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ETFs ETFs

BetaShares FTSE RAFI Australia 200 ETF: A disciplined approach to rebalancing the portfolio with a contrain methodology

Tile letter on red rack in word ETF (abbreviation of Exchange Traded Fund) on wood background

BetaShares FTSE RAFI Australia 200 ETF QOZ offers distinctive exposure to Australian equities based on a fundamental index. QOZ aims to track the FTSE RAFI Australia 200 Index before fees and expenses. Conforming to a contrarian methodology, the index construction is driven by a four-factor method developed by US-based Research Affiliates. The five-year average of the four metrics (book value, sales, cash flow, and dividend) are used to build a portfolio with reliable but currently undervalued stocks.

Approach

QOZ aims to track the FTSE RAFI Australia 200 Index before fees and expenses. This index eliminates the traditional market-cap-weighted index approach where portfolio weight depends on share price. Instead, QOZ favours stocks with a larger “economic footprint.” The index comprises the top 200 companies listed on the ASX, as measured by four equally weighted fundamental measures: sales, cash flow, dividends, and book value. Five-year averages are used for the first three factors, with the latest available book value applied. Stocks are weighted based upon an equally weighted composite score of these four metrics. 

Portfolio 

Market-cap-weighted Australian equity benchmarks are dominated by large sectors and companies. A handful of very large financial services and materials companies compose a significant slice of the overall pie. QOZ shares these characteristics, but instead of weighting by market cap, it uses an index based on fundamental metrics in which stocks with bigger economic footprints (earnings, sales, dividends, and book value) receive more prominence. 

Performance

Value-titled strategies have faced difficult times over the past decade. The returns have been typically overshadowed by the conventional growth-oriented strategies. However, it should be noted that such factor skews undergo cycles and may see an upturn when the macroeconomic environment changes. As at December 2021, QOZ delivered an annualised five-year return of 8.2% against the S&P/ASX 200’s 9.8%. The year 2016 was a period of contrasting halves as valuations dipped in the first half and quickly raced back and beyond in the latter half. The fund significantly outperformed the broader index over this period, delivering returns of 18.3%. The rally continued in 2017, and the fund ended with over 11.3% returns during the year. In 2018, US-China trade wars surfaced, causing global unrest in the equity markets. As such, the fund witnessed a sharp drawdown in the year’s final quarter.

Company Profile 

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 76% of Cimic.

(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

Ecolab Poised for Long-Term Growth as Institutional Business Recovers from Pandemic

Business Strategy and Outlook

As the global leader in the cleaning and sanitation industry, Ecolab provides products that help its hospitality, food-service, and healthcare customers do laundry, wash dishes, and maintain regulatory compliance. With unmatched scale and a solid razor-and-blade business model, Ecolab’s competitive advantages are firmly in place. The company’s cleaning and sanitation scale dwarfs the competition. Ecolab generates over 3 times the revenue of its largest rival. Its industries are fragmented, with many markets made up of regional and local competitors. Ecolab controls roughly 8% of the $152 billion global market. 

With its unrivaled scale and breadth of product offerings, the company is an attractive partner to global hospitality and food-service firms. We think it will continue to grow from market share gains and expanding into new markets. The firm uses a razor-and-blade business model by providing cleaning equipment to customers that solely uses Ecolab’s proprietary consumables. This model creates a steady stream of consumables revenue. The installed base and consumables model also leads to high customer switching costs, as clients are generally reluctant to switch out equipment and retrain staff.

Financial Strength

Ecolab is in decent financial health. Net debt/adjusted EBITDA was 3.1 times as of Dec. 31, well above below the company’s long-term goal of 2.0 times. The company’s leverage ratios are currently elevated as it recently closed the $3.7 billion Purolite acquisition, which was mostly financed with debt. Ecolab’s leverage ratio will likely remain elevated throughout 2022. The institutional business continues to recover, with operating income up 73% in 2021 versus 2020, on 11% revenue growth. Segment operating margins expanded 500 basis points to 14% in 2021. While this is still well below pre-pandemic levels above 21%, it shows how volume recovery translates to an outsized profit rebound. This level of margin expansion likely is a result of management’s decision to maintain its workforce throughout the COVID-19 slowdown, despite the sharp decline in volumes.

Bulls Say’s

  • Ecolab’s focus on delivering savings on labor, energy, and water for customers makes the firm’s products and services attractive even during economic slowdowns. 
  • Ecolab’s customers are willing to pay a premium to protect their own brand reputations. For example, a restaurant knows what a food contamination incident can do to its standing with customers. 
  • Rising fresh water costs will drive demand for industrial water management systems. Ecolab’s water management systems will be able to save its customers water and energy costs, which will increase water business profits.

Company Profile 

Ecolab produces and markets cleaning and sanitation products for the hospitality, healthcare, and industrial markets. The firm is the global market share leader in this category with a wide array of products and services, including dish and laundry washing systems, pest control, and infection control products. The company has a strong hold on the U.S. market and is looking to increase its profitability abroad. Additionally, Ecolab serves customers in water, manufacturing, and life sciences end markets, selling customized solutions. 

(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

SCA Property Group reported strong 1H22; Shares overvalued slightly

Investment Thesis 

  • Strong FY22 distribution guidance.
  • SCP is trading at a slight premium to its NTA.
  • Sustainable distribution yield.
  • Strong and experienced management team.
  • Retail properties continue to be a softening broader market in Australia.
  • Current low interest rate environment fosters growth and demand in the retail industry.
  • Improving trends in supermarket sales growth, with strong performance from Woolworths.
  • Robust development outlook and potential upside from development pipeline and new acquisitions. 
  • Increasing exposure to anchor and non-discretionary customers, providing sustainable and longer-term cash flows and rental income.
  • SCP’s portfolio occupancy rate is 98.3%; it has in excess of 1,300 tenants. The bulk of gross rent comes from Woolworths and Wesfarmers, and of the remaining portion, there is a heavy weighting towards non-discretionary categories

Key Risks

  • Potential further Covid-19 impacts may result in rental earnings and valuation declines.
  • Likely increases in interest rates or deterioration in credit/capital markets in coming years. This narrows the interest rate-dividend yield differential.
  • Digital trend of online shopping reduces demand for retail spaces especially with the entrance of Amazon in the Australian market. Hence, this may also affect valuations of assets.
  • Any deterioration in property fundamentals especially delays with developments, declining asset values, retailer bankruptcies and rising vacancies.  
  • Lower sales growth for WES/Coles and WOW because of Costco and Aldi taking market share

FY21 Results Highlights

Relative to the pcp: 

  • NPAT of $432.4m was up 320.2% due to an increase in the fair value of investment properties. Funds From Operations (FFO) of $94.3m, up +30.4% (or on FFO per unit basis, 8.57 cents per unit was up +27.5%). Adjusted Funds From Operations (AFFO) of $80.9m, was up +29.6% (AFFO per unit of 7.35 cpu, was up +26.7%). 
  • Distributions of 7.20 cpu, was up by 26.3% and equates to a payout ratio of 99% of AFFO. 
  • Gearing of 32.5% was up from 31.3% at 30 June 2021 due to acquisitions completed during the period. Management highlighted this is toward the lower end of SCP’s target range of 30-40% (with a preference to remain below 35% at this point in the cycle). 
  • SCP’s investment property portfolio value of $4,426.4m, is up by $426.4m since 30 June 2021, on valuation increase of $386.5m and acquisitions of $347.5m, offset by transfer of properties to “held for sale” of $307.6m. SCP’s net tangible assets of $2.84 per unit is up +12.7% from $2.52 at 30 June 2021 primarily due to the valuation increase.  

Company Profile

SCA Property Group (SCP) owns a diversified shopping centres portfolio located throughout Australia. The portfolio is currently valued at $4,426.4 million. SCA Property Group predominantly focuses on convenience retailing through its ownership and management of a quality portfolio of neighborhood and sub-regional shopping centres and freestanding retail assets.

(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

GOOGL’s 4Q21 results highlighted the strength in Google’s Search business

85215903 - attractive businessman using mobile phone while having lunch

Investment Thesis:

  • Commands a strong market position in online advertising and online eyeballs. 
  • Search advertising increases its share of advertising spend. 
  • Leveraged to online video streaming and advertising via YouTube. 
  • Strong balance sheet with over US$130bn in cash, which gives flexibility to invest in growth options or undertake capital management initiatives. 
  • Focus on innovation across advertising businesses, which should help to sustain growth.
  • Strong management team.
  • Value accretive acquisitions in existing and new growth areas. 
  • Recent disclosure suggests GOOGLE’s Cloud business building good revenue momentum. 

Key Risks

  • Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data. 
  • Regulatory changes which impact the way GOOGLE does business (e.g. forced changes to products). 
  • Expenses such asTAC (traffic acquisition costs) increase ahead of expectations and which the company is unable to pass onto customers.
  • Deterioration in economic conditions, which would put pressure on the advertising revenue.
  • Competition from companies like Facebook Inc., Amazon etc. could put pressure on margins. 
  • Potential return from investment on new, innovative technology fails to yield adequate results

Key Highlights: 4Q22 group results. 

Relative to the previous corresponding period (pcp), group revenues of $75.3bn was up +32% (or up +33% in constant currency). Group cost of revenues of $32.9bn was up +26%, mostly driven by other cost of revenues (up +25% to $19.6bn). The drivers of this were: content acquisition costs (primarily driven by costs for YouTube’s advertising-supported content); costs for subscription content; hardware costs; and costs associated with data centers and other operations. Operating income of $21.9bn was up +40%, with operating margin at 29%. Net income of $20.6bn was up +36%. GOOGLE maintains an attractive free cash flow profile, delivering FCF of $18.6bn in 4Q21 and $67bn in FY21. The Company ended FY21 with $140bn in cash and marketable securities and repurchased a total of $50bn shares in FY21.

Google Services is driven by strong consumers: Overall Google Services revenue for FY21 of $237.5bn was up +41% YoY, a significant acceleration on FY20A growth of +11%. 4Q21 revenue of $69.4bn was up +31% YoY, “driven by broad-based strength in advertiser spend and strong consumer online activity.” Over 4Q21, “retail was again by far the largest contributor to year-on-year growth of our ads business. Finance, media and entertainment, and travel, were also strong contributors.”

Company Profile

Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Access, Calico, CapitalG, GV, Verily, Waymo, and X, as well as Internet and television services.

(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
Global stocks Shares

URW Under Huge Debt, But All Can Be Cleared At Ease

Business Strategy and Outlook

Unibail-Rodamco-Westfield or URW, was formed in 1968, and it acquired several large malls through to 1995, and offices thereafter. In 2000 it launched a conventions and exhibitions business and is now the European leader in that sector. In 2007 Unibail merged with Rodamco, becoming the largest retail REIT in continental Europe. The group expanded into the United Kingdom and United States via the acquisition of Westfield in 2018. 

The Westfield acquisition was via a combination of cash and scrip, and management committed to noncore asset sales to reduce debt. Progress was good until the COVID crisis crimped its previous earnings certainty, and market sentiment toward URW. The group’s assets remain high quality, owning centres that are among the best in Europe and the United States. Its iconic assets include the Carrousel du Louvre in Paris, Westfield Mall of Scandinavia in Stockholm, Westfield centres at Stratford and Shepherd’s Bush in London, the Westfield World Trade Centre in New York, Westfield Valley Fair in the San Francisco region, and many others. It is foreseenURW’s malls to perform strongly once economic conditions return to approximately normal. However, URW’s large debt load combined with an earnings hole of unknown duration has put the balance sheet under pressure. 

URW was able to issue debt during the COVID crisis at cheap prices (albeit slightly higher than 2019 levels), but needs to reduce debt. In November 2020, shareholders rejected a proposed EUR 3.5 billion equity raising. URW may instead exit its more than EUR 10 billion of assets in North America, sell more than EUR 2 billion of assets in Europe, pay no distributions until 2023, and cut development spend. Given the fast-changing landscape, it wouldn’t be of surprise to see further adjustments to the strategy, with management taking an opportunistic approach, with options including full or partial asset sales, development partnerships.

Financial Strength

URW is under financial pressure due to its high debt load combined with a hole in its earnings from coronavirus shutdowns, social distancing, and related economic damage. Its loan to valuation ratio of 42.5% (pro forma, as at Dec. 31, 2021) is excessive in Analysts’ view. A proposed EUR 3.5 billion equity raising was rejected by shareholders in November 2020, URW instead raising cash through European asset sales over 2021 and 2022, and potentially EUR 10 billion of sales in North America. It is assumed the capital proceeds will be used to repay debt, and are confident gearing can be brought under 35%, however, to go much lower than that will require favourable conditions for asset sales, which could take time. If the economy approaches normal conditions and other planned cash collection/retention measures proceed, the company should be on a firmer footing. However, if COVID-19 variants result in consumer aversion to public places well into 2022, it is possible URW would have to raise equity again. In the event of dangerous new variants that require longer restrictions on retail trading, there is a remote risk this could completely wipe out current securityholders, though this would be an extreme scenario. A prolonged rise in interest rates is also a risk, though URW’s long-dated debt profile and leases linked to CPI and tenant sales provide some protection from this.

Bulls Say’s

  • COVID-19 vaccine rollouts, and the milder omicron virus variant, should help URW’s rents and asset sales in coming years. 
  • URW tenants have recovered to sales numbers near pre-COVID-19 levels. Though not maintained, this suggests that rents should eventually recover to preCOVID-19 levels once pandemic issues are in the past. 
  • Although e-commerce competition is intense, a lot of the damage has already been done. URW’s affluent catchments remain desirable for retailers, who require a physical presence to maintain their brand and customer service standards.

Company Profile 

Unibail-Rodamco-Westfield, or URW, owns a portfolio of quality malls, about two thirds in continental Europe. Since acquiring Westfield in 2018 URW also has about 10% in the U.K. and about 25% in the U.S., but it plans to drastically reduce exposure to the latter. More than 90% of rent comes from shopping centres, the remainder from offices, mostly Paris, as well as some offices attached to mixed-use assets around the world, and a similar amount from a conventions and exhibitions business in France. 

(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
Fixed Income Fixed Income

Western Asset Australian Bond Trust – Class M: Among the best in the Australian Bond

20025825 - closeup image of businessman drawing 3d graphics

Western Asset Australian Bond is a compelling choice for domestic fixed-interest exposure owing to its bestin-class team and straightforward approach. Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills.

Approach

The philosophy of the team is to identify mispricings within sectors and securities allocating active risk in areas in which it has conviction while ensuring the portfolio remains diversified to avoid singular themes being pervasive through the portfolio. The team takes account of global macro insight from the global investment strategy committee and overlays its domestic market knowledge to come up with a base-case expectation looking forward six to nine months depending upon their conviction. In addition to this, the team develops multiple upside and downside scenarios as a risk-management framework. 

Portfolio

The portfolio can invest across government, semi-government, supranational, credit, securitised assets, inflation-linked bonds, and cash. As of November 2021, over 40% of the portfolio was invested in investment grade corporate bonds, around 25% in semi-government issues, 20% in government, 10% in supranational, with a small amount of mortgage-backed and asset-backed securities. Active duration moved short relative to the benchmark around mid-2021 but came back in line with the index around year-end. Similar to most Australian bond managers, they entered 2021 overweight in credit, indicative of their opportunistic profile.

People

The fund is managed by a seasoned team of investors who remain dedicated to this strategy. The team is led by Anthony Kirkham, who has had more than 30 years of wider experience, including nearly two decades at Western Asset Management and leading this strategy since 2002. Kirkham has credit analyst, dealer, and portfolio manager experience working for Commonwealth Bank, Metway Bank, RACV Investments, and Citigroup. He is supported by Damon Shinnick, who is a portfolio manager with a focus on credit portfolios.

Performance

This strategy has performed well over the medium and long term, especially compared with peers. It has delivered returns above the Bloomberg AusBond Composite Index, net of fees, over the past decade. That is ahead of its target return of 75 basis points (gross of fees) over the benchmark and market cycle. A tracking error of 100 basis points is targeted. Perhaps more impressive, though, is that these results put the strategy’s flagship A share class in the first quartile of its Morningstar Category over the trailing three, five, and 10 years to December 2021. Sector allocations and credit exposure continue to drive performance.

(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

Terex’s Fourth-Quarter Results Showed Strength, but Supply Headwinds Persist

Business Strategy and Outlook:

Terex provides customers an extensive product portfolio consisting of aerial lifts and materials processing equipment. Terex will continue to be one of the top companies in the heavy equipment industry, with strong brands that resonate with users across construction, industrial, utility, mining, and residential markets. Customers value Terex’s high-quality and strong-performing products, which also have good residual values. Terex also helps customers reduce their total cost of ownership through improved operational and fuel efficiency, limited machine down-time, and consistent parts availability.

The company’s strategy shifted in late 2015, when it repositioned its operations around two core segments, aerial work platforms and materials processing equipment and divested its unprofitable construction equipment, material handling and port solutions, and mobile cranes businesses. Company’s two core segments are market leaders in their respective industries. In aerial lifts, its Genie brand is highly regarded and offers customers a full line of products, including booms, scissor lifts, and telehandlers. The Genie brand also provides customers with valuable product features, such as safety, accessibility, and capacity, allowing Terex to achieve better pricing.

Financial Strength:

Terex maintains a sound balance sheet. Total debt at the end of 2021 stood at $674 million, which equates to a net debt/adjusted EBTIDA ratio just above 1. The company’s net leverage ratio declined significantly in 2021, as management paid down a substantial portion of debt $503 million. Terex will generate close to $300 million in free cash flow, supporting its ability to return free cash flow to shareholders. Looking ahead, management should focus on growing its dividend and tuck-in acquisitions to grow its two core segments. Management is determined to rationalize its manufacturing footprint and reduce its selling, general, and administrative spending to improve cost efficiencies. The company’s cash position as of year-end 2021 stood at $267 million on its balance sheet. The company has access to $600 million in credit facilities. Terex maintains a strong financial position, supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say:

  • Increased infrastructure spending in the U.S. and emerging markets could result in more downstream equipment purchases (materials processing), driving higher sales growth for Terex.
  • Non-residential construction spending may begin to recover from pandemic lows, creating demand for Terex’s aerial products.
  • The aging aerial fleet could lead users to buy newer models with advanced features, boosting sales of Terex’s aerial lifts.

Company Profile:

Terex is a global manufacturer of aerial work platforms, materials processing equipment, and specialty equipment, such as material handlers, cranes, and concrete mixer trucks. Its current composition is a result of numerous acquisitions over several decades and a recent shift to focus on its two core segments after divesting a handful of underperforming businesses. The company’s remaining segments see heavy demand in nonresidential construction as well as in maintenance, manufacturing, energy, and materials management.

(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

Seek’s Boost From the Strong Australian Labour Market Likely to Eventually Wane

Business Strategy and Outlook

Seek captures 90% of total time spent online searching for jobs, dominating the Australian market. This dominance within a small niche global geographic market, built through a first-mover advantage, represents a strong competitive advantage given its network effect. Australians view seek.com.au as their first port of call for looking for employment, which is why we ascribe a narrow moat to the company. 

Seek’s international investments offer strong growth potential. Through a close working relationship with investment group Tiger Fund, Seek has acquired minority shareholdings in the number-one online job sites in Brazil, Mexico, Indonesia, Thailand, Malaysia, the Philippines, and China. Low Internet penetration is a common feature among these countries while gross domestic product growth rates remain comparatively high. The Chinese investment, Zhaopin, is of particular interest, as funds continue to be reinvested back into further establishing its growing online market share. Internet data indicates that Zhaopin and rival 51Job continue to trade the desired number-one market position back and forth from month to month. Morningstar analysts view Seek as an entrepreneurial organisation that is unafraid to create new concepts and push the boundaries in offering a range of new services within education and job-seeking to an online market that is rapidly evolving, compared with traditional business models.

Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.

Financial Strength

Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.

Bulls Say  

  • Seek has a dominant position in the Australian market underpinned by a network effect-based economic moat. This enables strong cash generation to fund other overseas businesses. 
  • Seek has successfully diversified beyond its core Australian business to build a global online employment marketing group. 
  • The network effect, epitomised by successful online market Titans such as Google, eBay, and Facebook, demonstrates the virtuous circle of the largest audiences attracting more and more users because of audience size.

Company Profile

Seek operates the dominant Australian online job advertising website, capturing 90% of time spent online looking for jobs. It also has an education division that provides vocational courses online. Overseas investments provide Seek with market-leading positions in the online jobs market in Asia and Latin America.

(Source: Morningstar)

  • Relative to the pcp: (1) 

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

JB Hi-Fi’s Buyback Could Appeal to Taxpayers Depending on Personal Circumstances

Business Strategy and Outlook:

Material inflation is occurring in the home appliances category and presents both upside and downside risk to earnings. Management estimates prices for appliances, representing most sales at The Good Guys on estimate, have risen on average by about 8%. Higher average unit prices could bolster revenues in the second half, even if sales volumes decline as expected. However, relatively high inflation in relation to growth in consumers disposable income could weaken demand further, offsetting the positive impact. Management hasn’t yet observed any unusually high inflation in consumer electronics, the key category at JB Hi-Fi stores.

Higher online sales penetration and robust in-store sales at stand-alone stores offset the drop-in footfall to JB Hi-Fi’s mall stores. Low-single-digit group sales growth held up at similar levels to the December quarter-though continue to forecast a decline in the second half and sales decreasing by 3% in fiscal 2022.

Financial Strength:

A 2% decline in group sales and AUD 288 million in net profit after tax were pre-announced in January 2022. However, a surprise off-market buyback perhaps explains a 5% uptick in the shares following the release. JB Hi-Fi is returning AUD 250 million in funds via the buyback, following two strong years of trading which has resulted in an under-geared balance sheet and significant franking credits. The buyback price will be between 8% and 14% below the five-day volume-weighted average price, or VWAP, to April 8, 2022. A capital component of AUD 3.18 per share will be paid, with the remainder in the form of a fully franked dividend. At AUD 43.00 analysts estimate JB Hi-Fi will buy back 5.8 million shares or 5% of currently issued capital. While the expected buyback price is lower than current share prices, Australian taxpayers who have a low marginal tax rate could benefit materially from participating versus selling shares on market.

JB Hi-Fi declared a fully franked dividend of AUD 1.63 per share, representing a 65% payout ratio of first-half underlying earnings.

Company Profile:

JB Hi-Fi Limited is a specialty retailer of branded home entertainment products. The group’s products particularly focus on consumer electronics, electrical goods, and white goods through its JB Hi-Fi, JB Hi-Fi Home, and The Good Guys stores. The company primarily operates from stand-alone destination sites and shopping centre locations in Australia and New Zealand, but the online platform is becoming increasingly important.

(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

Arista Shining From High End Switching Demand Turned on as Cloud Data Centers Expand

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook

Arista Networks has solidified its market presence through data center switching and software-based networking innovation, and it is alleged customers will remain loyal to the firm’s Extensible Operating System software and peripheral products. Arista’s initial growth came from high-frequency trading firms that found value in its low-latency switches and EOS. By remaining at the forefront of switching and routing speeds, Arista became a key networking supplier to giant cloud operators, service providers, and enterprises. 

It is seen EOS’ novelty lies in its single software image that provides a consolidated view of device activity from end to end and its ability to centrally upgrade the entire network. EOS contains leading software-defined networking features while remaining intuitive and fully programmable. Additional software offerings like CloudVision expand functionality and interoperability across networks. Arista uses merchant silicon for its hardware, which is held, allows the company to focus on its core competencies. 

Arista works closely with its core customers to optimize their networking ecosystems, which it is alleged, can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista entered into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless and security capabilities. Even with current customer concentration risk, It is viewed, that Arista is growing alongside key customers and that new ventures have expanded from core competencies.  It is held that Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers.

Financial Strength

It is considered Arista to be in a financially healthy position; its zero-debt balance and $3.4 billion in cash, cash equivalents, and marketable securities as of the end of 2021 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. It is held that the company’s financial health will remain stable and that cash could be deployed for growth via bolt-on products or technologies.

Bulls Say’s

  • Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades. 
  • Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines. 
  • Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyze growth in areas such as analytics, access points, and security.

Company Profile 

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific. (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.