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Stevanto’s Near Term Outlook Foresight Uncertain

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Business Strategy and Outlook

Stevanato is the market leader in pen cartridges and presterilized vials and holds the number position in prefillable syringes (behind Becton Dickinson). The company is a key supplier in the drug delivery supply chain, and provides drug containment and primary packaging solutions to 41 of the top 50 global pharma companies. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products. 

Stevanato aims to increase the percentage of product sales from high value solutions, which refers to products with proprietary intellectual property and greater complexity, such as presterilized drug containment and integrated self-injector pen and wearable devices. The company is prioritizing investment in research and development and broadening its offering through M&A. Capacity expansion is also a key component of Stevanato’s long-term strategic plan, and capital expenditures are likely to remain elevated over the next year or two. Competition for skilled employees is extreme, and future growth will depend on effectively hiring and retaining talent. 

Both the biopharmaceutical and diagnostic segments are expected to benefit from an increased contribution in high value solutions over time, which has been growing 20% year over year and now represents about 23% of consolidated revenue. It is anticipated the ongoing shift to high-value will provide a material tailwind for margin over the next five to 10 years, and also contribute to robust top line growth. It is seen an uncertain near-term outlook for the business, with both positives and negatives related to the ongoing pandemic. Some drug trials have postponed or delayed, leading to lower sales growth for some customers’ drug portfolios. However, this has been mitigated by the pressing need for vaccines and treatments, which has allowed Stevanato to enjoy compound annual top line growth near 25% over the last two years. The company supplies vials and syringes to about 90% of currently approved vaccines.

Financial Strength

Stevanato has a sound financial position.As of September 2021, total cash position in excess of long-term debt on the balance sheet was EUR 154 million. This was mainly related to the firm’s IPO from July 2021, which raised EUR 154 million. In analysts’ view, Stevanato has more than sufficient capital to fund increasing capacity investment, and it can also be seen the potential for tuck-in acquisitions to broaden the firm’s value proposition in the drug delivery supply chain.In the near term, however, Stevanato’s expansion plan is likely to be the focus of capital deployment. Because of a higher level of capital investment, the company reported free cash flow of negative EUR 9.9 million for the third quarter of 2021. It is anticipated significant earnings and cash flow growth over the next few years, and while free cash flow is likely to be close to flat in 2022, it is anticipated free cash flow above EUR 20 million in 2023. It is believed that it’s possible that some additional debt might be needed to cover cash flow needs, but, considering Stevanato’s current low degree of financial leverage, it is not to be concerned with an increase in debt at or below EUR 500 million.

Bulls Say’s

  • Stevanato has room to bring customers up the value chain to higher-value products and services, giving it a lengthy tailwind for earnings growth and margin expansion. 
  • In contrast to peers, Stevanato can use in-house produced glass vials and syringes for integrated selfinjector systems, reducing the number of vendors for customers and providing Stevanato with a possible cost advantage. 
  • As large economies such as India and China implement more stringent pharmaceutical standards, Stevanato stands to become a key cog in the supply chain in those countries.

Company Profile 

Italy-based Stevanato Group is a provider of drug containment, drug delivery and diagnostic solutions to the pharmaceutical, biotechnology and life sciences industries. It delivers an integrated, end-to-end portfolio of products, processes, and services that address customer needs across the entire drug life cycle including development, clinical, and commercial stages. Stevanato’s revenue is geographically diversified, with 60% of sales from Europe, the Middle East and Africa (EMEA), 27% in North America, 10% in Asia-Pacific (APAC), and 3% in South America. 

(Source: MorningStar)

General Advice Warning

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

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Dividend Stocks

TransDigm’s Commercial Aerospace Business Seen Performing Well During First Quarter

Business Strategy and Outlook

TransDigm Group operates as a holding company with a clear, consistent strategy: acquire businesses with proprietary aircraft components, primarily sole-source products, with high aftermarket content. TransDigm’s businesses manufacture and sell replacement parts for ignition systems, pumps, actuators, and flight controls, among other things. Since aircraft must be fully maintained to be operational and TransDigm is the only provider of many of their products, the company has significant pricing power. The firm operates with a high degree of financial leverage to amplify operating results. 

This strategy works because potential competing spare parts must be licensed by the Federal Aviation Administration to be identical to the original product. Since TransDigm’s designs are proprietary, it is challenging for would-be competitors to prove that their design is identical. This barrier to entry allows TransDigm to extract value from regulator-required maintenance and enables the firm to aggressively price spare parts. TransDigm had its IPO in 2006, after 13 years of private ownership, and it still uses private equity strategies of creating value. The firm aims to improve the operations of its target companies by increasing prices, productivity, and encourage employees to generate new business. TransDigm is highly decentralized and has numerous business units. It encourages business unit leaders to think like owners by setting aggressive targets for managers and allowing them to achieve these goals however they choose to. 

The coronavirus pandemic has substantially reduced travel and consequently grounded a large chunk of the global passenger fleet, though domestic air travel is rebounding. The progression of the global fleet age remains an open question with large ramifications for TransDigm. If airlines use the current fleet to bring back capacity during a potential commercial aviation recovery, TransDigm would benefit from the continued maintenance of these aircraft. If airlines take delivery of new aircraft and use newer, under-warranty aircraft to bring back capacity, it is likely to reduce TransDigm’s addressable market for several years.

Financial Strength

TransDigm considers itself a private-equity-like public company, so its capital allocation is meaningfully different than most aerospace and defense companies that are covered. TransDigm continuously utilizes financial leverage–gross debt is usually 7-8 times unadjusted EBITDA. While Analysts’ are normally concerned about such high leverage, it is alleged TransDigm’s private equity roots make it quite capable of handling debt. Management has been in place and using the same leveraged strategy since the founding of the firm in 1993. It is not anticipated that the company will reduce leverage meaningfully. The company has been diligent at keeping debt maturities several years away. The company does not have a material debt maturity coming due until 2024, which is seen, gives the company ample time to recover from the COVID-19 challenges to aviation. TransDigm was able to raise debt during April 2020, when airlines were struggling the most. It is alleged that TransDigm would be able to raise additional debt from capital markets if necessary because of the highly visible pricing power and intellectual property backing the firm.

Bulls Say’s

  • Roughly three quarters of TransDigm’s sales are solesource, which gives it immense pricing power. 
  • About 90% of TransDigm’s products are proprietary, which protects its sole-source incumbency. 
  • TransDigm has historically been able to acquire companies at reasonable prices and meaningfully improve operations

Company Profile 

TransDigm manufactures and services a diverse set of components for commercial and military aircraft. The firm organizes itself in three segments: a power and control segment, an airframe segment, and a small nonaviation segment. It operates as an acquisitive holding company that targets firms with proprietary, sole-source products with substantial aftermarket content. TransDigm regularly employs financial leverage to amplify operating results. 

(Source: MorningStar)

General Advice Warning

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

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Aecom Poised To Benefit From Favourable Long-Term Tailwinds In Infrastructure and Sustainability Solutions

Business Strategy and Outlook

In recent years, Aecom has transformed its portfolio and focused on growing its professional services business. The firm is in the process of exiting several business lines including fixed-price combined cycle gas power plant construction, at-risk oil and gas construction, and international at-risk construction projects. Furthermore, in January 2020, Aecom completed the sale of its management services business. It is seen Aecom’s transformation favourably and believe that the strategic shift will result in a less volatile and more profitable portfolio.

Furthermore, Aecom has improved its profitability thanks to several recent initiatives, including a $225 million general and administrative cost reduction plan completed in fiscal 2019, real estate consolidation, and a plan to exit over 30 countries to focus on the most profitable markets. It is encouraging that Aecom’s margin expansion thus far and see room for further upside, especially in the international business. It can be noted that there is a significant difference in profitability between the Americas and international segments: the adjusted operating margins on a net service revenue basis are in the mid-teens in the former but only mid-single digits in the latter. Considering an over 1,000-basis-point differential, it is viewed as room for further margin expansion in the international segment, and it is alleged the firm will continue to work to narrow the gap by further simplifying the business and completing its planned 30 country exits to focus on higher-margin markets. 

Analysts remain optimistic about the long-term outlook for Aecom as it is alleged that it’s poised to benefit from favourable long-term tailwinds in infrastructure and sustainability solutions. The company has a strong competitive position in the transportation, water, and environment end markets. As such, it is likely, Aecom is well positioned to capitalize on opportunities created by a growing focus on ESG concerns, including areas such as electrification of transit, clean water, and PFAS.

Financial Strength

At Dec. 31, 2021, the company owed roughly $2.2 billion in long-term debt while holding approximately $1.1 billion in cash and equivalents. Debt maturities are reasonably well laddered over the next few years. Additionally, Aecom can tap into its $1.15 billion revolving credit facility. It is projected that Aecom will generate average annual operating cash flow of approximately $700 million over the next five years. Considering that an investment-grade credit rating can have strategic importance for E&C firms and boost competitiveness in winning new awards, it is likely, Aecom to prioritize paying down its debt balance. In the long-run, it is anticipated the firm to maintain its leverage ratio within management’s target range of 2.0 times to 2.5 times. Additionally, it is alleged that management will continue to allocate excess capital to opportunistic stock repurchases.

Bulls Say’s

  • Thanks to its diversified portfolio, it is anticipated Aecom to take advantage of growth opportunities in sectors with favourable long-term prospects, including transportation and water. 
  • Through its Aecom Capital segment, the firm should be able to capitalize on growth in public-private partnerships (P3), which I said to have some economic moat potential due to customer switching costs. 
  • Following the 2015 acquisition of Hunt Construction, Aecom became the leading nationwide builder of iconic sports arenas, such as the Los Angeles Rams NFL stadium.

Company Profile 

Aecom is one of the largest global providers of design, engineering, construction, and management services. The firm serves a broad spectrum of end markets including infrastructure, water, transportation, and energy. Based in Los Angeles, Aecom has a presence in over 150 countries and employs 51,000. The company generated $13.3 billion in sales and $701 million in adjusted operating income in fiscal 2021

(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

Freight Demand To Remain Strong In Near Term, Benefitting Cummins

Business Strategy and Outlook

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

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

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

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: MorningStar)

General Advice Warning

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

Categories
Shares Small Cap

Stevanto’s Near Term Outlook Foresight Uncertain

Business Strategy and Outlook

Stevanato is the market leader in pen cartridges and presterilized vials and holds the number position in prefillable syringes (behind Becton Dickinson). The company is a key supplier in the drug delivery supply chain, and provides drug containment and primary packaging solutions to 41 of the top 50 global pharma companies. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products. 

Stevanato aims to increase the percentage of product sales from high value solutions, which refers to products with proprietary intellectual property and greater complexity, such as presterilized drug containment and integrated self-injector pen and wearable devices. The company is prioritizing investment in research and development and broadening its offering through M&A. Capacity expansion is also a key component of Stevanato’s long-term strategic plan, and capital expenditures are likely to remain elevated over the next year or two. Competition for skilled employees is extreme, and future growth will depend on effectively hiring and retaining talent. 

Both the biopharmaceutical and diagnostic segments are expected to benefit from an increased contribution in high value solutions over time, which has been growing 20% year over year and now represents about 23% of consolidated revenue. It is anticipated the ongoing shift to high-value will provide a material tailwind for margin over the next five to 10 years, and also contribute to robust top line growth. It is seen an uncertain near-term outlook for the business, with both positives and negatives related to the ongoing pandemic. Some drug trials have postponed or delayed, leading to lower sales growth for some customers’ drug portfolios. However, this has been mitigated by the pressing need for vaccines and treatments, which has allowed Stevanato to enjoy compound annual top line growth near 25% over the last two years. The company supplies vials and syringes to about 90% of currently approved vaccines.

Financial Strength

Stevanato has a sound financial position.As of September 2021, total cash position in excess of long-term debt on the balance sheet was EUR 154 million. This was mainly related to the firm’s IPO from July 2021, which raised EUR 154 million. In analysts’ view, Stevanato has more than sufficient capital to fund increasing capacity investment, and it can also be seen the potential for tuck-in acquisitions to broaden the firm’s value proposition in the drug delivery supply chain.In the near term, however, Stevanato’s expansion plan is likely to be the focus of capital deployment. Because of a higher level of capital investment, the company reported free cash flow of negative EUR 9.9 million for the third quarter of 2021. It is anticipated significant earnings and cash flow growth over the next few years, and while free cash flow is likely to be close to flat in 2022, it is anticipated free cash flow above EUR 20 million in 2023. It is believed that it’s possible that some additional debt might be needed to cover cash flow needs, but, considering Stevanato’s current low degree of financial leverage, it is not to be concerned with an increase in debt at or below EUR 500 million.

Bulls Say’s

  • Stevanato has room to bring customers up the value chain to higher-value products and services, giving it a lengthy tailwind for earnings growth and margin expansion. 
  • In contrast to peers, Stevanato can use in-house produced glass vials and syringes for integrated selfinjector systems, reducing the number of vendors for customers and providing Stevanato with a possible cost advantage. 
  • As large economies such as India and China implement more stringent pharmaceutical standards, Stevanato stands to become a key cog in the supply chain in those countries.

Company Profile 

Italy-based Stevanato Group is a provider of drug containment, drug delivery and diagnostic solutions to the pharmaceutical, biotechnology and life sciences industries. It delivers an integrated, end-to-end portfolio of products, processes, and services that address customer needs across the entire drug life cycle including development, clinical, and commercial stages. Stevanato’s revenue is geographically diversified, with 60% of sales from Europe, the Middle East and Africa (EMEA), 27% in North America, 10% in Asia-Pacific (APAC), and 3% in South America. 

(Source: MorningStar)

General Advice Warning

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

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Property

Charter Hall Long WALE REIT (CLW) reports solid earnings up by 5.6%

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Investment Thesis:

  • Trading at a discount to NTA and our blended valuation. 
  • Economic conditions appear to be improving ahead of expectations post the Covid-19 related impact – this should be positive for asset revaluations and rents. 
  • Strong history of delivering continuing shareholder return and dividends.
  • Solid balance sheet position.
  • Strong property portfolio metrics.
  • Selective asset acquisitions.
  • Expiry risk is relatively low in the near-term. 
  • Attractive yield in the current low interest rate environment. 

Key Risks:

  • Regulatory risks. 
  • Deteriorating property fundamentals, including negative rent revisions. 
  • Deterioration in economic fundamentals leading rent deferrals etc. 
  • Sentiment towards REITs as bond proxy stocks impacted by expected cash rate hikes.
  • Deterioration in funding costs.

Key highlights:

  • Charter Hall Long WALE REIT (CLW) reported a solid set of 1H22 results reflecting operating earnings of $97.8m, or 15.31cps, up +5.6%, and distributions of 15.24cps, up 5.1% on pcp.
  • CLW’s portfolio retained strong operating metrics – at period-end, CLW’s portfolio is 99.9% occupied and comprised 549 properties with a long WALE of 12.2 years.
  • In the half, CLW also completed its acquisition for $814m for a 50% interest in the ALE Property Group, acquired in partnership with Hostplus. The ALE Property Portfolio comprises 78 high quality pub assets, of which 74 bottle stores are in 99% metropolitan locations.
  • The ALE Property Portfolio comprises 78 high quality pub assets, of which 74 bottle stores are in 99% metropolitan locations.
  • The stock currently trades at a discount to its net tangible assets, most likely as investors are concerned over the impact of Covid-19 and associated regulatory lockdown measures, and its impact on property valuations.
  • However, over the longer term, based on the quality of CLW’s management team and property portfolio, and sustainable dividend yield.
  • CLW’s total property portfolio value increased ~$1.42bn to $6.98bn, driven by $923m of acquisitions and $532m in property revaluation uplift.

Company Description: 

Charter Hall Long WALE REIT (ASX: CLW) is an Australian REIT listed on the ASX and investing in high quality Australasian real estate assets (across office, industrial, retail, agri-logistics and telco exchange) that are  redominantly leased to corporate and government tenants on long term leases. CLW is managed by Charter Hall Group (ASX: CHC). 

(Source: Banyantree)

General Advice Warning

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

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Resale looks like a bargain as Poshmark has $26 fair value estimate

Business Strategy and Outlook:

Poshmark is among the largest apparel resale platforms on the market, boasting an interactive marketplace that benefits from a triumvirate of secular tailwinds: social commerce, an ongoing mix-shift toward online retail sales, and the stratospheric growth of the apparel resale market. The firm’s strategy coalesces around four key priorities: product innovation, category expansion, international growth, and buyer acquisition. We take a neutral view of management’s roadmap, with our research leaving us unconvinced that Poshmark’s international thrusts are poised to generate excess returns for investors, and surmise that purportedly adjacent categories like consumer electronics, art, or pets may not be concordant with the firm’s apparel core competency.

As a slew of firms have entered the resale space, competition has arisen around exclusive access to customers, inventory assortment, and distribution channels, with long-term equilibrium remaining uncertain. Consolidation looks inevitable, particularly as the scope of those companies’ offerings see increasing overlap, commensurate with category, price point, and geographic expansion. Poshmark’s right to win hinges on its ability to convincingly answer the “why Poshmark?” query, attracting platform participants with some combination of competitive seller services, frictionless listing, quick inventory turnover, attractive fees, broad assortment, and authentication services.

Financial Strength:

Poshmark’s financial strength is viewed as sound. The firm carries no long-term debt, has $236 million in cash and cash equivalents on its balance sheet as of the third quarter of 2021, and figures to be free cash flow positive over two of the next three years. The management has adequate wiggle room to pursue moat-bolstering investments, while narrowing operating losses should provide a route to enduring profitability by our midcycle (2025) forecasts. Following its IPO, the firm’s capital structure has simplified meaningfully, retiring $50 million in convertible notes issued during the third quarter of 2020 that carried a panoply of derivative clauses. Shareholder dilution hereafter should be limited to those shares issued in the normal course of business, with approximately 8.6 million options and RSUs outstanding (just north of 11% of free float) as of the third quarter balance sheet date. Poshmark’s waterfall of investment priorities is viewed as consistent with other high growth firms: pursuing internal investments and strategic mergers and acquisitions.

Bulls Say:

  • Five straight quarters of operating profitability (ending in the third quarter of 2021) suggest a strong underlying business model once acquisition costs normalize. 
  • Early traction in Australia and Canada could augur well for long-term success in those markets. 
  • Adding APIs and analytics tools for wholesalers and liquidators could add another platform use case, while generating higher units per transaction, average order values, and fulfillment cost leverage.

Company Profile:

Poshmark is one of the largest players in a quickly growing e-commerce resale space, connecting more than 30 million users on a platform that sells men’s and women’s apparel, accessories, shoes, and more recently consumer electronics and pet products. The marketplace operates in four countries–the U.S., Canada, Australia, and India–with a capital-light, peer-to-peer model that dovetails nicely with prevailing trends toward social commerce, apparel resale, and an ongoing pivot toward the e-commerce channel. With $1.4 billion in 2020 gross merchandise volume, or GMV, we estimate that the firm captured just shy of 10% of the global resale market, as rolling lockdowns and tangled supply chains provided a meaningful impetus for channel trial during 2020 and 2021.

(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

Regulatory advantaged Las Vegas Sands positioned to benefit from Asian demand recovery in 2022

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy and Outlook:

Although the pandemic and government regulation continue to materially affect near-term demand in Macao (68% of estimated 2024 EBITDA), Las Vegas Sands and the gaming enclave are still thought of as well positioned for long-term growth. Not only does Sands hold a dominant mass and nongaming position on the attractive Cotai Strip, but the company will reinvest proceeds from the planned $6.25 billion sale of its Vegas assets (scheduled to close in 2022) in its Asian assets, strengthening the brand locally. Meanwhile, Sands’ position in the profitable Singapore gaming market (32% of estimated 2024 EBITDA), where a duopoly remains in place through 2030, is buoyed by the company expanding its presence with the renovation of its existing towers in 2022-23 and development of a fourth tower scheduled to open in 2025, solidifying our view of the firm’s long-term growth.

Although the pandemic and government regulation present material potential demand headwinds, analysts continue to forecast annual mid-single-digit steady-state visitation growth in Macao during 2025-30, supported by China outbound travel that they expect average high-single-digit annual growth during that time. Also, upcoming developments are expected that add attractions and improve Macao’s accessibility, which will improve the destination’s brand, supporting our constructive long-term view on Macao.

Financial Strength:

Las Vegas Sands entered 2020 with the industry’s strongest balance sheet, as its 1.5 times net debt/adjusted EBITDA was well below the 4 times covenant level. But given the material impact from COVID-19 on 2020-22 gaming demand, the company has suspended its dividend and share repurchases. That said, Las Vegas Sands ended 2021 with $1.9 billion in cash and $4 billion available in credit. This liquidity provides the company enough liquidity to operate at near zero revenue into 2023, assuming a monthly cash burn of around $350 million. Its liquidity profile stands to be enhanced further with the planned sale of its Las Vegas assets for $6.25 billion in 2022.

The proceeds from the sale are expected to be reinvested in its existing Macao (if the government allows) and Singapore properties and used to pay down debt in the back half of our 10-year forecast. As a result, the company’s financial health remains solid.

Bulls Say:

  • Sands is well positioned to exploit growth opportunities in the attractive Asia casino market with a dominant position in Singapore (around mid-60s EBITDA share) and China (around mid-30s EBITDA share). 
  • The company has a narrow economic moat, thanks to its possession of one of only two licenses to operate casinos in Singapore and one of only six licenses to operate casinos in China. 
  • Sands’ continued investment in Macao and Singapore support its competitive position.

Company Profile:

Las Vegas Sands is the world’s largest operator of fully integrated resorts, featuring casino, hotel, entertainment, food and beverage, retail, and convention center operations. The company owns the Venetian Macao, Sands Macao, Londoner, Four Seasons Hotel Macao, and Parisian in Macao, the Marina Bay Sands resort in Singapore, and the Venetian and Palazzo Las Vegas in the U.S. (which it plans to sell to Apollo and VICI for $6.25 billion in 2022). Sands are expected to open a fourth tower in Singapore in 2025. After the sale of its Vegas assets, the company will generate all its EBITDA from Asia, with its casino operations generating the majority of sales.

(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 Philosophy Technical Picks

La Nina and Investment Markets Wipe Out Profits, but Suncorp Inches Closer to Management Targets

Business Strategy and Outlook

Suncorp is a well-capitalised financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons and Terri Scheer. In New Zealand key brands include Vero, AA Insurance and Asteron Life. Some brands are specific to certain states, but at a group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia. 

The group’s exposure to the Queensland market, where large natural peril events have tended to be larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events. Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounting for more than half of total lending. Suncorp Bank’s smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors.

Financial Strength 

Suncorp Group is in good financial health. As at Dec. 31, 2021, Suncorp Insurance had a prescribed capital amount, or PCA, multiple of 1.71 times the regulatory minimum. Following the payment of the final dividend, a special dividend, and AUD 250 million buyback, at a group level that leaves Suncorp with AUD 492 million of capital in excess of its common equity Tier 1 target. This excess capital provides a buffer for unforeseen insurance and bad debt events. The common equity Tier 1 ratio for the insurance business was 1.28 times post the final dividend payment, within the target range of 1.08-1.28 times the PCA, and well above the regulatory minimum of 0.6 times. The bank’s common equity Tier 1 ratio as at Dec. 31, 2021 was 9.9%, above Suncorp’s 9% to 9.5% target range. Suncorp targets a dividend payout of 60-80% cash earnings (excluding special dividends).

Bulls Say’s

  • Suncorp owns a portfolio of well-known insurance brands and a regional bank that lacks switching or cost advantages. A focus on processes and systems, largely digitising customer interactions, should support underlying earnings growth. 
  • General insurance is inherently risky, with factors such as weather, natural disasters, and investment markets affecting earnings and capital adequacy. 
  • Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but customers are price sensitive.

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.

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ResMed reported 2Q22 results reflecting strong revenue growth to US$894.9m, up +12%, or +13%

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Investment Thesis

  • Global leader in a significantly under-penetrated sleep apnea market. 
  • High barriers to entry in establishing global distribution channels. 
  • Strong R&D program ensuring RMD remains ahead of competitors.
  • Momentum in new masks releases. 
  • Bolt-on acquisitions to supplement organic growth.
  • Leveraged to a falling Australian dollar. 

Key Risks 

  • Disruptive technology leading to better patient compliance.
  • Product recall leading to reputational damage.
  • Competitive threats leading to market share loss.
  • Disappointing growth (company and industry specific).
  • Adverse currency movements (AUD, EUR, USD).
  • RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation.

Key Highlights 2Q22 Results

  • Revenue increased 12% (13% in constant currency) to US$894.9m driven by higher demand for sleep and respiratory care devices and a major product recall by one of the Company’s largest competitors. Across geographies, revenue in the Americas climbed +14%, in Europe, Asia, and other markets it increased +12%, and RMD’s software-as-a-service business saw +8% revenue growth. By product segment, globally in constant currency terms device sales increased by 16%, while masks and other sales increased by 10%.  
  • Non-GAAP operating income of $267.7m, up +5%. This equated to US$1.47 per share, up 4%.
  • Net income was up +12% to US$201.8m. 
  • Gross margin declined 230 basis points to 57.6%.
  • Diluted earnings per share was up +11% to US$1.37.
  • The Board declared quarterly dividend of US42cps. 
  • RMD’s balance remains strong with cash balance of $194m, $680m in gross debt and $496m in net debt, whilst debt levels remain modest, and the Company retains ~$1.6bn for drawdown under its existing revolver facility.

Company Profile 

ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio). 

(Source: Morningstar)

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