Author: lvc-admin

Categories
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.

Categories
Dividend Stocks

CPU Group – The Board declared a 40% franked interim dividend of 24cps, up +4%.

Investment Thesis:

  • Current expectations of aggressive interest rates increase globally. 
  • CPU is globally diversified with a revenue model that generates predictable recurring revenues and strong free cash flow generation.
  • Two main organic growth engines in mortgage servicing and employee share plans should lead to organic EPS growth.
  • Expectations of margin improvement via cost reductions program. 
  • Leveraged to rising interest rates on client balances, corporate action and equity market activity.
  • Potential for earnings derived from non-share registry opportunities due to higher compliance and IT requirements.
  • Solid free cash flow and deleveraging balance sheet.

Key Risks:

  • Increased competition from competitors such as recently listed Link and Equiniti which affect margins.
  • Cost cuts are not delivered in accordance with market expectations.
  • Sub-par performance in any of its segments, especially mortgage servicing (Business Services) as a result of higher regulatory and litigation risks; Register and Employee Share Plans as a result of subdued activity.
  • Exchanges such as ASX are exploring blockchain solutions to upgrade its clearing and settlement system (CHESS). This distributed ledger technology can bring registry businesses in-house and disrupt CPU.

Key Highlights:

  • Group Revenue (ex-MI) was up +4.5% (adjusting for the CCT acquisition, organic operating revenue growth was down -2.2% and excluding event-based revenues and CCT, operating revenue ex MI was up +3.6%) and including Margin Income as well as CCT, total revenue rose +4.6%.
  • EBIT increased +14.2% to $217.9m whilst EBIT excluding Margin Income increased +16.7% to $157.8m (adjusting for CCT, it was up +15.5% to $156.1m) with EBIT ex MI margin up +150bps to 14.4%, largely due to the growth in Employee Share Plans supported by cost management initiatives.
  • Management NPAT was up +16.5% to $137.4m and Management EPS increased by +4.5% to 22.76cps (excluding dilution from the Rights Issue and the contribution from CCT, legacy EPS increased +10.6%).
  • Net operating cash flow increased +63.8% to $203.3m, representing an EBITDA to cash conversion rate of ~66%, up +20%, which combined with capex and net MSR spend, delivered FCF $181.5m.
  • Net cash outflow was $633.4m, after spending $713m on acquisitions net of disposals and $101.9m on dividends.
  • Net debt +99.2% over FY21 to $1342.2m, increasing Net Debt/ EBITDA by +0.95x to 2.02x, at the higher end of target range.
  • The Board declared a 40% franked interim dividend of 24cps, up +4%.
  • Management continues to refine the portfolio and have reclassified the UK Mortgage Services business as an asset held for sale, anticipating the sale of the business in the foreseeable future.

Company Description:

Computershare Ltd (CPU) is a global market leader in transfer agency and share registration, employee equity plans, mortgage servicing, proxy solicitation and stakeholder communications. CPU also operates in corporate trust, bankruptcy, class action and a range of other diversified financial and governance services. 

(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

Western Union Is Shifting to Digital

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

Business Strategy and Outlook

Western Union’s primary macroeconomic exposure is to employment markets in the developed world, as the search for better economic opportunities is the fundamental driver for money transfers. While conditions have improved over time in the United States and Europe, with new entrants adding to the issues for legacy operators like Western Union. At this point, we don’t see a catalyst to improve the situation, and pandemic-related headwinds appear to be lingering. Recent geopolitical events could be an additional headwind. Another major issue for Western Union is the industry shift toward electronic methods of money transfer. The company has been actively building out its presence in electronic channels in recent years to adapt to the change in the industry. Western Union saw a sharp spike in digital transfers at the beginning of the pandemic, and growth has remained strong. Western Union achieved a 32% year-over-year increase in transaction growth in 2021 as this area of the company’s business jumped to about a quarter of revenue. 

Morningstar analysts believe the firm’s aggressive approach is the best strategy as Western Union positions itself to maintain its scale advantage despite the shift. From Morningstar analyst view, scale and market share across all channels will be the dominant factor in long-term competitive position, and Western Union appears to be maintaining its overall position. However, the growth that the company is seeing in digital transfers does not appear to be leading to strong overall growth.

Western Union Is Shifting to Digital

Western Union’s third-quarter results weren’t particularly impressive, as the company continues to battle some pandemic-related headwinds. However, from a long-term point of view,  focus is more on the company’s digital channel results, as Morningstar analysts believe sharing in this channel’s growth is key to maintaining the company’s scale advantage and wide moat over time. On that front, Western Union maintains double-digit growth in digital. Morningstar analysts view the company’s shares as undervalued, as the company has the potential to adapt to a shifting market. Thus, maintain a $26 fair value estimate.

Digital channels considered as the bright spot for the company. Growth in digital channels did moderate as the company lapped the spike it saw last year. However, year-over-year transaction and revenue growth of 19% and 15%, respectively, can be considered as a solid result. Digital transfers now account for about one quarter of revenue, and management believes it is on track to exceed $1 billion in digital revenue in 2021. As per Morningstar analysts perspective, Western Union’s ability to scale across both cash and digital channels is a significant advantage as the overall market shifts to digital.

Financial Strength 

Financial Strength Western Union’s capital structure is fairly conservative, as management sees a strong credit profile as an advantage in attracting agents. The company carried $3.0 billion in debt at the end of 2021, resulting in debt/EBITDA of 2.3 times; this is a reasonable level, given the stability of the business. Western Union also typically holds a substantial amount of cash. Net debt at the end of 2021 was approximately $1.8 billion, and we expect the company to hold a net debt position of about $2 billion over time. Given recent changes to tax laws, it’s possible Western Union might not hold as much cash as it has historically, as it will no longer incur a tax penalty upon repatriation. This could help free management’s hand, as the company historically has returned the bulk of its free cash flow to shareholders through stock repurchases and dividends

Bulls Say

  • The demographic factor that has historically driven industry growth–namely, the differential between population growth in developing and developed countries–remains in place for the foreseeable future. 
  • Western Union didn’t see a major drop-off during the last recession or the pandemic, highlighting the stability of the business. 
  • While the motives for immigrants to relocate to wealthier countries are well understood, developed countries also have incentive to open their borders, as negligible native population growth makes immigration a necessity for long-term GDP growth.

Company Profile

Western Union provides domestic and international money transfers through its global network of about 500,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network.

(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
Commodities Trading Ideas & Charts

PG&E Investing Heavily in California Energy Policy Projects

Business Strategy and Outlook

PG&E emerged from bankruptcy on July 1, 2020, after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. The new PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest more than $8 billion annually for the next five years, leading to 8% annual growth. California’s core ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. Morningstar analysts expect California regulators to support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizer its economy.

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors. 

Financial Strength 

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did entering bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms.  analysts expect PG&E to maintain investment-grade credit ratings. Morningstar analysts estimate PG&E will invest more than $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should result in minimal new equity and debt needs at least through 2023.Morningstar analysts expect PG&E will be prepared to reinitiate a dividend in 2024 after meeting the terms of its bankruptcy settlement. 

Bulls Says

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities.

Company Profile

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.6 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post bankruptcy reorganization

 (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

GM Will Likely Look Very Different and More High Tech in 2030 Than It Is Now

Business Strategy and Outlook:

GM is having a competitive lineup in all segments, combined with a reduced cost base, finally enabling the firm to have the scale to match its size. The head of Consumer Reports automotive testing even said Toyota and Honda could learn from the Chevrolet Malibu. The GM’s earnings potential is excellent because the company has a healthy North American unit and a nearly mature finance arm with GM Financial. Moving hourly workers’ retiree healthcare to a separate fund and closing plants have drastically lowered GM North America’s break-even point to U.S. industry sales of about 10 million-11 million vehicles. It has more scale to come from GM moving its production to more global platforms and eventually onto vehicle sets over the next few years for even more flexibility and scale. Exiting most U.S. sedan segments also helps.

GM makes products that consumers are willing to pay more for than in the past. It no longer has to overproduce trying to cover high labor costs and then dump cars into rental fleets (which hurts residual values). GM now operates in a demand-pull model where it can produce only to meet demand and is structured to do no worse than break even at the bottom of an economic cycle when plants can be open. The result is higher profits than under old GM despite lower U.S. share. It now seeks roughly $300 billion in revenue by 2030 from many new high-margin businesses such as insurance, subscriptions, and selling data, while targeting 2030 total company adjusted EBIT margin of 12%-14%, up from 11.3% in 2021 and 7.9% in 2020. GM takes actions such as buying Cruise, along with GM’s connectivity and data-gathering via OnStar, position GM well for this new era. Cruise is offering autonomous ride-hailing with its Origin vehicle and GM targets $50 billion of Cruise revenue in 2030. GM is investing over $35 billion in battery electric and autonomous vehicles for 2020-25 and is launching 30 BEVs through 2025 with two thirds of them available in North America. Management also targets over 2 million annual BEV sales by mid-decade and in early 2021 announced the ambition to only sell zero-emission vehicles globally by 2035.

Financial Strengths:

GM’s balance sheet and liquidity were strong at the end of 2021, apart from $11.2 billion in underfunded pension and other postemployment benefit obligations, an improvement from $30.8 billion at year-end 2014. Management targets automotive cash and securities of $18 billion and liquidity of $30 billion-$35 billion. GM had calculated that at year-end 2021, the automotive net cash and securities, excluding legacy obligations but including Cruise, of $7.7 billion, about $5.26 per diluted share. Global pension contributions in 2022 are expected at about $570 million, with about $500 million of that amount for non-U.S. plans. 

Auto and Cruise debt at Dec. 31 is $17.0 billion, mostly from senior unsecured notes and capital leases. Credit line availability after an April 2021 renewal is about $17.2 billion across three lines with one of those lines being a 364-day $2 billion line allocated exclusively to GM Financial. The other two automotive lines are a $4.3 billion line expiring in April 2024 and an $11.2 billion line. The $11.2 billion line has $9.9 billion available until April 2026 while the remaining portion is available until April 2023. GM fulfilled its UAW VEBA funding obligations in 2010. GM had calculated in 2021 that the automotive and Cruise debt/adjusted EBITDA at 1.3, excluding legacy obligations and equity income. Automotive debt maturities including capital leases are about $463 million in 2022.

Bulls Say:

  • GMNA’s break-even point of about 10 million-11 million units is drastically lower than it was under the old GM. The company’s earnings should grow rapidly as GM becomes more cost-efficient.
  • GM’s U.S. hourly labor cost is about $5 billion compared with about $16 billion in 2005 under the old GM.
  • GM can charge thousands of dollars more per vehicle in light-truck segments. Higher prices with fewer incentive dollars allow GM to get more margin per vehicle, which helps mitigate a severe decline in light- vehicle sales and falling market share.

Company Profile:

General Motors Co. emerged from the bankruptcy of General Motors Corp. (old GM) in July 2009. GM has eight brands and operates under four segments: GM North America, GM International, Cruise, and GM Financial. The United States now has four brands instead of eight under old GM. The company lost its U.S. market share leader crown in 2021 with share down 280 basis points to 14.6%, but it is expected that GM to reclaim the top spot in 2022 due to 2021 suffering from the chip shortage. GM Financial became the company’s captive finance arm in October 2010 via the purchase of AmeriCredit.

(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.