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Technology Stocks

Strong 2022 Outlook Motivates Us to Lift Eaton’s Fair Value Estimate

Business Strategy and Outlook

 Eaton is a specialized producer of highly engineered products and services. These offerings are designed to solve customer pain points in vital portions of the world’s infrastructure. We believe Eaton has mostly positioned its portfolio in profitable niches that should benefit from secular trends like energy transition and electrification, to propel long-term growth. Eaton’s portfolio can be divided into two portions: it’s more legacy industrial sector and its electrical sector. 

Industrial serves a variety of end markets and houses the aerospace and vehicle segments, while electrical consists of the Americas and global segments. Eaton’s products mostly compete in differentiated niches of its end markets, which we think reduces the risk of commoditization. Moreover, many of its end-market solutions are mission-critical, like fuel pumps in aerospace applications or uninterruptible power supply in hospitals. Others lower customers’ total cost of ownership or compete in industries with a high cost of failure.

 In 2018, the company created a new segment, eMobility, which aims to take advantage of the secular trend toward electric vehicles. It is believed that the company can leverage its technology core competency from its electrical sector while taking advantage of its OEM relationships in its vehicle segment. Of all of Eaton’s businesses, the most bullish trend is in its electrical sector and its aerospace business, given data center growth, necessary upgrades to aging infrastructure, and the eventual commercial aerospace recovery.

After revisiting the Eaton thesis and came away far more bullish on the company after management made two prudent capital allocation decisions to sell the commoditized and secularly challenged businesses in lighting and hydraulics. The recent bolt-ons, particularly Tripp Lite, given growth potential in the data center market are particularly liked. It is now believed that Eaton will likely hit all its upward revised targets by 2025, save for its eMobility margin aspirations, given continued investment needs there. Nonetheless, the market is too generous in its assessment of Eaton based on fundamental, intrinsic valuation.

Financial Strength

Eaton is on a decent financial footing. Eaton’s credit rating had steadily improved under Craig Arnold’s stewardship to single A, but the firm is slightly more leveraged now from a net debt/EBITDA standpoint at 2.4 times as a result of the coronavirus pandemic. Nonetheless, it is not a concern as these results are in line with peers, and expect this ratio will come down to under 2 times by 2023 as the firm’s growth returns. It is estimated that 25% of cash on the balance sheet is needed to support Eaton’s global operations, though it is also noted that Eaton is a very strong generator of free cash flow. Further, the firm’s interest coverage ratio (EBIT/interest) is nearly 14 times, which when considered is a strong indicator that the company can safely meet its obligations. Given acquisitions announced at the end of 2020, Eaton will be out of the merger and acquisition market in 2021, given its dividend and share repurchase commitment, but consider the company financially healthy enough to pursue acquisitions once more in 2022 if it should prefer this route over repurchases. At year-end 2020, the company’s pension and other postretirement liabilities’ shortfall totalled just over $1.6 billion, which detracts about $4 from our fair value estimate. Nonetheless, this effect may be overstated in a rising interest-rate environment.

Bulls Say’s

  •  Eaton’s portfolio moves will create lots of value for shareholders and transform Eaton from a 10% ROIC generator to one in the mid-teens. 
  • Investors should welcome many of the secular trends Eaton is positioned to capture, including energy transition, digitization, and electrification as well as the commercial aerospace recovery. 
  • The market could rerate Eaton with an even higher multiple if Congress passes an infrastructure bill. 

Company Profile 

Eaton is a diversified power management company operating for over 100 years. The company operates through various segments, including electrical products, electrical systems and services, aerospace, vehicle, and most recently eMobility. Eaton’s portfolio can broadly be divided into two halves. One part of its portfolio is housed under its industrial sector umbrella, which serves a large variety of end markets like commercial vehicles, general aviation, and trucks. The other portion is Eaton’s electrical sector portfolio, which serves data centers, utilities, and the residential end market, among others. While the company receives favorable tax treatment as a domiciliary of Ireland, most of its operations take place 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.

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Dividend Stocks Expert Insights

Star Entertainment Group reflects gross revenue declined -22% to $580m, EBITDA declined -87% to $29m and NPAT loss of $74m

Investment Thesis:

  • Additional cost measures announced to support earnings.
  • Monopolies in the casino industry in SGR’s operating geographies and is one of the market leaders in other games such as slots.
  • Economic moat in the nightlife landscape in Sydney given regulatory environment (such as lock-out laws).
  • Diversified business base across different types of entertainment, hotels, retail stores and food & beverage establishments.
  • Strong tourism growth once borders reopen is expected to a tailwind for SGR.
  • Lower AUD could improve international spending in domestic markets.
  • Domestic table games segment remains strong.

Key Risks:

  • Weakening VIP segment, potentially making Sydney less viable.
  • Further deterioration of consumer spending and household discretionary income 
  • Regulatory risks e.g. repeal of lockout laws could increase competition in the nightlife landscape in Sydney.
  • Establishment of new Crown casino in Sydney will increase competition (especially amongst VIP customers) and could potentially dismantle SGR’s monopoly in Sydney.
  • Win-rate risk (if the casinos have a much lower win-rate than the mathematical expected value).
  • Potential scandals.

Key Highlights:

  • On a normalised basis, gross revenue declined -22% to $580m, EBITDA declined -87% to $29m and NPAT was a loss of $74m, impacted by Covid-19 related property shutdowns, operating restrictions, and border closures. Statutory EBITDA of $31m (pre significant items) was down -87% and statutory net loss was $74m (post significant items) vs profit of $49.7m in pcp.
  • Operating expenses increased +23.6% to $401m, reflecting Covid-19 related inefficiencies and investment in staff to position the properties for re-opening.
  • Net debt increased by +4% over 2H21 to $1.2bn with net leverage increasing to 5.2x, impacted by property shutdowns. However, SGR received full waiver of debt covenants for the December 2021 testing date and an amendment of the covenant ratios for the June 2022 testing date.
  • SGR has liquidity of $520m in cash and undrawn facilities.
  • Asset sale continued (to release capital from non-core or low-yielding assets), with SGR selling VIP jet for ~$40m, entering into agreement for the sale of an interest in the Treasury Brisbane assets for $248m (ex GST) and continuing work on the potential sale and leaseback (or similar transaction) of a minority holding in The Star Sydney property. 
  • Operating cashflow declined -96% to $11m with cash collection down -90% to 45%.
  • Capex of $125-150m (FY23 guidance is ~$175m).
  • D&A expense of ~$205m.
  • Net funding costs of $50-55m.
  • JV equity contributions of ~$35m, primarily relating to Gold Coast Tower 2.
  • Cost pressures to continue in 2H22 driven by wages, insurance, energy, Covid-19 related challenges and further investment in headcount in regulatory and compliance functions.
  • Trading Update – in the period from 1 January 2022 to 13 February 2022, total revenue was up +7% YoY with Sydney revenue up +20% (gaming revenue up +17% and non-gaming revenue up +46%) and Queensland revenue is down -6% (gaming revenue down -12% and non- gaming revenue up +32%) with Omicron impact peaking in mid-January and progressively easing. 

Company Description:

The Star Entertainment Group Limited, an integrated resort company, provides gaming, entertainment, and hospitality services in Australia. The Company operates through three segments: Sydney, Gold Coast, and Brisbane. It owns and operates The Star Sydney casino, which includes hotels, apartment complex, restaurants, and bars; The Star Gold Coast casino, which consists of hotels, theatre, restaurants, and bars; and Treasury casino in Brisbane that comprises hotel, restaurants, and bars. The company also manages the Gold Coast Convention and Exhibition Centre. The company was formerly known as Echo Entertainment Group Limited and changed its name to The Star Entertainment Group Limited in November 2015.

(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

Tassal Group Board declared an interim dividend of 8cps, up +14.3%, in line with a target pay-out ratio of at least 50% of Operating NPAT.

Investment Thesis:

  • Number one player in the domestic market (approximately 50% market share), with only one major competitor (Huon Aquaculture Group). This could see rational pricing behavior, which should be positive for both companies. 
  • High barriers to entry (assets, desired temperatures and regulatory licences are difficult to obtain).
  • Initiatives like selective breeding programs and investments in infrastructure appear to be paying dividends, with more recent generations of TGR’s salmon showing more robust growth than their predecessors. 
  • Given the complex nature of salmon farming, TGR is unlikely to have its dominant position as an Australian leading salmon farmer seriously threatened in the foreseeable future.
  • Addition of prawns into TGR’s product portfolio brings diversification benefits to the Company’s risk profile.
  • Growth in prawns represents material upside for group earnings.

Key Risks:

  • Impact on production due to adverse weather conditions and diseases. 
  • The De Costi subsidiary presents an opportunity for diversification; however, execution and competitive risks remain. 
  • Potential review of chemical colouring in salmon may lead to further negative publicity and undermine demand for salmon. 
  • Cost pressures or cost blowout could deteriorate margins significantly given the large cost base relative to earnings (EBITDA).
  • Irrational competitive behaviour (domestic and international markets).
  • Negative media reports on the sustainability of the Tasmanian salmon industry.
  • Regulatory risks regarding Federal, State and Local laws and regulations regarding the leases, licenses, permits and quotas which may affect TGR’s operations.

Key Highlights:

  • TGR’s operating EBITDA was up +14.1% to $89.5m, driven by strong revenue growth of +43.3% to $419.1m, but partially offset by lower EBITDA $/kg due to Grocery tenders in late FY21 and a material increase in supply chain costs.
  • Operating cashflow of $86.99m, was up 110.2% and more aligned with operating EBITDA.
  • Revenue of $419.14m, up +43.3%.
  • Operating cash flow of $86.99m, up +110.2%
  • Underlying EBIT of $50.01m, up +6.9%.
  • Underlying NPAT of $31.18m, up +10.3%.
  • The Board declared an interim dividend of 8cps, up +14.3%, in line with a target payout ratio of at least 50% of Operating NPAT.
  • Leverage (Bank debt / Operating EBITDA) reduced from 2.55x to 2.37x as cash was used to lower debt and growth in EBITDA (in line with operating cashflow). Debt service cover was stable at 2.80. Gearing (Net debt/ Equity) reduced to 38.0% from 39.7%.
  • TGR retained prudent credit metrics with significant headroom to banking covenants.
  • TGR has substantial headroom available in debt facilities with $160.1m in undrawn debt facilities and cash of $43.1m. 
  • Capex fell to $46.0m (versus 1H21: $67.7m) as TGR’s major investment program rolled off.

Company Description:

Tassal Group (TGR) is Australia’s largest vertically integrated seafood/aquaculture company. Based in Tasmania, TGR is engaged in hatching, farming, processing, sale and marketing of Atlantic salmon and ocean trout. Tassal is also undergoing investments to enter the prawn’s market. The company’s products are distributed in Australia, Japan and other international markets. 

(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.

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Technology Stocks

Carsales.com Ltd (CAR) reported strong 1H22 results & Balance sheet position; Declared fully franked dividend of 25.5cps

Investment Thesis

  • Leading market position in online car classifieds. 
  • Overseas expansion provides new growth opportunities from the challenging core Australian market. 
  • Heavily reliant on two growth stories (South Korea and Brazil).
  • Diversified geographic coverage.
  • Bolt-on acquisitions provide opportunities to supplement organic growth.
  • The Company can sustain high single-digit and low double-digit revenue growth. 
  • CAR’s move into adjacent products and industries. 
  • Increasing pricing in South Korea to boost margins.
  • Looking to take more of the car buying experience online with dealers (i.e. increasing its total addressable market). 

Key Risk

  • Rich and demanding valuation.
  • Competitive pressures, that is car dealer driven substitute platform or the No. 2 & 3 player gain ground on CAR.
  • Motor vehicle sales remain subdued.  
  • Value destructive acquisition / execution risk with international strategy.
  • Not immune from broader downturn in economy (consumer likely to delay a significant purchase in time of uncertainty). 

1H22 Results Highlights. Relative to the pcp: 

  • Look-through revenue of $282m, up +30% and Look-through EBITDA was up +15% to $149m, driven by strong domestic results in the Private and Media segments, growth in Encar in South Korea and good cost discipline. 
  • Adjusted NPAT of $89m up 20% and adjusted EPS of 31.4c. 
  • CAR reported strong cash flow with Reported EBITDA to operating cash flow conversion of 100%. The Board declared a fully franked interim dividend of 25.5cps, consistent with longstanding dividend payout policy of 80%.

Company Profile

Carsales.com Ltd (CAR), founded in 1997, operates the largest online automotive, motorcycle and marine classifieds business in Australia. Carsales is regarded as one of Australia’s original disruptors and has expanded to include a large number of market-leading brands. The Company employs over 800 and develops world leading technology and advertising solutions in Melbourne. CAR has also expanded to numerous global markets, such as South Korea, Brazil, and other countries in Latin America.

  • 1H22 Results Highlights. 

 (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.

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Commodities Trading Ideas & Charts

Rio Tinto Ltd reported strong FY21 results reflecting strong earnings with strong balance sheet position

Investment Thesis 

  • One of the largest miners in the world with a competitive cost structure.
  • Tier 1 assets globally, which are difficult to replicate. 
  • Highly cash generative assets with attractive free cash flow profile. 
  • Shareholder return focused – ongoing capital management initiatives.  
  • Commodities price surprises on the upside (potential China stimulus to combat Coronavirus impact). 
  • Strong balance sheet position.
  • Electrification and light-weighting trends in automobile industry provide long-term growth runway for aluminium demand.

Key Risks

  • Further deterioration in global macro-economic conditions.
  • Deterioration in global iron ore/aluminium supply & demand equation.
  • Production delay or unscheduled site shutdown.
  • Natural disasters such as Tropical Cyclone Veronica.
  • Unfavourable movements in AUD/USD.
  • Company not achieving its productivity gain targets. 

FY21 Results Highlights. Relative to the pcp: 

  • $25.3bn net cash generated from operating activities was +60% higher than FY20 driven by higher prices for RIO’s key commodities. This flowed through to +88% YoY change in free cash flow of $17.7bn, despite a +19% increase in capex to $7.4bn. 
  •  $21.1bn of net earnings, up +116%, mainly reflecting higher prices, the impact of closure provision increases at Energy Resources of Australia (ERA) and other non-operating sites, $0.5bn of exchange and derivative gains and $0.2bn of impairments. $7.4bn capex was made of $0.6bn of growth capital, $3.3bn of replacement capital and $3.5bn of sustaining capital, funded from internal sources, except for Oyu Tolgoi underground development, which is project finance. 
  • $37.7bn underlying EBITDA was up +58% on a margin of 57%. 
  •  $21.4bn underlying earnings (or underlying EPS of US1,321.1cps) were up +72%. 
  •  RIO retained a strong balance sheet with $1.6bn of net cash at FY21-end, versus net debt of $0.7bn at the start of the year, reflecting the free cash flow of $17.7bn, partly offset by $15.4bn of cash returns to shareholders. 
  •  The Board declared a record $6.7bn final ordinary dividend (or US417cps) and $1.0bn final special dividend (or US62cps). This brings the full-year dividend to $16.8bn, equivalent to US1,040cps and 79% of underlying earnings.

Company Profile

Rio Tinto Limited (RIO) is an international mining company with operations in Australia, Africa, the Americas, Europe and Asia. RIO has interests in mining for aluminium, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock and diamonds. 

  • FY21 Results Highligh

(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.

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Global stocks Shares

AIG Targeting for an underlying combined ratio below 90% by the end of 2022

Business Strategy and Outlook

The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, had noncore businesses it needed to shed, and had material issues in its core operations that it needed to fix. It is encouraging, however, by the recent progress in terms of improving underwriting margins, and the plan to take out $1 billion in costs by 2022 would be another material step. In 2020, the impact of the coronavirus has obscured the company’s progress, but it is held results over the past year have been encouraging. COVID-19 losses to date have been very manageable. As a percentage of capital, losses have stayed well within the range of historical events that the industry has successfully absorbed in the past. 

The longer-term picture looks relatively bright. The pricing environment has not been particularly favorable in recent years. However, in 2019, pricing momentum picked up in primary lines, and this positive trend only accelerated in 2020. More recently, pricing has started to plateau, but the industry has enjoyed the highest pricing increases it has seen since 2003. While higher pricing is necessary to some extent to offset lower interest rates and a rise in social inflation, pricing increases appear to be more than offsetting these factors. As a result, commercial P&C insurers are experiencing a positive trend in underlying underwriting profitability, and potential for a truly hard pricing market can be seen, similar to the period that followed 9/11. 

It is seen AIG has made material progress in improving its under/over the past couple of years, and has set a target for an underlying combined ratio below 90% by the end of 2022. Assuming an average level of catastrophe losses, it is likely this is a level that would allow P&C operations to achieve an acceptable level of return, and a harder pricing market may make hitting this target easier.

Financial Strength

It is alleged AIG’s balance sheet is sound, although the company is arguably in a somewhat weaker position than peers until it can improve profitability. Equity/assets was 13% at the end of 2021. This level is lower than P&C peers but reasonable if AIG’s life insurance operations, which operate with higher balance sheet leverage, are considered. During 2014, the company reduced its debt load by about $10 billion and eliminated much of its high-coupon debt, which improved its financial flexibility. Barring any unforeseen events, it is anticipated the company has room to continue to return capital to shareholders, and management had been returning a lot of capital to shareholders, in part through divestitures and some restructuring, although in recent years management has curtailed buybacks as AIG pivoted toward growth and acquisitions have become part of the strategic plan

Bulls Say’s

  • The aftermath of AIG’s issues during the financial crisis occupied much of management’s attention for quite some time. With these issues resolved, management can focus on the company’s operations, and there could be ample scope for improvement. 
  • AIG has demonstrated progress in improving underwriting margins in its P&C business. 
  • The current focus on risk-adjusted returns sets a proper course for the company, and just increasing profitability to the level of its peers would represent a material improvement.

Company Profile 

American International Group is one of the largest insurance and financial services firms in the world and has a global footprint. It operates through a wide range of subsidiaries that provide property, casualty, and life insurance. Its revenue is split roughly evenly between commercial and consumer lines. 

(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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Shares Small Cap

Airbnb Limiting Pebblebrook To Push Its Rates

Business Strategy and Outlook

Pebblebrook Hotel Trust is the largest U.S. lodging REIT focused on owning independent and boutique hotels. After Pebblebrook merged with LaSalle Hotel Properties in December 2018, the company owns 53 upper-upscale hotels, with more than 13,000 rooms located in urban, gateway markets. Pebblebrook’s combined portfolio has a higher revenue per available room price point and EBITDA margin than its hotel REIT peers. 

The recent merger with LaSalle provides Pebblebrook some new avenues to create value for shareholders. The company doubled in size while taking on only a portion of the general and administrative costs, making the combined company more efficient. Pebblebrook’s CEO, Jon Bortz, previously ran LaSalle and acquired many of the hotels in that portfolio. His knowledge of those hotels combined with management’s demonstrated ability to maximize margins should allow him to implement cost-saving initiatives that drive up margins. Additionally, management has begun an extensive renovation program across both the LaSalle portfolio and the legacy portfolio that will drive EBITDA gains over time. 

In the short term, the coronavirus outbreak significantly affected the operating results for Pebblebrook’s hotels, with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations allowed leisure travel to quickly return, driving high growth in 2021. It is held the company should continue to see strong growth in 2022 and beyond as business and group travel eventually returns to 2019 levels by 2024 in analysts base-case scenario. However, there are several factors that will remain headwinds for hotels over the long term. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing hotels from pushing rate increases even though it is nearing full occupancy on many nights. Finally, while the shadow supply created by Airbnb doesn’t directly compete most nights, it does limit Pebblebrook’s ability to push rates on nights when it would have typically generated its highest profits.

Financial Strength

Pebblebrook is in solid financial shape from a liquidity and a solvency perspective after the merger with LaSalle, but it is alleged that additional assets sales will put the company in great financial shape. The company seeks to maintain a solid but flexible balance sheet, which is anticipated will serve stakeholders well. Pebblebrook does not currently have an unsecured debt rating. Instead, it uses secured debt on its high-quality portfolio and takes out unsecured term loans. Debt maturities in the near term should be manageable through a combination of refinancing and the company’s free cash flow. Additionally, the company should be able to access the capital markets when acquisition opportunities arise. It is projected 2024, the year it is likely operations will fully return to normal, net debt/EBITDA and EBITDA/interest will be roughly 7.4 and 4.2 times, respectively, both of which are slightly outside of the long-term range for the company but should continue to improve over time.As a REIT, Pebblebrook is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cash flow from operating activities, providing plenty of flexibility for capital allocation and investment decisions. It is held Pebblebrook will continue to be able to access the capital markets given its current solid balance sheet and its large, higher-quality, unencumbered asset base.

Bulls Say’s

  • Potentially accelerating economic growth may prolong a robust hotel cycle and benefit Pebblebrook’s portfolio and performance. 
  • The acquisition of the LaSalle Hotel Trust portfolio provides management many renovation opportunities to drive revenue and margin growth. 
  • After the merger, Pebblebrook’s larger size could increase the company’s negotiating power with online travel agencies.

Company Profile 

Pebblebrook Hotel Trust currently owns upper-upscale and luxury hotels with 13,247 rooms across 53 hotels in the United States. Pebblebrook acquired LaSalle Hotel Properties, which owned 10,451 rooms across 41 U.S. hotels, in December 2018, the company current Pebblebrook CEO founded in 1998, though management has sold many of those hotels over the past few years. Pebblebrook’s portfolio consists mostly of independent hotels with no brand affiliations, though the combined company does own and operate some hotels under Marriott, Starwood, InterContinental, Hilton, and Hyatt brands. 

(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

ADAS Safety Features To Be Part Of Future Standard Equipment For Vehicles By End Of The Decade

Business Strategy and Outlook

It is alleged Aptiv’s average yearly revenue growth to exceed average annual growth in global light-vehicle demand by high-single-digit percentage points. The company provides automakers with components and systems that are in high demand from consumers and that government regulation requires to be installed. Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles. 

In analysts opinion, Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. Aptiv enjoys relatively sticky market share, supported by highly integrated customer relationships and long-term contracts. The design phase of a vehicle program can last between 18 months and three years depending on the complexity and extent of the model redesign. The production phase averages between five and 10 years. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration. 

New Car Assessment Programs are used by governments around the world to provide an independent vehicle safety rating. Legislators, especially in the United States and in Europe, have set NCAP guidelines that will progressively require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend certain models to achieve a 4- or 5-star safety rating, some ADAS features must be part of that vehicle’s standard equipment to even qualify for certain rating levels.

Financial Strength

In analysts view, Aptiv’s financial health is in good shape. Since 2015, pro forma for the spin-off of Delphi Technologies in 2017, total debt/total capital has averaged 15.2% while total debt/EBITDA has averaged 2.9 times.Most of Aptiv’s capital needs are met by cash flow from operations. However, the COVID-19 pandemic necessitated the drawdown of the company’s $2.0 billion revolver on March 23, 2020. The revolver was repaid after the company raised capital through share issuance and a mandatory convertible preferred in June 2020. Aptiv’s liquidity remains healthy at $5.6 billion, with around $3.1 billion in cash and equivalents as well as $2.0 billion in unutilized revolver and $510 million in available receivables factoring facility at the end of December 2021. The company has a debt/EBITDA covnenant ratio of 3.5 times. Aptiv’s $2.0 billion revolver expires in 2026.As of Dec. 31, 2021, Aptiv had approximately $4.1 billion in senior unsecured note principal outstanding with maturities that ranged from 2025 to 2051, at a weighted average stated interest rate of 2.8%. To fund a portion of the $4.3 billion acquisition of Wind River (remaining portion from available cash), in February 2022, Aptiv issued senior unsecured notes including $700 million at 2.396% due in 2025, $800 million at 3.250% due in 2032, and $1 billion at 4.150% due in 2052. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say’s

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, it is likely Aptiv’s revenue to grow mid- to high-singledigit percentage points in excess of the percentage change in global demand for new vehicles. 
  • The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile 

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 12% of 2021 revenue, including sales to GM’s Shanghai joint venture, followed by Stellantis at 11%, and Volkswagen at 9%. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively. 

(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

Etsy Inc : Major e-commerce marketplace operator sets sights on encouraging repeat purchase behaviour

Business Strategy and Outlook

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties–Etsy, Reverb, Depop, and Elo7–all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite.  

Etsy’s competitive strategy is viewed sound, with the quickly growing firm capitalizing on a surge of COVID-19 induced demand, providing one of only a handful of outlets through which customers could purchase facemasks during the nadir of the pandemic. Though mask sales have dwindled, the platform has remained sticky, with Etsy seeing its active buyer base swell to 96 million (up 18% annually) through 2021 despite lapping a halcyon 2020 in which it netted 36 million customers (75% growth from 2019). Experts claim 171% two-year stacked growth reflects investments made well in advance of the demand surge–from moving its marketplace operations to the cloud (through a partnership with Google), to investing heavily in search engine optimization efforts, and tinkering with performance and brand marketing to boost unaided awareness. 

Moving forward, Etsy is expected to continue to add unique inventory (recently onboarding a number of Indian sellers), to expand its burgeoning international operations (44% of fourth-quarter GMV), to continue to improve search functionality and to expand its suite of seller tools and advertising options, while periodically targeting competitively advantaged tuck-in acquisitions that offer exposure to similarly differentiated end markets. Particularly important will be efforts to increase repeat purchase behavior, with the long-term driver of GMV growth likely be increased average revenue per user in lieu of buyer acquisition after the firm achieves saturation in its six key markets–getting buyers to go to Etsy “not just for the cushions, but for the couch.”

Financial Strength

Etsy’s financial position is viewed sound. While the firm’s gross leverage looks high for an e-commerce company (averaging 5.2 times through 2024, according to analyst forecasts), main concerns are alleviated by a highly cash generative business, with free cash flow to the firm clocking in at 25% of sales in 2022, an operating model that requires minimal maintenance capital expenditure, and access to a $200 million credit facility. Moreover, a net debt position of only $1.3 billion as of the end of 2021 (1.6 turns) suggests only modest underlying leverage. Etsy’s convertible debt structure adds an interesting twist to financial statement analysis. The company has three outstanding series of convertible issuances–$1 billion in 0.25% 2021 notes (due in 2028), $650 million in 0.125% 2020 notes (due in 2026), and $650 million in 0.125% 2019 notes. The structure is common among technology firms, and offers a few key benefits; fewer restrictions, choice of cash or share settlement, cheap capital, and the ability to raise straight debt through subsequent issuance, which strikes us as reasonable (and aligns with practices at technology peers like Twitter and Wayfair). Etsy limits potential dilution with a capped call derivative strategy, with subsequent series that have been utilized to prepay outstanding balances. While the principal value of these notes is accounted for in long-term debt, the equity portion (option value) is accounted for as additional paid-in-capital, with premiums amortized as noncash interest expense over the option’s life. Finally, Etsy is expected to maintain substantial financial flexibility in order to meet its allocation priorities–investments in the business, strategic acquisitions, and share repurchases. Consistent with management commentary, any near-term cash dividend is not anticipated (2026 at the earliest, barring acquisitions), with management preferring the flexibility associated with buybacks.

Bulls Say’s

  • E-commerce trial amidst COVID-19 likely pulled forward e-commerce adoption by two to three years, benefiting digital native platforms like Etsy. 
  • After more than doubling its 2019 buyer base, Etsy has likely reached a demand tipping point, with high teens active buyer penetration across its core six markets heightening barriers to success for new entrants. 
  • The offsite advertisements offer a nice vehicle to increase platform take rates, GMV growth, and seller inventory turnover.

Company Profile 

Etsy operates a top-10 e-commerce marketplace operator in the U.S. and the U.K., with sizable operations in France, Germany, Australia, and Canada. The firm dominates an interesting niche, connecting buyers and sellers through its online market to exchange vintage and craft goods. With $13.5 billion in 2021 consolidated gross merchandise volume, the firm has cemented itself as one of the largest players in a quickly growing space, generating revenue from listing fees, commissions on sold items, advertising services, payment processing, and shipping labels. As of the fourth quarter of 2021, the firm connected more than 96 million buyers and more than 7.5 million sellers on its marketplace properties: Etsy, Reverb (musical equipment), Elo7 (crafts in Brazil), and Depop (clothing resale).

(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
Shares Small Cap

Qantas Airways – Omicron impact on 2H22 underlying EBITDA of ~$650m

Investment Thesis:

  • Attractive way to play the Covid reopen trade for investors.  
  • Aiming for all segments to deliver return on invested capital > weighted average cost of capital.
  • Strong position in the domestic market (Qantas Domestic and Jetstar continue to remain the two highest margin earning airlines in the domestic market).
  • Jetstar is well positioned for growth and rising demand in Asia. 
  • Partnership with Woolworths for Loyalty bodes well for membership and earnings.
  • Oil price hedging in FY22 could contribute to performance.
  • Increased competition in the international segment.
  • Relative to peers, strong balance sheet strength; investment grade credit rating.

Key Risks:

  • Disasters that could hurt the QAN brand.
  • Earnings recovery gets pushed out again due to travel restrictions or return of another Covid-19 variant. 
  • Ongoing price led competition forcing QAN to cut prices affecting margins.
  • Leveraged to the price of oil. 
  • Adverse currency movements result in less travel.
  • Labor strikes. 
  • Depressed economic conditions leading to less discretionary income to spend on travel. 

Key Highlights:

  • Omicron impact on 2H22 underlying EBITDA of ~$650m (after mitigations) with operating expenses for 2H22 to include ~$180m of inefficiencies and ramp up costs.
  • Domestic capacity to be 68% of pre-Covid levels in 3Q22, increasing to 90-100% in 4Q22, equating to total FY22 capacity of ~60%.
  • International capacity to be 22% of pre-Covid levels in 3Q22, increasing to 44% in 4Q22, equating to FY22 capacity of 18%.
  • Loyalty on track to deliver more than $1bn gross cash receipts in FY22 and remains committed to its target of $500-600m underlying EBIT by FY24 after returning to double-digit growth by end of CY22.
  • Net capex (excluding land proceeds) in FY22 of $850m and in FY23 of $2.3-2.4bn.
  • Underlying D&A in FY22 of $1.8bn.
  • Net debt within the $4.4-5.5bn target range by end of FY22 and at the bottom half of range from FY23 onwards.
  • The Recovery Plan delivered $840m in savings since the start of the program and remains on track to deliver greater than $900m by the end of FY22.
  • Balance Sheet repair continued with net debt reduction of -9.8% over pcp to $5.5bn (now within target range), refinancing A$300m bond maturing in May 2022.
  • Total liquidity of $4.3bn including $2.7bn cash and committed undrawn facilities of $1.6bn maturing in FY23 and FY24.
  • Investment grade credit rating of Baa2 from Moody’s maintained. 
  • Shareholder distributions remain on hold. 
  • 1H22 fuel cost declined -75% compared to pre-Covid-19 to $0.5bn, primarily due to a -74% reduction in fuel consumption. 

Company Description:

Qantas Airways Ltd (QAN) provides passenger and freight air transportation services in Australia and internationally. QAN also operates a frequent flyer loyalty program. QAN was founded in 1920 and is headquartered in Mascot, Australia.

(Source: Banyantree)

General Advice Warning

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