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Commodities Trading Ideas & Charts

Con Ed’s Clean Energy Transition Plan Boosts Growth but Requires Regulatory Support

Business Strategy & Outlook: 

To reaffirm the $86 per share fair value estimate for Con Ed after incorporating updates from the company’s annual environmental, social, and governance investor presentation. To reaffirm the no-moat and stable moat trend ratings. Management raised its 10-year capital investment outlook to $72 billion from $68 billion, supporting that Con Ed will continue to find attractive energy transition investments. To reaffirm the $15.7 billion capital investment forecast for 2022-24 and 6% average annual earnings growth estimate, in line with management’s budget. About one third of Con Ed’s investment plan is allocated to helping New York eliminate energy sector carbon emissions by 2040. This transition likely will result in rapid growth at its electric business but shrinking gas and steam demand. Management estimates by 2050 electricity demand on its system could climb 40% while gas demand falls 60% and steam demand falls 20%-40%. Decarbonizing buildings and transportation is the biggest immediate growth opportunity. The expected Con Ed will spend more than $7 billion on building electrification and EV charging by 2030. New York City recently banned gas service in new small buildings in 2024 and new large buildings in 2027. The state plans to ban new gasoline car sales by 2035.

Electric transmission and rate-regulated renewable energy projects could be incremental growth opportunities beyond 2025 but are too uncertain to incorporate now. Con Ed likely would have to win competitive bids and regulators would have to change ratemaking structures for Con Ed to benefit from the $40 billion of estimated capital investment that will be required for New York to reach its 70% renewable energy target by 2030. To think, management made a good capital allocation decision to sell its renewable energy business in October to eliminate near-term equity needs. The outcome of Con Ed’s 2023-25 electric rate review will be a key signal of regulatory support.

Financial Strengths: 

Total debt/EBITDA peaked at over 5 times in 2020, but expect it to decline to around 4 times by 2025. Although this ratio currently is somewhat elevated, I believe it is acceptable due to the favorable New York regulatory framework. The $6.8 billion clean energy business sale effectively pre-finances Con Ed’s utility growth investments, which support the 6% annual earnings growth forecast. This removes the risk that ConEd will have to issue large amounts of equity and debt in potentially volatile markets during the next few years. The clean energy business sale also eliminates the $400 million of annual capital expenditures the expected Con Ed to invest to develop its clean energy pipeline. The estimated ConEd can finance its $15 billion of planned utility investments in 2023-25 without issuing new equity. The expected Con Ed would have to issue around $1.5 billion of equity during the next three years to fund its utility and non-utility growth plan. It issued 10.1 million shares in July 2021.

Bulls Say:

  • Con Ed received a good price for its renewable energy business and now has the capital it needs to execute its three-year utility investment growth plan.
  • Con Ed has increased its dividend for 48 straight years. The expected dividend growth to accelerate from its 3% pace the last few years.
  • New York’s regulatory framework for electricity and natural gas provides for forward-looking rate cases and usage-decoupled customer rates, significantly reducing earnings and cash flow variability.

Company Description:

Con Ed is a holding company for Consolidated Edison of New York, or CECONY, and Orange & Rockland, or O&R. These utilities provide steam, natural gas, and electricity to customers in southeastern New York—including New York City—and small parts of New Jersey. The two utilities will generate nearly all of Con Ed’s earnings once it closes the sale of its clean energy business to RWE. Con Ed’s clean energy business owns the second-largest portfolio of utility-scale solar projects in the U.S. Following the sale, Con Ed’s only non-utility earnings will come from investments in gas and electric transmission.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

NAB also retained strong balance sheet metrics and capital position, with group Common Equity Tier 1 (CET1) ratio of 11.51%

Investment Thesis

  • NAB is trading on an undemanding valuation, with 1.6x Price to Book (P/B) and dividend yield of 5.4%. 
  • All else being equal, NAB is offering an attractive dividend yield on a 2-yr (5.6%) and 3-Yr (5.8%) view. 
  • Strong oligopoly position in Australia (along with three other major banks in CBA, ANZ, WBC).
  • Strong management team and Board. 
  • Macro environment to be both a tailwind and headwind –a rising interest rates environment to be both positive and negative in that while it will enable banks to charge more for loans, it also could result in deterioration in asset quality, slower loan growth, as well as higher inflation and wage growth to be detrimental to costs expense. 
  • Well capitalized after the capital raising. 
  • Though management has been cautioned to expect cost to increase, highlight NAB’s strong franchise model with management capable of improving below a 40% cost to income ratio (however do not factor in management’s long-term target of 35%).
  •  Potential pressure on net interest margins as competition intensifies with other major banks. Though these pressures are to slightly alleviate as it moves into a higher interest rate environment.
  •  Improving return on equity with management proving their abilities in recent times to manage profitability in a low interest rate environment. 
  • Strong provisioning coverage. 
  • A well-diversified loan book.

Key Risks

  • Impacts from Covid-19 are more severe than already provisioned for.
  • Low growth environment impacting earnings. 
  • Potential cuts or reduction to dividends due to low earnings growth. 
  • Intense competition for loan and deposit growth. 
  • Normalizing / increase in bad and doubtful debts or increase in provisioning. 
  • Funding pressure for deposits and wholesale funding (increased funding costs). 
  • Any legal fees, settlements, loss or penalties associated with ASIC or US-based law suits.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Cash earnings up +8.3% to $7,104m. Statutory net profit up +8.3% to $6,891m. Net interest margin (NIM) declined 6bps to 1.65%. 
  • Group Common Equity Tier 1 (CET1) ratio of 11.51%, down 149 bps from September 2021 mainly due to the impact of the on-market share buy-back in FY22 totalling $3.9bn (94 bps), and Citi consumer business acquisition (30 bps). Leverage ratio (APRA basis) was 5.1%. Liquidity coverage ratio (LCR) quarterly average of 137%. Net Stable Funding Ratio (NSFR) of 119%. 
  • The Board declared a fully franked final dividend of 78cps, up 5cps from the pcp, and brings full year dividend to 151cps, up +18.9%.
  • Business and Private Banking. Cash earnings of $3,013m, was up an impressive +21.5%, driven by higher revenue (on stronger volume growth and higher margins), and lower credit impairment charges, partly offset by higher operating expenses for additional bankers and resources to support growth, LanternPay acquisition and investment in technology. 
  •  Personal Banking. Cash earnings of $1,591m, declined -3.6%, mainly due to the impact on margins from intense home lending competition, a lower level of credit impairment writebacks, partly offset by lower operating costs. 
  • Corporate and Institutional Banking. Cash earnings of $1,628m improved an impressive +34.9% on higher revenue from strong volume growth and higher margins, and lower credit impairment charges. 
  • New Zealand Banking. Cash earnings of $1,403m was up +14.1% on higher revenue due to growth in volumes and higher margins, partly offset by higher credit impairment charges and operating expenses.

Company Description

National Australia Bank Limited (NAB) is one of Australia’s largest banks, with majority of their financial service businesses operating in Australia and New Zealand. The bank also has a presence in Asia, UK and the US. NAB offers banking services, credit and access card facilities, leasing, housing and general finance, international and investing banking, wealth and funds management, life insurance and custodian, trusts and nominee services.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Enbridge’s 2023 Outlook Is a Modest Negative; Lowering Fair Value Estimates

Business Strategy & Outlook: 

Enbridge’s 2023 outlook was more mixed than anything else. 2023 EBITDA guidance of a midpoint of CAD 16.2 billion is close to the unchanged expectations of CAD 16.3 billion. However, interest expense is expected to increase to CAD 3.9 billion, materially above earlier forecast, and capital spending of CAD 6 billion is CAD 1 billion above the estimates. The higher spending is reducing near-term cash flows and thus caused us to modestly reduce the fair value estimates. The estimated value is now CAD 52 ($38) per share, down from CAD 53 ($39). The narrow moat rating is unchanged. Enbridge also increased the dividend 3% as expected. While Enbridge highlighted plans to buy back stock potentially, one doesn’t expect excess cash flow from the firm until 2026, implying buybacks are likely to increase debt levels. Growth in 2023 across the business is weighted heavily toward liquids pipelines, gas transmission, and gas distribution. The growth should allow Enbridge to come close to meeting its leverage guidance of below 4.75 times in 2023, as the model is about 4.8 times. Enbridge also announced that it is working toward developing a carbon dioxide sequestration hub in Corpus Christi with Oxy Low Carbon Ventures, which adds to its energy transition credentials.

Financial Strengths: 

Enbridge carries higher levels of leverage, at levels between 4.5 to 5 times, than most high-quality North American midstream firms, which are typically below 4 times. However, this higher degree of leverage is supported by the protected nature of its earnings stream. Further, it should also decline over the next few years and Enbridge’s core capital spending profile shifts to CAD 3 billion to CAD 4 billion in spending compared with prior years of CAD 6 billion-plus. Notably, Enbridge has outlined plans to spend up to an incremental CAD 2 billion annually on debt reduction or share buybacks. Enbridge’s dividend is prized by both investors and the management team. After averaging 14% annual growth from 2013-20, one only expects growth to be about 3% annually for the foreseeable future. The shift reflects a recognition of the slower growth across Enbridge’s business but also a preference by investors toward generating free cash flow after capital spending and dividends. Enbridge’s outlined capital spending plans already reflect substantial free cash flows available for higher capital returns to shareholders via buybacks or debt reduction with CAD 2 billion earmarked for this effort annually. This profile is markedly better than most U.S. midstream peers, which in many cases are still struggling to balance a large committed dividend or distribution payouts to shareholders alongside reasonable levels of capital spending.

Bulls Say:

  • Enbridge is the liquids-focused version of gas-oriented Williams in terms of an attractive, highly regulated utility like earnings profile.
  • Enbridge offers a highly secure dividend that can increase 3% annually for the foreseeable future.
  • The cancellation of Keystone XL puts Enbridge in a leading position to capture new organic pipeline expansions to serve the unmet need from producers.

Company Description:

Enbridge owns extensive midstream assets that transport hydrocarbons across the U.S. and Canada. Its pipeline network consists of the Canadian Mainline system, regional oil sands pipelines, and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada’s largest natural gas distribution company. Finally, the firm has a small renewables portfolio primarily focused on onshore and offshore wind projects.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

JHG achieved solid investment performance, with 50%, 60%, 65%, and 76% of assets under management

Investment Thesis:

  • JHG is a truly global asset manager with US$299.7bn in FUM and significant distribution capabilities.
  • Trading on undemanding multiples – 9.1x PE-multiple and 7.2% dividend yield.
  • US$200m share buyback should support share price.
  • Improving flow in the higher margin retail segment.
  • Significant cost selling opportunities and a broader product offering, including new product development.
  • continue to see consolidation at the industry level as an important theme. Trian Partners has taken a 16.7% position in JHG, with the Company appointing two of Trian’s Directors Nelson Peltz and Ed Garden to the JHG Board. From understanding Trian’s partners have been on the record noting the need for industry consolidation. Trian Partners also have a significant shareholding in Invesco Ltd.
  • Current CEO Dick Weil is retiring, and a new CEO could bring a fresh perspective and strategy to the firm.

Key Risks:

  • Funds underperform versus their respective benchmarks.
  • Funds outflow – both retail and institutional (loss of a large mandate).
  • Shift to passive investing accelerates.
  • Loss of key management or investment management personnel.
  • Change in regulatory guidelines plus potential downside from UK’s exit from European Union.
  • Unfavourable currency movements.
  • Change in CEO could result in uncertainty over the strategic direction.

Key Highlights:

  • Adjusted operating income of $328.1 was -30% lower. Adjusted operating margin of 36.2% was weaker than the 42.0% in 1H21. 2Q22 relative to 1Q22 and 2Q21, and in $: JHG achieved solid investment performance, with 50%, 60%, 65%, and 76% of assets under management outperforming relevant benchmarks on a 1yr-, 3yr- , 5yr-, and 10-yr basis, respectively, as at 2Q22-end.
  • AUM declined -17% to $299.7bn, due to tough global markets, FX (US dollar appreciation), and net outflows of $(7.8) bn (due to a significant slowdown in intermediary gross sales and investment underperformance in key strategies).
  • 2Q22 operating income of $143.9m was improved versus $124.6m in 1Q22 but weaker than $225.0m in 2Q21. 2Q22 adjusted operating income (adjusted for one-time, acquisition and transaction related costs) of $149.3m declined from $178.8m in 1Q22 and $269.3m in 2Q21.
  • 2Q22 diluted EPS of $0.56, improved from $0.47 in 1Q22 and $0.79 in the 2Q21. $0.63 on an adjusted basis was lower than the $0.75 in 1Q22 and compared to $1.16 in 1Q21.
  • JHG completed $56m of share buybacks during 2Q22. (6) The Board declared a quarterly dividend of $0.39 per share (which is equivalent to 1Q22).
  • Capital management update. On 27 July 2022, the Board declared a 2Q22 dividend (for the three months ended 30 June 2022) of US$0.39 per share. Further, as part of the US$200m on-market buyback programme approved by the Board in May 2022, JHG purchased ~2.1m of its ordinary shares on the New York Stock Exchange and its CHESS Depositary Interests on the Australian Securities Exchange in 2Q22, for US$56m.

Company Description:

Janus Henderson (JHG) is an independent global asset manager, specializing in active investment. JHG was formed via a merger between Janus Capital Group and Henderson Group. JHG offers expertise across all major asset classes including equities, quantitative equities, fixed interest, multi-asset and alternatives. The group manages approximately $371bn, has over 2,000 employees and is dual listed on the New York Stock Exchange and the Australian Stock Exchange.

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria

Business Strategy & Outlook

Incitec Pivot aims to expand its business around its strong global market share in explosives. This provides an increasingly stable earnings stream relative to volatile earnings from its fertilizer business. Competitive advantages include a duopoly Australian explosives business and global explosives operations. Incitec Pivot is also a dominant player in the Australian domestic fertilizer market and enjoys a degree of domestic fertilizer pricing power from its dominant market share in eastern states, but it is too small to influence global prices. The fertilizer business does not possess an economic moat. Explosive earnings are leveraged to mining volumes as much as price and should benefit from long-term global growth in demand for minerals and metals. Additionally, mining strip ratios are expected to increase over time, with more explosives required to mine the same amount of ore. Given these dynamics, the demand for ammonium nitrate is to continue growing. However, growth is likely to be uneven and subject to cyclical changes in demand for commodities. Significant increases in capacity have led to near-term oversupply of ammonium nitrate on the east and west coasts of Australia. Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria. There will likely be an oversupply of ammonium nitrate in Western Australia to 2020 and in Eastern Australia to 2021. 

In Western Australia, Orica has commissioned a new plant in the Pilbara with Yara of Norway. Incitec Pivot sources its ammonium nitrate from Wesfarmers in the west, so margins will be overly hurt by the oversupply. Incitec Pivot’s explosives business is strategically short ammonium nitrate, or AN, production capacity by around 200,000 tonnes in a long-capacity market. A superior product offering is essential to facilitate this strategy, with demand supported by flexible third-party agreements that are footprint-logical. Expansion at Moranbah in the east would only be considered after markets come back into balance.

Financial Strengths

Group net operating cash flow increased 68% to AUD 1.09 billion in fiscal 2022. This allowed net debt to fall by 7% to AUD 949 million. Gearing is modest at 15% and net debt/EBITDA just 0.5. Low debt with a strong fiscal 2023 cash flow forecast creates optionality for additional capital management. Debt ratios are well below the company’s 1.0 to 1.5 net debt/EBITDA target range. This places Incitec in a sound position to navigate the conversion of Gibson Island to import only and to explore new opportunities like green hydrogen manufacture. That and/or capital management post fiscal 2022. There is an expressed concern over capital misallocation in the recent past, including on-market share buy-backs. It is pleasing therefore that management has expressed an investment bias to capital-light and faster cash returning projects aligned to the strategy. The equity capital raised in fiscal 2020 increased the company’s liquidity and supported a continued investment grade credit rating. Over the long run, Incitec Pivot to return approximately 50% of earnings to shareholders through dividends, which is a reasonable payout ratio.

Bulls Say

  • Investors enjoy bumper dividends at peak cycle times.
  • Continued growth of the explosives business will reduce earnings volatility.
  • Over the longer term, explosives earnings are favorably leveraged to mining volumes rather than prices, and mine strip ratios are expected to increase over time.

Company Description

Incitec Pivot is a leading global explosives company with operations in Australia, Asia, and the Americas. It is estimated its share of the global commercial explosives market at about 15%. Explosives contribute 80% of EBIT. Incitec Pivot is also a major Australian fertilizer producer and distributor and is the only Australian manufacturer of ammonium phosphates and urea. Ammonium phosphates are sold in the domestic market and exported.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Property

Waypoint REIT Ltd (WPR) reported solid 1H22 results, in line with expectations

Investment Thesis

  • WPR currently trades at a discount to its NTA 
  • Solid distribution yield. 
  • On market buyback should be supportive of WPR’s share price levels. 
  • As of FY21, quality $3.09bn asset portfolio (433 properties) with Weighted Average Lease Expiry (WALE) of 10.0 years. 
  • Majority of assets on triple net leases, where the tenant is responsible for all property outgoings. 
  • Waypoint REIT leases to Viva Energy who has an Alliance Agreement/Site Agreements with Coles Express and a brand License Agreement with Shell. 
  • Potential expansion of property network by way of earnings accretive acquisitions. 
  • Solid capital management with gearing with flexibility to make further acquisitions. 
  • High barrier to entry; difficult to replicate asset portfolio.

Key Risks

  • Tenant concentration risk. 
  • Termination of the alliance agreement with Coles Express. 
  • Competition by other branded service stations. 
  • Increased cost of fuel supply putting pressure on tenants. 
  • The sale of properties in the portfolio resulted in lower rental income. 
  • Potential for excess supply of service stations thus affecting valuations and other property metrics of the portfolio.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Distributable Earnings of $61.4m, up +0.2%. 
  • Statutory net profit of $213.8m, down -15.1%, due to lower net valuation gains on investment property partially offset by higher net valuation gains on derivatives. 
  • Net tangible assets per security of $3.18, up +7.8% over 1H21-end of $2.95. WPR saw 71 investment properties (which equates to over one-sixth of the portfolio) independently valued in 1H22 with directors’ valuations performed on the balance. This resulted in a gross valuation uplift of $139.5m and the portfolio weighted average capitalisation rate (WACR) tightening to 5.02% at 1H22-end. 29 non-core assets exchanged or settled for $141.8m, in line with WPR’s carrying value at FY21-end. 
  • WPR’s pro forma gearing of 26.1% declined from 27.3%. Pro forma weighted average debt maturity of 4.9 years, improved from 4.5 years. 
  • Management confirmed the distribution for the three-month period ended 30 June2022 of 4.51 cents per security.

Company Description

Waypoint REIT Ltd (WPR) is an Australian listed REIT that owns a portfolio of service stations across all of Australia’s states and territories. It currently owns 469 service stations in its portfolio. Its service stations are leased on a long-term basis to Viva Energy Australia who has licence and brand agreements with Shell and Coles Express.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

PPT delivered strong earnings growth for FY22 with underlying PBT 19 percent yy

Investment Thesis

  • Trades below the valuation and represents >10% upside to current share price. 
  • PPT is a diversified business with earnings derived from trustee services, financial advice and funds management. 
  • PPT has an opportunity to increase FUM via its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity, whilst PPT continues to maintain FUM in Australia equities which is near maximum capacity. This equates to flattish earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds). 
  • Retail and institutional inflow of funds is expected to be solid especially from positive compulsory superannuation trend and flow from Perpetual Private. 
  • Potential for Perpetual Private to drive growth in funds under management and funds under advice. 
  • Cost improvements in Perpetual Private and Corporate Trust.

Key Risks

  • Any significant underperformance across funds.
  • Significant key man risk around key management or investment management personnel.
  • Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation. 
  • Average base management fee (bps) per annum (excluding performance fee) continues to be stable at ~70bps but there are risks to the downside from pressures on fees. 
  • More regulation and compliance costs associated with the provision of financial advice and Perpetual Private. 
  • Exposure to industry funds which are building in-house capabilities (~15-20% of total PPT funds under management).

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • The company entered into a binding Scheme Implementation Deed to acquire 100% of shares in Pendal Group, targeted to be implemented by late CY22/early CY23 and Pendal shareholders receiving 1 PPT share for every 7.50 Pendal shares plus $1.976 cash/Pendal share (implying an offer price of $6.54/Pendal share), with acquisition expected to;
  •  Realise $60m of annual pre-tax synergies within the first two years and deliver double digit EPS accretion for PPT in the 12 months post implementation, with one-off costs to achieve synergies of $110m phased with majority incurred over 18 months and other transaction costs of $40m.
  • Create greater scale with $1.4bn in revenue and ~$456m in UPBT driven by increased economies of scale, and combined AUM of >$201bn, covering Global, US, UK, European and Australian equities, Multi Asset and Cash and Fixed Income strategies, significantly improving market position and brand recognition. 
  • Expanded team with employees across 16 locations around the globe and enhanced global distribution network. Management expects to fund the cash component of the offer totalling $757m via a new debt facility, which will also re-finance Perpetual’s existing debt facility and include undrawn headroom for liquidity management purposes and expects pro forma leverage to be ~1.7x gross debt/pro forma EBITDA (~1.3x Net Debt/pro forma EBITDA) with de-leveraging occurring in year 3 post-implementation given the strong cash flow generation of the combined businesses with a clear pathway to 1.2x Gross Debt/pro forma EBITDA (~0.8x Net Debt).
  • The Board declared a fully franked final dividend of 97cps, resulting in a total dividend for the full year of 209cps, an increase of +16% y/y, representing a payout ratio of 80%, in line with company’s payout range of 60-90% UPAT on an annualised basis. 
  • ROE improved +44bps y/y to 16.2%.

Company Description

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core segments in (1) Perpetual Investments which is one of Australia’s largest investment managers; (2) Perpetual Private which is one of Australia’s premier high net worth advice business; and (3) Perpetual Corporate Trust which provides trustee services. PPT manages ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as at 30 June 2021).

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

SGM’s FY22 results were solid and driven by higher volumes and prices

Investment Thesis

  • Improvement in scrap prices across key regions. 
  • Cloud recycling could add significant earnings over the long run. 
  • Investment in improving scrap quality should improve SGM’s competitive position. 
  • Undemanding valuation relative to its own historical average and ASX200 Industrials Index. 
  • Self-help initiatives to support earnings. 
  • Improving Return on Capital (ROC). 
  • Current on-market share buyback. 

Key Risks

  • Significant downturn in global economy. 
  • Trade war between China and the U.S. escalates. 
  • Weaker scrap prices in key regions. 
  • Lower volumes. 
  • Regulatory changes – particularly around China’s anti-pollution policies. 
  • Cost pressures impacting group margins 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Underlying revenue of $9,264.4m was up +56.6%, driven by higher volumes and selling prices (ferrous and non-ferrous). Sales volumes of 8,106m tonnes, was up +12.2%. 
  • Underlying operating earnings (EBIT) of $756.1m was up +95.6% on pcp, driven predominantly by: strong contribution from SA Recycling, contributing the bulk of the $144.8m improvement in JV contribution; non-acquired growth in volumes contributed over $100m; and $307.8m in margin growth. Earnings growth was partially offset by $170.9m increase in organic metal costs. Underlying NPAT of $578.9m was up +103.8%. 
  • The Board declared a final dividend of 50cps (50% franked), bringing the full year dividend to 91.0cps, up +116.7% YoY. 
  • Return on productive assets (capital efficiency) improved by 16% to 39.0%. (5) Capital expenditure forecast for FY23 was increased – at the March Investor Day management estimated FY23 sustaining and environmental capex would be approximately $175m, however this has been increased to $220m due to higher spending on environmental and increased costs from inflation. 
  • North America Metal (NAM) sales revenue of $2,669.9m was up 66.8% driven by higher sales prices and sales volumes (up +17.7%). Intake also improved over the period and was higher than pre-Covid levels. Trading margin of $881.4m was up +55% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Segment underlying EBIT of $293.4m was up +114.2%. 
  • Australia & New Zealand Metal (ANZ) revenue of $1,694.4m was up +54.2% driven by +55.2% increase in average selling prices. Sales volumes were largely unchanged on pcp (-0.3% YoY). Trading margin of $423.1m was up +34.9%. Costs were up +16.5% and lower than NAM due to flat volumes. Segment EBIT of $186.9m was up +80.2%. 
  • UK Metal sales volumes were up +9.0% YoY and average selling prices up +47.3%, driving sales revenue growth of +60.6% YoY to $1,594.9m. Management noted that the Trading Margin of $234.6m was up only +23.9% “due to market structure and competitive dynamics, UK was not able to hold onto as much of the sales price increase as NAM or ANZ.” Segment underlying EBIT of $69.8m was up +52.7% on pcp. 
  • Sims Lifecycle Services reported revenue of $327m (up +2.5%) and underlying EBIT of $16.3m was down -25.2% driven by the 30% reduction in prices for units resold, driven by reduced manufacturing activity in China due to Covid lockdowns. 
  • SA Recycling reported sales volumes growth of +33.3%, sales revenue up +74.8% to $4,993.1m, trading margin of $1,520.1m up +69% and underlying EBIT (50% share) of $298.5m 

Company Description

Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Ralph Lauren has closed more than 75 stores, reduced exposure to U.S. department store and off-price channels

Business Strategy & Outlook

Ralph Lauren’s restructuring over the past few years puts it on solid footing as it navigates macroeconomic challenges. In response to poor inventory control and heavy discounting in years past, Ralph Lauren has closed more than 75 stores, reduced exposure to U.S. department store and off-price channels, and cut product lead times. These and other changes have resulted in strong gross margin increases. Although sales have declined in North America from peak levels, the restructuring, including new merchandise and better pricing for core products, has positioned Ralph Lauren for low-single-digit sales growth and mid-60s gross margins. Further, advertising support as a percentage of sales in the mid-single digits in the long term and anticipate its direct-to-consumer sales will rise to 73% of sales in fiscal 2032 from 63% in fiscal 2022, thereby reducing the brand’s dependence on U.S. physical retail and providing better control over pricing and positioning.

An increasing direct-to-consumer business as essential as customer visitation is declining in many retail stores and malls. Much of Ralph Lauren’s growth came from international markets. The brand is more of a premium brand in Europe and Asia than in North America, allowing for reduced discounting and higher average unit retail. In Europe, store openings in underserved markets to support its existing e-commerce and attract new customers. In Asia, where Ralph Lauren trails some competitors, 7% compound average annual sales growth over the next decade as stores open and e-commerce expands in mainland China. Sales in Europe and Asia-Pacific will rise to 58% of total sales in fiscal 2032 from 49% in fiscal 2022. As evidence of the potential for Ralph Lauren, a comparable American brand, narrow-moat PVH’s Tommy Hilfiger, produced 75% of its sales outside North America in fiscal 2021.

Financial Strengths

Ralph Lauren has a strong balance sheet. The company recently sold Club Monaco (undisclosed terms) and licensed Chaps. It also paid off $500 million in debt that came due in 2022. After these moves, it closed September 2022 with long-term debt of $1.1 billion but $1.4 billion in cash and investments (net cash of about $4 per share). Ralph Lauren will generate significant cash flow for stock buybacks and dividends despite disruption from the pandemic. After suspending it during the pandemic, the firm resumed its dividend in fiscal 2022 and plans to pay $3 per share in dividends in fiscal 2023.Its long-term dividend payout ratio at about 44%. As for buybacks, Ralph Lauren repurchased shares on a consistent basis prior to the pandemic and has recently resumed them. It will generate an average of about $680 million per year in free cash flow to equity over the next five fiscal years and use practically all of it for share repurchases and dividends. Ralph Lauren’s yearly capital expenditures dropped below 3% of sales as its conserved cash during the pandemic. Now, though, larger investments in digital capabilities, store remodels, and store openings. Ralph Lauren’s annual average capital expenditures at 4.5% of sales over the next five years.

Bulls Say

  • Business trends have improved for Ralph Lauren in Europe and Asia, which is advantageous as both regions have higher average unit retail and better growth prospects than the United States. 
  • Ralph Lauren’s gross margins are higher than those of some competitors and have been improving, as much of its merchandise achieves premium pricing. 
  • Ralph Lauren’s growth came from controlled retail and e-commerce, allowing for better command over pricing and marketing. The firm has reduced its share of revenue from wholesale channels by about 20 percentage points over the past 12 years.

Company Description

Founded by designer Ralph Lauren in 1967, Ralph Lauren Corp. designs, markets, and distributes lifestyle products in North America, Europe, and Asia. Its products include apparel, footwear, eyewear, jewelry, leather goods, home products, and fragrances. The company’s brands include Ralph Lauren Collection, Polo Ralph Lauren, Lauren Ralph Lauren, and Double RL. Distribution channels for Ralph Lauren include wholesale (including department stores and specialty stores), retail (including company-owned retail stores and ecommerce), and licensing.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Danaher continues to prune its portfolio of businesses

Business Strategy & Outlook

Through the Danaher Business System, Danaher aims for continuous improvement of its scientific technology portfolio by seeking out attractive markets and then making acquisitions to enter or expand within those fields and divest assets that are no longer seen as core. After acquisitions, Danaher aims to accelerate core growth at acquired companies by making R&D and marketing-related investments. It also implements Lean manufacturing principles and administrative cost controls to boost operating margins. Overall, Danaher’s strategic moves are appreciable, which have pushed it into attractive end markets with strong growth prospects and sticky, recurring revenue streams. For example, recurring revenue could reach about 80% of sales after the pending environmental and applied solutions (EAS) group divestiture in late 2023.

Danaher’s acquisition-focused strategy has contributed to it becoming a top-5 player in the highly fragmented and relatively sticky life science and diagnostic tool markets less than 20 years after its first acquisition in the space (Radiometer in 2004). Recent life science and diagnostic acquisitions have included Beckman Coulter, Pall, and Cepheid. In early 2020, Danaher completed the acquisition of GE Biopharma, now called Cytiva, which fills in some gaps for Danaher within the biopharmaceutical development and manufacturing tool market. Within the life sciences field, the end market is particularly attractive given its strong growth trajectory, high margins, and high switching costs associated with regulatory and reproducibility concerns of end users. Management has started making more acquisitions in that space, such as Aldevron, and expects more tuck-in acquisitions in this and other end markets. Danaher also continues to prune its portfolio of businesses. The planned EAS group divestiture is just the latest for the company that distributed shares in the now publicly traded Fortive Corp (industrials) in 2016 and Envista (dental) in 2019 directly to shareholders. More divestitures are possible in the future, as well.

Financial Strengths

Danaher’s acquisition-focused strategy makes financial flexibility and capital market access important. In recent years, the company has issued debt to make significant acquisitions, such as Beckman Coulter (2011), Pall (2015), Cepheid (2016), and Cytiva (2020) before deleveraging to more manageable levels again. At the end of 2021, gross leverage stood at just 2 times, including COVID-19-elevated profits. Danaher has expressed a desire to maintain its investment-grade status, and it should be achievable. However, the company is highly acquisitive, and future acquisitions could significantly boost leverage from current levels before the company aims to return to more manageable levels.

Bulls Say

  • The Danaher Business System focuses on continuous improvement, including the acceleration of core growth and margin expansion through marketing initiatives and innovation, which appears positive for Danaher’s long-term prospects. 
  • Danaher’s shift to healthcare markets has created a less cyclical business in attractive markets with high barriers to entry and impressive recurring consumables revenue streams. 
  • Danaher has plenty of opportunities to consolidate and improve performance in its targeted life science and diagnostic end markets.

Company Description

In 1984, Danaher’s founders transformed a real estate organization into an industrial focused manufacturing company. Through a series of mergers, acquisitions, and divestitures, including the Fortive separation in 2016, Danaher now focuses primarily on manufacturing scientific instruments and consumables in three segments: life sciences, diagnostics, and environmental and applied solutions. In late 2019, Danaher separated from its dental business through an initial public offering process, and in early 2020, it acquired GE’s Biopharma business, now called Cytiva, which added to its life sciences segment.

(Source: Morningstar)

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