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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.

Categories
Dividend Stocks

Johnson Controls’ Service Offerings Are Gaining Traction

Business Strategy and Outlook

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products.

In early 2019, Johnson Controls sold its power solutions business to a consortium of investors for $11.6 billion of net proceeds that the firm used to pay down debt and repurchase shares. Johnson Controls’ prudent capital allocation strategy in tandem with its simplified business model that is clearly showing improving fundamentals have been catalysts for the stock.

 As a pure play building technologies and solutions business, Johnson Controls stands to benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building products and solutions.The COVID-19 pandemic will increase the market opportunity for healthy building solutions, such as air filtration and touchless access controls. These secular tailwinds should allow Johnson Controls to grow faster than the economies it serves. Indeed, over the next three years (through fiscal 2024), the firm is targeting revenue growth at a 6%-7% compound annual rate, compared with expectations of 4%-5% market growth. Key levers behind Johnson Controls’ targeted outperformance include continued product innovation (supporting market share gains and pricing); increased service penetration (a higher margin opportunity); and the firm’s participation in meaningful growth themes (for example, energy efficiency, smart buildings, and indoor air quality solutions).

Financial Strength

After selling its power solutions segment in April 2019, which netted Johnson Controls $11.6 billion, the firm paid down $5.3 billion of debt and repurchased 191 million shares (21% share reduction) for approximately $7.5 billion. The firm’s balance sheet is now in great shape, with a net debt/2021 EBITDA ratio of about 1.8, which is below management’s targeted range of 2.0-2.5. The firm finished its fiscal 2021 with $7.7 billion of debt, about $1.3 billion of cash on the balance sheet, and $3 billion available on two credit facilities. The firm’s significant liquidity as dry powder for additional buybacks or acquisitions

Bulls Say’s

  •   Johnson Controls should benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building solutions. 
  • The COVID-19 pandemic should increase the market opportunity for air filtration and touchless access control solutions. 
  • Johnson Controls’ free cash flow conversion has been improving, exceeding 100% in 2020-21. A 100% free cash flow conversion is in line with other world-class firms

Company Profile 

Johnson Controls manufactures, installs, and services HVAC systems, building management systems and controls, industrial refrigeration systems, and fire and security solutions. Commercial HVAC accounts for about 40% of sales, fire and security represents another 40% of sales, and residential HVAC, industrial refrigeration, and other solutions account for the remaining 20% of revenue. In fiscal 2021, Johnson Controls generated over $23.5 billion in revenue.

(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

LNK results reflects Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA

20025825 - closeup image of businessman drawing 3d graphics

Investment Thesis:

  • LNK is currently under a takeover offer by D&D, which the LNK Board has unanimously recommended. 
  • Leveraged to ongoing outsourcing of administration by retail super funds.
  • LNK still has exposure to any further upside in PEXA’s valuation. 
  • New contract wins in Fund Administration and increased market activity.
  • Successfully delivering on its offshore expansion story. 
  • Efficiency benefits from the cost out program. 
  • Clarity around Brexit will remove uncertainty / potential discount assumed in current valuation / share price.  
  • Value accretive bolt-on acquisitions. 
  • Favourable currency movements. 

Key Risks:

  • LNK does not receive all the regulatory approvals for the current takeover offer from D&D. 
  • Lower market activity and business / investor confidence. 
  • Loss of major client contract(s) in Fund Administration.
  • Adverse changes in super regulatory environment – e.g. super account consolidation.
  • Lack of product development.
  • Adverse currency movements.

Key Highlights:

  • Link Administration Holdings Ltd (LNK) reported strong 1H22 results ahead of expectations, with the Company upgrading its FY22 guidance.
  • LNK’s results reflect – Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA.
  • Statutory Loss of $81.7m was due to a non-cash impairment charge of $81.6m related to the BCM business and rationalisation of LNK’s premises footprint.
  • According to management, the GTP remains on track to deliver the committed gross annualised savings of $75m by the end of FY22.
  • For 1H22, the GTP delivered gross savings of $14.9m (including D&A).
  • D&D takeover offer unanimously recommended by LNK Board – total consideration of $5.68 per share.
  • As per LNK’s announcement on 22 December 2021, the Company has entered a scheme of implementation deed with Dye & Durham (D&D) to have 100% of its shares acquired at $5.50 per share plus a fully franked 3cps interim dividend (which declared at the 1H22 results)
  • Investors may also receive a further 15cps if LNK reaches an agreement to sell its Banking and Credit management (BCM) business prior to or up to 12 months after the implementation of the scheme. LNK shareholders are expected to vote on the scheme in May 2022.
  • BCM sales does not proceed and investors miss out on the additional 15cps value.
  • There are contingencies in the offer, which also relates to the Woodford Matters (if there are fines before the completion of the scheme this may delay or put the takeover into jeopardy).

Company Description:

Link Administration Holding Ltd (LNK) is the largest provider of superannuation fund administration services to super fund in Australia. Further, the Company is also a leading provider of shareholder management and analytics, share registry and other services to corporates in Australia and globally. The Company has 5 main divisions: (1) Retirement & Super Solutions (RSS), (2) Corporate Markets (CM), (3) Technology & Operations (T&O), (4) Fund Solutions (FS) and (5) Banking & Credit Management (BCM). LNK was listed on the ASX in October 2015. 

(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
Technology Stocks

Jack Henry Remains Committed to the Idea That Slow and Steady Wins the Race

price of btc is going to breakout

Business Strategy and Outlook

 Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers.

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is to be believed was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur

 Jack Henry has generally outperformed its larger peers in terms of growth, and expect this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  •  The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions.

(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

J.B. Hunt’s Intermodal Rate Backdrop Holding Strong, 2022 Freight Outlook Favorable

Business Strategy and Outlook

 At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it struck an agreement with Norfolk Southern in the East. Hunt has established a clear leadership position in intermodal shipping, with a 20%-plus share of a $22 billion-plus industry. The next-largest competitor is Hub Group, followed by Schneider National’s intermodal division and XPO Logistics’ intermodal unit. Intermodal made up slightly less than half of Hunt’s total revenue in 2021.

Hunt isn’t immune to downturns, but over the past decade-plus it’s reduced its exposure to the more capital-intensive truckload-shipping sector, which represents about 28% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt is also shifting its for-hire truckload division to more of an asset-light model via its drop-trailer offering while investing meaningfully in asset-light truck brokerage and final-mile delivery.

 Rates in the competing truckload market corrected in 2019, driving down intermodal’s value proposition relative to trucking. Thus, 2019 was a hangover year and fallout from pandemic lockdowns pressured container volume into early 2020. However, truckload capacity has since tightened drastically, contract pricing is rising nicely across all modes, and underlying intermodal demand has rebounded sharply on the spike in retail goods consumption (intermodal cargo is mostly consumer goods) and heavy retailer restocking. Hunt is grappling with near-term rail network congestion that’s constraining volume growth, but the firm is working diligently with the rails and customers to minimize the issue. The expectation is that  2.5%-3.0% U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer term, with 2.0%-2.5% pricing gains on average, though Hunt’s intermodal unit should modestly outperform those trends given its favorable competitive positioning.

Financial Strength

J.B. Hunt enjoys a strong balance sheet and is not highly leveraged. It had total debt near $1.3 billion and debt/EBITDA of about 1 time at the end of 2021, roughly in line with the five-year average. EBITDA covered interest expense by a very comfortable 35 times in 2021, and expect Hunt will have no problems making interest or principal payments during our forecast period. Hunt posted more than $350 million in cash at the end of 2021, up from $313 million at the end of 2020. Historically, Hunt has held modest levels of cash, in part because of share-repurchase activity and its preference for organic growth (including investment in new containers and chassis, for example) over acquisitions. For reference, it posted $7.6 million in cash and equivalents at the end of 2018 and $14.5 million in 2017. The company generates consistent cash flow, which has historically been more than sufficient to fund capital expenditures for equipment and dividends, as well as a portion of share-repurchase activity. It is expected that trend to persist. Net capital expenditures will jump to $1.5 billion in 2022 as the firm completes its intermodal container expansion efforts, but after that it should also have ample room for debt reduction in the years ahead, depending on its preference for share buybacks. Overall, Hunt will mostly deploy cash to grow organically, while taking advantage of opportunistic tuck-in acquisitions (a deal in dedicated or truck brokerage isn’t out of the question, but and suspect the final mile delivery niche is most likely near term).

Bulls Say’s

  •  Intermodal shipping enjoys favorable long-term trends, including secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail). 
  • It is believed that the intermodal market share in the Eastern U. S. still has room for expansion, suggesting growth potential via share gains from shorter-haul trucking. 
  • J.B. Hunt’s asset-light truck brokerage unit is benefiting from strong execution, deep capacity access, and tight market capacity. It’s also moved quickly in terms of boosting back-office and carrier sourcing automation.

Company Profile 

J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).

(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

Jack Henry & Associates: margins under pressure as company developed and migrated clients to a new card processing platform

Business Strategy and Outlook

Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, it is seen this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers. 

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is likely was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur. 

Jack Henry has generally outperformed its larger peers in terms of growth, and is believed for this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. It is held Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions. 

(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

Mondelez’s management refraining from quantifying its cost-saving aims

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Business Strategy and Outlook

Since taking the helm at Mondelez four years ago, CEO Dirk Van de Put has orchestrated a plan to drive balanced sales and profit growth by empowering local leaders, extending the distribution of its fare, and facilitating more agility as it relates to product innovation (aims that are hitting the mark). It wasn’t surprising reigniting the top line was at the forefront of its strategic direction. More specifically, Mondelez targets 3%-plus sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends at home and abroad. Further, it has looked to acquire niche brands to build out its category and geographic exposure, which is seen to be prudent. 

But despite opportunities to bolster sales, it weren’t anticipated the pendulum to shift entirely to top-line gains under Van de Put’s watch; rather, based on his tenure at privately held McCain Foods and past rhetoric, it is alleged driving consistently profitable growth would be the priority. As such, the suggestion showcase that Mondelez is poised to realize additional efficiency gains through fiscal 2022 favorably. While management has refrained from quantifying its cost-saving aims, it is seen an additional $750 million in costs (a low- to mid-single-digit percentage of cost of goods sold and operating expenses, excluding depreciation and amortization) it could remove (on top of the $1.5 billion realized before the pandemic). It is foreseen this can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities. 

It isn’t likely that, these savings to merely boost profits, though. In this vein, management has stressed a portion of any savings realized would fuel added spending behind its brands in the form of research, development, and marketing, supporting the brand intangible asset underpinning Mondelez’s wide moat. This aligns with analysts forecast for research, development, and marketing to edge up to nearly 7% of sales on average over the next 10 years (or about $2.4 billion annually), above historical levels of 6% ($1.7 billion).

Financial Strength

In assessing Mondelez’s balance sheet strength, it isn’t foreseen any material impediments to its financial flexibility. In this vein, Mondelez maintained $3.5 billion of cash on its balance sheet against $19.5 billion of total debt as of the end of fiscal 2021. Experts forecast free cash flow will average around 15% of sales annually over Experts 10-year explicit forecast (about $5.2 billion on average each year). And it is in view that returning excess cash to shareholders will remain a priority. Analysts forecast Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2031 (implying a payout ratio between just north of 40%), while also repurchasing around 2%-3% of shares outstanding annually. It is held Mondelez has proven itself a prudent capital allocator and could also opt to add on brands and businesses that extend its reach in untapped categories and/or geographies from time to time–although it is unlikely believe it has much of an appetite for a transformational deal. It is alleged the opportunity to expand its footprint into untapped markets–such as Indonesia and Germany–or into other adjacent snacking categories (like health and wellness) could be in the cards. Recent deals have included adding Tate’s Bake Shop for $500 million in 2018, Perfect Snacks (in 2019, refrigerated snack bars), Give & Go (2020, an in-store bakery operator),and Chipita (2021, Central and Eastern European croissants and baked goods) to its fold. But at just a low-single-digit percentage of sales, none of these deals are material enough to move the needle on its overall results.

Bulls Say’s

  • Mondelez’s decision to empower in-market leaders and fuel investments behind its local jewels (which historically had been starved in favor of its global brands) stands to incite growth in emerging markets for some time. 
  • Experts suggest the firm is committed to maintaining a stringent focus on extracting inefficiencies from its business, including the target to shed more than 25% of its noncore stock-keeping units to reduce complexity. 
  • Management has suggested it won’t sacrifice profit improvement merely to inflate its near-term sales profile, which is foreseen as a plus.

Company Profile 

Mondelez has operated as an independent organization since its split from the former Kraft Foods North American grocery business in October 2012. The firm is a leading player in the global snack arena with a presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles. Mondelez’s portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm derives around one third of revenue from developing markets, nearly 40% from Europe, and the remainder from North America. 

(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

BHP reported strong 1H22 results reflecting strong revenue and earnings growth; With strong balance sheet position

Coal is excavated at the Jim Bridger Mine, owned by energy firm PacifiCorp and the Idaho Power Company, outside Point of the Rocks, Wyoming March 14, 2014. West Virginia mined 120 million tons (109 metric tons) of coal in 2012, second to Wyoming, or about 12 percent of total U.S. production. Kentucky was third with about 9 percent of output, according to the National Mining Association. REUTERS/Jim Urquhart (UNITED STATES - Tags: ENERGY BUSINESS) - RTR3H5NY

Investment Thesis 

  • Based on blended valuation (consisting of DCF, PE-multiple & EV/EBITDA multiple), BHP is trading at fair value but on an attractive dividend yield.
  • Commodities prices especially iron ore prices deteriorate on lower demand from China.
  • Focus on returning excess free cash flow to shareholders in the absence of growth opportunities (hence the solid dividend yield). 
  • Quality assets with competitive cost structure and leading market position.
  • Growth in China outperforms market expectations.
  • Management’s preference for oil and copper in the medium to long-term.
  • Solid balance sheet position.
  • Ongoing focus on productivity gains.

Key Risks

  • Poor execution of corporate strategy.
  • Prolonged impact on demand if coronavirus is not contained.
  • Deterioration in global macro-economic conditions.
  • Deterioration in global iron ore/oil supply & demand equation.
  • Deterioration in commodities’ prices.
  • Production delay or unscheduled site shutdown.
  • Movements in AUD/USD.

1H22 Results Highlights Relative to the pcp: 

  • Earnings and Margins: Attributable profit of US$9.4bn includes an exceptional loss of US$1.2bn (which mainly accounts for Samarco dam failure of US$821m as well as an impairment of US deferred tax assets no longer expected to be recoverable after the Petroleum demerger of US$423m). This was significantly above 1H21 profit of US$3.9bn, which included an exceptional loss of US$2.2bn. Underlying attributable profit of US$10.7bn was much improved from US$6.0bn in the pcp. Profit from operations (continuing operations) of US$14.8bn was up +50%, due to higher sales prices across BHP’s major commodities, near record production at WAIO and higher concentrate sales at Spence, and favourable exchange rate movements; partially offset by impacts of planned maintenance across several assets, expected copper grade decline at Escondida, significant wet weather at Queensland Coal and inflationary pressures, including higher fuel, energy and consumable prices. Total Covid impacts was US$223m (pre-tax) versus US$405m in 1H21. Underlying EBITDA (continuing operations) of US$18.5bn, was up +33%, as margin of 64% improved from 60% in 1H21. Underlying return on capital employed improved to 39.5% from 23.6% in 1H21 (underlying return on capital employed, excluding Petroleum, is ~42.9%). 
  • Costs. BHP’s FY22 unit cost guidance for WAIO and Escondida remains unchanged whilst for Queensland Coal, it was increased, reflecting lower expected volumes for the full year as previously announced. At 1H22, unit costs at WAIO are below guidance and are tracking towards the lower end of the guidance range. WAIO unit costs (C1) excluding third party royalties, were 18% higher at US$14.74 per tonne, driven by higher diesel prices and costs relating to South Flank ramp up. Escondida unit costs were at the top end of the guidance range, driven by planned lower concentrator feed grade. Queensland Coal unit costs are tracking above the revised guidance range as BHP saw lower volumes due to significant wet weather impacts and labour constraints. 
  • Balance Sheet: BHP’s balance sheet remains strong with gearing of 10.0% versus 6.9% in the pcp, and with net debt at US$6.1bn versus US$4.1bn in the pcp. The increase of US$2.0bn in net debt reflects strong free cash flow generation, offset by the record final dividend paid to shareholders in September 2021 of US$10.0bn. Following a review of the net debt target, BHP also revised the range to between US$5-15bn from the previous target range of between US$12-17bn. 
  • Dividends: The Board declared a record interim dividend of US$1.50 per share or US$7.6bn, including an additional US$2.7bn above the minimum payout policy. This equates to 78%. 
  • Capex: Capex of US$3.7bn in 1H22 covers US$1.1bn maintenance expenditure, US$0.1bn minerals exploration and US$0.8bn petroleum expenditure. BHP expects FY22 capital and exploration expenditure of ~US$6.5bn (continuing operations), which is US$0.2bn lower than previous guidance due to favourable exchange rate movements. 

Company Profile

BHP Group Limited (BHP) is a diversified global mining company, with dual listing on the London Stock Exchange and Australia Stock Exchange. The company’s principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate. The company also has petroleum exploration, production and refining.

 (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

GPT reported NPAT of $1422.8 m with ample of liquidity; Reduced 1.7% of securities on issue through buyback

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Investment Thesis

  • Improving underlying conditions, although some uncertainty remains. 
  • Solid portfolio across Retail, Office and Logistics but short-term risk around valuations and property fundamentals due to Covid-19.
  • Diversified with Funds Management business generating income.
  • Balance sheet strength with gearing ratio at 28.2%, well within target range of 25-35%.
  • Strong tenant demand for the GPT east coast assets. 

Key Risks

  • Breach of debt covenants.
  • Inability to repay debt maturities as they fall due.
  • Deterioration in property fundamentals, especially delays with developments.
  • Environment of expected interest rate hikes. 
  • Downward asset revaluations.
  • Retailer bankruptcies and rising vacancies.
  • Outflow of funds in the Funds Management business reducing GPT’s income.
  • Tenant defaults as the economic landscape changes.

1H22 results summary. Relative to the pcp: 

  • Funds from Operations (FFO) of $554.5m was flat over pcp, despite the Company continuing to provide Covid-19 rent relief to tenants, with a +3.6% YoY increase in Retail, +11% increase in Logistics and +2.3% increase in Funds Management combined with -17% YoY decline in finance costs were offset by -4.5% YoY decline in Office and +80.4% YoY increase in corporate overheads due to not having the benefit of pcp savings from the withdrawal of bonus schemes and the support of JobKeeper. FFO per security increased +1.2% to 28.82 cents, driven by on-market security buy-back. 
  •  NPAT improved to $1,422.8m (vs loss of $213.2m in pcp), driven by investment property valuation increases of $924.3m (vs valuation declines of $712.5m in pcp), with 60% of coming from the Logistics portfolio and the balance from Office portfolio. 
  • Total 12-month return was 14.1% vs -2.4% in pcp, amid investment property revaluation gains, driving an increase in NTA per stapled security of +9.3% YoY to $6.09. 
  • Operating cashflow increased +7.2% YoY to $520.4m and FCF grew +6.7% to $467.5m, resulting from higher cash collections and no payment for variable remuneration schemes, partially offset by higher transaction costs and taxation payments. 

Capital management: 

  • Strong shareholder returns with the Board buying back ~32.3 million securities (1.7% of securities on issue) at an average price of $4.54 per security for a total consideration of $146.8m (on-market security buy-back program formally concluded). 
  • The Company declared a final distribution of 9.9cps, taking FY21 distribution to 23.2cps, up +3.1% over pcp and representing a distribution payout of 95.1% of FCF. 
  • Ample liquidity with $934.7m held in cash and undrawn bank facilities. 
  • Well managed debt profile with weighted average cost of debt down -70bps over pcp to 2.4%, with modest increase expected in FY22 because of potential interest rate increases. 
  • Gearing increased by +500bps to 28.2% YoY (well within gearing range of 25-35%) primarily driven by debt funded acquisition of the Ascot Capital portfolio, resulting in S&P/Moody’s rating of A (negative)/A2 (stable) vs A (stable)/A2 (stable) in pcp, within GPT’s target A-rating band.

Company Profile

GPT Group (GPT) owns and manages a portfolio of high-quality Australian property assets, these include Office, Business Parks and Prime Shopping Centres. Whilst the core business is focused around the Retail, Office and Logistics, it also has a Funds Management (FM) business that generates income for the company through funds management, property management and development management fees. GPT’s FM business has the following funds, GPT Wholesale Office Fund (GWOF – A$6.1b) launched in July 2006, GPT Wholesale Shopping Centre Fund (GWSCF – A$3.9b) launched in March 2007 and GPT Metro Office fund (GMF – A$400m) launched in 2014.

(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
Shares Small Cap

COE’s results with production of 1.57 MMboe, up +31%; sales volumes of 2.02 MMboe, up +67%, and sales revenue of $95.4m, up +96%.

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Investment Thesis:

  • Strong FY22 guidance provided by management. 
  • Sole will provide significant uplift in production and free cash flow. 
  • Sole’s volumes are mostly contracted out, which provides greater certainty at reduced exposure to price movements. 61% of COE’s 2P reserves (Proved and probable reserves) are under take-or-pay contracts, with uncontracted gas predominantly from 2024 onwards. 
  • Upside from COE’s exploration activity around Gippsland and Otway Basin. 
  • Strong management team led by CEO/MD David Maxwell, who has over 25 years industry / developing LNG projects with companies such as BG Group, Woodside Petroleum and Santos Ltd. 
  • Favorable industry conditions on the east coast gas market – with tight supply could lead to higher gas prices. 
  • Potential M&A activity – especially considering recent de-rating.

Key Risks:

  • Execution risk – Drilling and exploration risk.
  • Commodity price risk – movement in oil & gas price will impact uncontracted volumes. 
  • Regulatory risk – such as changes in tax regimes which adversely impact profitability. 
  • M&A risk – value destructive acquisition in order to add growth assets.
  • Financial risk – potentially deeply discounted equity raising to fund operating & exploration activities should debt markets tighten up due external macro factors.

Key Highlights:

  • COE’s management announced strong guidance relative to FY21: FY22 production guidance 3.0 – 3.4 MMboe (FY21: 2.63 MMboe); sales volume 3.7 – 4.0 MMboe (FY21: 3.01 MMboe); underlying EBITDAX $53 – $63m (FY21: $30m); capex of $24 – 28m (FY21: $32.3m).
  • COE achieved record results with production of 1.57 MMboe, up +31%; sales volumes of 2.02 MMboe, up +67%, and sales revenue of $95.4m, up +96%.
  • The +31% increase in total production to 1.57 MMboe, was driven by higher production from the Sole field and higher sales volumes contributed to a +163% increase in underlying EBITDAX to $25.5m.
  • COE was able to improve performance at Orbost Gas Processing Plant to drive earnings: Underlying EBITDAX up +163% to $25.5m; underlying net loss after tax of $6.0m (H1 FY21: $17.4m loss).
  • Step-change in total company gas production: H1 FY22 average daily rate of 50TJ/day, up +39% relative to 1H21 average daily rate of 36 TJ/day.
  • Athena Gas Plant sales began after successful commissioning.
  • COE retained a solid balance sheet with $92.2m in cash reserves at 31 December 2021.

Company Description:

Cooper Energy Ltd (COE) is an oil & gas exploration company focusing on its activities in the Cooper Basin of South Australia. The Company’s exploration portfolio includes six tenements located throughout the Basin. Gas accounts for the major share of the Company’s sales revenue, production and reserves. COE’s portfolio includes: (1) gas production of approximately 7PJ p.a. from the Otway Basin, most of which comes from the Casino Henry gas project which it operates. (2) COE is developing the Sole gas field to supply 24 PJ of gas p.a. from 2019. (3) Oil production of approximately 0.3 million barrels p.a. from low-cost operations in the Cooper Basin.   

(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.