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Global stocks Shares

UnitedHealth Group Inc : Targeting at increasing health care delivery efficiencies at lower costs

Investment Thesis:

  • Well positioned to benefit from positive healthcare trends and demographics. 
  • Optum offers a sustainable cost edge with predictive data and analytics. Management is expecting to achieve a further 20-40bps cost efficiencies through automation and machine learning.
  • Consistent top line growth with revenues growing at CAGR ~14% and operating earnings growing at CAGR ~17%. The Company has a very diversified portfolio which seemingly benefits in every market (with the insurer serving employers, individuals, Medicare, and state and local governments).
  • Excessive expansion of international business giving UNH some protection from increasing regulations in the U.S. The global business is now earning revenue of ~US$10bn.
  • Competent management team.
  • Generating very significant cash flow (growing at a CAGR ~15%) and returning a fair amount of that cash flow back to shareholders via a growing dividend (DPS grew at a CAGR 22% over FY15-18) and share repurchase program.

Key Risks:

  • Slowdown in customer acquisition if health insurance tax comes back in 2021. 
  • Headwinds from potential regulatory reforms like Medicare for all. 
  • Value destructive M&A.
  • Key-man risk due to management changes.
  • Increased competition (pricing pressure & innovative products) from new entrants or existing players like Anthem and Humana.
  • Cyber-attacks or other privacy or data security incidents resulting in security breaches.
  • Legal proceedings leading to substantial penalties or damage to reputation.

Key highlights:

Management continues to focus their efforts and strategies to build an integrated health care system, aiming at increasing health care delivery efficiencies at lower costs, and is targeting 5 areas to support long-term growth

(1) Value-based Care (comprehensive clinical strategy encompassing growing behavioural, home, ambulatory and virtual care capabilities) – e.g. OptumCare is developing a patient-cantered, value-based care delivery system and 100 health payers to serve more than 20 million patients in the U.S. 

(2) Health Benefits – advancing the quality, innovation and consumer appeal of benefit offerings and bringing value-based strategy to life.

 (3) Health Technology – e.g., NavigateNow health plan, which is an all-virtual care offering, allowing employees to connect with a virtual-based Optum Care team for on-demand care, including for urgent, primary, and behavioral health services, and is currently available in nine cities, with management planning to expand into 25 cities by the end of FY22 and anticipating it to reduce healthcare premiums by ~15% compared to traditional plans. 

(4) Health Financial Services (seeking to improve payment processes for members) – e.g., Optum Financial supports more than 8 million consumers with health bank accounts and processed ~$260bn in payments, up +53% YoY with management seeing additional opportunities to streamline payments for patients and providers, helping to drive increased transparency, reduce administrative burdens, and unlocking capital for providers. 

(5) Pharmacy (with an emphasis on specialty pharmacy) – prioritizing direct-to-consumer offerings with focus on increasing market share in the life sciences market and lowering the cost of specialty drugs by identifying lower-cost treatments earlier in the process.

Company Description: 

UnitedHealth Group (NYSE: UNH) is a diversified health care company offering a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services and includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State, and UnitedHealthcare Global businesses; and Optum, which provides information and technology-enabled health services through its OptumHealth, OptumInsight and OptumRx businesses.

(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

Aristocrat Leisure Ltd to invest in R&D to defend its narrow economic moat and maintain Market position

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

Business Strategy and Outlook

Aristocrat Leisure will continue to dominate the electronic gaming machine, or EGM, market. With a strong balance sheet and commanding market position, Aristocrat’s research and development expenditure is unmatched by peers. This investment is the lifeblood of any electronic gaming manufacturer, especially given rapidly changing technology, and allows Aristocrat to maintain game quality, differentiate products from lower-end competitors, and defend its narrow economic moat. 

Aristocrat is among the top three global competitors in the highly competitive EGM market, alongside International Game Technology and Scientific Games. Aristocrat’s North American ship-share has increased to around 23% in 2019, from around 13% in 2012. This trails leader Scientific Games but is broadly in line with International Game Technology. Aristocrat commands a number one position in class II and class III leased machines with around a third of the installed base, bolstered by the Video Gaming Technologies acquisition in 2014.

EGM sales have been particularly hard-hit as coronavirus-induced shutdowns, social distancing measures, and travel restrictions weigh on the firm’s customers. It is anticipated these casino, pubs, and clubs have been slowing capital expenditure prior to shutdowns to protect balance sheets, grinding EGM sales to a halt. Visitations fell well below pre-pandemic levels, and capital expenditure remains heavily restricted. 

However, Aristocrat’s fortunes aren’t entirely tied to its customers’ capital expenditure cycles. Leased, rather than purchased, machines represent most American land-based sales and attract a fee-per-day arrangement (which can be fixed or performance-based). In our view, this revenue is more naturally recurring than direct EGM sales. While it is expected venue shutdowns and lower visitations in the near term to weigh on leased machine profitability, Aristocrat’s customers don’t appear to be removing machines from floors to reduce costs, painting a brighter picture for leased machines to rebound as visitations recover.

Financial Strength

Aristocrat Leisure is in strong financial health. At Sept. 30, 2021, the company had AUD 0.8 billion net debt, equating to net debt/EBITDA of 0.5–down from AUD 1.6 billion in net debt, equating to net debt/EBITDA of 1.4 at Sept. 30, 2020. EBITDA interest cover is comfortable at 15 times. The AUD 1.3 billion capital raising to fund the AUD 5 billion acquisition of U.K.-listed Playtech–a deal which eventually failed to reach an appropriate level of shareholder support–leaves Aristocrat’s balance sheet extremely well-capitalised to explore further opportunities in real money gaming, or potentially return capital to shareholders. Aristocrat to ramp up paying out dividends from approximately 30% of underlying earnings from fiscal 2021, back to 40% by fiscal 2022. Rather than increasing this pay-out ratio in the near to medium term, it is expected that Aristocrat will instead increase investment in the business through research and development to maintain its market position and defend its narrow economic moat.

Bulls Say’s

  • Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players. 
  • Unlike the mature electronic gaming machine industry, the fast-growing mobile gaming market provides an avenue of strong growth for Aristocrat. 
  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on research and development allowing the firm to improve its competitive position and protect its narrow economic moat.

Key Investment Considerations:

  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on research and development allowing the firm to improve its competitive position and protect its narrow economic moat. 
  • With less turnover likely up for grabs in the near-term, heavy discounting could weigh on Aristocrat’s profitability in the fiercely competitive electronic gaming machine industry. 
  • Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players.

Company Profile 

Aristocrat Leisure is an electronic gaming machine manufacturer, selling machines to pubs, clubs, and casinos. The firm is licensed in all Australian states and territories, North American jurisdictions, and essentially every major country. Aristocrat is one of the top three largest players in the space along with International Game Technology and Scientific Games. Through acquisitions of Plarium and more recently Big Fish, Aristocrat now derives a significant proportion of earnings from the faster growing mobile gaming business.

(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 Shares

Dividend of BCE Inc. has been increasing 5% each year since 2015 and is expected to be the norm through 2026

Business Strategy and Outlook

BCE has been investing heavily to upgrade its wireline network by extending fiber to the home, or FTTH, which positions the firm to take share over its footprint. BCE also remains a leader in providing wireless service throughout Canada and has a formidable media business. 

BCE is the biggest Canadian broadband provider, with nearly 4 million high-speed Internet customers at the end of 2021 and a footprint that reaches three fourths of the nation’s population. Its two biggest competitors, cable companies Rogers (in Ontario), and Videotron (in Quebec) have about 2.5 million and 1.8 million subscribers, respectively. As a legacy phone provider, BCE has historically had an inferior network, contributing to better penetration rates for Rogers and Videotron. FTTH will meaningfully reduce operating costs, allow BCE to offer speeds comparable to or better than competitors, and charge higher prices. 

BCE is second to none in Canadian wireless and expects it to remain atop the market with Rogers and Telus. However, it is expected the wireless market to remain competitive and believe pricing will remain under pressure for the incumbents, even if the Shaw merger with Rogers is completed, due to regulatory scrutiny. Long term, average revenue per user will be stagnant, which will limit the firm’s ability to expand wireless margins. 

BCE also distinguishes itself from competitors with a high-quality and diversified media unit (Rogers is the only other Canadian telecom firm with media exposure, and BCE has superior assets). Crave is BCE’s over-the-top video-on-demand service available throughout Canada with a wealth of content, including from HBO, Showtime, and Starz. BCE is also the exclusive provider of HBO Max content in Canada and owns Canada’s top network (CTV) and top sports station (TSN). In total, BCE owns or has exclusive Canadian rights to 30 television channels, over 100 radio stations, an out-of-home advertising business, and broadcast rights for a multitude of sports teams, leagues, and even

Financial Strength

Although BCE ended 2021 with a net debt/EBITDA ratio of 3.0, above the 1.75-2.25 that it targets, and is expected the leverage ratio to stay above the firm’s target range throughout our five-year forecast, the firm’s financial position as strong and likely to improve. At the end of 2021, the company had CAD 207 million in cash, and an interest coverage ratio (adjusted EBITDA to interest expense) of over 9.0. BCE has CAD 1.5 billion to CAD 2.6 billion maturing each year between 2022 and 2025, but it is not anticipated it will have difficulty rolling the obligations over. BCE also had about 3.5 billion of available liquidity at the end of 2021 thanks to its committed credit facility. Higher debt levels in recent years are attributable to acquisitions (the biggest of which was the acquisition of a portion of MTS’ business for close to CAD 1.5 billion in cash), spectrum purchases, its fiber-to-the-home network buildout, and cash needs for pension funding. BCE will continually participate in spectrum auctions, it is not foreseen any upcoming auctions that will be as big as 2021’s 3500 MHz auction, where BCE spent CAD 2 billion. It is also expected capital spending to come down significantly after 2022, as the firm passes the accelerated portion of its fiber buildout, and any big mergers or pension contributions is not expected, as the company has eliminated its pension deficit. These should result in higher free cash flow that can go toward paying down debt. The company has sufficient flexibility should opportunities arise. BCE has increased its dividend by at least 5% each year since having to cut it during the financial crisis in 2008. The increase has been right at 5% each year since 2015, and is expected to be the norm through 2026. 

Bulls Say’s

  • The immense network improvement that will result from BCE’s fiber-to-the-home buildout will lead to wireline share gains and margin improvement. 
  • With the Canadian wireless market far less penetration than the U.S. and Europe, a long growth runway exists. As an industry leader, BCE is well positioned to take advantage. 
  • BCE’s fiber-to-the-home buildout leaves it well positioned for a transition to 5G, which will require significant fiber capacity.

Company Profile 

BCE is both a wireless and Internet service provider, offering wireless, broadband, television, and landline phone services in Canada. It is one of the big three national wireless carriers, with its roughly 10 million customers constituting about 30% of the market. It is also the ILEC (incumbent local exchange carrier–the legacy telephone provider) throughout much of the eastern half of Canada, including in the most populous Canadian provinces–Ontario and Quebec. Additionally, BCE has a media segment, which holds television, radio, and digital media assets. BCE licenses the Canadian rights to movie channels including HBO, Showtime, and Starz. In 2021, the wireline segment accounted for 54% of total EBITDA, while wireless composed 39%, and media provided the remainder.

(Source: Morningstar)

General Advice Warning

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

Categories
Technology Stocks

Snowflake Inc shifting to subscription model from a usage-based model for boosting its Monetization of products

Business Strategy and Outlook

In the past 10 years, Snowflake has culminated into a force that is far from melting, in our view. As enterprises continue to migrate workloads to the public cloud, significant obstacles have arisen, compromising performance of data queries, creating hefty data transformation costs, and yielding erroneous data. Snowflake seeks to address these issues with its platform, which gives all of its users access to its data lake, warehouse, and marketplace on various public clouds. Snowflake has a massive runway for future growth and should emerge as a data powerhouse in the years ahead. 

Traditionally, data has been recorded in and accessed via databases. Yet, the rise of the public cloud has resulted in an increasing need to access data from different databases in one place. A data warehouse can do this, but still does not meet all public cloud data needs–particularly, in creating artificial intelligence insights. Data lakes solve this problem by storing raw data that is ingested into AI models to create insights. These insights are housed in a data warehouse to be easily queried. Snowflake offers a data lake and warehouse platform, which cuts out significant costs of ownership for enterprises. Even more valuable, in our view, is that Snowflake’s platform is interoperable on numerous public clouds. This allows Snowflake workloads to be performant for its customers without significant effort to convert data lake and warehouse architectures to work on different public clouds. 

The amount of data collected and analytical computations on such data in the cloud will continue to dramatically increase. These trends should increase usage of Snowflake’s platform in the years to come, which will, in turn, strengthen Snowflake’s stickiness and compound the benefits of its network effect. While today Snowflake benefits from being unique in its multicloud platform strategy, it’s possible that new entrants or even public cloud service providers will encroach more on the company’s offerings. Nonetheless, Snowflake is well equipped with a fair head start that will keep the company in best-of-breed territory for the long run.

Financial Strength

Snowflake is financially stable, given the early stages of the company, analyst is confident it will generate positive free cash flow in the long term. Snowflake had cash and cash equivalents of $3.9 billion at the end of fiscal 2021 with zero debt on its balance sheet. Undergoing its IPO in the 2020 calendar year, Snowflake raised over $3 billion from the offering. The cash generated from its IPO will act as ample buffer for Snowflake to keep its cash and cash equivalents positive without taking on debt over the next 10 years. It is forecasted that Snowflake will become free cash flow positive in 2026, after which it is believed, it will continue to invest heavily back in its business rather than distributing dividends or completing major repurchases of its stock. 

Bulls Say’s

  • Snowflake could remain the only multicloud offering of its kind for much longer than anticipated, allowing it to increase its top line more with minimal pricing pressure. 
  • Snowflake could move to a subscription model from a usage-based model, boosting its monetization of its products. 
  • Snowflake could expand to other multicloud data needs, pushing spending per customer to greater heights.

Company Profile 

Founded in 2012, Snowflake is a data lake, warehousing, and sharing company that came public in 2020. To date, the company has over 3,000 customers including nearly 30% of the Fortune 500 as its customers. Snowflake’s data lake stores unstructured and semi structured data that can then be used in analytics to create insights stored in its data warehouse. Snowflake’s data sharing capability allows enterprises to easily buy and ingest data almost instantaneously compared with a traditionally months-long process. Overall, the company is known for the fact that all its data solutions that can be hosted on various public clouds.

(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 Technology Stocks

REA reports solid revenue up by 25%, EBITDA up by 27%

Investment Thesis:

  • Clear no. 1 market position in online property classifieds, with consumers spending over more time on realestate.com.au app than the number two website. 
  • Growth opportunities via expansion into Asia and North America.
  • Recent strategic partnerships with National Australia Bank (property finance) could potentially be positive in the long term. 
  • Upside in key markets – particular in areas where REA is under-penetrated and could potentially win market share from competitors. 
  • New product developments to increase customer experience. 
  • Regular price increases help offset listing pressure. 

Key Risks:

  • Competitive pressures lead to a further de-rating of the PE-multiple.
  • Volume (listings) outlook remains subdued in the near term. 
  • Execution risk with Asia/North America strategy.
  • Failing to get an adequate return on the recent acquisition of iProperty.
  • Value/EPS destructive acquisitions. 
  • Decline in Australian property market.
  • Given REA trades on a very high PE-multiple, underperforming to market estimates can exacerbate a share price de-rating.
  • Recent tightening of lending practices by banks would affect Financial services business.

Key highlights:

  • REA reported a strong 1H22 result which was largely in line with expectations. 
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%. 
  • The core Australian residential business did the heavy lifting, with revenue up +31%, driven by solid residential buy listings growth of +17% over the half (up +11% in 1Q & up +22% in 2Q despite lockdowns in Melbourne & Sydney).
  • Management did note that listings in Jan-22 had been unusually high which may lead to a decent 3Q performance, however 4Q is likely to be lower.
  • The current negative sentiment towards technology stocks in an increasing interest rates environment also adds further pressure to REA’s share price.
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%.
  • REA delivered positive operating jaws over the half = revenue up +25% – operating expenses growth +17%, with growth in costs driven by higher headcount and salaries in a tight labour market.

Company Description: 

REA Group (REA) provides online property listings, web management, financial services and data analytics to the real estate industry via advertising services. For consumers, REA offers the largest online real estate search engine in Australia. The Company also has operations and growing presence in Asia and other parts of the world.

(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

Suncorp’s Battered Bottom Line Masks Positive Momentum Across the Group

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy and Outlook:

There are positive signs for the future of Suncorp and perhaps early validation of management’s strategic investments though. Australian gross written premiums, or GWP, increased 5%, with the insurer benefiting from premium rate increases as well as growth in policy numbers. In New Zealand, increases were even larger, with GWP up 14%. Improved digital sales and service capabilities, including claims lodgment and tracking, should bring cost savings and improve the customer experience. Lifting marketing of key brands and simplifying product offerings are also likely helping. Cost inflation in home and motor insurance in the mid-single digit percent range has so far been offset by rate increases and further negated by work the insurer is doing to manage costs. Tools to better allocate work to builders and benchmark repair costs are examples.

Suncorp has a point with areas government should focus on. Improve public infrastructure, provide subsidies to improve resilience of private dwellings, address planning laws and approval processes, and remove inefficient taxes and charges on insurance premiums.

Financial Strength:

Suncorp has a track record of returning surplus capital to shareholders via special dividends and share buybacks. The fully franked final dividend of AUD 23 cents is down from AUD 26 cents per share last year, with the payout ratio at the top end of the 60%-80% target range. Home loans grew at an annualised rate of 5.3%, but net interest margins, or NIM, tumbled 12 basis points to 1.97%. Growth in premiums and home loans have come at cost. Operating expenses increased 5.8% as Suncorp ramps up spend on digital initiatives and marketing, and insurance commissions grow with premiums. Digital sales made up 38% of Australian insurance sales in the half, up from 33% in first-half fiscal 2021, with some brands already at 50%.

Company Profile:

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(Source: Morningstar)

General Advice Warning

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

Categories
Global stocks

Raising FMC’s Fair Value Estimate to $135 on Improved Outlook; Shares Slightly Undervalued

Business Strategy and Outlook

FMC is a pure play crop chemicals producer. The company is one of the five largest patented crop protection companies globally. FMC acquired Cheminova in 2015, increasing exposure to Europe and expanding its portfolio of crop chemicals. In late 2017, FMC acquired DuPont’s divested crop chemicals portfolio, which included blockbuster insecticide Rynaxypyr. At the same time, the company divested non-crop chemicals businesses. FMC is fairly balanced from a geographical standpoint among North America; Latin America; Asia; and Europe, the Middle East, and Africa. Latin America is the largest region, contributing over 30% of revenue, while the remaining regions typically account for 20% to 25% each. The company is also balanced from a crop exposure standpoint, with soybeans being the largest at nearly 20% of total revenue.

As emerging-market food consumption rises, demand for patented crop chemicals should rise to facilitate yield improvements. FMC’s pipeline of new premium products should generate sales growth above the general crop chemical industry. Both acquisitions greatly enhanced FMC’s research and development pipeline, which should allow the company to continue producing new crop chemicals as older products roll off patent. The company plans to launch 10 new molecules over the next decade that feature new modes of action. FMC also plans to launch new biologicals, or environmentally friendly pesticides. These new products should help farmers fight resistant pests, which are increasingly rendering older crop chemicals ineffective and require new crop chemicals.

Financial Strength

FMC is in good financial health. FMC’s leverage ratios fluctuate throughout the year as the company is subject to seasonality. However, unless the firm makes a transformative acquisition, It is expected that leverage ratios will generally remain healthy. With no large planned capital additions, the company should maintain its financial health and should be able to meet all its financial requirements, including dividends, going forward. FMC reported solid fourth-quarter results as adjusted EBITDA was up 30% year on year versus the prior-year quarter driven by higher volumes, a mix shift toward premium products, and increased prices.

On a qualitative basis, the results were in line with our thesis that FMC will continue to benefit from an increased proportion of new premium products that will drive revenue growth and margin expansion. FMC shares rallied on the company’s strong results and solid guidance for further profit growth in 2022. At current prices, we view shares as slightly undervalued, with the stock trading slightly below our updated fair value estimate but in 3-star territory. A major driver of our improved outlook comes from FMC’s growth of its Biologicals portfolio. Biologicals are pesticides, fertilizers, and other plant health inputs that are made from living or naturally occurring materials, versus traditional synthetic crop chemicals.

Bulls Say’s

  • FMC has transformed its portfolio to focus on crop chemicals, which should see strong growth prospects as yield gains are needed to support rising food consumption from emerging markets.
  • FMC has a large presence in Brazil, one of the few places with meaningful growth potential in arable land.
  • FMC’s pipeline should allow the company to continue expanding profits as the patents expire for its two largest molecules over the next decade.

Company Profile

FMC is a pure-play crop chemical company. The company has diversified its sales to create a balanced crop chemical portfolio across geographies and crop exposure. Through acquisitions, FMC is now one of the five largest patented crop chemical companies and will continue to develop new products through its research and development pipeline.

(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

BWP’s portfolio value increased by $280.6m to $2,916.7m

Mortgage, investment, real estate and property concept. Dollar money and house keys

Investment Thesis

  • Stable and sustainable distribution yield.
  • Trades on a ~6.4% premium to NTA.
  • Strong and experienced management team.
  • WES stake in BWP (24.75%) provides security against risk of non-renewal of leases by Bunnings. 
  • High quality property portfolio with long weighted average lease expiry, strong lease covenants, and high occupancy.
  • Low interest rate environment is encouraging for the housing industry and hardware sales however any sudden increase in interest rates provides risk to both revenue and debt financing costs. 
  • Solid balance sheet with low gearing levels. 
  • Risk of poor execution in redevelopment of assets vacated by Bunnings to other uses.

Key Risks 

  • Any slowdown in demand and net absorption for hardware space.
  • Persistent lower inflation (and deflation) affecting retailers.
  • Economic conditions affect property fundamentals such as values (cap rates and rental growth), vacancies, retail activity (and hence demand for space at big-box retail sites). 
  • Risk of non-renewal of leases by Bunnings Group. 

Property Portfolio Update

  • During 1H22, BWP’s entire investment property portfolio was revalued (10 by independent valuers and remaining 63 properties subject to directors’ valuations). BWP’s weighted average capitalisation rate was 5.11% (versus 30 June 2021: 5.65%; 31 December 2020: 5.84%).
  • BWP’s portfolio value increased by $280.6m to $2,916.7m (which captures capital expenditure of $2.3m and revaluation gains of $291.8m, after adjusting for the straight-lining of rent of $1.0m and less net proceeds from divestments of $14.5m (In July 2021, BWP finalised its sale for its Mindarie, Western Australia property for $14.5m and did not acquire any assets during 1H22).
  • Occupancy and average lease expiry of 97.6% and 4.3 years (flat versus December 2021) respectively.
  • 47 leases were subject to annual fixed or CPI reviews during 1H22 with a weighted average increase in annual rent for 23 CPI reviews of 3.3% and the 24 fixed reviews was 3.4%.
  • Excluding rental income form properties acquired, upgraded or vacated and re-based since the pcp, rental income increased by 2.2% over the pcp, which betters 1.8% for the 12 months to 31 December 2021.

Company Profile 

BWP Trust (BWP) is a real estate investment trust focused on operating, owning, and divestments and acquisitions of large format retailing properties, in particular, Bunnings Warehouses, leased to Bunnings Group Ltd (‘Bunnings’). Bunnings is the leading retailer of home improvement products in Australia and New Zealand and is a major supplier to builders and trades people in the housing industry. BWP is managed by an external responsible entity, BWP Management Ltd who is paid an annual fee based on the gross assets of BWP. Both Bunnings and BWP Management Ltd are wholly-owned subsidiaries of Wesfarmers (WES), one of Australia’s largest listed companies. WES owns ~24.75% of BWP. Currently, BWP is the largest owner of Bunnings Warehouse sites, with a portfolio of ~80 stores. Eight properties have adjacent retail showrooms leases to other retailers.  BWP also owns one stand-alone showroom property. The assets have a current value of ~$2.9bn, WALE of ~4 to 5 years, 97.5% occupancy rate.

(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

Netflix Inc Subscriber Growth Slows Down; while Reported Improved profitability in 4Q21

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Investment Thesis

  • Trades on multiples which are susceptible to de-rating should growth rates miss expectations.
  • An increase and escalation of intense competition by rivals such as Walt Disney (Disney+) and Apple Inc (Apple TV+).
  • NFLX is transitioning from solely content distribution to content creation which presents execution risk.
  • Significant existing user base, which is continuing to grow strongly, particularly in the International market. 
  • Competitive positioning globally, as a market leader not only in the industry but starting to carve a leading position against cable television.  
  • International expansion opportunities across emerging markets as well as solidified position in established markets (US). 
  • Exclusive contracts with best producers including Sony Entertainment, Warner Bros and Universal Pictures. 
  • Growing demand for Netflix exclusives.
  • Flexibility to pick up content driven away by TV to customize viewing according to user tastes and preferences. 

Key Risk

  • High valuation and trading multiples which are susceptible to de-rating should growth rates miss expectations.
  • Escalation of intense competition and streaming wars, especially with Walt Disney(DIS) who own a strong content portfolio covering Disney, Pixar, Marvel, Star Wars, and National Geographic brands and sports streaming service ESPN+. DIS also holds a majority stake in Hulu, which is an online streaming service provider.
  • Execution risks around content creation versus content distribution.
  • Increasing competition based on price or exclusive content contracts.
  • Investment into original content creation fails to live up to the success of exclusive contract deals of existing content. 
  • Bandwidth issues in emerging economies posing difficulties in penetrating these markets.
  • The long-term and fixed cost nature of content commitments hinder NFLX’s operating flexibility.

FY Q21 Results Summary

  • Revenue grew +16% over pcp with a +8.9% increase in average paid memberships and +7% increase in ARM (average revenue per membership) on both a reported and FX neutral basis. The Company ended the quarter with 222million paid memberships with 8.3million paid net adds in the quarter, with UCAN region adding 1.2million paid memberships (vs 0.9million in pcp), marking strongest quarter of member growth in this region since the early days of Covid-19 in 2020. APAC grew paid memberships by 2.6million (vs 2million in pcp) with strong growth in both Japan and India. EMEA was the largest contributor to paid net adds adding 3.5million vs 4.5million in pcp and LATAM delivered paid net adds of 1million vs 1.2million in pcp. 
  •  Operating margin of 8.2% was down -620bps over pcp driven by large content slate in the quarter (margin was above beginning of quarter forecast of 6.5% due to slightly lower than forecasted content spend), resulting in FY21 operating margin of 20.9%, above management’s 20% guidance forecast. 
  • EPS increased +11.8% over pcp to $1.33 and included a $104m non-cash unrealized gain from FX remeasurement on Euro denominated debt. 
  •  Net cash generated by operating activities was an outflow of $403m vs outflow of $138m in pcp resulting in FCF of negative $569m vs negative $284m in pcp (for FY21, FCF amounted to negative $159m, in-line with management’s expectation for approximately break-even).

Company Profile

Netflix Inc (NASDAQ: NFLX) is an American company operating a global entertainment streaming service, which provides subscription video on demand to movies and television episodes over the Internet. The Company operates in three different segments, Domestic Streaming (US market comprising almost half of the business), International Streaming and Domestic DVD (1% of revenue). These businesses generate membership fees as well as revenues from DVD by mail. Netflix provides its services in over 190 countries with over 150 million members, distributing user focused content that fits consumer tastes and preferences.

(Source: Banyantree)

  • Relative to the pcp: (1) 

General Advice Warning

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First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Business Strategy and Outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Cost inflation encouraged large mining companies to outsource capital-intensive, lower-returning processes. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine has sustained earnings momentum. 

The financial record to now is impressive and the balance sheet is unleveraged. Mineral Resources has diversified its earnings streams and improved financial disclosure. In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining Services and Processing contributed 96% of group EBIT. Step forward to fiscal 2020 and Mineral Resources has materially improved its level of financial disclosure, and the greater depth of clients and number of project sites also reduces risk. We think the business model is demonstrably sustainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness.

Mineral Resources’ mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, Mining Services is core. Twelve 5 to 15 million tonne per year crushing and screening plants are owned and operated on 12 sites. Clients substantially include the largest mining companies and contract books have been renewed over time leading to volume growth. Power is supplied by mining companies and margins are comparatively stable. Bolstering growth in the core business centred on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights.

First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Group revenue fell 12% to AUD 1.4 billion reflecting a sharp 40% drop in realised iron ore price, only partially countered by improved lithium pricing and higher mining services volumes and revenue.Underlying first-half NPAT collapsed to a loss of AUD 36 million against a previous corresponding period, or pcp, profit of AUD 430 million. Despite this, Morningstar analyst increased its fair value to A$47.30 as they don’t think the drivers behind the first-half earnings miss affect the longer-term outlook, and time value of money is an ever present tailwind.

Financial Strength

Mineral Resources is in reasonable financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020, from a net debt position of AUD 872 million at end June 2019. But strong net cash outflows in first-half fiscal 2022, including high costs associated with COVID-19, see the net cash balance deteriorate to an AUD 583 million net debt position as of December 2021 . The current circumstance is unusual and a return to the normal territory is expected for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. A failed investment in Aquila Resources in 2014 attempted to leverage Mineral Resources into Aquila’s West Pilbara Iron Ore Project, and was symptomatic of where Mineral Resources found itself. Booming lithium markets directed the investment decision.

Bulls Say 

  • Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings. 
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth. 
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  • Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile

Mineral Resources listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western 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.