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Global stocks

Jazz Reports Strong Q4, Raising FVE to $172 on Improved Near-Term Outlook; Shares Undervalued

Business Strategy and outlook

Jazz Pharmaceuticals added its leading drug, Xyrem, to its portfolio in 2005 with the acquisition of Orphan Medical for about $123 million. This was a great price for the then newly approved drug, which became a blockbuster. At that point, Xyrem was the only approved treatment for cataplexy (sudden muscle weakness or paralysis) in narcolepsy; it has since garnered additional approvals for excessive daytime sleepiness in patients with narcolepsy. Jazz reached a settlement in 2017 with Hikma Pharmaceuticals to not allow generics on the market until January 2023. Jazz will retain some economic profit from royalties on generic sales and a shared distribution program. 

Management has been focused on diversifying its portfolio, with the new drug approvals of Zepzelca (for metastatic small-cell lung cancer), Rylaze (for acute lymphoblastic leukemia), and Xywav (for the treatment of cataplexy, EDS, and idiopathic hypersomnia). Strong launches and commercialization efforts for these drugs will be crucial for Jazz to diversify its portfolio. Acquiring recently launched drugs has been part of Jazz’s portfolio diversification strategy. In May 2021, Jazz acquired GW Pharmaceuticals for the hefty price of $7.2 billion. GW contributed $677 million to Jazz’s overall 2021 revenue, largely driven by its leading product, Epidiolex. This drug is a cannabidiol for the treatment of severe, rare forms of epilepsy.

Financial Strength

Jazz is in a decent financial position thanks to historically strong cash flow generation from Xyrem’s sales of $7.2 billion. GW’s leading drug, Epidiolex, could be a potential blockbuster grossing over $1 billion annually by 2023. Company has already received FDA approval and is also marketed in Europe. This acquisition allows Jazz to reach patient populations with rare and severe forms of epilepsy with approved indications for Epidiolex as young as one year of age. 

The GW acquisition will be dilutive to both GAAP and non-GAAP adjusted net income in the near term, and it will damp adjusted ROICs. Historically, management has pursued both larger deals ($1 billion or more) and smaller, early-stage deals for growth while spending a low-double-digit percentage of sales on R&D. Once the acquisition of GW is fully integrated and management has deleveraged, the company will continue making acquisitions to help expand and diversify its portfolio.

Bulls Say

  • The GW acquisition allows Jazz to reach patient populations with rare and severe forms of epilepsy with approved indications for Epidiolex as young as one year of age.
  • Jazz’s extensive network of sleep doctors should give the company a competitive edge when marketing its new sleep therapies.
  • Xyrem’s historically strong cash generation has allowed the company to make recent acquisitions to help diversify its portfolio.

Company Profile

Jazz Pharmaceuticals is an Ireland-domiciled biopharmaceutical firm focused primarily on treatments for sleeping disorders and oncology. Jazz has nine approved drugs across neuroscience and oncology indications; its portfolio includes Xyrem and Xywav for narcolepsy, Zepzelca for the treatment of metastatic small-cell lung cancer, Rylaze for acute lymphoblastic leukemia, and Vyxeos for acute myeloid leukemia. In May 2021, Jazz acquired GW Pharmaceuticals and gained its leading product, Epidiolex for the treatment of severe, rare forms of epilepsy.

(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

Veeva’s CRM Application Propelled It to Become Leading Solution Of It’s Niche Market

Business Strategy and Outlook

Veeva is the leading provider of cloud-based software solutions tailored to the life sciences industry, providing an ecosystem of products to address the operating challenges and regulatory requirements that these companies face. Its highly specialized offerings for the life science industry allow companies to improve operational efficiency to get products to market faster while ensuring regulatory compliance and ultimately sell more effectively. Its effective technology and dominant position enable Veeva to generate excess returns commensurate with a wide-moat company. Its strong retention, continued development of new applications, increasing penetration with existing customers, addition of new customers, and expansion into industries outside of life sciences should allow the company to extend its market leadership, in Analysts view. 

The company operates in two categories. Commercial solutions entail vertically integrated customer relationship management services and end-market data and analytics solutions. R&D solutions is a horizontally integrated content and data manager. Veeva’s CRM application supports real-time collaboration and regulatory oversight and enables incremental add-on solutions. The incremental functionality is critical to improving marketing programs while remaining in compliance with mandated antikickback laws and statutes. This service has been well received by the life sciences industry and has propelled Veeva to become the leading solution with the lion’s share (approximately 80%) of this niche market. As a follow-on to the initial introduction of CRM, management introduced R&D solutions to broaden the portfolio that addresses the largely unmet needs of the life sciences industry outside of CRM. Each module offers features and functionality targeting four key areas in life sciences: clinical (trial management), regulatory (compliance), quality of manufacturing, and safety.

Financial Strength

It is held Veeva enjoys a position of financial strength arising from its strong balance sheet (no debt) and leading position in a growing market. As of fiscal 2022, Veeva had over $2.4 billion in cash and short-term investments and no debt. It is likely the company will continue to use the cash it generates from operations to fund future growth opportunities. From Analysts perspective, management has been disciplined about M&A and taking on debt. The 2019 acquisition of Crossix was the firm’s largest to date, at approximately $430 million. It is anticipated the company will continue make small tuck-in acquisitions and fund them through available cash and cash flow from operations. Even in this scenario, increasing liquidity is foreseen, as the firm’s reserve of cash should continue to increase.

Bulls Say’s

  • Veeva’s best-of-breed vertical addressing unmet needs provides opportunities to further penetrate a highly fragmented market. 
  • The rapid adoption of the company’s new modules continues to entrench Veeva in mission-critical operations of customers, making it increasingly challenging for competitors to gain a foothold. 
  • Veeva’s institutional knowledge and codevelopment partnerships with customers enable the company to develop robust offerings addressing market needs.

Company Profile 

Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics. 

(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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Expert Insights Technology Stocks

More Than 90% Of Fortune 100 Firms Could Be Using Splunk’s Offerings As A Vote Of Confidence In Its Enterprise Product Lineup

Business Strategy and Outlook

Splunk is a leader in ingesting, indexing, and analyzing machine generated data, and it alleged the company will maintain its leadership status for the foreseeable future. It is held machine data to become more pervasive, impacting every part of an enterprise’s operations. With more data to ingest, index, and analyze, it is foreseeen narrow-moat Splunk has a long runway for growth as it seeks to continue to dominate the enterprise market. Splunk’s offerings primarily target two broad use cases: security and full-stack monitoring & analysis (FSMA). On the security front, Splunk’s SIEM, or security information and event management, operates as a well-refined alert system, putting out alerts if any nefarious activity appears on a client’s network. Splunk’s security orchestration, automation, and response, or SOAR, software is geared toward triaging these issues automatically. SIEM and SOAR software, working in tandem, allow an enterprise’s IT team a reprieve by using artificial intelligence to triage security issues, thereby leading to a substantially lower number of alerts that need to be manually dealt with. 

The FSMA space is nascent, springing into existence as a method of unifying and coalescing disparate parts of an enterprise’s monitoring framework. Splunk’s FSMA offering seeks to give enterprises a one-stop shop to monitor their entire IT stack, ranging from application performance to logs to end user experience. Splunk’s offering allows enterprise customers to remove these data silos and monitor the entire IT stack from one consolidated platform. 

It is held Splunk warrants a narrow economic moat thanks to high customer switching costs. It is foreseen more than 90% of Fortune 100 firms using Splunk’s offerings as a vote of confidence in its enterprise product lineup. Further, it is impressing, Splunk’s strong cloud dollar-based net retention (DBNR) that has consistently remained above 120%. With the ability to land big customers and consistently upsell them, analysts remain confident in Splunk’s long-term growth prospects.

Financial Strength

It is anticipated Splunk’s financial position is healthy. Splunk ended fiscal 2022 with $1.43 billion in cash and current investments. This is juxtaposed with the company’s convertible senior notes of $3.14 billion at the end of fiscal 2022. While debt exceeds cash-in-hand currently, it is likely Splunk’s cash and cash generation over the next five years will far outstrip its commitments over the same time period. As the company undergoes the cloud transition, its effect on free cash flow has been evident. The company’s FCFE (free cash flow to equity) margins from 2014 to 2019 were comfortably in the double-digits. However, with the cloud transition dampening revenue and increasing operating spend, free cash flow margins have been significantly lower than before. However, it is alleged these transitory costs to allay and project that Splunk will achieve consistent double-digit FCFE margins starting fiscal 2025. It isn’t likely for any major shifts in Splunk’s capital structure. It is foreseen the company raising capital in the future by issuing more equity or taking advantage of low interest rates and issuing debt.

Bulls Say’s

  • Splunk has secular tailwinds behind its back as the security and FSMA markets are expected to grow rapidly. 
  • Splunk’s products are incredibly sticky, offering the company an opportunity to increase cross-selling velocity as customers increase their usage of Splunk’s platform. 
  • Many of Splunk’s enterprise customers are undergoing digital transformations. This shift should bode well for Splunk as these efforts typically include leveraging technology such as Splunk’s for efficiency gains.

Company Profile 

Splunk is a cloud-first software company that focuses on analyzing machine data. The company is a major player in two markets: security and full-stack monitoring & analysis. Splunk is currently undergoing a cloud transition as the company weans its on-premises customers over to its cloud products that are delivered as software-as-a-service. The firm’s top line consists of the sale of software licenses, cloud subscriptions, and maintenance and support. 

(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

Sonic Healthcare up to $500m on market buyback supportive at current share price levels

Investment Thesis

  • As the Covid pandemic subsides, near-term earnings may underwhelm but longer term, we don’t doubt the quality of SHL’s assets, which is geographically diversified, and high quality management team.
  • Ageing population requires more diagnostic tests, especially as Medicine focuses on preventative medicine.
  • Market leading positions in pathology (number one in Australia, Germany, Switzerland, and UK number three in the US). Second leading player in Imaging in Australia.
  • High barriers to entry in establishing global channels.
  • Ongoing bolt-on acquisitions to supplement organic growth and potentially improve margin from cost synergies.
  • Leveraged to a falling dollar. 
  • Globally diversified.

Key Risks

  • Disruptive technology leading to reduced diagnostics costs.
  • Competitive threats leading market share loss.
  • Deregulation resulting in new pathology collection centres.
  • Adverse regulatory changes (fee cuts).
  • Disappointing growth.
  • Adverse currency movements (AUD, EUR, USD).

Bulls Say’s

  • Revenue of $4,757m, up +7%. 
  • EBITDA of $1,540m, up +18%.
  • Net Profit of $828m, up +22%.
  • Cash generated from operations of $1,041m, up +28%, reflecting EBITDA growth and lower interest payments. SHL achieved 85% conversion of EBITDA to gross operating cash flow.
  • Earnings per share of 170.8cps, up +21%.
  • SHL retained a strong balance sheet position, with gearing at record low level of 12.9% (vs 12.5% in the pcp) and below covenant at <55%, interest cover of 44.9x (vs 33.8x in the pcp and above covenant limit of >3.25x) and debt cover of 0.3x (vs 0.4x in the pcp and covenant limit of <3.5x), and with ~$1.4bn of available liquidity.
  • SHL maintained its progressive dividend policy, with the Board declaring an increase of 4 cents (or up +11%) to 40 cents (100% franked) for the FY2022 Interim Dividend.

Company Profile 

Sonic Healthcare (SHL) is a medical diagnostics company with operations in Australia, New Zealand, and Europe. The company provides a comprehensive range of pathology and diagnostic imaging services to medical practitioners, hospitals and their patients along with providing administrative services and facilities to medical practitioners. SHL has three main segments: (1) Pathology/clinical laboratory services based in Australia, NZ, UK, US, Germany, Switzerland, Belgium and Ireland. (2) Diagnostic imaging services in Australia; and (3) Other which includes medical centre operations (IPN), occupational health services (Sonic HealthPlus) and laboratory automation development (GLP Systems).

(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

PayPal Holdings Inc. : FY21 Revenue of $25.37bn Largely in Line With Consensus Forecast of $25.35bn

Investment Thesis:

  • Leveraged to the structural growth story of electronics payments and e-commerce globally.
  • Strong market position (largest payments platforms in North America) and increasing global market share.
  • Sophisticated technology platforms which have been incrementally improved via R&D and acquisitions. PYPL’s technology stack are difficult to replicate and impose high barriers to entry to new competitors.
  • Value-accretive acquisitions.
  • Incoming strategic partnerships to further unlock payment efficiency and access to wider markets (e.g. Instagram, Uber, Paymentus).
  • Strong free cash flow generation gives way to capital management initiatives.

Key Risks:

  • Global macro-economic conditions deteriorate, impacting consumer spending and business activity.
  • Pricing pressures from emerging competitors and alternatives to PayPal. Leading banks or tech giants such as Amazon may develop their own payment platforms to cannibalize sales from Paypal (e.g. Apple Pay).
  • U.S.-China geopolitical tensions impeding cross-border e-commerce transactions.
  • Adverse currency movements and regulatory changes (data privacy / protection, governments’ intervention/protection policies).
  • Security and technology risks (including cyber-attacks).
  • Value destructive acquisition(s).

Key highlights:

PYPL FY21 revenue of $25.37bn was largely in line with consensus forecast of $25.35bn, however, GAAP EPS of $3.52 missed forecast of $3.60. The Company added 49 million NAAs (net active accounts) bringing total active accounts to 426 million, up +13%, leading to TPV growing +33% to $1.25 trillion with management forecasting TPV to reach $1.5 trillion in FY22. Management announced a pivot in strategy to shift emphasis more towards engagement and driving higher value NNAs, leading to scrapping of the 750 million accounts target by 2025. However, management remains confident of new strategy driving higher ROI

  • Pivot in strategy – Management has pivoted their strategy and is shifting emphasis more towards engagement and driving higher value NNAs (consumers who are more engaged, drive incremental sales for merchants which drive growth at much higher margins and ROI) rather than just focusing on generating account creation (over time the Company still expect to grow net new actives, but more in line with pre-pandemic levels), leading to management scraping their target of growing active accounts to 750 million by 2025.
  • eBay headwinds in the rearview – last revenue pressure in 2Q22. eBay’s migration of payments away from PYPL led to 1100bps headwind on top-line in FY21, however, the Company remains at final stage of transition with no pressure past 2Q22 and a final ~400bps revenue headwind in FY22 (concentrated in 1H22).
  • Capital management. Given strong cash flow generation (cashflow from operations up +8% over pcp to $6.3bn and FCF up +9% over pcp to $5.4bn) and strong balance sheet with ample liquidity of $16.3bn in cash, equivalents and investments, management continued shareholder return initiatives, returning $3.4bn in the year via repurchase of ~15.4m shares of common stock.
  • Growing proportion of private label sales. Own brand sales percentage increased across all segments, with Bapcor Trade delivering 29.6% (up +50bps over 2H21), Retail delivering 33.9% (up +120bps over 2H21), Speciality Wholesale delivering 54.6% (up +130bps over 2H21) and New Zealand delivering 30.3% (up +40bps over 2H21), with the Company remaining on track to reach its 5-year targets to supplement market leading brands with BAP’s own brand products, which should be a positive for margins.
  • Revenue growth of ~15-17% Revenue growth of ~15-17% on a spot and FXN basis (excluding eBay to grow ~19-21%) vs prior guidance of high-teens, as spending remains impacted by omicron, inflationary pressures, and lack of stimulus.

Company Description:

PayPal Holdings Inc (NASDAQ: PYPL) is an American company in the global payments industry that acts as a payment gateway between merchants and customers, enabling electronic forms of payment instead of cash and cheques. The Company also provides an online payment system that allows individual persons to send and receive money between PayPal accounts. As of 2021, PayPal has 426 million active users and facilitates transactions across more than 200 countries and 25 currencies.

(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

Bank Of America Corp Revenue Growth Outpaced Expense Growth

Investment Thesis:

  • Attractive valuation versus Analysts price target. 
  • Leveraged to the improving economic conditions and activity in the U.S. 
  • Efficiency gains at the expense line exceeds market expectations. 
  • Significant leverage to the yield curve steepening in the U.S.
  • Cost out program to support earnings over the long-term. 
  • Revenue growth driven by consumer and business. 
  • Credit quality is very strong, with further reserve releases possible.  
  • Capital position is well above requirement level and management’s desired buffer, which opens up capital management initiatives.  

Key Risks:

  • Further decline in net interest margins from low yields and U.S. Fed interest rate cuts.
  • Intense competition to loan growth.
  • Subdued economic growth. 
  • Funding pressures for deposits and wholesale funding. 
  • Political and regulatory changes affecting the banking legislation.
  • Credit risk with potential default of mortgages, personal and business loans and credit cards.
  • Efficiency gains disappoint relative to market expectations.

Key highlights:

BAC’s FY21 results beat consensus on both top and bottom line, as revenue growth outpaced expense growth YoY to deliver positive operating leverage, which combined with the benefit from share repurchases delivered EPS of $3.57 (vs estimate of $3.44), equating to ROE of 12.2% (up +544bps over pcp) and ROTCE of 17% (up +752bps over pcp). Asset quality continued to improve, and shareholder returns remained strong. Maintain Buy – improvement in NII (loan growth + interest rate hikes) combined with management’s outlook of flat costs growth should drive operating leverage, with long term margin expansion coming from investment in technology leading to competitive and cost advantages. 

  • FY22 outlook – robust YoY growth expected in NII. Robust YoY NII growth (1Q to be up about “a couple of hundred million” QoQ and grow each subsequent quarter) driven by high-single-digit YoY loan growth and aided by interest rate increases (+100bps parallel shift in the interest rate yield curve is estimated to benefit net interest income by $6.5bn), particularly if short-term rates rise more and sooner than expected given higher balance sheet sensitivity to short end interest-rate (~2x compared to 3Q15, middle of last rate cycle). Flat expenses compared to pcp. Effective tax rate of 10-12%. 
  • Strong asset quality with loss rate at historical lows. Asset quality improved significantly with net charge-offs continuously declining through FY21 to historic low of $362m (down -59% over pcp) resulting in a historically low net charge-off ratio of 15bps (down -23bps over pcp), which combined with improving macroeconomic conditions, led to provision for credit loss benefit of $489m (down by $542m over pcp), reflecting a net reserve release of $851m.
  • Changes to NSF fees and overdraft fees – $750m headwind in FY22. Management announced elimination of NSF (non-sufficient funds) fees and -71.4% YoY reduction in overdraft charge per occurrence to $10 in FY22, which is expected to see -75% YoY decline in fees to ~$250m in FY22.
  • Strong shareholder returns with $7.5bn in share repurchases equating to $25.1bn for the year and $1.7bn in dividends equating to $6.6bn for the year.

Company Description: 

Bank of America (BAC) is one of the largest banks in the U.S., serving consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and 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
Commodities Trading Ideas & Charts

NRG Narrows Winter Storm Uri Loss, Moves Forward With Capital Allocation Plan

Business Strategy and Outlook

NRG Energy has completed its latest strategic shift following the $3.625 billion acquisition of Direct Energy in January 2021, the sale of most of its Northeast power generation fleet, and the planned closure of four Midwest power plants. A higher share of retail energy earnings helps offset the long-term threat to NRG’s legacy fossil fuel generation fleet as renewable energy grows. NRG will benefit the most if electricity demand grows in its key markets, particularly Texas and the Northeast. In Texas, brief summer heat spells in 2018 and 2019 along with Winter Storm Uri in February 2021 show that growing demand can also create more energy price volatility and risk. Uri resulted in $1 billion of gross losses for NRG in just two weeks. 

Despite offsetting much of those one-time losses, it’s uncertain how energy market reforms in Texas will impact NRG in the long run. NRG’s transformation has taken twists and turns during the last five years, ultimately shrinking its wholesale generation business and increasing its retail energy business. Between 2016 and 2020, NRG divested half of its generation fleet, brought in nearly $3 billion of cash, and eliminated $10 billion of debt. In spring 2017, NRG sent subsidiary GenOn Energy into bankruptcy and in 2018, NRG sold its renewable energy business, its 47% stake in NRG Yield, and its South Central generation.

Financial Strength

NRG’s transformation, which started in mid-2017, simplified its balance sheet and improved its credit metrics. Before the Direct Energy acquisition, NRG had cut its recourse debt below $6 billion and was on track to reach investment-grade credit metrics by the end of 2020. The all-cash Direct Energy acquisition and losses from the Texas winter storm in February 2021 push that back slightly. Management is targeting 2.5-2.75 times net debt/EBITDA, a level it reached in 2019 but might not reach again until 2023 or later. The winter storm losses led management to scale back its 2021 debt reduction target to less than $300 million from the pre-storm $1.05 billion target. The board’s decision to initiate a $1 billion stock repurchase plan in late 2021 suggests NRG’s capital allocation focus has shifted away from balance sheet repair. Lower capital expenditures should boost cash flow as NRG adjusts to maintenance levels at its core business. The retail business requires little capital investment.  

The $3 billion of cash proceeds from the renewable energy, NRG Yield, and South Central business sales helped NRG finance the Direct Energy acquisition with no new equity. Management reset the dividend at $1.20 per share annualized in 2020, up from $0.12 in 2019. NRG plans to pay a $1.40 per share annualized dividend in 2022. Robust free cash flow and share buybacks should allow management to meet its 7%-9% dividend growth target easily. Before the 2017-18 restructuring, NRG carried $19.5 billion of consolidated debt at year-end 2015, but only $7.9 billion was recourse parent debt. The rest was nonrecourse debt at GenOn Energy, NRG Yield, or project financing. The GenOn bankruptcy eliminated $2.7 billion of debt, and the 2018 divestitures eliminated another $7 billion of debt. NRG used $2 billion of cash proceeds from its 2018 asset sales to pay down parent debt and repurchase $1.25 billion of stock. NRG bought back $1.6 billion of stock in 2019-20 before the Direct Energy acquisition.

Bulls Say’s

  • NRG’s transformation in 2017-20 cut the business in half, improved its credit metrics, and generated substantial cash to use for the dividend, stock buybacks, and acquisitions like Direct Energy. 
  • NRG’s match between its wholesale generation earnings and its retail supply earnings provides a hedge that stabilizes consolidated earnings. 
  • NRG’s primary operations are in Texas, which we think will have among the fastest electricity demand growth of any state during the next decade.

Company Profile 

NRG Energy is one of the largest retail energy providers in the U.S., with 7 million customers, including its 2021 acquisition of Direct Energy. It also is one of the largest U.S. independent power producers, with 16 gigawatts of nuclear, coal, gas, and oil power generation capacity primarily in Texas. Since 2018, NRG has divested its 47% stake in NRG Yield, among other renewable energy and conventional generation investments. NRG exited Chapter 11 bankruptcy as a stand-alone entity in December 2003.

(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

S32 reported strong 1H22 results driven by higher commodities prices and strong production results

Investment Thesis

  • Prices of S32’s key commodities expected to moderate or be relatively flat relative to FY21 realized prices.
  • Management highlighted “FY22 guidance is unchanged with the exception of non-operated Brazil Alumina and our underground base metals operation Cannington. Separately volumes at Mozal Aluminium and Cerro Matoso are expected to lift from FY21 following our investment in high returning improvement projects that will increase production into currently favourable markets for aluminium and nickel”. 
  • Analysts estimate the Company will produce significant free cash flow over the next three years; adequate to support growth and capital management.
  • Significant cash on the balance provides flexibility = capital management. 
  • The Board has resolved to further expand S32’s capital management program by $110m to $2.1bn, leaving $302m to be returned to shareholders by 2 September 2022. 
  • The Company is still paying a dividend despite the uncertainty and volatility.   
  • Both Standard and Poor’s and Moody’s reaffirmed their respective BBB+ and Baa1 credit ratings.

Key Risk

  • Decline in key commodity prices.
  • Significant shock to global growth. 
  • Cost blowouts (inflationary pressures) / production disruptions.
  • Company fails to deliver on adequate capital management initiatives.
  • Adverse movement in currencies. 
  • Value destructive acquisition. 

1H22 Results Highlights. Relative to the pcp: 

  • Underlying revenue increased +32% to $4.602m driven by higher prices for most commodities, which combined with -4.6% reduction in total cost base amid divestment of South Africa Energy Coal, led to underlying EBITDA increasing +138% to $1,871m with margins improving +19.7% to 44%. 
  • Underlying EBIT increased +288% to $1,514m with margin improving +23.5% to 35.5%, further benefitting from a reduction in underlying depreciation and amortisation following the recognition of a non-cash impairment charge for Illawarra Metallurgical Coal in FY21. 
  •  Underlying earnings increased +638% to $1,004m and statutory profit after tax increased +1847% to $1,032m, benefiting from portfolio changes completed in FY21 and a broad recovery in commodity prices.

Company Profile

South32 (S32) is a globally diversified metals and mining company. S32’s strategy is to invest in high quality metals and mining operations where their distinctive capabilities and regional model enables them to extract sustainably performance. The regional model means their businesses are run by people from within the region. The company’s African operations are supported by a regional office in Johannesburg South Africa and Australian and South American operations by an office in Perth. 

  • Relative to the pcp: (1) 

(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

Fineos Shares Remain Disconnected to Fair Value

Two businesswomen working late in office look at documents

Business Strategy and Outlook

Fineos is a core software vendor to the global life, accident, and health, or LA&H, insurance industry. The firm generates revenue mainly from subscriptions and product implementation services. Fineos help insurers streamline workflow, save costs, and win new business. Fineos is currently migrating customers to a cloud-based offering (from on-premise products). This makes it easier to rollout new features and support at lower marginal costs, while also providing more recurring subscription revenue. 

The firm executes a classic land and expand strategy. Building on its leadership in claims and absence products, Fineos aims to cross-sell its broader product set including payments, billing, data and more. It intends to expand the use of the Fineos platform across multiple jurisdictions with existing multinational clients. Higher customer expectations cost pressures, regulatory requirements, or increasing competition are prompting insurers to switch from clunky internal systems to external software like that from Fineos. 

There is ample room for Fineos to deploy new modules to existing customers and grow penetration over time. This further increases switching costs..Fineos has built multiple reference accounts from doing business with large insurers, who help with additional business wins. Risks include competition from larger competitors, and customer concentration, which may limit price hikes. These may be offset by Fineos’ high switching costs and the risk aversion of insurer clients in changing core systems. Fineos’ product switching costs are contingent on the group continuing to invest (such as in product development) to add value to customers.

Fineos Shares Remain Disconnected to Fair Value

Fineos had good top line growth in first-half fiscal 2022. Revenue grew 24% from the previous corresponding period, or pcp, to EUR 65 million. Morningstar analysts have lowered its fair value estimate to AUD 4.80 from AUD 5.10. But Fineos shares remain at a discount to Morningstar analysts estimate of intrinsic value. Morningstar analysts think the market is underpricing: 1) the inherent switching cost in Fineos’ products, stemming from the risk aversion of its customers to switching providers; and 2) the trend of insurers migrating their business administration processes to the cloud, providing opportunity for Fineos to take share. These drivers underscore Morningstar analysts expectation that Fineos will keep growing market share, noting around 55% of insurers still use legacy systems that have limited functionality and higher operating costs

Financial Strength

Fineos’ balance sheet is appropriately sound. As of Dec. 31, 2021, Fineos has cash and equivalents of EUR 48.6 million and no debt. But current earnings quality is weak. Cash flows have historically been maintained by equity raises, rather than from the ordinary course of business. Cash conversion (operating cash flows to EBITDA) has been irregular. Investing cash flows frequently outstrip operating cash flows due to constant reinvestments, such as for product development or acquisitions. Net cash should grow as the business scales. Morningstar analysts estimate Fineos can generate sustainable positive free cash flows by fiscal 2026-27. Until Fineos reaches scale, however, prospective business acquisitions over the next five years will likely require equity raises. Alternatively, FINEOS can drawdown debt for acquisitions, but this could result in gearing levels and debt coverage deteriorating quickly. Longer-term, we expect Fineos to realise operating leverage via a combination of revenue growth and the scaling of fixed costs. This should help maintain growth in earnings and help the firm become more cash generative. 

Bulls Say

  •  Fineos has low penetration in a sleepy industry that’s ripe for disruption. Operating metrics are solid and trending positively. 
  • Switching costs are high. A competitor who creates a better product only wins half the race. The other half is to build credible reference accounts and convince insurers to switch, which can be lengthy ordeals. 
  • Morningstar analysts believe Fineos will remain the leader in its niche space, as it continues to reinvest in its products or pursue acquisitions, bolstering its capabilities, increase the switching costs of its product suite and expand the modules on offer.

Company Profile

Fineos Corp Holdings PLC is an Irish company engaged in providing software solutions that include management and administration of policies and claims to the life, accident, and health insurance industry. The company’s platform, Fineos AdminSuite, comprises Fineos Absence, Fineos Billing, Fineos Claims, Fineos Payments, and Fineos Provider, among other solutions.

(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

Tabcorp holdings remain challenged in their wagering & Media

Business Strategy and Outlook

  • The demerger of its Lotteries & Keno business (to be named The Lottery Corporation) from its Wagering & Media business (to be named Tabcorp) could unlock shareholder value as standalone business. 
  • Subdued outlook for wagering business and cost pressures likely to keep a lid on margin expansion in the near term.
  • Positive regulatory changes could drive out smaller uneconomical corporate bookmakers. 
  • Potential capital management initiatives.

Financial Strength

  • Competitive pressures within the core Wagering business.
  • Loss of market share.
  • Lack of product development.
  • Cost blowouts with failed investment in Sun Bets business in the UK.
  • Adverse outcome from any regulatory change. 

Bulls Say’s

  • Revenue of $2,934m was up +2.2%, variable contribution was mostly flat (-0.9%) at $942m and underlying EBITDA of $529m was down -5.5% vs pcp, mainly reflecting the impact of Covid-19 with a strong performing Lotteries and Keno businesses being offset by Wagering & Media and Gaming Services (impacted by venue restrictions and trading). Management delivered a further $16m in savings in 1H22 from 3S optimization program, bringing total savings to date from the program to approximately $46m.
  • The Company declared an interim dividend of 6.5 cents per share, which is down -13.3% on pcp and represents a payout ratio of 77% of net profit before significant items (and at the top end of 70 – 80% range).
  • Underlying NPAT of $187m was down -9.7% on pcp.
  • Gearing (gross debt / EBITDA) of 2.5x is at the lower end of target range of 2.5 – 3.0x.
  • Revenues of $1,073m were -9.8% weaker, with EBITDA of $148m down -34.8% on pcp as margin declined -530bps driven by higher generosities (due to highly competitive market) and advertising spend. Covid-19 related retail closures impacted wagering turnover (retail was down -36% vs digital up +2%) & revenue and media subscription revenues. Increased investment and Advertising & Promotion (A&P) expenses also impacted segment earnings.

Company Profile 

Tabcorp Holdings Ltd (TAH) is an integrated gambling and entertainment company listed in Australia, with operations overseas. The business operates three key segments – Wagering & Media, Keno and Gaming Services. These services are delivered to customers through TAH’s retail, digital and Sky media platforms. 

(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.