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Dividend Stocks

SUL reported strong 1H22 results reflecting sales of $1,705.1m

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Investment Thesis 

  • Trading below our valuation and on attractive trading multiples and dividend yield. 
  • Strong tailwinds/fundamentals in SUL’s four core segments. For instance, sales for vehicle aftermarket continue to remain strong (with increase in second hand vehicle sales (Supercheap); travellers seeking social distancing and hence moving away from public transport (Supercheap); with Covid lockdown measures in forced, more people are spending their holidays domestically (BCF; macpac), utilising their vehicles (Supercheap); growing awareness of fit and healthy lifestyles (rebel).
  • Solid capital position.
  • Strong brands in BCF, macppac, rebel and Supercheap with solid industry positions in largely oligopolies and solid store network.
  • Transitioning to an omni-channel business. Whilst previously the business has been modelled on like-to-like store numbers, management now thinks of business metrics based on club members and has been able to grow the active club membership much faster than store numbers (store numbers in last 5 years have grown +2% CAGR vs active club members at +10% CAGR), providing it with an opportunity to expand customer base and therefore revenue base without significant capex for investment in stores (most of the customers are omni channel). Management continues to push towards expanding its online sales (Covid-19 added to this tailwind), with online sales penetration of ~13-15% of total sales currently and expected to reach 20-25% over the next 5 years.
  • Attractive loyalty members program, with over 8 million members. 

Key Risks

  • Rising competitive pressures.
  • Any issues with supply chain, especially as a result of the impact of Covid-19 on logistics, which affects earnings.
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings update or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower.

1H22 Results Highlights

Relative to the pcp: 

  • Sales of $1,705.1m was down -4.0% vs 1H21 but up +18.1% vs 1H20. 
  • Segment EBITDA of $329.4m was down -21.2% vs 1H21 but up +27.0% vs 1H20. 
  •  As a result of supply chain disruption, SUL’s gross margin of 46.7% was 100 bps below pcp but 170 bps above 1H20, driven by improved sourcing, pricing and tailoring the range of inventory, offset by higher freight and transport costs, growth in home delivery sales and some normalisation of promotional activity in 2Q22. 
  •  Normalised NPAT of $112.8m was down -35.8% vs 1H21 but up +60.9% vs 1H20 (Normalised EPS of 49.9 cents). 
  •  SUL was able to expand its store network, completing 15 new store openings and 28 refurbishments and relocations. 
  •  SUL maintains a conservative balance sheet with no bank debt and $94m cash balance. 
  • The Board declared a fully franked interim dividend of 27.0cps and reaffirmed its dividend policy to pay out total annual dividends of between 55% and 65% of underlying NPAT.

Company Profile

Super Retail Group (SUL) is one of Australasia’s Top 10 retailers. SUL comprises four core segments. (1) BCF: Australia’s largest outdoor retailer focused on selling Boating, Camping and Fishing products. (2) macpac:retailer of apparel and equipment with their own designs focused on outdoor adventurers. (3) rebel:retailer of branded sporting and leisure goods and equipment for casual and serious fitness enthusiast. (4) Supercheap Auto: specialty retail business which specialises in automotive parts and accessories.

(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

Tech-Led Reimagination Starting to Bear Fruit, but eBay’s Near-Term Road Looks Turbulent

Business Strategy and Outlook:

With divestitures of Stubhub, eBay Classifieds, and Gmart largely in the rearview mirror, eBay’s business looks remarkably similar to its genesis: a customer-to-customer e-commerce platform connecting hundreds of millions of buyers and sellers worldwide, with an emphasis on non-new, seasoned goods. The core eBay Marketplace business should have plenty of room to run, considering management’s estimated $500 billion total addressable market for non-new, seasoned goods, and could benefit from swelling interest in resale markets and a strong pull-forward in e-commerce demand in 2020 and 2021.

eBay’s Marketplace generated the sixth-highest gross merchandise volume, or GMV, among global players in 2021, and renewed attention by management in core verticals like collectibles, used and refurbished goods, liquidation inventory, premium shoes, and luxury jewelry–often products without a benchmark average sales price, or ASP, index (limiting price comparison pressure and leaning into the marketplace’s edge in price discovery)-appears clever. The eBay’s, 147 million active buyer base, and recent platform improvements (including managed payments, promoted listings, and inventory management services) should prove sufficient to solidify advantages in many targeted verticals.

Financial Strength:

eBay’s financial health is sound. The company has access to a $1.5 billion commercial paper facility and a $2 billion line of credit represent attractive backstops, particularly when considering that the firm maintained only $4.2 billion in net debt at the end of 2021, with a further $5.8 billion available in short-term investments. eBay’s highly free-cash-flow generative business model, comfortable coverage of interest payments (7.8 times over the same period), and investment-grade credit rating suggest that the firm should have no trouble meeting its fixed obligations.

Management again raised its buyback facility again in the fourth quarter of 2021, to $6 billion from $2 billion prior. With $1.6 billion in cash and equivalents on the balance sheet at the end of 2021, eBay maintains a bulletproof balance sheet, with substantial flexibility to meet fixed interest and principal payments, invest in attractive internal investment opportunities, and return a generous amount of capital to shareholders through share repurchases and dividends.

Bulls Say:

  • The firm’s managed payments rollout executed seamlessly, and offers optionality for auxiliary financial services down the line.
  • Recent successes in higher-touch luxury resale and collectibles categories offer a blueprint for sustained growth in the C2C marketplace.
  • The addition of auction-based items and offsite advertising could catalyze better sell-through rates and monetization in the promoted listings business.

Company Profile:

eBay operates one of the largest e-commerce marketplaces in the world, with $87 billion in 2021 gross merchandise volume, or GMV, rendering the firm the sixth-largest global e-commerce company. eBay generates revenue from listing fees, advertising, revenue-sharing arrangements with service providers, and managed payments, with its platform connecting more than 147 million buyers and roughly 20 million sellers across almost 190 global markets. eBay generates just north of 50% of its GMV in international markets, with a large presence in the U.K., Germany, and Australia.

(Source: Morningstar)

General Advice Warning

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

Categories
Property

Scentre Group (SCG) reported strong FY21 results

Investment Thesis

  • Trades below our valuation, with an attractive (and growing) distribution of ~5%.
  • Strong and experienced management team.
  • Highest quality property portfolio of any Australian listed retail REIT with SCG’s portfolio heavily weighted to the growth economies of Sydney, Brisbane, and Melbourne. Approx. 20 million people live within close proximity to SCG’s 42 Westfield Living Centres. 
  • Expectations of a prolonged low interest rate environment and ongoing fiscal measures should be supportive of consumer spending.
  • Potential recovery in retail sales.
  • Balance sheet is in a strong position. 
  • Potential upside from its >$3bn redevelopment pipeline – if SCG undertakes ~$700m of developments p.a., we expect c$80m of value created per annum. SCG expects in excess of 15% returns (development yields >7.0% and cap rates of ~5.5%; NOI growth with rent escalations of CPI +2% and development yield targets of >7%).

Key Risk

  • Covid-19 is prolonged with significant lockdowns re-introduced.
  • Significant re-basing of rents.
  • Structural shift continues to remove consumers/foot traffic from SCG’s centres. 
  • Unexpected and aggressive increases in interest rates or deterioration in credit/capital markets.
  • Any slowdown in demand and net absorption for retail space;
  • Any deterioration in property fundamentals especially delays with developments, declining asset values, retailer bankruptcies and rising vacancies.  
  • Any delays in developments.
  • Lower inflation (and deflation) affecting retailers

1H22 Results Key Highlights:  Relative to the the pcp:

  • Operating Profit of $845.8m, or 16.32cps, up +10.9%. 
  • Funds From Operations (FFO) of $862.5m, or 16.64cps, up +12.7%. 
  • Statutory result inclusive of unrealised non-cash items was $887.9m, up from ($3,731.8)m and includes property revaluation gains of $81.2m. 
  •  Operating Profit, FFO and the Statutory result each include a non-cash Expected Credit Charge (ECC) of $168.8m relating to the financial impact of the Covid-19 pandemic versus $304m in FY20. 
  •  Net Operating Cash Flows (after interest, overheads and tax) of $913.6m, was up +24.8%, driven by SCG collecting $2,258m in gross rent in FY21, ~$200m more than FY20. 
  • Distribution of $738.7m equates to 14.25cps, up +103.6% and exceeds guidance. 
  •  SCG maintained a strong balance sheet with available liquidity of $5.6bn, which is sufficient to cover all debt maturities to early 2024; Interest cover of 4.0x; balance sheet gearing at 31 December 2021 of 27.5%; 12.8% FFO to debt; and 5.6x debt to EBITDA. S&P, Fitch and Moody’s upgraded SCG’s outlook to Stable. 

Company Profile

Scentre Group (SCG) is an Australia Retail A-REIT. The company derives earnings from operating, managing and developing retail assets. SCG has interests in 42 high-quality Westfield malls across Australia and New Zealand, worth ~$38.2bn. SCG owns 7 of the top 10 centres in Australia, and 4 of the top 5 centres in New Zealand. SCG earmarked ~$3bn in potential development.

 (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

VMware’s VSphere and ESXi Hypervisor Being Virtualization Gold Standards

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Business Strategy and Outlook

VMware, a pioneer of virtual machines, dominates the maturing data center server virtualization market. With organizations prioritizing cloud over on-premises computing infrastructure, it is seen VMware’s robust cloud provider partnerships, including the hyperscalers, should help the firm handle the changing market landscape. It is anticipated VMware’s growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio. 

Analysts’ view of cloud networking, akin to VMware’s assessment, is that most enterprises will utilize hybrid cloud solutions. Public clouds can precipitously augment network growth but enterprises face integration complexities among on-premises networks and private and public clouds. Beyond hyperscale cloud provider partnerships, VMware’s Cloud Provider Program offers thousands of cloud partners collaborating with VMware software. In Analysts’ view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. It is held the November 2021 spin-off from Dell Technologies put an end to an uncertain future around VMware, and that growth can accelerate through VMware’s integration with cloud vendors and cadence of product releases outside of Dell’s umbrella. With solid free cash flow and growth opportunities, it is foreseen its $11.5 billion special dividend, to all shareholders, as part of the spin-off was worth the price of becoming a stand-alone entity. 

VMware’s vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. It is projected the company’s strong franchises within end user compute, security, and virtualized networking and storage can be overlooked, and support growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. It is likely, software cohesion across on-premises and clouds along with nascent networking products should give VMware sustainable growth.

Financial Strength

It is held VMware a financially stable company that should continue generating strong free cash flow. The company’s main expenditures are in the forms of developing product innovations and marketing efforts. VMware’s R&D expenditures are in the low 20s as a percentage of revenue while sales and marketing expenditures are in the low 30s. In the past, VMware has bolted on firms to bolster its presence in focus growth areas, and it is projected organic developments to be supplemented with future acquisitions. As of the end of fiscal 2022, VMware had $3.6 billion in cash and equivalents, and it is anticipated the company will pay its debts on time.VMware completed its first special dividend of $11 billion in December 2018, which helped Dell Technologies facilitate an exchange of Dell Class V tracking stock (DVMT) for a new class of Dell Technologies Class C common stock or a cash buyout option for shareholders. As part of becoming an independent company and spinning off from Dell, VMware paid special dividends worth $11.5 billion and retained an investment-grade credit rating. Although VMware raised capital to help pay the special dividend, it is likely to quickly lower its obligations through cash on hand and its robust free cash flow generation.

Bulls Say’s

  • VMware’s hybrid cloud program could yield tremendous growth if VMware is cemented as the dominant software supplier between private and public clouds. Its presence in hyperscale public cloud networks could make it the de facto virtualization choice. 
  • Product leadership in application management, enduser computing, cybersecurity, and software-defined networking provides robust growth opportunities beyond core virtualization. 
  • VMware can more tightly integrate itself with Dell peers as a stand-alone company, while also benefiting from its Dell commercial contract and their salesforce.

Company Profile 

VMware is an industry leader in virtualizing IT infrastructure and became a stand-alone entity after spinning off from Dell Technologies in November 2021. The software provider operates in the three segments: licenses; subscriptions and software as a service; and services. VMware’s solutions are used across IT infrastructure, application development, and cybersecurity teams, and the company takes a neutral approach to being the cohesion between cloud environments. The Palo Alto, California, firm operates and sells on a global scale, with about half its revenue from the United States, through direct sales, distributors, and partnerships. 

(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

Challenger Ltd fully franked interim dividend of 11.5cps up by 21%

Investment Thesis

  • CGF is trading on fair valuation, with a 2-yr forward PE-multiple of 14.3x and price-to-book value of 1.0x. 
  • Exposure to an attractive retirement income market, with strong long-term growth tailwinds.
  • Near-term challenges are likely to be priced in at current valuations, in our view, with investor expectations reset lower. 
  • Solid capital position.
  • Further cost initiatives leading to reduction in the already low cost-to-income ratio.
  • Two complementary businesses both with leading market positions.

Key Risks 

  • Weaker than expected annuity sales growth within its Life (annuity) segment.
  • Structural and reputational detriments from the Royal Commission lasting longer than anticipated. 
  • Any increase in competition from major Australian banks in annuities.
  • Weaker than expected net inflows for the Funds Management segment (possibly from lower interest levels from financial planners/advisers/investors).
  • Weaker than expected performance of boutique funds within its Funds Management segment.
  • Lower investment yields.
  • Uncertainty over capital requirements of deferred lifetime annuities.

Fund Management

  • EBIT increased +28% to $45m driven by +26.4% increase in FUM-based fee income with average FUM up +26% and a steady FUM-based margin of 16.7bps, partially offset by -50% decline in performance fees and +15% increase in expenses. Funds Management ROE increased +600bps to 33.8%.
  • FUM increased by +20% to $109bn, with net flows reaching $900m, reflecting a strong contribution from retail clients, with momentum continuing into the start of 2H22 with the business securing a GBP1bn UK fixed income mandate.
  • Investment performance remained strong with 92%, 96% and 94% of FUM outperforming the benchmark over 3 years, 5 years and since inception, respectively.

Company Profile 

Challenger Ltd (CGF) is an Australian-based investment management firm managing $78.4 billion in assets as of December 2018. CGF operates two core segments: (1) a fiduciary Funds Management division; and (2) APRA-regulated Life division. Challenger Life Company Ltd (Challenger Life) is Australia’s largest provider of annuities.

(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

Megaport Ltd – Company achieved 2,455 customers across 768 Enabled Data Centres

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take several years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Strong R&D program ensuring MP1 remains ahead of competitors.
  • Strong cash balance of $104.6m. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key highlights:

(1) Revenue increased +42% over pcp to $51.2m, driven by increased usage of services across all regions, with North America delivering strongest growth across all regions, increasing +55% over pcp, followed by Europe (+35% over pcp) and Asia Pacific (+28% over pcp). Monthly recurring revenue (MRR) increased +46% over pcp to $9.2m, driven by strong customer growth compounded with a 5% increase over pcp in services per customer. 

(2) Profit after direct costs improved +69.4% over pcp to $30.9m, driven by revenue growth and a controlled network cost. 

(3) Opex increased +42% over pcp with employee costs increasing +40% over pcp amid investment in headcount to support business growth (employee costs as a percentage of revenue declined -100bps over pcp to 55%), marketing (+126% over pcp) and travel (+1481% over pcp) costs increasing amid a gradual return of travel and conference activities following global easing of Covid-19 restrictions, and IT costs increasing +106% over pcp due to expensing of Software as a Service (SaaS) costs, previously capitalised, following a change in accounting policy. 

(4) The Company achieved 2,455 customers (up +7.4% over 2H21) across 768 Enabled Data Centres (420 located in North America, 208 in EMEA and 140 in Asia Pacific). 

(5) The Company ended the half with cash and equivalents position of $104.6m, down -23.2% over 2H21.

Company Description: 

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(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 Expert Insights

Omicron Boost to Healius’ Earnings Appears Short-Lived but Core Pathology Proves Resilient

Business Strategy and Outlook:

As demand for PCR testing surged during the omicron wave, higher positivity rates limited the ability of pathology providers to pool tests, causing significant delays and accelerating adoption of rapid antigen tests. While Healius is improving its turnaround times, management admitted that the sector wouldn’t be able to keep up again if a similar surge were to occur. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Healius continues to increase its exposure to higher-margin modalities, and the company remains on track with its costout initiatives such as digitisation and network optimisation.

Despite Virtus deciding not to proceed with the acquisition of Adora, Healius is still classifying the business as a discontinued operation and suggested a sale to a different party is imminent.

Financial Strength:

Healius’ interim 2022 underlying EBIT rose 177% to AUD 376 million driven by operating leverage from elevated PCR testing. Healius declared a fully franked interim dividend of AUD 0.10 per share. Net debt/EBITDA was 0.4 at half-end, but it is expected that gearing to slightly increase following its Agilex acquisition. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages.

The smaller imaging segment, which contributed just 3% of group underlying EBIT, was weaker than expected. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages. This was despite support labour, excluding radiologists, reducing 4% on average per site.

Company Profile:

Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue is almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.

(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

Orora Ltd strong momentum with ongoing share buyback and balance sheet flexibility

Investment Thesis

  • Trading on fair value relative to our valuation.
  • Exposure to both developed and emerging markets’ growth.
  • Near-term headwinds should be in the price.
  • Revised strategy following recent strategic review.
  • Bolt-on acquisitions (and associated synergies) provide opportunities to
  • supplement organic growth.
  • Leveraged to a falling AUD/USD.
  • Potential corporate activity.
  • Capital management (current on-market share buyback plus potential for
  • additional initiatives).

Key Risks

  • Competitive pressures leading to margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in US, EM and Australia.
  • Emerging markets risk.
  • Adverse movements in AUD/USD.
  • Declining OCC prices.

1H22 Results Highlights

  • Sales revenue increased +9.6% (+10.6% in CC).
  • Underlying EBIT increased +10.4% (+11.1% in CC) driven by significantly improved performance in the North America segment.
  • Operating cash flow increased +0.6% to $145.5m with cash conversion declining -400bps to 75%, with higher earnings offset by an increase in working capital.
  • Net debt increased +13% over 2H21 to ~$512m, primarily reflecting the impact of increased debt arising from the on-market share buyback and increased capex partially offset by stronger earnings. ORA’s current leverage of 1.6x is below management’s targeted level of 2-2.5x EBITDA.

Company Profile 

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and 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.

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Shares Small Cap

Qube Working Towards Cost Effective Supply Chain

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Business Strategy and Outlook

Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains. 

It is alleged Qube to generate robust earnings growth over the long term on acquisitions, developments and organic growth. The domestic port logistics industry has traditionally been very fragmented, highly competitive, and inefficient. Currently, there are more than 250 operators providing port logistics services in one segment of the market. These are typically small operators with limited geographic scope offering limited point-to-point services. Qube’s strategy is to provide a broad range of services nationwide, touching multiple segments of the import/export supply chain. Analysts are supportive of this strategy and believe there is significant scope for further industry rationalisation. 

Consolidating the fragmented logistics chain should significantly improve Qube’s competitive position. Qube has already established a dominant market share in some specific port logistics offerings, particularly with regards to rail haulage services to and from Port Botany. Successfully developing its strategic land holdings into inland intermodal terminals should add materially to Qube’s future earnings and support cost advantages to less efficient peers. Qube aims to develop inland rail terminals as an alternative to moving container volumes from port via road. When fully developed, Moorebank will be Australia’s largest inland intermodal terminal. The bulk and general segments are highly fragmented and competitive but Qube is one of the largest players, with operations at 28 city and regional ports. The automotive stevedoring business operates in a duopoly market structure, holding long-term off-ship transportation, processing and storage contracts with major foreign vehicle manufacturers.

Financial Strength

Following the sale of Moorebank warehouses, Qube is in strong financial health. Gearing (net debt/net debt plus equity) was 10% in December 2021, well below Qube’s 30%-40% long-term target range. It has less than AUD 400 million in debt after receiving the upfront component of Moorebank sale proceeds, providing ample headroom to fund developments and bolt-on acquisitions. A special dividend or share buyback is likely in 2022. It is projected net debt/EBITDA to fall from 3.8 at June 2021 to below 2 times in 2022 and for the medium term. Qube’s businesses have delivered steadily increasing operating cash flow in recent years, though operations remain cyclical. Recent growth initiatives should generate strong future cash flow, though a large-scale acquisition or development project may require new equity funding. Qube has significant capital expenditure requirements including Moorebank development. Qube is committed to paying 50%-60% of earnings per share before amortisation as dividends.

Bulls Say’s

  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration. 
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving strong returns for Qube. 
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders

Company Profile 

Qube has three main divisions: operating; property; and Patrick. Operating undertakes road/rail transportation of containers to and from port, operation of container parks, customs/quarantine services, warehousing, intermodal terminals, international freight forwarding, domestic stevedoring, and bulk transport. Patrick is the container terminals business acquired from Asciano, and the property division includes tactical land holdings in Sydney. 

(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

Temple & Webster Group strong focus on reinvesting earnings back into business

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(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.