance for the Company to make a value destructive acquisition. 
  • Reinstatement of the dividend is positive and highlights management’s confidence in future earnings growth.  
  • Focusing on sustainable packaging in an environmentally friendly market.

Key Risks:

  • Competitive pressures leading to further margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in Australia and Asia.
  • Emerging markets risk.
  • Poor acquisitions or not achieving synergy targets as PGH moves to reduce its dependency on packaging for food, diary, and beverage clients to more high growth sectors such as healthcare.
  • Adverse currency movements (purchased raw materials in U.S. dollars)

Key Highlights:

  • Revenue increased +3.7% to $927.2m, with Packaging and Sustainability up +7.4% driven by volume growth and the pass through of higher material and other input costs and Materials Handling and Pooling up +5.3% driven by growth in pooling and infrastructure demand and resilient hanger reuse service volumes, partially offset by -10.9% decline in Contract Manufacturing
  • Underlying EBITDA declined -8% to $151m with margin compressing by -200bps to 16.3% and underlying EBIT declined -16% to $83m with margin compressing by -210bps to 9%, primarily due to lower earnings in the Contract Manufacturing amid lower volumes and lags in recovering raw material costs. PGH saw almost flat earnings in Packaging & Sustainability and Materials Handling & Pooling as significant raw material and freight cost inflation was mitigated through strong pricing discipline and efficiency programs.
  • Underlying NPAT declined -25% to $39m and reported net loss of $21m amid net after-tax expense for underlying adjustments of $60m mostly related to non-cash impairments and write-downs in the Contract Manufacturing segment of $65m (after tax).
  • Operating cashflow declined -19% to $110.4m and FCF declined -72% to $13m.
  • Net debt increased +0.3% to $601m, driven by lower earnings in the Contract Manufacturing segment along with an increase in working capital, leading to gearing increasing +0.3x to 2.7x vs target range of <3.0x.
  • Liquidity remained strong with $288.9m in committed undrawn facilities, with the Company extending the maturity of the debt portfolio to an average of 3.4 years and introducing new lenders, increasing diversification and reducing refinancing risk.
  • The Board declared a 65% franked interim dividend of 3.5cps, down -30%

Company Description:

Pact Group Holdings Ltd (PGH) was established by Raphael Geminder in 2002 (Mr. Geminder remains a major shareholder with ~44% and is the brother-in-law of Anthony Pratt, Chairman of competitor Visy). Pact has operations throughout Australia, New Zealand and Asia and conceives, designs, and manufactures packaging (plastic resin and steel) for many products in the food (especially dairy and beverage), chemical, agricultural, industrial and other sectors.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Property

Toll Brothers Has Made Good Progress Moving to a Lighter Land Acquisition Strategy

Business Stratgy and Outlook

 Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

The U.S. housing market remained robust in 2020-21 despite the pandemic, and expect continued strength this decade, with homebuilders and multifamily developers starting about 1.6 million homes annually over much of that time frame, above the 1.4 million historical average for annual new-home production.

 The three tailwinds driving increased demand for Toll Brothers’ traditional offerings: Strong demand for entry-level homes should encourage established homeowners to sell their first homes in favor of new move-up homes; the popularity of empty-nester homes and active-adult communities is increasing among baby boomers; and growing household wealth should put the company’s “affordable luxury” products in reach of younger households.

Toll also invests in for-sale urban high-rise infill and for-rent projects to diversify revenue and leverage existing assets. Although it is thought as these projects are riskier, and believe the firm mitigates some of this added risk by careful underwriting and joint venture partnerships. It is believed that these projects have generally met Toll Brothers’ expectations, and think the company has a robust project pipeline that will continue to contribute profitable growth in a healthy market.

Overall, Toll Brothers will continue to capitalize on what is seen as strong long-term housing demand dynamics. That said, given its luxury build-to-order focus and higher average selling price, and don’t think the firm is as well positioned to capture demand from first-time millennial buyers as lower-priced homebuilders like D.R. Horton.

While Toll Brothers can achieve positive economic profits with increased sales volume, but it is expected that competition and the company’s more capital-intensive land acquisition strategy (compared with peers) to restrain the amplitude of those profits. However, management is focused on moving to a lighter land strategy and has made substantial progress.

Financial Strength

As of Oct. 31, 2021, Toll Brothers had approximately $3.4 billion in total liquidity, including $1.6 billion in unrestricted cash and $1.8 billion capacity on a revolving credit facility. It is believed that this capital structure is appropriate for a large-scale production homebuilder. Toll’s $3.6 billion of outstanding debt consists of unsecured, fixed-rate notes payable ($2.4 billion), term loans and credit facilities (approximately $1 billion), and mortgage loan facilities (about $150 million). The outstanding senior notes have maturities staggered through fiscal 2030, with no more than $650 million due in any one year over the next 10 fiscal years. Between 2017 and 2021, Toll generated $4.4 billion of cumulative operating cash flow. Toll Brothers has formed joint ventures to participate in attractive opportunities and mitigate risk on certain land development, home construction, and other adjacent projects. As of fiscal 2020, the company was doing business with 46 joint venture partners and had approximately $431 million invested in joint venture projects, with a commitment to invest an additional $75 million. All of the company’s for-rent projects have been or will be developed in joint ventures. This is a prudent strategy, given the increased riskiness of these projects and Toll Brothers’ relative inexperience with this market. The company has guaranteed debt of certain unconsolidated, joint venture entities that is not recorded on the balance sheet–approximately $240 million as of fiscal 2020. And this is believed that the underlying collateral should be sufficient to repay a large portion of the obligation, should a triggering event occur.

Bulls Say’s

  •  New-home demand has strengthened, and inventory of existing homes remains tight. Job and wage growth should support growth in household formations and increased demand for new homes. 
  • The aging baby boomer population could spur demand for Toll Brothers’ empty-nester and active-adult products. 
  • Toll Brothers’ targeted customers are wealthier, have stronger credit profiles, and are more likely to make all-cash payments than the typical homebuyer.

Company Profile 

Toll Brothers is the leading luxury homebuilder in the United States with an average sale price well above public competitors. The company operates in 60 markets across 24 states and caters to move-up, active-adult, and second-home buyers. Traditional homebuilding operations represent most of company’s revenue. Toll Brothers also builds luxury for-sale and for-rent properties in urban centers across the U.S. It has it headquarters in Horsham, Pennsylvania.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Property

Duke Realty Corp shifting its portfolio from suburban office properties to become the leading domestic-only industrial REIT in the United States

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

Business Strategy and Outlook

Duke Realty has enjoyed an impressive run, shifting its portfolio from suburban office properties to become the leading domestic-only industrial REIT in the United States. Over the past few years, the company capitalized on depressed supply and an explosion of growth driven by a steady economy and the rise of e-commerce. However, with industrial vacancy hovering at historically low levels, investors may be late to the party. Supply has increased to levels not seen since 2007, posing a significant threat to the buoyant rent growth Duke Realty’s portfolio had been experiencing. 

As experts have noted in their no-moat argument for the company, Duke Realty’s properties are largely commoditized, with locations that are often along highways, miles away from metropolitan city centres. While prices for this type of land have risen over the years, the structures are easily replicable, causing other real estate companies to throw their hats in the ring, diversifying to meet the demand for industrial property. 

Major retailers continue to shift their strategies as brick-and-mortar shopping loses ground to its online counterpart. Fortunately for Duke Realty, warehouses that support e-commerce sales require more space, up to three times as much as traditional retail warehouses. While e-commerce currently accounts for only about 13% of total retail sales, its piece of the pie is growing at a double-digit pace annually. It is eventually viewed additional supply bringing Duke Realty’s returns to the cost of capital, since little prohibits new entrants to this market. Despite the competitive nature of this industry, Duke Realty has an established presence and first-mover advantage in many high-quality markets. The company’s tenants typically sign multiyear leases, so it may take some time before the effects of new construction on returns are seen.

Financial Strength

Duke Realty’s balance sheet has improved over the years and is in good financial shape. The company’s debt/EBITDA was 4.6 by the end of 2022. It is alleged as a maintainable level, given the company’s plan to finance most of its developments by disposing noncore assets. Its focus on Tier 1 markets will keep its facilities in high demand as e-commerce grows and retailers shift to an online strategy. Current leases have around 2.25% contractual rent bumps, so cash flows should rise with inflation in the short term. As a REIT, Duke Realty is required to pay out at least 90% of its income as dividends to shareholders. It’s likely that the company will continue to tap into the debt markets as its main source of financing given its healthy appetite for developments and cheap access to capital. Management continually evaluates the portfolio and sells facilities as well as land, which allows the company to subsidize developments and not become overburdened with debt financing. It is forecasted that dispositions will be steady as the company trims noncore assets.

Bulls Say’s

  • E-commerce should continue to drive demand for logistics space, and Duke Realty was an early mover with an established tenant list. 
  • The coronavirus outbreak will accelerate the growth of e-commerce relative to brick and mortar retail 
  • Historically low vacancy rates for industrial facilities should continue to warrant double-digit leasing spreads in the short term.

Company Profile 

Duke Realty is an Indianapolis-based publicly traded REIT that owns and operates a portfolio of primarily industrial properties and provides real estate services to third-party owners. It has interest in over 150 million square feet across the largest logistics markets in the U.S. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Praemium 1H22 FUA was up by 43% to $49bn; Merger with Powerwrap brings significant opportunities for synergies

Investment Thesis

  • Merger with Powerwrap creates a much better capitalized and resourced competitor in the market, with significant opportunities for synergies. 
  • Increasing diversification via geography and product offering. 
  • Increasing competition amongst platform providers such as Hub24, Wealth O2, BT Panorama, Netwealth, North Platform etc.
  • Very attractive Australian industry dynamics – Australian superannuation assets expected to grow at 8.1% p.a. to A$9.5 trillion by 2035. 
  • Disruptive technology and hold a leading position to grow funds under advice via SMAs. 
  • The fallout from the Royal Commission into Australian banking has led to increased inquiries for PPS’ products/services. 
  • Growing and maturing SMSF market = more SMSFs demand for tailored and specific solutions.  
  • Bolt-on acquisitions to supplement organic growth 
  • pFurther consolidation in the sector could benefit PPS. 

Key Risk

  • Execution risk – delivering on PPS’s strategy or acquisition. 
  • Contract or key client loss. 
  • Competitive platforms/offering (new technology). 
  • Associated risks in relation to system, technology and software.
  • Operational risks related to service levels and the potential for breaches.
  • Regulatory changes within the wealth management industry.
  • Increased competition from major banks and financial institutions

1H22 results summary: Compared to pcp 

  • Australian business saw revenue increased +21% to $30.3m, with Platform revenue up +31% to $21.7m driven by FUA increase of +28% to $21.1bn and Portfolio Services revenue up +7% to $8.5m driven by VMA software and VMA admin revenue growth of +5% and +28%, respectively. EBITDA (excluding corporate costs of $0.6m) declined -6% to $8.2m with margin declining -700bps to 27% amid investments in operations to support client growth and R&D to drive continued innovation in proprietary technology. Powerwrap contributed $10.1m in revenue, $0.8m in EBITDA and delivered $3.3m in annualized cost synergies. 
  • International (discontinued operations): revenue was up +41% to $8.9m with platform revenue up +53% to $5.4m from accelerating momentum in platform FUA which increased +58%, Planning software revenue up +91% to $2.1m amid increase in WealthCraft CRM and planning software licences in 2021 which grew +41% internationally, and Fund revenue down -24% to $0.6m. EBITDA loss declined -94% to a breakeven, comprising UK’s EBITDA of $0.1m, Hong Kong’s EBITDA profit of $0.8m and Dubai’s EBITDA loss of $1m.

International business divested – surplus net proceeds to be returned to shareholders. Management completed the sale of International business to Morningstar for $65m, with the transaction expected to be completed during Q2/Q3 of CY22 and the Board intending to return surplus net proceeds to shareholders. 

Expense growth to stabilize. Management expects further Powerwrap synergies post scheme migration ($4m in annualised synergies by 30 June 2022, with a further $2m annualised in FY23 from efficiencies and natural attrition). 

Company Profile

Praemium Limited (PPS) is an Australian fintech company which provides portfolio administration, investment platforms and financial planning tools to the wealth management industry.

 (Source: Banyantree)

  •                    Given the

shareCompany Profi                             General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Treasury Wine Estates – The Board declared an Interim Dividend of 15cps, representing a NPAT Payout Ratio of 66%

Investment Thesis:

  • Better than expected China investigation outcomes.  
  • Significant opportunity to grow its Asian business (reallocation opportunities) which will provide a more balanced exposure to the region rather than one specific country. 
  • Group margin expansion opportunity from premiumization and good cost control. 
  • The turnaround in Americas business could lead to significantly higher margins.
  • Favorable currency movements (leveraged to a falling AUD/USD).
  • Further capital management initiatives. 

Key Risks:

  • Further deterioration (or worse than expected) outcome from China tariffs / investigation.
  • U.S. turnaround disappoints. 
  • Slowdown in wine consumption in key markets. 
  • Adverse movement in global wine supply and demand. 
  • Increase competition in key markets. 
  • Unfavorable currency movements (negative translation effect).
  • Policy and / or demand changes in China leading to an impact on volume growth. 

Key Highlights:

  • Group net sales revenue (NSR) of $1.27bn were down -10.1% YoY, driven by the divestment of the U.S. Commercial portfolio, lower shipments to Mainland China and reduced commercial wine portfolio volumes in Australia and the U.K.
  • NSR per case of A$95.60 was up +16.1% YoY due to the premiumization of the portfolio.
  • Management noted that 83% of global sales revenue now comes from the Luxury and Premium portfolios, an increase of +8% YoY.
  • Group operating earnings (EBITS) were down -3.6% to $262.4m, however excluding the Australian country of origin sales to Mainland China, EBITS was up +28.3% highlighting solid momentum in other parts of the business. EBITS margin of 20.7% was up +140bps and management continues to work towards their group EBITS margin of >25%.
  • The Board declared an interim dividend of 15cps (fully franked), representing a NPAT payout ratio of 66% (vs target of 55 – 70%).
  • TWE balance sheet is in a solid position with leverage (net debt / EBITDAS) of 1.8x and interest cover of 13.5x. 
  • Company has ample liquidity of $1.4bn available.
  • In Penfolds division EBITS of $165.1m was down -17.4% YoY and margin was down -60bps to 43.1%The performance was largely driven by decline in shipments to Mainland China, with Asia NSR down -31.5% YoY to $203.8m. However, segment NSR and EBITS excluding China were up +49.1% and +32.1%, respectively.
  • In Treasury Americas division EBITS of $85.2m was up +26.9% YoY and margin was up +500bps to 18.3%. Volume and NSR decline of -39% and -7.7%, respectively, was driven by the divestment of the U.S. Commercial brand portfolio in Mar-21.
  • In Treasury Premium Brands division EBITS of $39.0m was up +32.3% and margin improved +210bps to 9.3%. Volumes and NSR declined -11.7% and -6.3%, respectively, driven by the reduced demand seen during 1H22 vs pcp which saw increased pandemic related demand. Margins improved on the back of a +6.1% increase in NSR per case (improved portfolio mix) and improved CODB.

Company Description:

Treasury Wine Estates (TWE) is one of the world’s largest wine companies listed on the ASX. As a vertically integrated business, TWE is focused on three key activities: grape growing and sourcing, winemaking and brand-led marketing. Grape Growing & Sourcing – TWE access quality grapes from a range of sources including company-owned and leased vineyards, grower vineyards and the bulk wine market. Winemaking – in Australia, TWE’s winemaking and packaging facilities are primarily located in South Australia, NSW and Victoria. The Company also has facilities in NZ and the US.  Brand-led Marketing – TWE builds their brands through marketing and distributes its products across the world.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Link Administration Holdings Ltd to Maintain its Dividends and Reduce its Debts

Business Strategy and Outlook

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends. The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, which sold its remaining holding in the company in 2016. 

It is considered the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years. 

Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer, which has a 10% market share following its acquisition of Pillar, previously group revenue, grows at around 4% per year, comprising 1.5% population growth and 2.5% inflation. Experts assume corporate markets revenue grows at 3% per year, reflecting inflation, and assume no market share gains due to the strength of major competitor Computershare. According to analysts EBIT margins grow from 12% in fiscal 2021 to 21% by fiscal 2031 partly due to cost-cutting. Over the next decade, an EPS CAGR, excluding amortisation of acquired intangible assets, of 9%. The capital-light nature of the business model means it is anticipated cash conversion to be strong, enabling dividends to be maintained and net debt gradually reduced, assuming no further acquisitions. Experts discounted cash flow valuation assumes a weighted average cost of capital of 7.7%.

Financial Strength

Link’s balance sheet is in good shape with a net debt/EBITDA ratio of around 2.6 as at Dec. 31, 2021, which is within the company’s target range of 2 to 3. From an interest coverage ratio perspective, Link has a manageable interest coverage ratio of around 14.

Bulls Say’s

  • It is alleged Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage. 
  • Experts base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years. 
  • The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Profile 

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.