Author: lvc-admin

Categories
Global stocks Shares

Telstra Ltd delivered strong earnings growth with declining NBN headwinds; Resulting in increased shareholder returns

Investment Thesis

  • Solid FY22 earnings guidance with management flagging a turning point as it expects mid to high single digit growth in FY22.
  • Solid dividend yield in a low interest rate environment. 
  • On market buyback of $1.35bn (post sale of part of Towers business), expected to be completed by end of FY22, should support its share price.
  • Additional cost measures announced to support earnings.
  • InfraCo provides optionality in the long-term. 
  • Despite intense competition, subscriber growth numbers remain solid. 
  • Company looking to monetize $2.0bn of assets. 
  • In the long-term, the introduction of 5G provides potential growth, however we continue to monitor the ROIC from the capex spend. 
  • TLS still commands a strong market position and has the ability to invest in growth technologies and areas (e.g., Telstra Ventures) which could provide room for growth.
  • Industry consolidation leading to improved pricing behavior by competitors. 
  • The Company continues to deliver strong underlying earnings growth which combined with declining NBN headwinds could see the Company increase shareholder returns via increased dividends which combined with the remaining 60% of the current buybacks should support the share price

Key Risk

  • Further cuts to dividends.
  • Further deterioration in the core mobile and fixed business.  
  • Management fails to deliver on cost-out targets and asset monetisation. 
  • Any increase in churn, particularly in its Mobile segment – worse than expected decrease in average revenue per users (or any price war with competitors).
  • Any network disruptions/outages.
  • More competition in its Mobile segment. Merger of TPG Telecom and Vodafone Australia creates a better positioned (financially and resource wise) competitor
  • Quicker than expected deterioration in margins for its Fixed segment.
  • Risk of cost blowout in upgrading network and infrastructure to 5G.

Key highlights 1H22                        1H22 Results Highlights. 

  • On a reported basis, total income declined -9.4% over pcp to $10.9bn, amid declines of ~$450m in one off nbn receipts and ~$200m in nbn commercial works. 
  • Operating expenses on an underlying basis declined -8.5% over pcp, with underlying fixed costs declining -8.9% over pcp enabled by ongoing drive to digitise and simplify processes, move to an agile workforce and continued migration of fixed customers to the nbn network as well as focus on rationalising 3rd party vendors and services. 
  • Underlying EBITDA increased +5.1% over pcp to $3.5bn driven by strong growth in Mobile. 
  • Net finance costs declined -22.5% over pcp to $238m, primarily due to a reduction in interest on borrowings and financing items relating to contracts with customers. 
  • Underlying EPS was up +55% over pcp to 6.2 cents per share, representing a strong start against T25 ambition for underlying EPS target of high teens CAGR from FY21-25. 
  •  Net cash provided by operating activities declined -5.7% over pcp to $3,246m mainly due to a $1,193m decline in receipts from customers, partly offset by a $955m reduction in payments to suppliers and employees. FCF (after lease payments) declined -9.1% over pcp to $1,675m

Company Profile

Telstra Corporation (TLS) provides telecommunications and information products and services. The company’s key services are the provision of telephone lines, national local and long distance, and international telephone calls, mobile telecommunications, data, internet and on-line. Its key segments are Mobile, Fixed, Data & IP, Foxtel, Network applications and services and Media

(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

MVF reported solid 1H22 results; Growing above industry growth resulting in market share of 20.8% in key domestic markets

Investment Thesis

  • High barriers to entry with unique expertise and assets. 40-year heritage of leadership in science and innovation in ARS and women’s imaging, coupled with the depth of experience from the doctors and clinical team which will continue to underpin MVF’s future growth and maintain treatment success rates.
  • Aging Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favourable demographic tailwinds.
  • Improving balance sheet with flexibility to execute expansion strategies. Earnings increasingly become diversified as the Malaysian business gains momentum. 
  • Potential earnings diversification and growth via international expansion and increased presence in diagnostics.
  • Demonstrated capacity to perform well in terms of cost out and earnings growth despite tough conditions (i.e., lower cycle volumes).
  • Transparent and detailed disclosures.

Key Risk

  • Low growth environment impacting earnings.
  • Regulatory risk as changes in government funding may increase patient’s out-of-pocket expenses and thereby volume demand. 
  • Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue 
  • The Australian market does not rebound following this period of downturn. Population of males and females with fertility problems decline.
  • Loss of key specialists.
  • Loss of market share especially to low-cost providers, with one already appearing in Victoria.
  • Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment.
  • Execution of international forays into Malaysia goes poorly.

1H22 results summary:  Relative to the pcp:

  • Revenue increased +11.2% to $101m, largely driven by domestic stimulated cycles growth of +6.6% and average ARS revenue per stimulated cycle growth of +4.4%, partially offset by decline in ultrasound scan volumes. 
  • Adjusted EBITDA of $26.8m, increased +8.5% with volume leverage gained from increased domestic IVF activity partly offset by short-term margin declines in Ultrasound and Kuala Lumpur, pandemic related costs and $1m increase in medical malpractice and D&O liability insurance reflecting appropriate insurance policies in the current settings. 
  • Adjusted NPAT of $13.4m increased +11.7% and came in +3.1% ahead of management’s guidance. Reported NPAT declined -17.6% to $12.2m, primarily due to receipt of Job Keeper subsidies in pcp. 
  • FCF (excluding job keeper subsidy receipts in pcp) increased +51.6% to $9.7m, driven by 83% cash conversion of EBITDA to pre-tax operating cash flows and a decline of -42% in capex to $3.6m. 

Growing above industry growth and gaining market share

IVF industry fundamentals remain attractive including advanced maternal age and stable and continued government funding, which saw positive industry momentum continue in the half with industry volume growth at +3.6% and MVF recording above-industry growth of +6.6% resulting in market share gains of +70bps to an overall market share of 20.8% in key domestic markets. 

Company Profile

Monash IVF Group Ltd (MVF) offers assisted reproductive technology services, ultrasound services, gynecological services, in-vitro fertilization services, consultancy services and general clinical services to patients in Australia and Malaysia. MVF comprises 40 clinics and ultrasound practices and employs ~100 doctors and has a network of 650 associated health professionals. 

(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

Brambles reported 1H22 results reflecting group revenue of US$ 2,766.4m, up +8%

Investment Thesis:

  • High quality company with a history of earnings and dividend growth.
  • Massive opportunity to convert white-wood users as well as the palletisation of emerging markets.
  • On-going on-market share buyback should support its share price.
  • Strong management team with proven ability to maintain cost margins amidst cost pressures through strategic business efficiencies.
  • Volume growth in the US Pallet business and improving outlook for margin.
  • BXB’s scale, existing customer base and balance sheet will ensure it remains a market leader in the mid-to-long term.
  • M&A activity

Key Risks:

  • Competitive pressures and cost inflation leading to margin erosion, particularly in the North American market. 
  • Operations are very capital intensive. 
  • Any further loss of large contracts significantly reducing revenue and earnings.
  • Weak economic conditions will lead to less consumption of FMCG, and hence less use of pallets.
  • Volatile whitewood prices.
  • Exposed to a wide range of currency and political risks. 
  • Reintroduction of widespread lockdowns in key regions.

Key Highlights 1H22 Results:

  • Group revenue of US$2,766.4m, +8% YoY in constant currency terms with contribution from all three reporting segments. Key components of top line growth: price realisation across all regions to recover inflation and cost-to-serve pressures contributed +8%; new contract wins contributed +2%; and like-for-like volume growth was down -2% due to the strong Covid-19 related demand in the previous corresponding period and pallet availability constraints during this year.
  • Underlying profit of US$481.2m was up +4%. Key components of group profit drivers over the half: impact of US$85m due to inflation across the group; US$93m impact from fuel and transport inflation across the group; US$35m impact from higher losses / lower returns (primarily in the U.S.); and US$24m costs associated with the transformation program.
  • Underlying EPS of US21.3cps was driven by higher operating earnings and benefit from the share buy-back programme. The Company declared an interim dividend of US10.75cps (or AUD15.06cps), representing a payout ratio of 50% (within target range of 45-60%).
  • Free cash flows after dividends over the half deteriorated by US$311.7m to an outflow of US$147.9m due to: (i) US$115m impact from the reversal of FY21 timing benefits comprising the US$80m of pallet purchases deferred from the prior year and US$35m relating to the timing of FY21 tax payments; (ii) capital expenditure jumped significantly due to lumber inflation of $270m and US$80m of additional pallet purchases (which were deferred from the prior year.
  • BXB’s financial ratios remain well within <2.0x financial policy, with net debt / EBITDA at 1.37x vs 1.18x in pcp.

Company Description: 

Brambles Limited is a supply-chain logistics company operating in more than 60 countries, primarily through the CHEP brands. Headquartered in Sydney, its largest operations are in North America and Western Europe. The company’s main segments are: pallets, reusable produce crate (RPCs) and containers. It services customers in the fast-moving consumer goods industries and also operates specialist container logistics businesses serving the automotive, aerospace, and oil and gas sectors. It employs more than 14,500 people and owns more than 550 million pallets, crates and containers through a network of more than 850 service centres.

(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

Another Solid Medibank Result Despite Ongoing Noise Around Claim Costs

Business Strategy and Outlook

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

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

Financial Strength

Medibank’s first-half fiscal 2022 profit slipped 2.7% to AUD 220 million but was in line with our broadly unchanged earnings forecasts. In a debt-free position Medibank is in sound financial health. It is forecasted that Medibank can fund for long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range. Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, we believe the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021.

Bulls Say’s

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

Company Profile 

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

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

Cummins Have An Exposure To End Markets That Have Attractive Tailwinds

Business Strategy and Outlook

It is held Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation. 

The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. It is likely Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to increasing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, it is alleged the truck market to also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. It is seen this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. It is anticipated some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins. 

Cummins has exposure to end markets that have attractive tailwinds. In trucking, it is likely new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, it is projected Cummins will continue to invest in BEVs and fuel cells to power future truck models. It is foreseen a zero-emission world is inevitable, but it is held Cummins can use returns from its diesel business to drive investments.

Financial Strength

Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, it is projected the company can meet its near-term debt obligations given its strong cash balance. It is also found comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities.Cummins can also generate solid free cash flow throughout the economic cycle. It is held the company can generate over $2 billion in free cash flow in analysts midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, It is alleged management is determined to improve its distribution business following its transformation efforts in recent years. It is foreseen Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. In Analysts’ view, Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth. 
  • Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions. 
  • Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.

Company Profile 

Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry. 

(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

Uniti Capitalizing In Its Niche (Fiber)

Business Strategy and Outlook

With its lease renegotiation with Windstream (which makes up about 60% of Uniti revenue and over 80% of EBITDA) now finalized, Uniti is on much more stable financial footing and can continue on the path it was on prior to the Windstream uncertainty, maintaining itself with reliable returns and cash flow from Windstream while diversifying its business and adding more indefeasible rights of use agreements on its fiber, which carry long-term certainty and virtually no operating costs.

Diversification has come primarily via acquisitions and fiber network construction, which spawned the firm’s fiber infrastructure segment, where Uniti leases dark and lit fiber and small cells to wireless carriers and other enterprises. While it is generally skeptical about the economics of such businesses, it is in view Uniti as better positioned than many competitors because it focuses on second- and third-tier cities, where it is not supported competition is quite as intense. For example, Crown Castle explicitly says its footprint covers only the largest U.S. cities. In addition, the major cable providers in the United States are absent over much of Uniti’s footprint. It is alleged fiber use to continue growing substantially given constantly increasing data consumption across wired and wireless networks, and it is likely Uniti can capitalize in its niche.

It is also seen Uniti’s original leasing business, where it has engaged in sale-leaseback transactions to buy other companies’ fiber and immediately lease it back at attractive rates, but it is unconvincing it can materially grow beyond Windstream. It is not foreseen Uniti adds much value beyond providing capital, so it is held virtually any firm with access to cheap financing can compete. As such, it is anticipated suitors will compete on price, and finding sizable deals at attractive rates will be difficult.

Financial Strength

Uniti is a highly leveraged company, with net debt of 5.8 times adjusted EBITDA at the end of 2021 and a debt/capital ratio of over 100%. The resolution of the Windstream lease renegotiation significantly improves Uniti’s financial position and makes it unlikely to be in near-term danger of bankruptcy, but it still has substantial risk, especially if stress in the financial markets results from a global economic downturn. In addition, effects from the Windstream lease amendment remove flexibility Uniti needed to execute its diversification and expansion strategy. Uniti cut its quarterly dividend from $0.60 to $0.05 in March 2019 and has since raised it to $0.15. It is likely to raise it only marginally, which it needs to do to continue qualifying as a real estate investment trust. With the reduced dividend level, it is held the firm can make the required interest and principal payments on its debt while maintaining a debt/EBITDA ratio of about 6.0. The firm has no significant debt maturities until 2023, when more than $1 billion, or about 20% of its total debt, comes due. Beyond survival, it is likely Uniti’s weak financial position inhibits its ability to operate as it had planned. It was already highly leveraged, and it is anticipated it intended to rely on equity issuance to fund expansion and diversification. If its stock remains depressed relative to prior years, which is justified if it loses a significant portion of Windstream revenue, it is likely it will lack currency needed to buy additional assets.

Bulls Say’s

  • Uniti’s renegotiation of its Windstream lease gives the ability to add new leases to existing fiber, which can be very lucrative, as it requires little new spending.
  • Uniti’s sale-leaseback transactions provide nearly 100% margins, require no spending or upkeep on Uniti’s part, and lock in high-return revenue streams for 15 years or longer.
  • There is less competition to provide fiber exists in the second- and third-tier cities where Uniti operates, and Uniti’s network will be in demand to facilitate evergrowing data transport needs.

Company Profile

Uniti is a REIT with about 130,000 route miles of fiber in the U.S., primarily in the Southeast. Uniti reports its business in two segments: leasing and fiber. Leasing currently makes up about two thirds of total revenue and consists mostly of Uniti’s master lease agreement with Windstream. Uniti was spun out of Windstream in 2015 with a substantial portion of Windstream’s network assets, and it immediately leased the entire portfolio back for Windstream’s exclusive use. Other leasing revenue stems from sale-leaseback transactions with other fiber holders. Uniti generates fiber revenue by leasing dark and lit fiber to wireless carriers and other enterprises. (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

WiseTech Global Ltd reported strong 1H22 results driven by strong top line revenue growth

Investment Thesis

  • Market leading position (significantly ahead of the nearest competitor).
  • Growing global trade and increasingly globalization of products sold.
  • High degree of revenue visibility and low customer annual attrition rates. 
  • R&D spend will ensure product/services are enhancing WTC products. WTC’s vision is to be the operating system for global logistics. Having completed 39 acquisitions since its IPO in 2016, WTC has assembled significant resources and development capabilities to fuel its CargoWise technology pipeline.
  • Scalability of the business model.  
  • Geopolitical tensions considered by management as “tailwinds” due to higher consolidation of the logistics software industry.

Key Risks

  • Company announces another earnings downgrade.
  • Organic growth could moderate further, which may no longer warrant such a lofty valuation. However, organic growth has improved over FY19.
  • Management noting that revenues from recent acquisitions actually declined and offered little margin. This means the return from these acquisitions could take longer than management’s expectations. 
  • Competitive threat (new product/technological advancements).
  • Disruption to technology (data breach).
  • Adverse currency movements.

1H22 Results: Relative to the pcp:

  • 1H22 Total Revenue of $281.0m, up +18% (+22% ex FX) on 1H21. 
  • CargoWise revenue was up +29% (+33% ex FX) to $193.0m, driven by Large Global Freight Forwarder rollouts, new customer wins, price and increased existing customer usage. 
  •  Acquisition (non-CargoWise) revenue of $87.9m, down -1% (up +2% ex FX). 
  •  Market penetration momentum continuing – two new global rollouts secured in 1H22 – FedEx and Access World – and Brink’s Global Services (Brink’s) signed post 31 December 2021. 
  •  Ongoing product development delivered 589 CargoWise new product features and enhancements and continued expansion of the CargoWise ecosystem. 
  •  Organization-wide efficiency and acquisition synergy program well-progressed – $20.2m of gross cost reductions in 1H22 (net benefit $19.7m). 
  •  EBITDA of $137.7m up +54% driven by revenue growth and cost reductions. Margin of 49%, up 12bps. CargoWise’s 1H22 EBITDA margin of 58% represents an increase of 4pp on 1H21. 
  •  Underlying NPAT of $77.3m, up +77%. 
  •  WTC generated strong free cash flow of $90.3m, up +85%. 
  •  WTC retained a strong balance sheet, with cash as at 31 December 2021 of $380.3m and no outstanding debt excluding lease liabilities. WTC has an undrawn, unsecured, four-year, $225m, bi-lateral debt facility, to fund future growth. 
  •  WTC’s Board declared a fully franked interim ordinary dividend of 4.75cps, which equates to payout ratio of 20% of Underlying NPAT.

Company Profile

WiseTech Global (WTC), founded in October 1994, is a leading provider of software to the logistics services industry globally. WTC develops, sells and implement software solutions that enable logistics service providers to facilitate the movement and storage of goods, domestically and internationally. WTC’s software assists their customers to better address and adapt to the complexities of the logistics industry while increasing their productivity, reducing costs and mitigating risks. WTC services over 6,000 customers across more than 115 countries with offices in Australia, New Zealand, China, Singapore, South Africa, United Kingdom and the United States. 

(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

Origin Energy Ltd signals to exit coal-fired power generation; Replacing the plant with a large-scale battery

Investment Thesis

  • Higher oil prices benefit ORG’s APLNG project (higher revenues).
  • Balance sheet position is being restored with management focused on getting the debt covenants back to an investment grade level.
  • Achieving milestones within the APLNG project.
  • On-going focus on operating cost and capital expenditure reduction.
  • Increasing dividend profile and with a restored balance sheet the Company can also consider other capital management initiatives. 
  • Rationalization of asset portfolio, including asset sales and the IPO of its conventional upstream business should help improve the balance sheet position.  

Key Risks

  • Exploration and production risks.
  • Lower energy prices, particularly oil prices (for its APLNG project). 
  • Structural change in energy markets & increased competition.  
  • Not meeting cost-out targets. 
  • Highly geared balance sheet, with the company not being able to reduce debt fast enough. 

1H22 Key Highlights

  • Underlying EBITDA declined -4.8% over pcp to $1,099m, as increased earnings from Australia Pacific LNG amid higher oil and gas prices were more than offset by expected lower earnings in Energy Markets reflecting lower retail tariffs (set in FY21 when wholesale electricity prices were at lows due to subdued economic activity and increased renewables penetration) and higher energy procurement costs. 
  • Underlying profit increased +18% over pcp to $268m, driven by strong commodity prices, however, the Company recorded statutory loss of $131m, reflecting the one-off impairment and net capital gains tax expense associated with the $2bn sale of its 10% interest in Australia Pacific LNG. 
  •  Operating cash flow was an outflow of $79m vs inflow of $669m in pcp, amid lower earnings from Energy markets, higher working capital primarily due to timing of LNG cargo delivery and oil hedging and LNG trading losses. FCF (including major growth projects of Octopus equity investment of $260m and Kraken licence implementation costs of $37m) was an outflow of $112m vs inflow of $594m in pcp. 
  • Adjusted net debt increased +10.6% over 2H21 to $5.133bn, driven by the consideration associated with the investment in Octopus and higher working capital associated with the payment for an LNG cargo partially offset by APLNG cash distributions. (5) The Board declared an unfranked interim dividend of 12.5cps, representing 66% of FCF (excluding major growth projects), with partial franking expected to be restored in FY23.

Sale of 10% interest in APLNG – expected to restore balance sheet flexibility

Management executed an agreement to sell 10% of APLNG for net proceeds of $2.12bn (ORG retains 27.5% of shareholding, existing two APLNG board seats and upstream operatorship), with sale expected to be completed in 3Q22 (first half of CY22) and proceeds used to restore balance sheet flexibility with post sale adjusted Net Debt/adjusted Underlying EBITDA and gearing ratio declining to lower end of the target ranges of 2-3x and 20-30% from current levels of 3.9x and 34%, respectively. It will also provide FY22 net interest saving of $45-65m

Coal-fired generation

Management has submitted notice to AEMO for the potential early retirement of Eraring Power Station in August 2025 (vs prior targeted closure in 2032) and plans to install a large-scale battery of up to 700 MW at the site.

Company Profile

Origin Energy (ORG) is an integrated energy company with operations in exploration, production, generation and the sale of energy to millions of households and businesses across Australia. The Company has extensive operations across Australia and New Zealand and pursuing opportunities in the fast-growing energy markets of Asia and South America. The Company has two main segments: (1) Energy Markets – retail sales of electricity, gas and other customer solutions; electricity generation; and wholesale trading of electricity and gas. (2) Integrated Gas – consists of upstream exploration, development and production; the segment also holds the 37.5% ownership in Asia Pacific LNG project (APLNG). 

  • Sale of 10% inte(Sourc                    (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
Global stocks Shares

The a2 Milk Co. Ltd progressing well in 1H22

Investment Thesis

  • Inventory issue remains a downside risk but can also provide upside surprise should management work through the excess inventory in its distribution channels. It appears the inventory is at target levels for some of the key channels. 
  • Wining market share in Australia and China. 
  • Growing consumer demand for health and well-being globally. 
  • Demand growth in China for premium infant formula product.
  • Expansion into new priority markets, aided by the capabilities of Fonterra.
  • US expansion provides new markets + opportunities. 
  • Key patents provide barrier to entry.
  • Takeover target – the Company was the subject of a takeover bid in 2015.

Key Risks

  • Management fails to meet its revised FY21 guidance. 
  • Chinese demand underperforming market expectations.
  • Disruption to A2 milk supply.
  • Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
  • Expiration of A2M’s intellectual property rights may weaken or be infringed by competitors.
  • Withdrawal of A2M product from international markets due to market share loss or lack of market penetration. 

1H22 Results Highlights

  • Revenue was marginally lower, down -2.5% to $661m but in line with guidance, and up +24.8% on 2H21, due to (i) China label IMF sales were constrained in 1Q22 to rebalance distributor inventory levels with sales falling -11.4% for 1H22 vs pcp; (ii) English and other label IMF sales fell -9.8% in 1H22 vs pcp with lower market share; (iii) ANZ liquid milk sales were up with higher market share, while U.S. liquid milk sales were down.
  • EBITDA fell -45.3% to $97.6m due to lower revenue and gross margin as well as a +37.3% increase in marketing investment vs pcp. EBITDA margin of 14.8% in 1H22 (17.3% ex-MVM) was weaker versus 26.4% in 1H21. Gross margin percentage fell to 46.2% (with underlying gross margin of 50.7% excluding MVM), due to inclusion of MVM, adverse product mix and cost headwinds (especially raw milk and freight costs), partially offset by price increases.
  • NPAT including non-controlling interest was down -53.3% to $56.1m.
  • Balance sheet remains strong with closing net cash of $667.2m due to high operational cash conversion during 1H22. Inventory at the end of the period was $127.9m, higher than at the end of FY21, due to the inclusion of MVM.
  • A2M noted the Mataura Valley Milk (‘MVM’) acquisition and strategic partnership with China Animal Husbandry Group (‘CAHG’) was completed in July 2021 and fully consolidated into the results.

Company Profile 

The a2 Milk Company Limited (A2M) sells a2 brand milk and related products. The company owns intellectual property that enables the identification of cattle for the production of A1 protein free milk products. It also sources and supplies a2 brand milk in Australia, the UK and the US, exports a2 brand milk to China, and distributes and markets a2 brand milk and a2 Platinum brand infant nutrition products in Australia, New Zealand, and China

(Source: BanayanTree)

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

EOG Resources scale and double premium drilling strategy support its narrow economic moat

Business Strategy and Outlook

EOG Resources is one of the largest independent oil exploration and production companies. It derives almost all of its production from shale fields in the U.S., with a small incremental contribution from Trinidad. The firm differentiates itself by attempting to identify prospective areas before most peers catch on, enabling it to secure leasehold at attractive rates (rather than overpaying for land after the market overheats). It has only one large-scale M&A deal under its belt, related to its 2016 entry to the Permian Basin. Nevertheless, the firm is also active in most other name-brand shale plays, including the Bakken and Eagle Ford. Additionally, the focus now includes the Powder River Basin (Wyoming) and a new natural gas play in southern Texas that the firm has christened “Dorado.”

The firm’s acreage contains over 10,000 potential drilling locations that management designates as “premium.” These are expected to generate internal rates of return of at least 30% (assuming $40/bbl WTI and $2.50/mcf natural gas). However, management is now prioritizing a sizable subset, 6,000-plus locations, designated “double premium.” These are expected to deliver twice the returns at the same commodity prices. Opportunities that don’t currently satisfy this criteria may be upgraded later, if the company can reduce the expected development cost or boost the likely flow rate of the well. During the past several years, EOG added more premium locations than it drilled, resulting in a net increase to its premium drilling opportunities, and the firm expects to do the same with its double premium inventory.

Financial Strength

Overall, EOG’s financial health is excellent compared with peers, giving it the ability to tolerate prolonged periods of weak commodity prices, if necessary. It has more cash than debt, generates substantial free cash under a wide range of commodity scenarios, and aims to retain a substantial cash cushion to enable it to take advantage of downcycles by repurchasing stock without unduly stressing the balance sheet at an inopportune time.The firm holds about $5.1 billion of debt, resulting in very low leverage ratios. At the end of the most recent reporting period, debt/capital was 19% and net debt/EBITDA was slightly negative. Furthermore, the firm also has a comfortable liquidity stockpile, with $5 billion cash and another $2 billion available on its undrawn revolver (though a portion of this will be used to fund the firm’s $600 million special dividend payable March).

Bulls Say’s

  • EOG is among the most technically proficient operators in the business. Initial production rates from its shale wells consistently exceed industry averages. 
  • EOG’s vast inventory of premium drilling locations provides a long runway of low-cost resources. 
  • EOG often adds new premium drilling opportunities to its queue via exploration or by using improved knowhow and technology to “upgrade” opportunities that did not previously qualify.

Company Profile 

EOG Resources is an oil and gas producer with acreage in several U.S. shale plays, including the Permian Basin, the Eagle Ford, and the Bakken. At the end of 2021, it reported net proved reserves of 3.7 billion barrels of oil equivalent. Net production averaged 829 thousand barrels of oil equivalent per day in 2021 at a ratio of 72% oil and natural gas liquids and 28% natural gas.

(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.