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Technology Stocks

Launching Coverage of No Moat, Stable Moat Trend GoDaddy With an $80 FVE

Business Strategy & Outlook:

GoDaddy’s position as the world’s leading domain registrar creates a unique opportunity to capture demand from newly formed businesses and upsell complementary products beyond domain registration. The one-stop-shop model will appeal to micro- and small businesses looking to establish and manage a ubiquitous online identity with integrated commerce solutions. The initial domain registration process is typically a customer’s first interaction with GoDaddy, and acts as an onramp for additional products. For example, an entrepreneur seeking an online presence for their idea may approach GoDaddy for a domain registration initially, and as a natural extension purchase a subscription to a domain linked email account, website building tools and commerce solutions. 

GoDaddy has expanded its offering beyond domain registration to include a domain aftermarket platform, website design, security and hosting services, productivity tools such as email, and omni-commerce solutions. While domain registration remains the company’s core offering, GoDaddy made a strategic shift into the omni-commerce market via the 2021 acquisition of payment processing platform Poynt. This acquisition complements the company’s existing product suite and allows GoDaddy to compete more directly with providers such as narrow-moat Block (owner of Square) and narrow-moat Shopify. While the company’s shift into payment processing remains in its infancy, GoDaddy aspires to offer payment functionality across all surfaces including attaching it to every new domain registered. However, GoDaddy is pursuing growth in a crowded market with several established providers, and the company is expected to face challenges upselling products to existing clients due to customer switching costs and inertia. While the GoDaddy will have greater success upselling products to newly formed businesses or those upgrading from a subpar product, the company will need to maintain competitive pricing over the medium term to take share, limiting margin upside. In conjunction, GoDaddy’s core offering is commoditized, with new entrants such as Google Domains increasing pricing pressure.

Financial Strengths: 

GoDaddy’s balance sheet is stretched as the company has increased leverage to support growth and return capital to shareholders. As of year-end fiscal 2021, the company had a net debt position of about $2.6 billion and reported $3.9 billion of long-term debt from a credit facility and senior notes. This includes $800 million of senior notes issued in February 2021 intended to fund working and capital expenditure, as well provide headroom for strategic acquisitions. While this has increased the company’s leverage, the GoDaddy will be able to meet interest and maturity payments on outstanding debt over our forecast period. the company will remain compliant with the operating and financial covenant’s related to the various debt instruments including remaining below certain gearing ratios. 

GoDaddy does not pay dividends but instead returns capital to shareholders through a share repurchase program. The company intends to return $3 billion of capital to shareholders over the three years to fiscal 2024, which shall be funded through free cash flow and debt.

Bulls Say:

  • GoDaddy benefits from a highly recognizable brand, economies of scale, and customer switching costs.
  • Omni-commerce is a natural extension for GoDaddy with promising uptake to date.
  • The strategic shift into payment processing should provide opportunity for greater scale-based cost advantage.

Company Description:

GoDaddy is a provider of domain registration and aftermarket services, website hosting, security, design, and business productivity tools, commerce solutions, and domain registry services. The company primarily targets micro- to small businesses, website design professionals, registrar peers, and domain investors. Since acquiring payment processing platform Poynt in 2021, the company has expanded into omni-commerce solutions, including offering an online payment gateway and offline point-of-sale devices.

(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

Pandemic-Driven Home Improvement Trend Pushes Demand Forward for Kingfisher; Shares are Undervalued

price of btc is going to breakout

Business Strategy & Outlook:

Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base. Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity.

With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.

Financial Strengths: 

Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus. Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance.

Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.

Bulls Say:

  • Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U.K. and France, as well as people spending more time indoors during the pandemic.
  • Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations.
  • As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.

Company Description:

Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France.

(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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Global stocks Shares

Carnival’s Return to Profitability in Sight Despite Omicron and Geopolitical Speed Bumps

Business Strategy & Outlook:

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships at 2021 fiscal year-end. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, global travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers have slowly resumed cruising since the summer of 2021 (after a year-plus no-sail halt), the cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. 

On the yield side, the Carnival is expected to see some pricing pressure as future cruise credits continue to be redeemed through 2022, a headwind partially mitigated by the return of capacity via full deployment of the fleet. And on the cost side, higher spend to maintain tighter cleanliness and health protocols should keep expenses inflated. Aggravating profits will be staggered reintroduction of the fleet through the first half of 2022, crimping near-term profitability and ceding previously obtained scale benefits. As of March 22, 2022, 75% of capacity was already deployed and the entire fleet should be sailing by the important summer season. These persistent concerns, in turn, should lead to average returns on invested capital including goodwill, that are set to languish below our 10.4% weighted average cost of capital estimate until 2026, which supports our no-moat rating. While Carnival has carved out a broad offering across demographics, the product still has to compete with other land-based vacations and discretionary spending for share of wallet. It could be harder to capture the same percentage of spending over the near term given the perceived risk of cruising, heightened by persistent media attention.

Financial Strengths:

Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with around $7 billion in cash and investments at the end of February 2022. This should cover the company’s cash burn rate through the end of the redeployment ramp-up, which had run around $500 million or more in recent months due to higher ship startup costs. The company has raised significant levels of debt since the onset of the pandemic with $35 billion in total debt, up from around $12 billion at the end of 2019. The company has less than $3 billion in short term and $2 billion in long-term debt coming due over the next year (as of Feb. 28, 2022).

The company is focused on reducing debt service as soon as reasonably possible in order to reduce future interest expense. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term.  Carnival has just over one year’s worth of liquidity to operate successfully in a no-revenue environment. There is no anticipation on an imminent credit crunch in the near term, even with no associated revenue (which the company has successfully resumed capturing), as long as capital markets continue to function properly. Additionally, in order to free up cash to support operating expenses, Carnival eliminated its dividend in 2020 ($1.4 billion in 2019). Another $3 billion in current customer deposits were on the balance sheet, offering working capital that can be utilized to run the business and indicating demand for cruising still exists. And capital markets remain open to financing, with the company announcing a $500 million at-the-market equity raise at the end of January 2022, indicating access to cash is still plentiful.

Bulls Say:

  • As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate as capacity limitations are repealed.
  • A more efficient fleet composition (after pruning 19 ships at the onset of the pandemic) may benefit the cost structure to a greater degree than initially expected, as sailings fully resume.
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Description:

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with all of its capacity set to be redeployed by summer 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(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
Dividend Stocks

Watsco to continue executing its buy and build strategy to outperform market growth

Business Strategy and Outlook

Watsco is the largest player in the fragmented heating, ventilation, air-conditioning, and refrigeration distribution industry with low-double-digit percentage market share. The company predominantly operates in the United States (approximately 90% of revenue) with an outsize presence in the Sunbelt states. Since entering the HVACR distribution market in 1989, Watsco has operated a “buy and build” strategy and has completed over 60 acquisitions that have expanded the company’s geographic footprint and product assortment. Watsco’s acquisition strategy has primarily targeted smaller family-owned businesses. The firm also operates three joint venture partnerships with narrow-moat-rated HVAC manufacturer Carrier. These JVs account for approximately 60% of consolidated revenue, and the relationship grants Watsco exclusive distribution rights for Carrier products across select regions of the U.S. 

According to the Air-Conditioning, Heating, and Refrigeration Institute, shipments of air-conditioners and furnaces in the U.S. have grown at about a 6% compound annual rate since the 2009 housing crisis trough. Over the same period, Watsco increased its top line at about a 10.5% CAGR, driven by about 5% average same-store sales growth and 5.5% average growth from acquisitions (including the formation of Carrier JVs). 

Residential HVAC demand (along with repair and remodel spending) soared during the pandemic, driven by more time spent at home and increased discretionary income. Strong pricing power for HVAC manufacturers and distributors accompanied the robust demand environment. Fiscal 2021 was an excellent year for Watsco with over 20% year-over-year revenue growth and record operating margin (10% compared with the 8% 10-year average). However, it is unlikely this performance is maintainable over the long run. Despite upcoming regulatory tailwinds, it is anticipated to see only modest HVAC shipment growth over the next 10 years (using 2021 as the base year) as the replacement cycle matures. Nevertheless, it is alleged Watsco will continue to execute its buy and build strategy to outperform market growth.

Financial Strength

Watsco has a perennially strong balance sheet as the firm has historically operated with very low financial leverage. While Watsco generates sufficient operating cash flow to reinvest in organic growth opportunities and acquisitions and return capital to shareholders, the firm does have an unsecured revolving credit facility that it uses to fund its capital allocation outlays. Nevertheless, Watsco’s net debt/EBITDA ratio averaged less than 0.5 during the last 10 years. It is held management will continue to operate with a conservative balance sheet for the foreseeable future.

Bulls Say’s

  • Watsco will continue to effectively employ its “buy and build” strategy to consolidate the HVAC distribution market and compound cash flow. 
  • Watsco serves end markets with attractive long-term growth prospects driven by an undersupplied U.S. housing stock, structurally higher R&R spending, and favorable regulatory changes (for example, energy efficiency standards). 
  • Watsco’s investments in digital technology have differentiated the firm from its competition.

Company Profile 

Watsco is the largest heating, ventilation, air-conditioning, and refrigeration products distributor in North America. The company primarily operates in the United States (90% of 2021 revenue) with significant exposure in the Sunbelt states. Watsco also has operations in Canada (6% of sales) and Latin America and the Caribbean (4% of sales). The company’s customer base consists of more than 120,000 dealers and contractors that serve the replacement and new construction HVACR markets for residential and light commercial applications. 

(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
Global stocks

Through its own operations and through those of its alliance partners, Renault has a solid presence in Eastern Europe, South America, and South Korea

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Business Strategy and Outlook

Renault owns 43.7% of Nissan, while Nissan owns roughly 15% of Renault and 34% of Mitsubishi. The alliance is structured as a partnership, with each company operating as an individual entity. Combined, the alliance stands as one of the largest global automakers. The companies benefit from increased scale, purchasing power, and the ability to share vehicle technology and platforms. The group is governed by the alliance board of Renault-Nissan BV, which is 50% jointly owned by Renault and Nissan. Boardroom and management upheaval from the Carlos Ghosn scandal was a huge distraction for the alliance. Renault installed Jean-Dominique Senard (formerly in charge of Michelin) as chairman. The company hired Luca de Meo as CEO (former head of SEAT), who started on July 1, 2020. 

Renault also owns 67.7% of the parent of Russian automaker AvtoVAZ, which makes Lada, the country’s best-selling brand. However, on March 23, 2022, the company said it may write down its Russian assets, another turnaround setback. In addition, Renault owns 99.4% of Romanian automaker Dacia, and 80.0% of Samsung Motors. Nissan holds a 34% stake in Mitsubishi Motors. Renault has organized these companies into an integrated global alliance, sharing purchasing, information services, research and development, production facilities, vehicle platforms, and powertrains. Through its turnaround plan, dubbed “Renaulution” and initiated in 2020, Renault will focus on its geographic market strength and better utilization of alliance cost efficiencies. 

In the Western European new-car market, Renault has the third-largest share, trailing Volkswagen and Stellantis. To its detriment, Renault has only had limited exposure to China, the world’s largest auto market, but upon the formation of a joint venture with Chinese automaker Dongfeng, local production began in 2017. Nissan has successfully penetrated the Chinese market, annually selling more than 1.0 million units. Renault also has production facilities in Brazil, India, Russia, and Turkey. Through its own operations and through those of its alliance partners, Renault has a solid presence in Eastern Europe, South America, and South Korea.

Financial Strength

Renault’s automotive business has significant financial leverage, but in experts’ opinion, this is not overly burdensome relative to the company’s substantial cash position. With financial services on an equity basis, total debt/EBITDA has averaged 1.0 times during the period from 2011 to 2021 but was negative 9.7 times at the end of 2020 due to operating losses from COVID-19. The ratio was 3.4 times at the end of 2021. Adding in the impact of operating leases and netting cash against debt, net adjusted debt/EBITDAR during the same period averaged negative 0.2 times, with 2020 coming in at negative 4.2 times, and year-end 2021 at 0.9 times.Before 2008, with financial services on an equity basis, total debt/EBITDA was around 1.5 times. On lower EBITDA and higher outstanding debt in 2008 and 2009, the leverage ratio jumped to 3.6 and 20.6 times, respectively. In early 2009, the company received a EUR 3 billion loan from the French government to reduce refinancing risks associated with accessing credit markets at extremely high interest rates. In 2012, Renault also sold its entire stake in AB Volvo to reduce indebtedness. In response to the coronavirus pandemic, the company announced that it would not pay a dividend in 2020 on 2019’s financial results. Also, the company arranged a EUR 5 billion credit line guaranteed by the French government, on which, it drew down EUR 4 billion. At the end of 2020, the undrawn EUR 1 billion was no longer available. Management targets full reimbursement of the French guaranteed loan by the end of 2023. Total liquidity of the automotive group was EUR 17.3 billion at the end of 2021, including a EUR 3.4 billion undrawn credit line and EUR 13.9 billion in cash.

Bulls Say’s

  • Renault’s alliance with Nissan provides scale and purchasing power that the company would otherwise struggle to achieve on its own. 
  • Renault is the largest manufacturer of light commercial vehicles in Europe, excluding pick-ups, with around a 16% share of the market and a 25% share of the electric LCV market. 
  • The company’s low-cost products, like the Dacia Logan, have benefited from increased demand for value-priced vehicles by cost-conscious consumers.

Company Profile 

Renault possesses a global alliance of automotive manufacturing, financing, and sales operations. The company’s alliance partners consist of AvtoVAZ (67.7%), Dacia (99.4%), Nissan (43.7%), Renault Samsung Motors (80.0%), and Mitsubishi (Nissan owns 34%). Total 2021 Renault-Nissan-Mitsubishi alliance sales volume of 7.9 million vehicles makes the alliance the third largest vehicle group in the world, behind Toyota at 10.5 million and Volkswagen at 8.6 million vehicles sold. 

(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
Global stocks Shares

Narrow-Moat Nordstrom Poised for a Turnaround as Its Strategic Plans Take Hold

Business Strategy & Outlook:

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While the company was unprofitable in 2020 because of the COVID-19 crisis, its profitability returned in 2021, and its brand intangible asset is intact. Despite a rocky couple of years, the Nordstrom’s full-price and Rack off-price stores have competitive advantages over other apparel retailers.

Nordstrom is responding well to changes in its market. The company has about 100 full-price stores, with nearly all of them in desirable Class A malls (sales per square foot above $500) or major urban centers. This is viewed as an advantage, as some lower-tier malls are unlikely to survive. Moreover, Nordstrom has a presence in discount retail with Rack (about 250 stores) and significant e-commerce (42% of its sales in 2021). Still, the firm’s full-price business is vulnerable to weakening physical retail, and Rack competes with firms like no-moat Poshmark and narrow-moats TJX and Ross.

Nordstrom unveiled a new strategic plan, Closer to You, in early 2021 that emphasizes e-commerce, growth in key cities (through Local and other initiatives), and a broader off-price offering. Among

the merchandising changes, Nordstrom intends to increase its private-label sales (to 20% of sales from 10% now) and greatly expand the number of items offered through partnerships (to 30% from 5% now). The firm set medium-term targets of annual revenue of $16 billion-$18 billion, operating margins above 6%, annual operating cash flow of more than $1 billion, and returns on invested capital in the low teens. Nordstrom will consistently generate more than $1 billion in operating cash flow, achieve ROICs in the teens, and reach $16 billion in annual revenue in 2024. However, they will trend higher, the operating margins will be slightly below 6% in the long run due to intense competition, but this could change if some of the new initiatives are more successful than expected.

Financial Strengths:

The Nordstrom is in good financial shape and will overcome the virus-related downturn in its business. The firm closed 2021 with more than $300 million in cash and $800 million available on its revolving credit facility. Although it also had $2.9 billion in long-term debt, most of this debt does not mature until after 2025. Nordstrom had net debt/EBITDA of a reasonable 2.5 times at the end of 2021. Nordstrom generated $200 million in free cash flow to equity in 2021, but this amount to rise through reductions in operating expenses, working capital management, and moderate capital expenditures. As per forecast an annual average of about $840 million in free cash flow to equity over the next decade. As Nordstrom’s results have improved, it has resumed cash returns to shareholders. In 2021, about $250 million in share repurchases and dividends totaling $0.76/share (23% payout ratio). Also, to conserve cash, Nordstrom has suspended its dividends and share repurchases (used more than $400 million combined in cash in 2019), but to anticipate both will resume in 2022. Over the next decade, the buybacks of about $340 million per year and an average dividend payout ratio of about 23%. Nordstrom’s capital expenditures were quite elevated prior to 2020. Its store count has increased from 292 at the end of 2014 to about 360 today as more than 60 Rack stores have opened

since 2014 and the company has expanded into Canada and New York City. Nordstrom has estimated its total investment in Canada and New York at $1.1 billion for 2014-19. The estimated Nordstrom’s yearly capital expenditures will average about $650 million over the next decade, well below 2019’s $935 million. 

Bulls Say:

  • ONordstrom’s online sales exceeded $6 billion in 2021, making it one of the largest e-commerce firms in the U.S.
  • ONordstrom suspended dividends and share repurchases   when the pandemic hit but has resumed cash returns to shareholders. The projected annual combined dividends and share purchase above $400 million over the next five years.
  • ONordstrom serves an affluent customer base in its full line stores, which separates it from the many midlevel retailers in malls. Most of its stores are in productive malls that are not expected to close.

Company Description:

Nordstrom is a fashion retailer that operates approximately 100 department stores in the U.S. and Canada and approximately 250 off-price Nordstrom Rack stores. The company also operates both full- and off-price e-commerce sites. Nordstrom’s largest merchandise categories are women’s apparel (28% of 2021 sales), shoes (25% of 2021 sales), men’s apparel (14% of 2021 sales) and women’s accessories (14% of 2021 sales). Nordstrom, which traces its history to a shoe store opened in Seattle in 1901, continues to be partially owned and managed by members of the Nordstrom family.

(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
Dividend Stocks

More Questions Than Answers in Perpetual’s Offer for Pendal

Business Strategy and Outlook

Perpetual has three business offerings: as an asset manager, a private wealth advisor, and a corporate trust service provider. Acquisitions form part of the group’s strategy to build scale and expand its products and services.  Product, channel, and geographic diversification is a key focus for the investments business. It is executing this by mainly acquiring fund managers. This follows a history of subpar performance in its Australian investments business and its inability to grow organically. Recent acquisitions of Barrow Hanley and Trillium expand its addressable market and add to its asset class offerings. Priorities include growing its distribution offshore, expanding its clientele, and broadening its product suite. 

The private wealth business caters to the established wealthy, medical professionals, business owners, family offices, and aged care providers. It increases the value added to clients by providing a variety of services beyond financial planning. These capabilities are propped up by acquisitions. The Fordham acquisition is one example, where it allows Perpetual to extend accounting services to its clients. In return, its acquirers also act as referrers of new business.  The corporate trust business provides outsourced responsible entity, custodial, and trustee services to debt capital markets as well as to managed funds. Ongoing agendas include acquisitions to add scale–in the process allowing it to further lower its pricing–as well as the provision of value-added services such as data and analytic solutions to help increase the stickiness of its client base. 

The management’s initiatives are projected to revive growth in earnings and economic returns in the medium term. With increased investment, both Barrow Hanley and Trillium should offset outflows from Perpetual’s Australian equity funds and help grow fee revenue. The moatworthy private wealth and corporate trust businesses are also strong drivers of earnings growth: The former is positioned to gain market share in the domestic financial advice industry, while the latter benefits from growing securitisation volume and increasing demand for outsourced responsible entity services.

Financial Strength

Perpetual is currently in reasonable financial health with a modestly geared balance sheet. Perpetual has about AUD 248 million of debt as at Dec. 31, 2021. It has a gearing ratio (debt/[debt plus equity]) of 21.5% at the end of the period, below its stated target gearing of 30%. A gross debt/EBITDA ratio of 0.8 times is forecasted in fiscal 2022. Perpetual has stated it expects to reduce the gross debt/EBITDA to zero within five years following the acquisition of Barrow Hanley, which was completed in November 2020. Perpetual has revised its dividend payout ratio to 60%-90% of underlying profit after tax, in line with its focus on acquisitive growth. Although it is preferred that the firm maintains a balanced payout ratio, free cash flow is estimated to be sufficient to cover dividends even at a 90% payout ratio, in the absence of sizable acquisitions.

Bulls Say’s

  • New acquisitions, such as Trillium and Barrow Hanley, materially improve Perpetual’s growth prospects. There is potential for upside from increased reinvestment, which should help revive net inflows. 
  • The private wealth and trust segments benefit from tailwinds such as growth in the high-net-worth client space, as well as progressive increases in securitisation volume following the 2008 financial crisis. 
  • Large scale of FUMA and relatively low capital requirements provide recurring revenue streams and support strong returns on capital and positive free cash flows.

Company Profile 

Perpetual is one of Australia’s oldest financial services firms, founded in 1886. It has three operating segments, with the investments business being the main earnings generator. It mainly employs an active value style in managing listed assets. Perpetual also provides financial planning services to high-net-worth clients via its private segment. In its trust segment, it provides outsourced responsible entity services to funds, as well as custodial and trustee services in the debt capital markets, particularly in securitisation issuances.

(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
Dividend Stocks

Medibank Expected To Protect High Returns on Equity Rather Than Chase Growth

Business Strategy and Outlook

Medibank is Australia’s largest private health insurer operating under the Medibank and ahm brands. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. Government policy settings are expected, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

It is believed that Medibank’s current strategy, which has seen growth in policyholder numbers and margins, should see the positive trends continue. Initiatives included increasing the number of service providers where individuals pay no-gap, introducing reward programs (such as discounts) for members, investing in the digital offering to make claim lodgment easier, adding tools and resources such as 24/7 nurse teleservice, and a new focus on in-home care. To help support margins there has also been a renewed focus on claim costs. Medibank secured audit rights with hospitals which allows the insurer to investigate where rehabilitation referrals of a hospital exceed industry averages and expanded efforts to identify errors in claims made by hospitals.

Despite larger players generating respectable return on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation, or at the least a pull-back in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission.

Financial Strength

In a debt-free position Medibank is in sound financial health. The insurer is projected to fund long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range.Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021.

Bulls Say’s

  • Industry growth is tied to a steadily increasing population, ageing demographics and the rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs. 
  • Premium growth is generally tied to the increasing cost of healthcare. 
  • The symbiotic relationship with the private hospital operators and buyer power over general practitioners is a key strength of Medibank’s business model. The majority of private hospital income is paid by the insurers.

Company Profile 

Previously owned by the Australian government, Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.8 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

(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

Initiating on Tencent Music Entertainment, USD 8.60 FVE; Cloud Music, HKD 130 FVE; TME Our Top Pick

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy & Outlook:

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

With China’s antitrust laws putting an end to TME’s exclusive music copyright agreements, it’s anticipated more competition for users. Its peer Cloud Music is aiming to bridge the content gap by signing with previously inaccessible labels. Despite competitive headwinds, the TME will remain the largest platform for music streaming, benefiting primarily from network effect and intangible assets that maintain user engagement and stickiness. The subscription prices are unlikely to go lower because: 1) competitors are making losses and have little incentive for price competition; and 

2) Chinese streaming platforms offer almost the lowest prices worldwide, so more discounts will be less effective in attracting users.

Unlike developed markets, the supply side of music in China is more fragmented, with just 30% of licensing from top five labels. As licensors sell their content on a mostly fixed cost basis, TME is well-positioned to see margin expansion as revenue grows.

Financial Strengths:

TME is financially sound. As of the end of 2021, the firm was sitting on a net cash position of CNY 22 billion, more than three times that of peer Cloud Music. Despite some near-term industry challenges, the firm to generate positive free cash flows over the next years. Taking advantage of the low interest environment, the company issued a total of USD 800 million (CNY 5 billion) senior unsecured notes at below 2% interest in 2020. 

The debt/equity ratio is running at a manageable 30%, and debt/EBITDA is maintained below 1.5 times as at the end of 2021. The firm is believed to maintain this capital structure. Given the positive free cash flow assumptions the firm can easily fulfill its debt obligations while simultaneously funding future investment initiatives. The business has been generating positive free cash flows since 2016. In 2021, it generated a free cash flow of CNY 3.5 billion. This is significantly better than peer Cloud Music, who will be burning through cash for the next couple of years.

Bulls Say:

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

Company Description:

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

(Source: Morningstar)

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

Self-help measures planned to optimize Kingfisher’s store footprint

Business Strategy and Outlook

Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base. 

Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity. 

With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.

Financial Strength

Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus.Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance. Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.

Bulls Say’s

  • Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U. K. and France, as well as people spending more time indoors during the pandemic. 
  • Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations. 
  • As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.

Company Profile 

Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France. 

(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.