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Technology Stocks

Twilio’s software building blocks are constructing a cloud communications empire

Business Strategy and Outlook:

Twilio is a cloud-based communication-platform-as-a-service, or CPaaS, company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows developers to integrate messaging, voice, and video functionality into business applications. We believe narrow-moat Twilio has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform. 

In a go-to-market model that focuses on empowering developers to utilize the APIs to build products in a highly customized fashion, Twilio has been able to expand into use-cases that would be difficult to penetrate otherwise. For widely sought-after use-cases, Twilio has developed solution applications, like Flex Contact Center, which combine various channel APIs into a unified interface to create use-case-specific solutions.

Financial Strength:

Twilio is in a healthy financial position. Revenue is growing rapidly, and the company is beginning to scale, while the balance sheet is in good shape. As of December 2021, the company had cash and short-term investments of $5.4 billion and a debt balance of $985.9 million. In March 2021, Twilio issued $1.0 billion of senior notes, consisting of $500 million of 3.625% notes due 2029, and $500 million of 3.875% notes due 2031. In June 2021, the company redeemed its prior convertible notes, due March 2023, in their entirety. Since raising approximately $150 million in its IPO in 2016, Twilio has completed several secondary offerings, recently announcing a $1.8 billion offering of its Class. A common stock in 2021.Twilio 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. Twilio does not pay a dividend, nor repurchase stock, and for a young company in a relatively nascent industry, we find it appropriate that the company focuses capital allocation on reinvestments for growth.

Bulls Say:

  • The addition of SI partnerships and solution APIs should lead to increasing success in winning enterprise customers, which not only offer a greater lifetime value for a proportionally smaller acquisition cost, but also tend to be stickier customers. 
  • Twilio has stellar user retention metrics, with churn consistently below 5% and net dollar retention north of 130% in recent years. 
  • As Twilio focuses on developing more solution APIs and growth shifts from usage-based messaging to SaaS-like priced solutions, there should be a natural uptick in both gross margins and recurring revenue.

Company Profile:

Twilio is a cloud-based communication platform-as-a-service company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows software developers to integrate messaging, voice, and video functionality into new or existing business applications. The company leverages its Super Network, Twilio’s global network of carrier relationships, to facilitate high speed cost-optimized global messaging and voice-based communications.

(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

Solid Quarter for National Australia Bank With Margin Pressure Offset by Valuable Loan Growth

Business Strategy and Outlook

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand. 

The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers.The macro economic impact of the coronavirus has put the near-term outlook for credit growth and profitability under a cloud. The main current influences on earnings growth are modest credit growth, a product of household risk aversion and deleveraging, and delays to business plans for capital expenditure. Intense competition is constraining interest margins. Operating expenses are expected to moderate from 2021 though after years of rising risk and compliance spend.

After enjoying super low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020. As a result of which, Morningstar analysts expect a return to midcycle levels around 0.18% in fiscal 2025. The MLC wealth divestment completed in May 2021 after reaching an agreement with IOOF for AUD 1.44 billion as the bank simplifies and refocuses on its core banking operations.

Solid Quarter for National Australia Bank With Margin Pressure Offset by Valuable Loan Growth 

National Australia Bank’s first-quarter cash profit of AUD 1.8 billion is a strong start to the year. Operationally performance in the quarter was solid. The bank continues to sustain home loan growth ahead of the market, growing by 2.6% in the quarter. But with net interest margins, or NIM, trending lower, for the earnings run rate to hold, the release of loan loss provisions will need to step up. NIM fell 5 basis points to 1.64%, Morningstar analysts maintained a fair value estimate to AUD 28 per share. Morningstar analysts continue to assume NIM improvements in fiscal 2023 on a higher cash rate with a recovery to a NIM of 1.85% by fiscal 2025. Despite cost inflation, analysts think the bank can keep operating costs flat in dollar terms in fiscal 2023 and expect the benefits of fewer systems, more streamlined loan processing to allow the bank to reduce branch costs and staff numbers over time

Financial Strength 

National Australia Bank is in good financial health, with common equity Tier 1 of 12.4% above the regulator’s 10.5% benchmark as at Dec. 31, 2021. The bank slashed the fiscal 2020 dividend to AUD 60 cents per share on both lower earnings and a reduced dividend payout ratio. Morningstar analysts expect the payout to average 70% of earnings before notable items over the next five years, in line with the target range of 65%-75% introduced in 2020. National Australia Bank has AUD 3.5 billion in excess capital, assuming a target common equity Tier 1 ratio of 11% (management target of 10.75% to 11.25%). This assumes completion of the AUD 2.5 billion share buyback announced in July 2021 and the acquisition of Citigroup’s Australian consumer business.

Bulls Say

  • Management focus is on successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth. 
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from the rebound in demand for business credit. 
  • NAB has the ability to achieve significant cost savings and drive operational efficiency improvements

Company Profile

National Australia Bank is the most business-focused of the four major banks, holding the largest share of business loans and the number-three spot in home loans. National Australia Bank is currently the third-largest bank by market capitalization, with the franchise covering consumer, small business, corporate, and institutional sectors. Under the UBank brand the bank also owns one of Australia’s largest digital-only banks. Offshore operations in New Zealand round out the group.

 (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

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Business Strategy and Outlook

Zebra Technologies is a key partner for supply chain, logistics, and operational efficiency for customers across industry verticals. Zebra has acquired and maintained a dominant share position in the automatic identification and data capture, or AIDC, marketby pivoting into higher-growth technologies over its life.

Morningstar analysts agree with the firm’s ongoing pivot into software, developing platforms internally and through acquisitions to augment and complement its existing portfolio.  Layering prescriptive software with machine learning and artificial intelligence on top of these solutions allows customers to focus on activities with higher return on investment and creates a stickier solution by further embedding Zebra’s technology in customer processes. Morningstar analysts think Zebra’s custom solutions give rise to steep customer switching costs, which underpin our narrow economic moat rating.

 Morningstar analysts expect Zebra to benefit from ongoing secular trends toward digitization and automation, notably in omnichannel retail, which has been accelerated by the COVID-19 pandemic and is a tailwind for the firm. Analysts consider the firm’s highest-growth opportunities will come from further building out its software portfolio and growing its base of recurring revenue, as well as from expanding its footprint in the healthcare market as health records and hospital workflows become digitized. The firm is done paying down its debt from its transformative 2014 Motorola deal, and management is now committing capital to bolt-on M&A and its heady research and development budget.

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Morningstar analysts raise its fair value estimate for Zebra Technologies to $449 per share, from $430, after the firm reported solid fourth-quarter results and raised its long-term guidance. Morningstar analysts believe COVID-19 impacts have benefited Zebra’s growth through accelerating demand for digitized solutions and automated workflows, however, it has simultaneously resulted in cost headwinds for supply chain and logistics, pressuring margins. Morningstar analysts believe that the long-term outlook for Zebra to lead the market in end-to-end digital transformation solutions and durably grow margins will come to fruition, despite ongoing constraints and considered it as short term. Morningstar analysts have greater confidence in Zebra’s growing portfolio of high growth adjacent markets to bolster the top line and modestly raise its long-term growth expectations. Shares pulled back on weak short-term margin guidance, and Morningstar analysts now view them as fairly valued.

Financial Strength

The firm was highly leveraged following its 2014 acquisition of Motorola Solutions’ enterprise division, but in the years following it has steadily paid down its debt. As of Dec. 31, 2021, the firm carried $991 million in debt, making its ratio of net debt/trailing 12-month adjusted EBITDA 0.51 times, well below the top of its target range of 2.5 times. Morningstar analysts  forecast Zebra to generate an average of $1.4 billion in free cash flow each year through 2026 and  allow it to easily service its obligations. With the remainder, analysts  expect the firm to pursue additional bolt-on acquisitions and conduct opportunistic share repurchases. However, Morningstar analysts don’t anticipate a transformative deal (like Motorola) in the short term and anticipate Zebra to remain in its target debt/EBITDA range. Zebra engages in receivables factoring, mostly in its operations in Europe, to help fund working capital. If the firm were to encounter a cash crunch, it has over $800 million of its revolving credit facility, which doesn’t expire until 2024, currently untapped.

Bulls Say 

  • Zebra derives 80% of its sales from a robust ecosystem of channel partners, which can customize its technology to specific sub verticals. 
  • Zebra has the largest share of the AIDC market with over 40%, per VDC Research. 
  • Zebra’s pivot into software should enable it to pursue higher-growth opportunities, expand margins, and heighten switching costs at end customers.

Company Profile

Zebra Technologies is a leading provider of automatic identification and data capture technology to enterprises. Its solutions include barcode printers and scanners, mobile computers, and workflow optimization software. The firm primarily serves the retail, transportation logistics, manufacturing, and healthcare markets, designing custom solutions to improve efficiency at its customers

(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

The Market For Uber Remains Fragmented, And Uber Competing Many Local Ride-Sharing Platforms And Taxis

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Business Strategy and Outlook

Founded in 2009 and headquartered in San Francisco, Uber Technologies has become the largest on-demand ride-sharing provider in the world (outside of China). It has matched riders with drivers completing trips over billions of miles and, at the end of 2020, Uber had 93 million users who used the firm’s ride-sharing or food delivery services at least once a month. In light of Uber’s network effect between riders and drivers, as well as its accumulation of valuable user data, it is alleged the firm warrants a narrow moat rating. 

Uber helps people get from point A to point B by taking ride requests and matching them with drivers available in the area. Uber generates gross booking revenue from this service (the firm’s mobility segment), which is equivalent to the total amount that riders pay. From that, Uber takes the remaining after the driver takes his or her share. Mobility gross booking declined 46% in 2020 due to the pandemic, while net revenue declined 43% with a slightly higher average take rate, although it is anticipated the take rate will decline in the long-run. The pandemic spurred 109% growth in delivery gross bookings and 182% increase in net revenue. 

It is likely, Uber has 30% global market share and will be the leader in Analysts’ estimated $452 billion total addressable ride-sharing market (excluding China) by 2024. The firm faces stiff competition from players such as Lyft (mainly in the U.S.) and Didi, a business in which Uber has an 11% holding after the sale of its operations in China to Didi in 2016. While Uber no longer operates in China, it does compete with Didi in other regions around the world. Globally, the market remains fragmented, and Uber competes with many local ride-sharing platforms and taxis. Delivery, the firm’s food delivery service, will continue to be one of the main revenue growth drivers. Both the mobility and delivery segments will benefit from cross-selling opportunities on the demand and supply sides of the platforms. Further utilization of Uber’s overall on-demand platform for delivery services in other verticals can also help the firm progress toward profitability, in Analysts’ view.

Financial Strength

At the end of 2021, Uber had $4.9 billion of cash and $9.3 billion of debt on its balance sheet. Uber burned $4.3 billion, $2.7 billion, and $445 million in cash from operations in 2019, 2020, and 2021, respectively, while capital expenditures averaged a bit less than $500 million during this period. It is likely, the firm to generate positive cash from operations beginning in 2022. By 2031, it is anticipated Uber’s cash from operations could exceed $23 billion, outpacing top-line growth due to operating leverage. It is projected Uber to become free cash flow positive in 2022, after which Analysts’ model it will average free cash flow to equity/revenue (FCFE/Sales) of over 10% through 2031. While it is held, Uber FCFE/Sales to reach 19% by 2031, it isn’t foreseen the firm issuing dividends. Uber will likely use any excess cash for further acquisitions.

Bulls Say’s

  • Uber’s position in the autonomous vehicle race could equalize gross and net revenue, after no longer needing to pay drivers. 
  • Pressure to pay a minimum amount per trip to its contracted drivers could create a barrier to entry for smaller players, helping Uber in the long-run. 
  • Uber’s aggregation of multimodal offerings will drive in-app stickiness, making Uber a one-stop shop for all transport needs.

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
Dividend Stocks

WHSP Growing Shareholders Money In Distinctive Ways Than Other Fund Managers And Capital Allocators

Business Strategy and Outlook

WHSP is a value investment style-oriented investment house with approximately AUD 9 billion in net asset value. Its approach to growing shareholder value is somewhat distinct from many fund managers and capital allocators, benefitting from advantages in its corporate structure, investment-style and from an unconstrained investment mandate. WHSP allocates capital largely in Australian equity markets–both public and private–where it feels its reputation as a long-term passive allocator of capital provides it with advantages. This reputation has been built over decades and is supported by a cross-shareholding with Brickworks–a unique corporate structure in Australian equity markets—partially shielding WHSP from the vagaries of equity markets. As a result, WHSP has greater flexibility to allocate capital in a manner abiding with true value investing paradigms, importantly including the ability to invest in a contrarian manner and with long time horizons. The group’s structure–as an investment holding company with a source of captive capital–provides further advantages. Constraints imposed by the requirement to fund redemptions in bear markets, and/or the need to ‘index hug’ in bull markets are less of a concern to WHSP, as often is the case for mutual fund structures. While these attributes are advantageous, they don’t provide a guarantee that the firm’s past successes will be replicated. 

WHSP provides capital on a long-term and passive basis, differing from private equity firms which are actively involved in management and strategy of investee enterprises. WHSP’s investment horizon also differs from uncertainty rating for WHSP. With negligible debt carried at the parent entity-level, WHSP’s cost of capital is therefore estimated at 11.0%. Analysts have incorporated the expected benefits of the Milton Corporation merger within their fair value estimate as of June 23, 2021. At the time, Analysts increased their fair value estimate by 9% to AUD 23.10 per share. It is seen that immaterial cost synergies associated with combining the two investment houses. Analysts’ valuation uplift is predominantly driven by WHSP financing the transaction with its overvalued scrip, which prior to the announcement was trading at a 43% premium to their fair value estimate.

Financial Strength

WHSP has an appropriately conservative approach to the use of debt. Net debt for the WHSP parent entity stood at AUD 26 million at fiscal 2021 year-end. Historically, WHSP’s approach has been for the parent-entity to remain ungeared and to hold significant cash balances at times. Holding significant cash balances at certain points in the equity market cycle is a central component of the value investment style and WHSP’s model for long-term shareholder value creation. Nonetheless, the advent of ultra-low interest rates in recent years has made the holding cash punitive. Therefore, the group uses debt facilities to access liquidity to take advantage of periods when equity market prices detach from long-term fundamentals. Nonetheless, WHSP parent-level gearing will remain modest with an upper limit of 15% (net debt equity) in place. The financial leverage of the group’s parent-entity is the most appropriate indicator of the financial health of WHSP. The financial exposure of WHSP to the fixed obligations, including debt, of its investments is inadvertently misstated in its consolidated financial statements. Under IFRS accounting standards, variation exists in terms of the extent and manner of reporting balance sheet items of WHSP’s investments in the group’s consolidated financial statements. The level of ownership in each investment dictates whether balance sheet items are fully consolidated or not. Regardless of the extent of WHSP’s ownership in each of its individual investments, there exists no material recourse or guarantees from WHSP of the debt or other fixed obligations of any of its investments. WHSP aims to pay steadily increasing dividends to shareholders from operating cash flow of the WHSP parent entity. The financial statements of the WHSP parent entity reflect WHSP’s status as an investor and the cash flows which WHSP receive as an investor in the multitude of businesses which it invests in

Bulls Say’s

  • WHSP’s uncompromising value investment style will likely see shareholder value creation continue. 
  • A cross-shareholding provides a strong defence against the short-term whims of equity markets. 
  • TPG’s recent merger with Vodafone Australia could improve the merged entity’s competitive position

Company Profile 

Washington H. Soul Pattinson, or WHSP, is a value-oriented investment house which invests in public and privately held companies. As an investor, WHSP allocates capital with a view to taking a long-term position in its investments and on a passive basis. A long-held cross-shareholding in one of its investments–Brickworks–has provided a shield to WHSP from the short term-ism that is often pervasive in equity markets. In 2021, WHSP merged with fellow investment house, Milton Corporation 

(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

Amcor Limited: Aiming on priority segments as Healthcare, Coffee & Pet Food

Investment Thesis:

  • Leading global market position, with high barriers to entry (very capital intensive).
  • Attractive exposure to both developed markets and emerging markets’ growth.
  • Clearly defined strategy to create shareholder value.
  • Bolt-on acquisitions provide opportunity to supplement organic growth.
  • Solid balance sheet.
  • Leveraged to a falling AUD/USD.
  • Benefits from the recently completed Bemis acquisition to start flowing through. 
  • Capital management initiatives – current share buyback of $600m. 

Key Risks:

  • Management fail to realize the synergies proposed in the Bemis transaction. 
  • Competitive pressures leading to margin erosion and potential balance sheet pressure (e.g. reduced earnings leading to potential debt covenant breaches). 
  • Input cost pressures in which the Company is unable to pass on to customers (even though the Company does pass through input costs).
  • Deterioration in global economic growth.
  • Value destructive acquisition. 
  • Emerging markets risk.
  • Adverse movements in AUD/USD.

Key highlights:

AMC’s 1H22 result highlighted the Company’s defensive capabilities and ability to recover higher input costs. Despite supply chain constraints holding back volumes, the Company delivered volume growth during the period and, on a further positive note, management’s comments suggested demand remains robust leading into 2H22. EBIT margin in both segments Flexibles and Rigid were down during the period (driven by input costs) but should improve in future periods. Management reiterated their previously provided FY22 guidance – EPS growth of 7-11% – however increased the share buyback amount to $600m (from $400m previously) for the full year. In our view, AMC’s current share price is screening attractively – trading on a 12-mth forward blended PE multiple of 13.9x and dividend yield of ~4.0%.  

• Group 1H22 headline results : AMC delivered solid 1H22 results, with revenue up +12% to $6.93bn, operating earnings (EBIT) up +5% to $769m and EPS up +9% to 35.8cps. Top line growth was assisted by approximately $650m driven by price increases highlighting AMC’s ability to pass through higher costs. Excluding pass through, organic sales were up +2% driven by higher volumes and favourable mix. AMC repurchased ~$300m shares in 1H22 and expect to repurchase a total of $600m in FY22. Group leverage (net debt / EBITDA) at the end of the period was 2.9x.

• Flexibles segment : Segment revenue was up +10% to $5.35bn, consisting of 2% organic growth (focusing on priority segments such as Healthcare, Coffee & Pet Food) and $480m boost from higher raw material costs recovery.

• Rigid Packaging segment : Segment revenue was up +17% to $1.58bn, however this includes +13% uplift from the pass through of higher raw material costs. Excluding pass through, segment revenue was up +4%. In North America, AMC saw solid underlying demand in the beverage business with volumes up +3% (accelerating to +6% in 2Q22).

• M&A quite whilst Bemis is bedded down and Covid hinders DD process : AMC hasn’t been active with bolt-on acquisitions in recent history, a key part of AMC’s growth strategy.

• Outlook – reaffirmed previous guidance : Management expects adjusted EPS to grow by 7-11% in constant currency terms, adjusted free cash flow of $1.1 – 1.2bn, and approximately $600m allocated to share repurchase (increased from $400m previously).

Company Description: 

Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe, and Asia. 

(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

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

Investment Thesis:

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

Key Risks:

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

Key highlights:

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

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

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

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

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

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

Company Description: 

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

(Source: Banyantree)

General Advice Warning

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

Categories
Technology Stocks

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

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Business Strategy and Outlook

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

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

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

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

Financial Strength

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

Bulls Say’s

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

Key Investment Considerations:

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

Company Profile 

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

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Shares

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

Business Strategy and Outlook

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

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

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

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

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: Morningstar)

General Advice Warning

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

Categories
Technology Stocks

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

Business Strategy and Outlook

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

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

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

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: Morningstar)

General Advice Warning

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