Category: Philosophy

An investment philosophy is a coherent way of thinking about markets, how they work to put into practice. It’s a set of core beliefs that you can go back in order to generate new strategies to make it work. The investment philosophy of Investor Desk begins from the perspective that our clients are seeking a relationship which focuses on their short- and long-term goals via the provision of a strategic wealth management plan, coupled with a transparent, flexible and nimble investment solution. Investor Desk embraces a holistic view of a client’s business and personal circumstances and seeks to meet their goals and objectives through best of breed technology and financial products, delivered via a client centric relationshipand service. In the absence of a well-considered strategic wealth management plan, we believe there is less capacity to define an appropriate level of portfolio risk. We believe that asset allocation, and genuine portfolio diversifications are the key drivers of portfolio risk, and that high transparency and liquidity are important for navigating volatile market conditions.

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Philosophy Technical Picks Technology Stocks

Nanosonics Still Screens as Materially Overvalued

 as evidenced by penetration of over 75% in Australia and New Zealand and 40% in North America. Moreover, the device patent expires in 2025, leading to slower volume growth in the medium term. Moreover, the device patent expires in 2025, leading to slower volume growth in the medium term. In 2021 consumables contributed 63% of group revenue. 

Nanosonics primarily distributes via GE Healthcare, its partner across multiple geographies. We estimate consumables to roughly earn a gross margin of 85% and devices 65% by fiscal 2026. Outside of trophon, the company expects to launch a new product in flexible endoscope cleaning in 2023. Previously, management intimated the addressable market to be equivalent to trophon and there is greater awareness of the infection issue this product addresses. 

Financial Strength

Nanosonics is in a net cash position and free cash flow positive. The operating model does not require significant capital investment, with the key investments for growth stemming from ongoing R&D spending, building out a salesforce and working capital. Despite having 60-day terms from distribution partners, the current net investment in working capital runs at approximately 28% of revenue due to high inventory holding levels which average roughly 200 days in stock. phase. The company first posted a profit in fiscal 2016 and is yet to pay a dividend, nor do we expect it to in the future as it invests in underpenetrated markets and its pipeline product.

Our fair value for narrow-moat Nanosonics by 13% to AUD 3.50 following fiscal 2021 results. Roughly half of our upgrade is attributed to increasing consumable usage across the trophon installed base and the remainder due to a stronger USD. A clear highlight was second-half fiscal 2021 consumables revenue in North America, or NA, increasing 30% sequentially to AUD 33 million as ultrasound procedure volumes recovered. For the first time since fiscal 2016, new installations in NA increased year on year, with 2,490 trophon units added in fiscal 2021. 

While the second half added 1,360 new units in NA, the run-rate has significantly declined from 2,000 new installations in first-half fiscal 2017. Revenue in the region declined 1% sequentially to just AUD 3.6 million in the second half. Nanosonics is in a strong financial position with AUD 96 million in net cash at fiscal 2021 year-end. Nanosonics’ next major product, dubbed Coris, aims to automate flexible endoscope cleaning but has been delayed to calendar 2023. Details remain scant and we continue to expect uptake of Coris to mirror that of the trophon post-launch. This results in AUD 84 million in sales by fiscal 2031, or 23% of group revenue.

Bulls Say’s 

  • Nanosonics is the market leader in automated HLD of ultrasound probes with significant further market penetration potential in most regions.
  • Establishing its direct distribution model should increase the gross margins achieved by Nanosonics once it reaches critical mass.
  • The company has reached a pivotal point where higher margin consumables dominate the revenue stream. This revenue stream is also protected by patents and the installed trophon device base.

Company Profile 

Nanosonics is a single-product company and its trophon device provides high-level disinfection, or HLD, of ultrasound probes used in semi-critical procedures. The patented technology uses low temperature sonically activated hydrogen peroxide mist that is suitable for probes sensitive to damage. Automated HLD is increasingly being adopted as the standard of care globally as it is superior in preventing cross-infection across patients. Nanosonics’ revenue is made up of capital sales of trophon units, ongoing consumables sales, and service revenue. At June 2021, there were 26,750 trophon units installed globally. Market penetration rates range from over 75% in Australia and New Zealand, roughly 40% in the United States to low-single-digit penetration in EMEA and elsewhere in 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.

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Philosophy Technical Picks Technology Stocks

Super Retail’s FVE Increases to an Expected Sales Uplift from Network Optimisation

The company’s fiscal 2021 sales of AUD 3,453 million and underlying earnings of AUD 307 million were broadly in line with our estimates. The trading update provided for the first seven weeks of fiscal 2022 is broadly tracking with full fiscal year estimate. Trading conditions in fiscal 2022 are likely to be more challenging than we anticipated just a few months ago with lockdowns heavily impacting retailing businesses in affected states. While the near-term trading outlook is similarly opaque as during Australia’s first COVID wave, we base our longer-term sales levels on historical growth trends. 

EBIT margins sharply increased in fiscal 2021, mostly due to less discounting because of greater consumer demand and relatively inelastic supply, as well as remarkable sales growth of 22% driving just as exceptional operating leverage. EBIT margins expanded some 450 basis points to almost 13%, after adjusting for lease accounting Standard AASB 16. In the five years to fiscal 2020, adjusted EBIT margins averaged just over 8%. Super Retail’s online sales increased by 43% in fiscal 2021, similar to the 44% achieved in fiscal 2020. E-commerce accounted for 12% of group sales in fiscal 2021, with outdoor specialist Macpac and sporting goods retailer Rebel leading with online penetration of 21% and 16%, respectively. The board declared a fully franked dividend of AUD 88 cents per share for fiscal 2021.    

Company’s Future Outlook 

We continue to expect consumer spending on auto parts, sporting goods, and outdoor gear to normalize by fiscal 2023 and with it currently elevated profit margins. In contrast, to match our intrinsic valuation with current share prices, we would have to assume increased spending levels on discretionary goods and higher profit margins to persist for much longer. We expect operating margins to weaken against a backdrop of replenished inventories, more discounting, and declining sales. we estimate a 9% drop in group revenue for fiscal 2022. The dividend was ahead of our AUD 84 cents forecast on a slightly higher than expected 65% payout ratio. While we maintain our 65% payout ratio forecast, we expect declining earnings to result in a lower dividend of AUD 64 cents in fiscal 2022, representing a 5% yield at current share prices

Company Profile 

Super Retail operates in Australia and New Zealand selling auto parts, sporting goods, and camping, fishing, and boating equipment. The group generates revenue of about AUD 2.5 billion. There are generally two to four larger players in each category in which the firm operates, with Super Retail the market leader in all three categories. The firm has been corporately active historically, adding to the sporting goods category in fiscal 2012 and acquiring Macpac of New Zealand in 2018.

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks Philosophy Technical Picks

ASX Interest Rate Pressures to Abate From Economic 2023

with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means we expect the share price to be largely driven by bond market movements and central bank interest rates. The ASX has long been protected by two significant barriers to competition through regulation and network effects. 

The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome. In March 2016, the government reiterated its desire for competition in cash equities clearing, which constitutes just 7% of ASX group revenue, but not in cash equities settlements, which make up a further 6% of group revenue. There are currently no proposals to introduce competition in derivatives clearing, ASX’s largest business (comprising around a third of group revenue), with obstacles such as cross-margining acting as a barrier to competition.

Financial Strength 

ASX is in good financial health due to its dominant Australian securities exchange, high margins, and capital-light business model. The wide economic moat has protected consistently strong and stable EBIT margins of around 70% over the past decade, and we forecast an average EBIT margin of around 70% over the next five years. Although revenue is vulnerable to market declines to some degree, the large margins limit leverage at an EPS level. 

ASX lacks an appetite for acquisitions, which is not a bad thing in our opinion. The company seeks to drive growth organically through product innovation and cost efficiencies. Our fair value estimate excludes the value of ASX’s franking credits, which are received by Australian resident taxpayers. However, as discussed in our recent special report, “10 Franked Income Stock Ideas for Australian Investors,” franking credits can effectively boost the fair value estimate for investors that receive them. 

Revenue was 4% above our forecast due to stronger than expected performances from the cash equities, listings, and information services divisions, but a weaker-than-expected performance from the derivatives and OTC division. Our fiscal 2022 expenses growth forecast of 5% is at the lower end of management’s guidance range of 5% to 7%, and lower than the 8% reported for fiscal 2021. Our fiscal 2022 capital expenditure forecast of AUD 114 million is at the top end of the AUD 105 million to AUD 115 million guidance range, and lower than the AUD 125 million in fiscal 2021.

Bulls Say’s 

  • Long-term earnings growth is underpinned by growth in the value of the stock market and protected by a wide economic moat. However, in the short term, earnings can be affected by market weakness, although EPS fell just 7% during the global financial crisis.
  • ASX has a wide economic moat underpinned by network effects and regulation. We expect this competitive advantage to protect EBIT margins of around 70% over the next decade and a low-single digit EPS CAGR.
  • ASX is financially robust with a good balance sheet, strong cash flow, and tight cost control.

Company Profile 

ASX is the largest securities exchange in Australia with an effective monopoly in listing, trading, clearing, and settlement of Australian cash equities, debt securities, investment funds, and derivatives. Other activities include the technology services, enforcing exchange rules, and exchange-related data. The ASX demutualised and listed on its own exchange in 1998 and subsequently acquired the Sydney Futures Exchange in 2006.

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks Philosophy Technical Picks

U.S. Foods Experiencing Strong Recovery From the Pandemic, but Moat Remains Out of Reach

will emerge from the pandemic in a stronger position that it was prior to the crisis, given the $1 billion in new business secured over the past year and the permanent elimination of $130 million in operating expenses. We expect the increasing availability of COVID-19 vaccines in 2021 will return US Foods’ organic sales to pre-pandemic levels by 2022, with long-term opportunities remaining intact. But as US Foods has not demonstrated a cost advantage, organic market share gains , consistent economic returns, or superior profits, we do not grant the firm a moat.

US Foods has improved profits the past few years, as gross margins increased from 16.8% in 2014 to 17.8% in 2019 (pre-pandemic), operating margins from 2.0% to 3.2%, and ROICs .We attribute this to positive customer mix (both to more profitable segments and more selective customer contracts within segments), more effective data-driven pricing, the centralization of purchasing and administrative functions, and a reduction of the sales force, facilitated by productivity-enhancing tools. But despite the added profits, we believe the reduction in the sales force hampered organic market share gains, a move with nontrivial consequences, as we view scale as the path to a competitive edge.

The lack of organic share gains impairs the firm’s ability to leverage its scale and progress toward a scale-based cost advantage. But we are encouraged by the firm’s recent decision to invest $50 million in growth opportunities, including expanding the sales force. We expect the firm will continue to grow inorganically, and we have a favourable view of its $1.8 billion tie-up with SGA Food Group and the $970 million acquisition of Smart Foodservice Warehouse, but we hold these deals fall short of providing a scale-based competitive edge.

Financial Strength

 US Foods has the financial strength to weather the pandemic. Given the firm’s acquisitive strategy, leverage runs high, with net debt/adjusted EBITDA at 5.4 times as of June. US Foods secured a $300 million term loan, issued $1 billion in long-term notes, and $500 million in convertible preferred stock since the onset of the pandemic. We expect leverage to return to a comfortable 2.6 times by 2023 as the market recovers from the pandemic and US Foods lightens up on share repurchases to prioritize debt reduction, which we think is prudent. We expect US Foods will resume repurchasing shares in 2025 (to the tune of 4%-5% of shares outstanding annually). We view this as a prudent use of cash when shares trade below our assessment of its intrinsic value. Furthermore, we have no concerns in the firm’s ability to service its debt (even during the pandemic), as interest coverage (EBITDA/interest expense) should average 6.5 times over the next five years, better than the 4.4 times average over the past three years. The firm’s priorities for cash use are capital expenditures, which we expect to amount to 1% of revenue annually over the next decade) and acquisitions (we expect about $140 million to $220 million annually, contributing a 1% bump to revenue each year). Further, the firm paid a $3.94 per share special dividend in 2016, but management has no plans to initiate an ongoing dividend as they view share repurchase as a more flexible way to return capital to shareholders. 

Bull Says

  • Continued acquisitions could modestly enhance US Foods’ scale, and the addition of its e-commerce platform should help increase share of wallet and loyalty with acquired firms’ customers.
  • US Foods is emerging from the pandemic as a stronger player, having secured over $1 billion in new business and eliminated $130 million in fixed costs.
  • US Foods benefits from secular tailwinds, such as Americans’ tendency to consume more food outside the home and industry share shifts to independent restaurants.

Company Profile

US Foods is the second-largest U.S. food-service distributor behind Sysco, holding 10% market share of the highly fragmented food-service distribution industry. US Foods distributes more than 400,000 food and non-food products to the healthcare and hospitality industries (each about 16.5% of sales), independent restaurants (33%), national restaurant chains (22%), education and government facilities (8%), and grocers (4%). In addition to its delivery business, the firm has 80 cash and carry stores under the Chef’Store banner .After Sysco’s attempt to purchase US Foods failed to gain federal approval in 2015, US Foods entered the public market via an initial public offering.

(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.