Author: lvc-admin

Categories
Technology Stocks

AMD Completes Acquisition of Xilinx; Firm’s Narrow Moat Is Strengthened With FPGA Leader

Business Strategy and Outlook

Advanced Micro Devices designs an array of chips for various computing applications. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. Morningstar analysts think AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives analyst confidence that the firm will generate excess returns over the cost of capital over the next decade and thus warrants a narrow economic moat rating.

Morningstar analysts thinks the firm is well positioned to enjoy data center growth driven by the shift from on-premise to cloud computing. In the mature PC market, Morningstar analysts think AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in both PCs and servers, though analysts expect x86-based chips to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semicustom processor applications, such as game consoles. AMD’s semicustom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though Morningstar analysts don’t believe AMD is as competitive in GPUs as it is in CPUs.

AMD Completes Acquisition of Xilinx; Firm’s Narrow Moat Is Strengthened With FPGA Leader

In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. Consequently, Morningstar analyst are raising its fair value estimate for AMD to $130 per share from $128. The updated fair value reflects the combined entity .Management expects annualized cost synergies of $300 million within 18 months, based on synergies in cost of goods sold and shared infrastructure through streamlining common areas. Morningstar analysts assume the joint firm will enjoy better cost economics at TSMC, with both standalone AMD and Xilinx being prominent customers of the foundry leader. 

Financial Strength 

At the end of June 2021, the firm reported $2.6 billion in cash and cash equivalents against $313 million in long-term debt. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While the firm has generated solid cash flow in recent years, the company’s longer-term competitiveness remains heavily dependent on the ability of AMD to retain healthy market share across PC, server, and GPU segments.

Bulls Say

  • AMD’s recent CPU and GPU offerings have been more competitive with Intel and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies. 
  • AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage. 
  • AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.

Company Profile

Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.

 (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

Mastercard Has Multiple Characteristics That Should Draw Investors’ Attention.

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy and Outlook:

Mastercard has multiple characteristics that draw investors’ attention. Despite the evolution in the payment space, a wide moat surrounds the business and view Mastercard’s position in the current global electronic payment infrastructure as essentially unassailable. Mastercard benefits from the on-going shift toward electronic payments, which provides plenty of opportunities to utilize its wide moat to create value over the long term. Digital payments, on a global basis, surpassed cash payments just a few years ago, suggesting that this trend still has a lot of room to run, and the emerging markets could offer a further leg of growth even if growth in developed markets slows. 

Mastercard is moderately skeptic to more modest movements in the electronic payment space, as it earns fees regardless of whether payment is credit, debit, or mobile. Cross-border transactions, which are particularly lucrative for the networks, came under heavy pressure due to the fallout from the pandemic and a reduction in global travel. Full recovery is forecasted, and this should drive relatively strong growth in the near term. From a longer-term point of view, it is likely that smaller and more regional networks are building out capacity for cross-border transactions, which could eat into growth a bit in the coming years. 

Financial Strength:

Mastercard’s balance sheet is solid. The company added a small amount of debt to its balance sheet in 2014 and in the years since has steadily increased debt. Still, debt/EBITDA at the end of 2021 was a very reasonable 1.3 times, and Mastercard’s leverage is still a bit below Visa’s. It is predicted that debt will increase a bit more, but Mastercard will retain relatively modest leverage in the long run.

The company has shown a relatively limited appetite for M&A, and the business model requires very little balance sheet investment, so management has considerable flexibility. Given the integral nature of Mastercard to the global payment infrastructure, it is discredit that management would be eager to get too aggressive with its capital structure. On the other hand, an overly conservative balance sheet structure could impede long-term shareholder returns. It is believed that the current amount of leverage strikes a reasonable balance.

Bulls Say:

Mastercard has been outperforming Visa in terms of growth. Its smaller size and some leveling in market share between the two could maintain this trend. 

  • There is still plenty of runaway for growth in electronic payments. Electronic payments only surpassed cash payments on a global basis a couple of years ago.
  • Management is appropriately focused on long-term growth opportunities and not near-term margins.

Company Profile:

Mastercard is the second-largest payment processor in the world, having processed close to $6 trillion in purchase transactions during 2021. Mastercard operates in over 200 countries and processes transactions in over 150 currencies.

(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

AMP focused on simplifying its business and reducing cost, with less emphasis on growth

Business Strategy and Outlook

AMP plans to simplify Australian Wealth Management, or AWM. It is focused on retaining larger, more profitable practices; so it can minimise compliance costs and regulatory breaches. Tighter compliance and education requirements are being enforced. The firm aims to retain its share of advisers through offering superior adviser support services, and aims to increase distribution via external advisers. Its extensive product suite will be reduced and made more cost-competitive to help attract future fund flows. AMP Bank has been merged with AWM as part of the group’s restructure.

Management intends to demerge, simplify and list AMP Capital’s unlisted real estate and infrastructure business. The directly-managed component of its listed investments business, known as Global Equities and Fixed Income, or GEFI, will be sold to Macquarie. The unlisted infrastructure debt business has also been sold to Ares. AMP’s immediate earnings outlook is subdued. Ongoing negative connotations to the AMP brand and higher education standards will prompt more advisers to leave AWM and deter prospective joiners into the AMP network–thus narrowing its distribution reach.

Financial Strength

AMP’s financial position is sound. AMP has consistently maintained a capital buffer above minimum regulatory requirements, or MRR, to help manage any unwelcome surprises in costs and navigate through periods of fluctuating earnings. AMP’s eligible capital resources as at Dec. 31, 2021, exceeds MRR and its internal target by about AUD 1.2 billion and AUD 383 million, respectively. The eligible capital/MRR ratio over the past five years has averaged 2.2 times. The lowest, however, was in 2021 with 1.9 times. AMP Bank is in sound financial health, with a common equity Tier 1 ratio of 10.4% as at Dec. 31, 2021. Another positive is a progressive increase in the deposit/loan ratio to 81% in December 2021, versus about 63% in 2015. 

The stable capital and funding positions provide comfort that it should be able to manage a potential increase in loan losses. However, there are risks that may impact AMP’s financial health. With ASIC and APRA expected to regulate AMP more aggressively, there is a possibility for further compliance costs, fines, remediation payments or class actions. The high execution risks in implementing its new strategy in the face of ongoing structural changes in the Australian financial advice industry is why there is limited scope for the board to return funds to shareholders in the near term.

Bulls Say’s

  • AMP remains the second-largest adviser network in Australia and can leverage scale to offer its services at a relatively lower cost to customers. 
  • AMP is well positioned to capture inflows from investors, notably the ageing demographic. People tend to seek out financial advice and be more concerned with retirement savings the closer they get to retirement. 
  • AMP should benefit from the progressive increase in the superannuation guarantee contribution rate to 12% by July 1, 2025.

Company Profile 

At its roots, AMP is a wealth manager, providing financial advice via Australia’s second-largest network of aligned financial advisers. It has a vertically integrated business model: AMP advisers can invest client funds into superfunds and non-super investments manufactured by AMP through the firm’s own platforms, though advisers are free to recommend non-AMP products and third-party platforms to their clients. The firm also has a small wealth presence in New Zealand with about 53 advisers. In addition, AMP has an investment management business, servicing both AMP’s adviser clients and external investors (such as institutional clients); and a retail banking business focused on deposit taking and residential mortgages.

(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

BAP Trading on an attractive FY23E PE Multiple of 18.1x and yield at 3.0%

Investment Thesis

  • Trading below our valuation. 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in secondhand vehicle sales; travelers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilizing their vehicles).
  • Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth).
  • Strong earnings growth profile. 
  • Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers. 
  • Significant distribution network across Australia to leverage from.
  • Ongoing bolt on acquisitions and associated synergies.
  • Growing BAP’s own brand strategy, which should be a positive for margins. BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products.
  • Weak macro story of leveraged Australian consumer and lower growth environment persisting.
  • Thailand represents a meaningful opportunity in our view. 

Key Risks

  • Rising competitive pressures.
  • Value destructive acquisition. 
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
  • Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower. 
  • Integration (and therefore synergies) of recent acquisitions underperform market expectations. 
  • Execution risk around Thailand. 

Key Highlights

  • The Board declared a fully franked interim dividend of 10cps, up +11.1% over pcp. 
  • The balance sheet remained strong with ample liquidity with cash increasing +101.5% over 2H21 to $79.8m and net debt of $203M (up +23.7% over 2H21) leading to a leverage ratio of 1.0x, providing the Company with significant financial flexibility to be able to respond rapidly to acquisition opportunities and continue to invest in high returning projects. 
  • Management continued investments in locations to support Truckline and Autobarn networks, expanded geographic footprint with BAP now having a presence in over 1,100 locations throughout Australia, New Zealand and Thailand, and signed 2 acquisitions adding annualised revenue of $50m at mid-single digit EBITDA multiples (pre-synergies).
  • The Board 

Company Profile 

Bapcor Ltd is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS.

(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

Uber’s Q4 results beat expectations; Margin expansion to continue on all fronts; Shares attractive

Business Strategy and Outlook:

Mobility demand continued to approach pre-pandemic levels, which further attracted drivers and stabilized prices for riders, expanding the adjusted EBITDA margin, displaying the platform’s strong network effect moat source. The firm’s ability to further monetize the platform via advertising and other verticals is also appealing. 

It appears that normalcy after the pandemic includes not only spending more time out of home and traveling, but also still ordering food and other products online for delivery or pickup as delivery continued to grow. While the mobility take rate dipped, the delivery take rate increased 60 basis points from last quarter and around 5 percentage points year over year.

A slowdown in the decline in air travel is witnessed, which we believe indicates that Omicron has already peaked and demand for travel and therefore airport rides and overall mobility demand may accelerate again. As Uber’s strong network effect continues to attract consumers, advertisers have begun to spend more on the firm’s marketplace platform.

Financial Strength:

Management guided to first-quarter year-over-year gross bookings growth deceleration due to a slight impact from omicron, which appears to have already peaked. Uber generated $25.9 billion in total gross bookings during the quarter, up 51% year over year, with contributions from mobility (up 67%), delivery (34%), and freight, which spiked 245% from last year due to the acquisition of Transplace. Mobility gross bookings hit 84% of pre-pandemic levels during the quarter, up from 79% in the third quarter. While the mobility take rate dipped, the delivery take rate increased 60 basis points from last quarter and around 5 percentage points year over year. Net revenue of $5.8 billion during the quarter was up 105% from 2021. Mobility net revenue grew 55%, while delivery net revenue went up 78%. Monthly active platform users increased 27% from last year to 118 million. Trip requests came in at 1.77 billion (up 23% year over year); however, due to omicron, frequency, or trips per user, declined nearly 10% from last year but stayed within the 14-15 trips range. 

Company Profile:

Uber Technologies is a technology provider that matches riders with drivers, hungry people with restaurants and food delivery service providers, and shippers with carriers. The firm’s on-demand technology platform could eventually be used for additional products and services, such as autonomous vehicles, delivery via drones, and Uber Elevate, which, as the firm refers to it, provides “aerial ride-sharing.” Uber Technologies is headquartered in San Francisco and operates in over 63 countries with over 110 million users that order rides or foods at least once a month. Approximately 76% of its gross revenue comes from ride-sharing and 22% from food delivery.

(Source: Morningstar)

General Advice Warning

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

Categories
Shares Technology Stocks

Twitter’s strong user growth and monetization keeps firm on track

Business Strategy and Outlook:

Despite the top-line miss, both user growth and revenue per user was impressive, as the firm continues to capitalize on the growing demand for brand and direct response advertising. Twitter’s effort to focus more on advertising opportunities is believed to mix well with its balanced brand and direct response revenue base in the long run, allowing the firm to capture more small- and medium-size business ad revenue and tap further into ecommerce growth. the firm has taken the right steps to focus on generating growth in advertising revenue. Following the sale of MoPub, the firm properly reallocated investment into direct response and commerce offerings, which should allow it to attract more small- and medium-size businesses and balance brand advertising. In addition, Twitter’s efforts to provide easier contextual advertising options combined with further user personalization and improvements to user experience in the app could attract even more brand advertising dollars. With the continuing user growth, it is expected that Twitter’s subscription products to slightly reduce its dependency on advertising.

On the commerce front, Twitter for Professionals profile options will attract more businesses as usage of the platform’s Shop module, which allows businesses to highlight their products to be purchased on Twitter, will drive transaction volume higher. However, the firm does face significant competition on this front, including from the likes of Facebook, Pinterest, and, of course, Amazon.

Financial Strength:

Total revenue came in at $1.6 billion, up 22% from last year, with growth in both advertising revenue (22%) and data licensing and other revenue (15%), bringing total revenue for the year to $5.1 billion in 2021. The firm’s user count increased 13% year over year to 217 million, with U.S. and international users up 3% and 16%, respectively. Management claims user numbers improved because of Twitter’s new single sign on feature and improved notifications that attracted former users to return to the platform. n the fourth quarter, costs and expenses totaled $1.4 billion, an increase of 35%, mainly due to increased investment in research and development as well as sales and marketing. The firm generated operating income of $167 million (11% margin) compared with operating income of $252 million (20% margin) last year

Company Profile:

Twitter is an open distribution platform for and a conversational platform around short-form text (a maximum of 280 characters), image, and video content. Its users can create different social networks based on their interests, thereby creating an interest graph. Many prominent celebrities and public figures have Twitter accounts. Twitter generates revenue from advertising (90%) and licensing the user data that it compiles (10%)

(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

DaVita Stays Steady on Cautious Guidance for 2022; Shares Fairly Valued

Two businesswomen working late in office look at documents

Business Strategy and Outlook

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, Morningstar analysts view DaVita’s long-term prospects as solid. 

Once COVID-19 concerns dissipate, Morningstar analysts expect DaVita to get back to more normalized growth trends driven primarily by ESRD trends. Analysts think low- to mid-single-digit revenue growth is likely for DaVita in the long run based on the continued expansion of the U.S. dialysis patient population, mild revenue per treatment growth, and ongoing international expansion. These expectations include ongoing expansion of at-home treatments, and we think DaVita can even benefit from extending the at-home treatment stage for patients, despite its clinic infrastructure. At-home patients still have relationships with clinics and are more likely to continue working and, in turn, remain on more profitable commercial insurance plans for a more substantial part of the 33 months where that is possible before Medicare automatically takes the lead on reimbursement for ESRD treatments. Eventually, most ESRD patients will need in-clinic therapy, too, unless they receive a kidney transplant. Of note, supply and demand for transplants remain greatly mismatched with the average wait list time around four years. But if those dynamics change, DaVita may even be able to benefit, as it has invested in early-stage initiatives to improve transplants. And in general, we think DaVita stands to benefit from the continued growth in the ESRD population however they are treated, and it is even pursuing integrated care models to gain a bigger piece of the treatment pie in the long run. 

With these factors in mind, management has highlighted mid-single-digit operating income and high-single-digit to low-double-digit earnings per share growth targets from 2021 to 2025, which is roughly in line with our assumptions during that period, as well.

DaVita Stays Steady on Cautious Guidance for 2022; Shares Fairly Valued

After trimming guidance for 2021 and expressing caution on 2022 during its third-quarter call, DaVita turned in solid operating results and guided in line with our 2022 expectations on its fourth-quarter call. Morningstar analyst   boosts its fair value estimate to $116 per share from $110 primarily to reflect a change in our long-term U.S. corporate tax rate estimate after previously assuming the tax rate would rise on Democratic policy initiatives, which appear unlikely now. Also, our fair value depends on business conditions normalizing in 2023 and beyond, and despite the near-term constraints, Morningstar analysts continue to see significant intangible assets and cost advantages around DaVita’s top-tier position in dialysis services, which informs our narrow moat rating on the firm. 

Financial Strength 

Like many healthcare services providers, DaVita operates with significant leverage, especially when considering lease obligations. DaVita owed $8.9 billion of debt and held $1.2 billion of cash and short-term investments as of September 2021, or in the middle of its net leverage target range of 3.0 to 3.5 times. Its operating lease obligations of $3.1 billion add another turn, roughly, to leverage. After refinancing many of its obligations, DaVita’s maturity schedule appears easily manageable, though, with big maturities in 2024 ($1.4 billion) and 2026 ($2.6 billion) but limited maturities otherwise. During that time frame, Morningstar analysts expect DaVita to generate at least $1 billion annually of free cash flow, so the company could handle those maturities as they come due through internal means. However, given the firm’s large share repurchase plans, Morningstar analysts think DaVita will seek to refinance its obligations coming due. After $2.4 billion of share repurchases in 2019, the company made another $1.4 billion of share repurchases in 2020 and $0.9 billion of repurchases through September 2021. The company anticipates making significant share repurchases going forward to boost its adjusted EPS growth (8% to 14% goal from 2021 to 2025) above its operating income prospects (3% to 7% goal from 2021 to 2025). It had $1.0 billion remaining on its share repurchase authorization as of September 2021.

Bulls Say

  • Excluding recent COVID-19-mortality challenges, we expect the ESRD patient population to grow at a healthy rate in the U.S. and around the globe for the long run, which should benefit DaVita. 
  • DaVita enjoys top-tier status in the essential dialysis business, and we do not expect competitive dynamics to negatively affect that attractive position anytime soon. 
  • While growing at-home care could change its business model a bit, DaVita could also benefit from ESRD patients being able to continue working and staying on commercial insurance plans.

Company Profile

DaVita is the largest provider of dialysis services in the United States, boasting market share that eclipses 35% when measured by both patients and clinics. The firm operates over 3,100 facilities worldwide, mostly in the U.S., and treats over 240,000 patients globally each year. Government payers dominate U.S. dialysis reimbursement. DaVita receives approximately 69% of U.S. sales at government (primarily Medicare) reimbursement rates, with the remaining 31% coming from commercial insurers. However, while commercial insurers represented only about 10% of the U.S. patients treated, they represented nearly all of the profits generated by DaVita in the U.S. dialysis business.

(Source: Morningstar)

General Advice Warning

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

Categories
Funds Funds

Vanguard Real Estate Index Fund Investor Shares: Low cost, no-frills U.S real estate exposure

Approach

Tracking the MSCI U.S. Investable Market Real Estate 25/50 Index yields a broadly diversified portfolio that captures the full scope of opportunities available to U.S. real estate investors. Market-cap weighting channels the market’s collective wisdom and promotes low turnover, underpinning an Above Average Process Pillar rating. This index selects stocks from the MSCI U.S. Investable Market Index, a broad benchmark the spans the complete U.S. stock market. It adds firms that are classified under the real estate sector. This includes equity REITs as well as real estate management and development firms. The fund excludes mortgage and hybrid REITs, which partially derive their revenue through real estate lending.

Portfolio

REITs represent 96% of this portfolio, with real estate management and development firms rounding out the remainder. REITs are required to distribute at least 90% of their taxable income to shareholders, so this fund consistently generates higher yield than the category average. REITs tend to be more sensitive to interest rates than other equity sectors, partially because interest rates directly affect property values. Additionally, their cash flows from rent collection are relatively fixed, making them somewhat bondlike. REITs’ interest-rate sensitivity depends on their lease durations. For example, office REITs (11% of portfolio) tend to be quite sensitive because of their longer lease cycles, but the shorter leases of residential REITs (14%) make them less responsive. Industrial (11%) and retail REITs (9%) tend to fall in the middle. This fund sprinkles investment across an array of property types, ensuring that its fate isn’t tied to a bet on interest rates or one industry’s performance. 

Performance

Specialty REITs have fared very well over the past few years. REITs that own and operate cell towers, like Crown Castle International CC and American Tower ATC, have turned in especially strong performance. This fund invests in specialty REITs more heavily than the category average, so it has reaped strong growth from these sound performers. Specialty REITs tend to be more volatile than other property types, but they have also demonstrated the potential for stronger returns. 

About the Fund

The investment seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments. The advisor attempts to track the index by investing all, or substantially all, of its assets-either directly or indirectly through a wholly owned subsidiary, which is itself a registered investment company-in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund is non-diversified.

(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

Calendar 2021 Guidance Met and Cash Can Now Begin to Flow Again for Cimic

Business Strategy and Outlook

Cimic has developed the ability, reputation, and balance sheet strength to undertake numerous large-scale contract mining and construction projects simultaneously and in different countries. Few companies, apart from Cimic, in the domestic contract mining and construction market have the reputation, skill, knowledge, or capability to undertake challenging megascale mining and infrastructure projects. But excess returns of the recent past look to be a function of the China-driven commodities boom.

Cimic’s annual operating revenue is split 60%-65% engineering and construction work, 20%-25% contract mining and 10%-15% services and property development work. Cimic’s contract mining business is highly capital-intensive but inherently lower risk than construction. Domestic and international mining contracts are normally schedule-of-rates style, with Cimic assuming risk on productivity and volumes. Cimic lowers operating risk on contract mining work by mainly undertaking open-cut mining at coal and iron ore sites with quality deposits for large resource companies. However, competition can be fierce for new contract mining work and renewals.

Financial Strength

Cimic is in strong financial health. The company finished December 2021 with AUD 502 million in net debt, leverage (ND/(ND+E)) of 32% and net debt to EBITDA a comfortable 0.6. The company sold a 50% stake in its Thiess mining contracting business to the U.K.’s Elliot in 2020, the transaction generating AUD 2.1 billion net cash proceeds. Cimic’s capital intensity is tempered with exposure to the equipment heavy mining contracting sector lessened. This should enhance the rate of cash conversion in future. 

In addition to the cash proceeds, the Thiess sell-down reduces Cimic’s lease liability balance by approximately AUD 500 million. Net operating cash flow exceeded AUD 1.0 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years. But net operating cash flow fell to AUD 927 million in 2019, not helped by one-off BIC Contracting exit costs in the Middle East and has been negative through to June 2021 due to COVID-19 and unwind in factoring. Traditionally, the company has a strong balance sheet and cash flow, which provides the necessary flexibility to tender for large infrastructure and mining contract projects. 

Bulls Say’s

  • Cimic could remain under pressure due to slower demand for mining services. Mining construction often involves higher levels of risk, as a result of fixed-price, fixed-time, and long-duration contracts. 
  • Cimic’s CEO was confidently forecasting strong earnings before COVID-19 led to an about-face and withdrawal of guidance. But Cimic says it is now building positive cash flow momentum again with awarding of new work. 
  • Increased focus on infrastructure construction projects and maintenance has helped stabilise earnings during weak market conditions for the domestic mining and energy sectors.

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
Dividend Stocks

Glaxo’s Diverse Portfolio Looks Poised to Support Steady Earnings Growth Over the Long Term

Business Strategy and Outlook:

As one of the largest pharmaceutical companies, GlaxoSmithKline has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product line up and expansive list of patent-protected drugs create a wide economic moat, in our opinion. The magnitude of Glaxo’s reach is evidenced by a product portfolio that spans several therapeutic classes as well as vaccines and consumer goods. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. Glaxo is expected to be a major competitor in respiratory, HIV, and vaccines over the next decade.

On the pipeline front, Glaxo has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and immune system, with genetic data to help develop the next generation of drugs. The benefits of this strategies are showing up in Glaxo’s early-stage drugs. This focus is expected to improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers.

Financial Strength:

Glaxo remains on fairly stable financial footing, with debt/EBITDA at 2.8 as of the end of 2021. While the company carries more debt than several of its peers, it generates relatively strong cash flows that should be largely stable. Glaxo has relatively higher debt levels than its peer group, and analysts don’t expect a major acquisition, but several smaller tuck-in acquisitions are likely as the firm augments its internal research and development efforts. Additionally, with the expected divestment of the consumer division in 2021, the combined dividend of the newly separated consumer group and the remaining pharma group are expected to be lower than the current dividend of the combined company as Glaxo has signalled a desire to invest more into the business at the expense of the dividend.

Bulls Say:

  • Glaxo’s next-generation respiratory drugs and HIV drugs look poised for strong growth over the next five years. 
  • Glaxo faces relatively minor near-term patent losses, setting up steady long-term growth. 
  • The firm’s well-positioned Shingrix vaccine should support strong long-term growth based on excellent efficacy and limited competition.

Company Profile:

In the pharmaceutical industry, GlaxoSmithKline ranks as one of the largest firms by total sales. The company wields its might across several therapeutic classes, including respiratory, cancer, and antiviral, as well as vaccines and consumer healthcare products. Glaxo uses joint ventures to gain additional scale in certain markets like HIV and consumer products.

(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.