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Technology Stocks

Coupa’s Opening Strategy in Business Spend Management Paying Off as it Plays the Long Game

Business Strategy and Outlook

Coupa Software is a cloud-based business spend management, or BMS, platform that allows firms to monitor, control, and analyze expenditures to lower costs and improve operational efficiency. Morningstar analyts believe Coupa has a long growth runway ahead as it continues to make strategic investments to expand its platform and spend management use-cases. In a go-to-market model that focuses on co-selling deals with system integrators, Coupa has been able to expand its market reach significantly. As back-office digital transformations are accelerating and Coupa remains the market-leading cloud BSM vendor, morningstrar analysts expect Coupa’s partners to increasingly advance Coupa’s adoption throughout businesses as they guide their clients through digital transformation initiatives. As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic spend management tool. As the firm introduces new modules,  Morningstar analysts believe Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, analysts also  believe a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions.

Coupa’s Opening Strategy in Business Spend Management Paying Off as it Plays the Long Game

Coupa Software is a cloud-based business spend management, or BSM, platform that allows companies to monitor, control, and analyze expenditures to lower costs and improve operational efficiency.  Coupa has built a broad-reaching self-reinforcing ecosystem of AI-informed spend management and Morningstar analysts believe the firm will benefits from a strong network effect and high switching costs. Morningstar anlaysts fair value estimate for Coupa is $152 per share, down from $232, as they model more muted long-term growth. As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic BSM tool. As the firm introduces new modules, Morningstar analysts believe Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, Morningstar analyst also  believe a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions.

Financial Strength

Coupa is in a decent financial position. As of January 2021, Coupa had $606.3 million in cash and marketable securities versus $1.5 billion in convertible debt.Coupa has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. Coupa does not pay a dividend, nor repurchase stock, and for a young company pioneering a novel offspring under the ERP umbrella,  it can be considered as  appropriate that the company focuses capital allocation on reinvestments for growth. Even so, the firm has historically demonstrated strong cash flows, with free cash flow margins averaging 13% over the last three fiscal years. While cash flows were pressured in fiscal 2021 as a result of the COVID-19 pandemic, Morningstar analysts expect healthy free cash flows in later years. Coupa reached non-GAAP profitability in 2019, posting both a positive non-GAAP operating margin and positive non-GAAP earnings from then on. The company has averaged a non-GAAP operating margin of 9.1% since 2019, and as the company scales, we expect non-GAAP operating margins to reach into the low-30% range at the end of our 10-year forecast period. These positive results should translate to profitability on a GAAP basis in the future as well.

Bulls Say 

  • Coupa has strong user retention metrics, with gross retention above 95% and net dollar retention north of 110%. 
  • As Coupa expands its platform both organically and inorganically, we expect increasing suite synergies to accelerate cross-selling activity, further entrenching customers within Coupa and creating greater monetization opportunities. 
  • Continual annual subscription price point increases reflect the stickiness of Coupa’s modules and suggest significant competitive differentiation in winning new deals over less expensive alternatives.

About the Company

Coupa Software is a cloud-based provider of business spend management, or BSM, solutions. Coupa’s BSM platform provides visibility into all spend, allowing companies to gain control over their spending, optimize their supplier network and supply chains, and manage liquidity. The platform’s transactional core consists of procurement, invoicing, expense management, and payment solutions, while supporting modules ranging from strategic sourcing solutions to supply chain design and planning solutions round out the comprehensive spend management ecosystem.

(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

Shopping Centres Australasia Property Group delivered strong first half results; FVE Increased to A$2.55

Property investment, savings money for buy new home concepts. A man hand holding coin over small residence house, stack of coins and money bag with blurred real estate. A sustainable investment.

Business Strategy and Outlook

Shopping Centres Australasia Property Group (SCA) owns and manages a portfolio of about 85 smaller shopping centres in Australia. Gross rental income is about evenly sourced from anchor tenants such as supermarkets, and smaller specialty tenants. SCA actively manages its portfolio, remixing specialty tenants, undertaking developments, and acquisitions and divestments. From its 2012 listing through to June 2020 SCA acquired more than 50 neighbourhood and subregional assets, and divested more than 30 freestanding and neighbourhood assets. 

Morningstar analysts expect SCA to persevere with its strategy of active management, and to remain focused on neighbourhood locations. Even the larger assets in its portfolio are at the smaller end of the “subregional” category, with less floor space dedicated to department stores than other sub regional assets. Morningstar analysts don’t rule out SCA acquiring larger assets, but analysts see that as likely only if market dislocation creates irresistible acquisition opportunities. The neighbourhood property space is so fragmented Morningstar analysts think acquisitions in that segment are more likely. 

What Lockdown? Strong December Half From Shopping Centres Australasia; FVE Up 9%

Shopping Centres Australasia, or SCA, delivered a strong first-half result, and Morningstar analysts increased its fair value estimate by 9% to AUD 2.55 per unit. The main driver of increased valuation is the remarkable defensiveness of SCA’s convenience assets, proven by their performance through lockdowns. Morningstar analysts think SCA can, and will, run higher gearing toward the midpoint of its target range of 30%-40% net debt/assets, holding more assets in its portfolio and thereby generating a higher earnings yield over time.

Financial Strength 

SCA is in solid financial health after about AUD 280 million of equity was raised in April 2020, bolstering the balance sheet. Gearing reduced from 34% as at December 2019 to 26% in June 2020 (as measured by look-through gearing, which is net debt/assets, including debt obligations in underlying vehicles such as SCA’s funds). As recovery ensued, gearing rose to 32.5% as at December 2001.Other things being equal, SCA’s assets could more roughly halve in value before it would breach the 50% gearing limit specified in its banking covenants. SCA’s interest cover ratio was 6.0 times at December 2021, triple the covenant limit of 2 times. We expect gearing to rise gradually due to acquisitions, to roughly the midpoint of SCA’s target gearing range of 30%-40%.

Bulls Say

  • About half of income comes from supermarkets with long leases that have remained open even during COVID-19 lockdowns, suggesting that SCA’s income is resilient. 
  • Despite interest rate rises on the horizon, discount rates are unlikely to rise as high as historical levels on property assets that can consistently generate income. 
  • Good anchor tenants generate foot traffic, and SCA charges rent well below levels in high-end discretionary focused shopping malls, suggesting that SCA is less vulnerable to e-commerce.

Company Profile

Shopping Centres Australasia Property Group owns a portfolio of smaller shopping centres. About half of rental income comes from anchor tenants, typically Woolworths or Coles businesses, or in some cases discount department stores. Despite its Australasian name, the assets are mostly in regional or suburban areas of Australia, and the group divested its New Zealand assets in 2016. The portfolio assets are neighbourhood (about 75% by value) and subregional (25%) shopping centres

(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

SkyCity is priced attractively for patient investors

Business Strategy and Outlook:

COVID-19 continues to weigh heavily on the firm’s near-term outlook. The Auckland casino–SkyCity’s core property–waded through over 100 days in lockdown during the period, heavily affecting visitor numbers at the group’s venues in the first half of fiscal 2022. Additionally, visitor numbers to the group’s second-biggest venue in Adelaide were subdued as capacity restrictions and domestic border closures in South Australia persistent for most of the first half of fiscal 2022. These are viewed as short-term issues, and it is expected SkyCity to bounce back when restrictions ease. SkyCity’s long-dated and exclusive licences in Auckland and Adelaide create a regulatory barrier to entry, underpinning the firm’s narrow economic moat, and position the business well to participate in the recovery as restrictions ease.

The Adelaide casino has remained open, albeit with restrictions for much of the first half of fiscal 2022. Renovations are complete and the group is poised to receive extra income from additional parking spots once city visitors return at greater levels. For now, the parking spots are being given away for a song, subject to visiting the casino facilities. New Zealand moved to a traffic-light COVID-19 protection framework in December 2021. This will reduce lockdowns and restrictions as the country allows more freedom for those who are vaccinated. Under red, the most extreme level of the traffic light system, hospitality venues may remain open with restrictions. While preferable to a full closure, we think it will still dampen revenue as many visitors choose to stay home out of an abundance of caution.

Financial Strength:

With a balance sheet well-positioned to weather the storm, analysts think current depressed prices present an opportunity for patient investors to gain exposure to a high-quality gaming business at a discount. However, the path to full capacity is likely to be gradual and material short-term catalysts are lacking. The analysts expect the recovery of SkyCity’s EBITDA to its prepandemic levels to take until fiscal 2023. In the second half of fiscal 2022, it is expected that the combined benefit of additional parking bays and the casino renovation to raise Adelaide’s EBITDA margins to 20% from 16%, in line with guidance. Visitors to the city of Adelaide have been subdued, at around 50% of prepandemic levels in the year to August 2021. 

Company Profile:

SkyCity Entertainment operates a number of casino-hotel complexes across Australia and New Zealand. The flagship property is SkyCity Auckland, the holder and operator of an exclusive casino licence (expiring in 2048) in New Zealand’s most populous city. The company also owns smaller casinos in Hamilton and Queenstown. In Australia, the company operates SkyCity Adelaide (exclusive licence expiring in 2035).

(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 Shares

Paylocity Wins Amid the War for Talent and a Bounce-Back in Labor Markets

Business Strategy and Outlook:

Paylocity delivered strong second-quarter fiscal 2022 results underpinned by a continued normalization of employment levels and growing demand for solutions to attract, manage, and retain employees amid fierce competition for labor and dispersed workforces. Amid tight labor markets and an intensifying war for talent, businesses are seeking solutions to attract and retain employees, which is creating industry tailwinds for all payroll and human capital management (HCM) players. Additionally, a sustained shift to dispersed workforces in a post-COVID-19 world is driving demand for HCM software that helps employers connect and manage remote employees or employees across multiple jurisdictions. Paylocity is expected to have capitalized on these tailwinds over the quarter through the appeal of the platform’s unique complimentary collaboration features such as social collaboration platform Community, and video and survey functionality. As with payroll and HCM peers, it is expected to uptake of these features aimed at driving higher employee engagement will entrench the software further into the client’s business and strengthen the customer switching.

Paylocity’s target market has naturally skewed upmarket in recent years as the platform and its embedded modules have evolved. Recent acquisitions including software integration tool Cloudsnap in January 2022 and global payroll provider Blue Marble in September 2021 position Paylocity well to cater for the needs of larger clients. To reflect this shift, the company has formally raised the upper limit of its target client to 5,000 employees, from 1,000 employees previously. At this stage, analysts maintain our longterm forecasts and take the announcement as a formalization of the current client mix, instead of a strategic shift upmarket.

Financial Strength:

The revenue growth estimated at a compound annual growth rate of 23% over the five years to fiscal 2026, driven by mid-single-digit industry growth, market share gains, and mid-single-digit revenue per client growth on greater uptake and monetization of modules. Over the same period, operating margins are expected to increase to about 20% from 9% in a COVID-19-affected fiscal 2021. This uplift is anticipated to be driven by operating leverage from increased scale, greater uptake of high margin modules, higher interest on client funds, and operating efficiencies from increased digital sales and service. Paylocity’s revenue increased an impressive 34% on the prior year. Following strong sales activity during the quarter and robust client retention, analysts have marginally lifted their full-year revenue and adjusted EBITDA forecasts 1% and 4%, respectively, to align with updated near-term guidance. EPS is expected to increase 14% to $1.48 in fiscal 2022, before growing at a CAGR of 32% to fiscal 2031 as Paylocity continues to grow scale and achieves operating leverage. 

Company Profile:

Paylocity is a provider of payroll and human capital management, or HCM, solutions servicing small- to mid-size clients in the United States. The company was founded in 1997 and targets businesses with 10 to 5,000 employees and services about 28,750 clients as of fiscal 2021. Alongside core payroll services, Paylocity offers HCM solutions such as time and attendance and recruiting software, as well workplace collaboration and communication tools.

(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

Capable Hands Remain at the Helm of Magellan; Valuation Upside High as Shares Lose Steam

Business Strategy and Outlook

Magellan is an active manager of listed equities and infrastructure. The firm has a fundamental, high-conviction investment approach. Its flagship Global strategy has historically tilted toward IT, e-commerce platforms, and consumer franchises; preferring large, developed market multinationals. FUM have been attracted by consistently achieving excess returns with lower volatility and drawdowns relative to peers.

Magellan’s products are well-distributed. Its funds are featured across platforms.There is a focus on targeting retail investors, with product expansion an increasingly common driver of growth. After pioneering the first active ETF in Australia in 2015, Magellan has worked on attracting new FUM via its partnership initiatives, launching its own low-cost active ETFs, and introducing a new equity fund that caters to retirees seeking predictable income.

Morningstar analysts think Magellan has built the foundations for ongoing earnings growth, supported by its economic moat, product variety, and historically strong track record. Regardless, the potential earnings upside from these positive traits will take time to manifest. In light of Magellan’s recent underperformance, Mornigstars analysts believe a sustained improved track record will be the precursor to stronger fund inflows.

Morningstar analysts anticipate fee margin compression from investors trading down from Magellan’s core funds in preference for its low-cost ETFs, mix shift to other asset classes, and industry wide fee pressure. Continued strong performance is key to sustaining margins, as future FUM growth is likely to hinge more on market movements rather than net inflows given Magellan’s maturity and scale.

Capable Hands Remain at the Helm of Magellan; Valuation Upside High as Shares Lose Steam

Magellan has historically delivered above market returns with relatively low drawdowns. This has allowed it to rapidly scale in FUM to over AUD 93 billion and provides the foundation for continued earnings growth. While Morningstar analysts don’t believe it will be immune from the structural trend of investors moving to passive investments, ongoing competition among fund managers and major institutions in-housing their asset management, and is better placed than most active managers to address these headwinds. Magellan is moving beyond just managing money, to implementing new initiatives such as product expansion to attract new money. Morningstar analysts  believe shares are undervalued, but concur there are limited near-term earnings and share price catalysts due to recent underperformance. 

Chairman and CIO Hamish Douglass’ indefinite leave from Magellan . But morningstar analysts  don’t believe this is overly value-destructive for shareholders. In the interim, Chris Mackay and Nikki Thomas will work with Magellan’s investment team to manage its flagship Global Equity strategies. The strategies are in good hands. Mackay is Magellan’s co-founder, and was its chairman and CIO until 2012. Despite analysts’ conviction in Magellan, Morningstar’s analyst concern is not all investors may be willing to ride out this storm. Thus Morningstar analysts have lowered its fair value estimate to AUD 34.50 per share from AUD 38, after factoring in 3% more net outflows than before and further trimming our retail fee forecasts.

Financial Strength 

Magellan is in sound financial health. The firm has a conservative balance sheet with no debt, with its financial position also boosted by solid operating cash flows. As of June 30, 2021, Magellan had cash and equivalents of about AUD 212 million and financial investments with a net fair value of around AUD 453 million mainly invested in its own unlisted funds and listed shares. This should provide it with enough liquidity to cope with most market conditions. Its high dividend payout ratio of: (1) 90%-95% of the net profit after tax of its core funds management business before performance fees; and (2) annual performance fee dividend in the range of 90%-95% of net crystallised performance fees after tax reflects the capital-light nature of asset management.

Bulls Say

  • Magellan retains an intangible brand, supported by historically strong performance, which it has leveraged to hold on to client funds, attract new money and charge premium fees. 
  • Due to structural market trends and product expansion initiatives, the prospects for organic FUM growth is strong, notably from investors seeking to diversify exposure to international equities or gain a steady retirement income stream. 
  • Aside from domestic tailwinds from superannuation, Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. should support growth.

Company Profile

Magellan Financial Group is an Australia-based niche funds manager. Established in 2006, the firm specialises in the management of equity and infrastructure funds for domestic retail and institutional investors. Magellan has been particularly successful in winning mandates from global institutional investors. Current FUM is split across global equities, infrastructure and Australian equities.

(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
Funds Funds

One of the cheapest funds tracking the broadly diversified S&P 500.

Investment Objective

Vanguard 500 Index Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks.

Approach

This broadly diversified portfolio is representative of the opportunity set in the large-blend category. It relies on the market’s collective wisdom to size its positions and enjoys low turnover as a result. It earns a High Process Pillar rating. The index pulls in stocks of the largest 500 U.S. companies that pass its market-cap, liquidity, and profitability screens.An index committee selects constituents from this eligible universe, allowing for more flexibility around index changes compared with more-rigid rules based indexes. The index committee aims to avoid unnecessary turnover, and it reconstitutes the index on an as-needed basis. The committee may temporarily deviate from these rules. It may not delete existing constituents that violate eligibility criteria until an addition to the index is warranted.The portfolio managers reinvest dividends as they are paid and use derivatives to equitize cash and keep pace with the benchmark. They have also historically used securities lending to generate additional income for the fund, which has helped tighten the fund’s tracking difference and make up for some of its annual expense ratio.

Portfolio 

Market-cap weighting allows the fund to harness the market’s collective view of each stock’s relative value, and it keeps turnover low. As of January 2022, stocks representing around 90% of the portfolio enjoy either a narrow or wide Morningstar Economic Moat Rating. This weighting scheme pushes the work of sizing positions onto the market. Over the long term, this has been a winning proposition. But the market has manic episodes from time to time. Over shorter time frames, investors’ enthusiasm for a particular stock or sector can make the portfolio top-heavy as it tilts toward recent winners. This has been the case with technology stocks in recent years. The portfolio’s top 10 holdings represented approximately 29% of its assets as of January 2022, higher than its historical average but much lower than the category average. Nonetheless, the fund is still representative of the opportunity set available to its actively managed peers in the large-blend category, and its sector and style characteristics are similar to the category average. As of December 2021, the fund was slightly overweight in tech stocks and made up the difference with a smaller allocation to industrials.

Performance 

From its inception in 2010 through January 2022, the exchange-traded share class outperformed the category average by 2.35 percentage points annualized. Its annual returns consistently ranked in the category’s better-performing half. The fund’s risk-adjusted returns also held up well against category peers, while its Sharpe ratio maintained a top-quartile ranking in the category over the trailing one-, three-, five-, and 10-year periods. Most of this outperformance can be attributed to its low cash drag and competitive expense ratio.

The portfolio tends to perform as well as its category peers during downturns while outperforming during market rallies. It captured 96% of the category average’s downside and 106% of its upside during the trailing 10 years ending in 2022. During the initial coronavirus-driven shock from Feb. 19 to March 23, 2020, the fund outperformed the category average by 9 basis points. It then bounced back faster than peers during the recovery phase from late March through December 2020, gaining 3.29 percentage points more than the category average. 

Tracking performance has been solid. Over the trailing one-, three-, five-, and 10-year periods ended January 2022, the fund trailed the S&P 500 by an amount approximating its annual expense ratio.

Top 10 Holdings

About the fund

The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The 500 Index Fund is a low-cost way to gain diversified exposure to the U.S. equity market. The key risk for the fund is the volatility that comes with its full exposure to the stock market. Because the 500 Index Fund is broadly diversified within the large-capitalization market, it may be considered a core equity holding in a portfolio.

(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
Small Cap

GrainCorp’s Bumper 2022 Is Set to Be Even More Lucrative Than Record 2021

Business Strategy and Outlook

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. GrainCorp’s core Australian grain storage and logistics business is heavily reliant on favourable weather patterns. Beyond storage and logistics, the grain marketing segment competes domestically and internationally against other major commodities trading houses such as Cargill and Glencore.

The firm will likely remain at the mercy of Australian grain competitiveness relative to global pricing. Similarly, GrainCorp’s oil crushing and refining business remains competitive. While we expect profitability in this segment to improve due to cost-savings measures and ongoing growth, we don’t believe the segment enjoys durable competitive advantages. 

Financial Strength

GrainCorp’s capital structure is reasonable. It comprises debt and equity, with noncore debt associated with the funding of grain marketing inventory. As a result of swings in crop prices, GrainCorp’s cash flow and working capital requirements can be volatile, so the company will need to drawdown on debt on demand. As at Sept. 30, 2020, core debt (net debt less commodity inventory) was AUD 37 million and total net debt was AUD 239 million. There’s a risk that earnings pressure in drought-affected years could test debt covenants with its bank lenders. 

The primary metrics are its net debt/capital gearing ratio and EBITDA/interest ratio. Gearing ratios can be volatile, given the swings in inventory levels. The net debt gearing ratio (net debt/net debt plus equity) sat at a reasonable 33% as at Sept. 30, 2021. Similarly, core debt gearing (core debt/core debt plus equity) was below 5%. Management doesn’t disclose the minimum EBITDA/interest ratio. In fiscal 2020, this ratio was about 4 times on an adjusted basis, but improved to 13 times in fiscal 2021.

Bulls Say’s 

  • With strategic processing, storage, and transportation assets, GrainCorp’s size gives the company scale advantages over regional competitors. 
  • Global thematics, such as increased food demand, particularly in Asia, should benefit agribusinesses such as GrainCorp. 
  • Despite divesting the malt business, GrainCorp has entered into a new grains derivative contract which assists with smoothing out earnings through the cycle.

Company Profile 

GrainCorp is an agribusiness with an integrated business model operating across three divisions. The company operates the largest grain storage and logistics network in eastern Australia. GrainCorp provides grain marketing services to all major grain-producing regions in Australia, as well as to Canadian and U.K. growers. The company has also diversified into edible oil refining and supply, and bulk liquid storage.

(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

James Hardie’s FVE Raised 4% to AUD 35.40; Outlook for Fiscal 2023 Is Strong

Business Strategy and Outlook

James Hardie Industries is the clear leader in fibre cement siding and internal lining products in North America and Asia-Pacific. After patenting cellulose-reinforced fibre cement in the late 1980s, the Australian company entered the North American market in 1990, establishing its business with the benefit of patent protection. In doing so, the company’s product line has become synonymous with the product category. The firm now enjoys 90% share in fibre cement siding in North America, its largest and most important market, with similar positions in Australia and New Zealand. More recently, James Hardie has entered the Philippines and European residential siding markets.

Fibre cement siding possesses durability advantages and superior aesthetics over vinyl cladding, leading to vinyl’s market share eroding to about 26% today from around 39% in 2003. At this same time, fibre cement’s share has increased to 19%, almost entirely due to increased penetration for Hardie’s product. With Hardie the clear leader in fibre cement systems, it is expected that the firm will continue to take share from vinyl while maintaining its own position within its category.

Financial Strength

James Hardie announced an ordinary first-half fiscal 2022 dividend of USD 0.40 per share after regular dividends were suspended in early fiscal 2021 in response to the pandemic. It is forecasted that an annual full-year payout ratio of 65% of underlying earnings, near the top-end of Hardie’s 50%-70% targeted payout range. Hardie runs a conservative balance sheet with leverage typically within a targeted range of 1-2 net debt/EBITDA. Net debt/EBITDA stood at 0.8 at the end of fiscal third-quarter 2022.Hardie’s asbestos-related liability–the AICF trust–has a gross carrying value at fiscal third-quarter 2022 of USD 1 billion and remains an overhang. However, payments to fund the liability are capped at 35% of trailing free cash flow. While this reduces cash flows available to shareholders over the medium term, the liability shouldn’t constrain the business’ ability to reinvest and thus expand and protect its competitive positioning. 

Bulls Say’s 

  • James Hardie’s clear leadership in the fibre cement category should drive growth in market share in the North American siding market. We forecast the company retaining its 90% share of the category, while fibre cement climbs to 28% of the total housing market. 
  • Hardie’s strong brand equity translates into pricing power, allowing for inflation in manufacturing costs to be easily passed on, thus protecting profitability in the face of imminent input cost inflation. 
  • The Fermacell acquisition could finally unlock Europe as an avenue of significant growth following market saturation in North America

Company Profile 

James Hardie is the world leader in fibre cement products, accounting for roughly 90% of all fibre cement building materials sold in the U.S. It has nine manufacturing plants in eight U.S. states and five across Asia-Pacific. Fibre cement competes with vinyl, wood, and engineered wood products with superior durability and moisture-, fire-, and termite-resistant qualities. The firm is a highly focused single-product company based on primary demand growth, cost-efficient production, and continual innovation of its differentiated range. With saturation of the North American market in sight, the acquisition of Fermacell in early 2018, Europe’s leading fibre gypsum manufacturer, will provide Hardie with a subsequent avenue of growth.

(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

Capri Has Suggested The Two Brands (Jimmy Choo and Versace), When Mature, Could Combine For Operating Profit Of $450 Million

Business Strategy and Outlook

It is probable Michael Kors lacks the brand strength (and ultimately pricing power) to provide an economic moat for Capri. Powered by store openings and retail expansion in the 2010-15 period, Michael Kors became one of the largest American handbag producers in sales and units. However, its sales have declined from peak levels due to markdowns at third-party retail, store closures, and weakness in some categories. While Capri has reduced distribution to limit discounting of its bags, competition in the American handbag market is fierce, and store closures in the region continue. Michael Kors, though, has good potential in Asia, which Bain & Company expects will compose 50% (up from 37% at present) of the worldwide luxury market by 2025. It is foreseen the brand stands to win favor with Chinese consumers, but it is not foreseen for the brand to reach Capri’s $1 billion Asia sales target (up from $448 million in fiscal 2021) in the next 10 years given its limited tenure in the region relative to Coach and others. 

Capri spent a steep $3.4 billion to purchase Jimmy Choo and Versace to boost its status as a luxury house and reduce its dependence on Michael Kors. However, it is not likely these deals have changed Capri’s no-moat status as the acquired brands have more fashion risk, less profitability, and narrower appeal than Michael Kors. Capri is investing in store remodels, store openings, and expanding the set of accessories for both Jimmy Choo and Versace, but it is not seen these efforts will yield the intended gains, particularly given the severe interruption it is probable from COVID-19. While Capri has suggested the two brands, when mature, could combine for operating profit of $450 million and account for 30% of its total, it is not probable for this to happen until the end of this decade.

Financial Strength

Capri has debt, but it is seen as it is very manageable. The firm took on significant debt to fund its Jimmy Choo and Versace acquisitions, which came with a combined price tag of $3.4 billion. At the end of December 2021, it had total short- and long-term debt of $1 billion, but it also had more than $261 million in cash and $1 billion in available borrowing capacity. Moreover, during the COVID-19 crisis, it amended its revolving and term loan credit agreement so that most of its term loan that was due in December 2020 was extended to December 2023. Thus, Capri has no significant debt maturities prior to 2023. The firm’s debt/adjusted EBITDA was a very manageable 2.3 at the end of fiscal 2021, and it is foreseen this will fall to 0.8 at the end of fiscal 2022 on greater EBITDA and debt reduction. Capri has resumed share repurchases, which were suspended during the pandemic. The firm averaged more than $500 million in annual buybacks in fiscal 2015-20. It is now foreseen its share repurchases at an annual average of about $740 million over the next decade. However, Capri does not pay dividends.Capri plans to open new stores and remodel existing stores for all three of its brands, although these efforts stalled in fiscal 2020 due to COVID-19. Analysts forecast its fiscal 2022 capital expenditures will rise to $205 million (3.7% of sales) from just $111 million (2.7% of sales) last year. Long term, Analysts forecast Capri’s annual capital expenditures as a percentage of sales at 4.1% as management works to improve the performance at Jimmy Choo and Versace.

Bulls Say’s

  • Michael Kors is one of the largest brands in terms of units and sales in the high-margin handbag market, and it is likely, this positioning should aid its prospects as it looks to grow in complementary categories like footwear. 
  • Michael Kors has reduced its dependence on wholesale customers, which is viewed favorably as increased direct-to-consumer sales allow for better pricing and control over marketing. 
  • The acquisitions of Jimmy Choo and Versace afford diversification opportunities by bringing two luxury brands that maintain products with high price points into the fold.

Company Profile 

Michael Kors, Versace, and Jimmy Choo are the brands of Capri Holdings, a marketer, distributor, and retailer of upscale accessories and apparel. Kors, Capri’s largest brand, offers handbags, footwear, and apparel through more than 800 company-owned stores, wholesale, and e-commerce. Versace (acquired in 2018) is known for its ready-to-wear luxury fashion, while Jimmy Choo (acquired in 2017) is best known for women’s luxury footwear. John Idol has served as CEO since 2003 but will be replaced in the position by Joshua Schulman in late 2022. (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
Commodities

First Solar’s Sales Efforts Have Become Increasingly Focused On Select End Markets

Business Strategy and Outlook

First Solar’s strategy has pivoted back to its origins as a supplier of thin film solar modules following the exit of its North American development business, and its operations and maintenance business in 2021. The company’s development business supported profits during 2012-17 when First Solar’s module business faced challenges. However, margins in the business became compressed in recent years, and it is likely the company made a prudent decision to exit the business given increasing need for scale. The company retains modest development activities in Japan, but it is not seen, these as core to its long-term strategy. 

Upon taking the helm in 2016, CEO Mark Widmar has led the successful execution of the transition to its Series 6 module. This was a major transition for the company and came at a hefty price tag–$2 billion in capital expenditures–but has resulted in a better competitive position compared with its prior module generation (Series 4). Further, the company’s sales efforts have become increasingly focused on select end markets. The U.S. and India represent approximately 90% of booking opportunities, where trade policies leave the company in a more favorable competitive position. In particular, the company performs well in the U.S. utility-scale market, where it is projected, its market share to be approximately 30%. 

Financially, the company is focused on leveraging scale benefits to drive margin improvement. Given continued expectations for declining selling prices and a largely fixed operating expense profile (circa 80% fixed), the key lever to grow operating margins is through capacity additions. It is largely definite with many of the company’s strategic moves in recent years. However, it is questioned whether a pure module supplier can achieve consistent excess profits. It would be interesting to see the company seek adjacent revenue opportunities- for example, balance of system components- to complement its module business.

Financial Strength

First Solar’s financial strength stands alone relative to solar module peers. It is considered that this a competitive advantage because it allows First Solar more flexibility to take advantage of investment opportunities. The company carries essentially no debt besides project debt associated with its Systems business and holds more than $1 billion in cash and investments as of late 2021. First Solar’s financial strength is in part due to its conservative approach to expanding capacity, which is in stark contrast to the track record of the broader industry. Cash flow generation has been weighed down by working capital in recent years, but it is probable, this should normalize over the medium term. Capital expenditures will be elevated for the next few years, due to large-scale manufacturing expansions in the U.S. and India. It is likely, the potential for local debt (India) and potential incentives (U.S.) to help fund part of the associated capital expenditures. Given its robust level of cash and investments, combined with continued steady cash flow generation, It isn’t seen the elevated capital expenditures posing a threat to the company’s financial position.

Bulls Say’s

  • First Solar’s balance sheet strength has enabled it to persist through solar cycles when competitors have failed. 
  • First Solar’s thin film cadmium telluride technology is unique within the industry and benefits from its simple manufacturing process and supply chain. 
  • First Solar is well positioned to benefit from potential U.S. manufacturing incentives.

Company Profile 

First Solar designs and manufactures solar photovoltaic panels, modules, and systems for use in utility-scale development projects. The company’s solar modules use cadmium telluride to convert sunlight into electricity. This is commonly called thin-film technology. First Solar is the world’s largest thin-film solar module manufacturer. It has production lines in Vietnam, Malaysia, and Ohio. It plans to add a large factory in India. 

(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.