Category: Research

Categories
Global stocks Shares

Near-Term Investments Should Position Starbucks Well for Long-Term Category Gains

Business Strategy & Outlook: 

Starbucks is the largest specialty coffee chain in the world, generating some $29 billion in sales during fiscal 2021. The firm’s attention to premium-quality coffee distinguishes it from chained competitors (alleviating pressure from quick-service restaurant competitors and at-home consumption), allowing Starbucks to charge substantially higher prices while creating a buzz around what has historically been a commoditized product. While the subindustry has attracted significant competitive attention, Starbucks’ premium positioning has allowed the firm to outflank competitors, leveraging its brand to raise prices 6.8% annually in the U.S. over the last five years, healthily in excess of category inflation. Commanding unit economics, with payback periods in the ballpark of a year and a half (against three to six years in the broader QSR space), should pave the way for mid-single-digit unit growth through 2031, as the firm increases penetration in its core company-owned markets (the U.S. and China), and with license partners in more than 80 global markets. 

Starbucks’ recent strategic focus on streamlined operations, adjacent menu innovation, digital engagement, and selective store closures strikes us as appropriate, with new openings concentrated in underpenetrated middle America and Chinese markets. While the firm’s trade area initiative created growth headwinds in 2020, as the firm closed 800 underperforming units in the U.S. and Canada, it should provide a durable foundation for unit development as the chain adjusts to a world that seems poised to skew toward off-premises sales, closer to home. Finally, the firm’s ongoing investments in its loyalty program, with nearly 27 million active users in the U.S. at the end of the second quarter of 2022, should resonate with an audience that has grown increasingly amenable to digital ordering, with more than half of order volume now driven by program participants. Starbucks remains a compelling long-term “growth at scale” story and the anticipating average top-line growth of nearly 11% through 2026 and adjusted EPS growth averaging 12.2% in base-case scenario.

Financial Strengths: 

Starbucks’ financial strength as sound. The company targets a lease-adjusted debt/EBITDAR of 3 times, consistent with an investment-grade credit rating. The calculations suggest that it was in compliance with this target at the end of fiscal 2021, with a lease adjusted debt/EBITDA ratio of 2.6 times. The firm also has access to an untapped $3 billion credit facility and a $3 billion commercial paper program. With few hard assets, the operating income-based leverage metrics are a more appropriate proxy for restaurant businesses’ liquidity and solvency. Starbucks’ debt/EBITDA returned to normalized levels in fiscal 2021, finishing the year around 2.3 times leverage, well below 5.3 times during a trying 2020. The EBITDA/interest coverage (11.6 times) in fiscal 2022. Starbucks’ strong free cash flow to the firm conversion (averaging 8.9% of sales through 2024) offers the flexibility to invest in technological improvements, new restaurant openings, and menu innovation. The firm shall prioritize growth capital expenditures (estimated at $5.7 billion through 2024), dividends ($7.2 billion), and share repurchases ($11.5 billion), with management targeting a long-term 50% dividend payout ratio. While share repurchases were suspended during the second quarter of fiscal 2022, and expect them to be ultimately reinstated in fiscal 2023 based on the firm’s investment opportunity priorities and $4.0 billion in cash and cash equivalents on the balance sheet at the end of the second quarter of fiscal 2022.

Bulls Say: 

  • Starbucks’ “stars for everyone” initiative should drive continued adoption of the firm’s loyalty program, materially increasing customer lifetime value.
  • Leading market share in China and exposure to a growing middle class contribute to a compelling growth narrative for the company.
  • Strength in the cold beverage platform could drive volume toward underpenetrated afternoon dayparts, helping prop up average unit volume with minimal incremental labor costs.

Company Description: 

Starbucks is one of the most widely recognized restaurant brands in the world, operating nearly 34,000 stores across more than 80 countries as of the end of fiscal 2021. The firm operates in three segments: North America, international markets, and channel development (grocery and ready-to-drink beverage). The coffee chain generates revenue from company-operated stores, royalties, sales of equipment and products to license partners, ready-to-drink beverages, packaged coffee sales, and single-serve products.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Demand for Boats Remains Strong, Boosting Selling Prices and Profits at Narrow-Moat Malibu

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy & Outlook: 

Malibu is a long-established name in performance sport boats, venturing into the sterndrive and saltwater segments via acquisitions in recent years. It is believed that its brand, innovative products, and consistent pricing power contribute to a brand intangible asset, which underpins the narrow moat rating. Supporting its market leadership, it’s demonstrated an ability to meet evolving customer preferences, bringing new products to market quickly, with new models and 30-40 new features rolled out annually in the performance sport segment. And it has capitalized on its brand strength by expanding into adjacent categories, such as trailers and accessories, which shall continue. However, Malibu hasn’t rested only on innovation to grow profits, also curating savings through streamlined production and rising efficiencies (through vertical integration). As evidence, efforts at Pursuit’s new plant had increased the EBT margin at the brand to 14% in 2021 (from 9% in 2020). With continuous improvements to the manufacturing process, Malibu should be able to limit expense growth over time. Additionally, Malibu shall grow via strategic acquisitions. 

The addition of Cobalt, Pursuit, and Maverick within the last five years has provided robust sales growth for the firm (averaging 33%), thanks to a strategy based on fit and the ability to raise shareholder value. As a result, the model expects tie-ups every other year in the $140 million price range, providing a volume bump of more than 500 incremental units on average. While such transactions should drive sales growth, and remain confident in Malibu’s ability to also maintain consumer interest in its legacy brands. The Malibu’s sales shall grow 10% on average over the next decade, including acquisitions. While demand for outdoor recreational products has been elevated with social distancing measures due to the pandemic, and maintained sales growth stemming from market share gains and expansion into whitespace categories. As a result of its success, Malibu should generate competitive adjusted returns on invested capital, including goodwill, that average 24% over the next decade.

Financial Strengths:

Malibu has maintained a healthy balance sheet, with leverage historically rising modestly as a result of its acquisition strategy. However, with adjusted EBITDA growing faster than debt in recent years, the leverage ratio has remained at less than 1 at the end of fiscal 2021, barring the pursuit of any transformational acquisitions. For access to liquidity, Malibu has a $170 million revolving credit facility (2024 maturity) and a $100 million term loan (2022-24 maturity). The company drew down its revolver as a precaution as COVID-19 spread domestically, but had repaid the loan prior to 2020 year-end (and now has around $57 million outstanding as of March 31). In normal operating periods, expecting cash on hand, cash from operations, and utilization of the credit facility to allow Malibu to fund its capital expenditures, which finance projects, tooling, and production improvements. In addition, the firm has agreements with third-party lenders to provide floor plan financing for dealers. Furthermore, Malibu has historically maintained flexibility in its capital structure through stock repurchases. The board of directors authorized the repurchase of up to $70.0 million of Class A Common Stock and the LLC Units, which is valid until Nov. 8, 2022. However, the modest repurchases over the near term, given the team’s penchant to spend strategically on acquisitions. Over the long term, Malibu should be able to generate enough free cash flow to finance both acquisitions and consistent share repurchases.

Bulls Say:  

  • Vertical integration across the brand portfolio could provide margin expansion.
  • The firm’s long-term annual sales growth goal of 10% should be attainable thanks to Malibu’s penchant for consistent acquisitions in underpenetrated categories. 
  • Malibu’s strong balance sheet, with low leverage and healthy free cash flow/equity, should offer the company the flexibility to withstand cyclical downturns and finance bolt-on acquisitions from cash on hand.

Company Description: 

Malibu Boats is a leading designer and manufacturer of power boats in the United States. It is the market leader in performance sport boats, sold under its Malibu and Axis brands. It acquired Cobalt Boats, a leading producer of sterndrive boats, in 2017 number-one market share position in the U.S. in the 24-foot to 29-foot segment), and Pursuit Boats, which makes high-end offshore and outboard motorboats in 2018. In 2021, it purchased Maverick Boat Group, a leading seller of flat fishing boats, with exposure to bay, dual-console, and center-console boats. Malibu has also expanded into boat trailers and accessories, and in 2020 began producing its own engines for its performance sport boats. Malibu’s target market includes a wide range of water enthusiasts who embrace active lifestyles.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
ETFs ETFs

BEAR seeks to generate returns that are negatively correlated to the returns of the Australian sharemarket

Fund Objective

BEAR seeks to generate returns that are negatively correlated to the returns of the Australian share market. The Fund expects to generate a positive return when the S&P/ASX Accumulation 200 Index falls (and a negative return when the index rises).  

The BetaShares Bear Funds are designed to provide returns that are negatively correlated with the Australian or U.S. share market, and so may be used to help protect against, or profit from, share market declines. It is important for investors in a Bear Fund to understand its features, including how it is priced, and that it targets a return over a one-day period only. Additionally, BetaShares strongly recommends investors review the relevant PDS and consider the risks associated with an investment in the relevant Bear Fund. These include the risk of negatively correlated returns, market risk, futures risk and gearing risk (in the case of BBOZ/BBUS). Investors should also check the BetaShares website for details of the Fund’s historical performance, as well as the current portfolio exposure, to ensure that the Fund continues to meet their investment objectives.

Strategy

BEAR is an ‘inverse ETF’. It invests in cash and cash equivalents and sells equity index futures contracts (i.e. ASX SPI 200 futures) to obtain its exposure. Selling these futures can typically be expected to generate a positive return when the S&P/ASX Accumulation 200 Index declines on a given day, and a negative return when the Index increases. A 1% fall in the Australian share market on a given day can generally be expected to deliver a 0.9% to 1.1% increase in the value of BEAR (and vice versa).

BetaShares Funds can be bought or sold during the trading day on the ASX, and trade like shares. ASX CODE BEAR BLOOMBERG CODE BEAR AU IRESS CODE BEAR.AXW IRESS INAV CODE BEARINAV.ETF DISTRIBUTIONS ANNUAL MGT FEE 1.19% P.A. EXPENSES CAPPED AT 0.19% P.A. INDIRECT COSTS 0.10% P.A. FUND INCEPTION 6 JUL 12 BENCHMARK S&P/ASX ACCUMULATION 200.

Portfolio

BetaShares offers four series of model portfolios, each of which seeks to achieve capital growth and income streams through a careful blending of asset classes, including Australian and international equities, bonds, cash and commodities. The models are constructed using ETFs and other exchange-traded products, resulting in institutional-quality portfolios that are cost-effective, highly diversified, transparent, and simple to explain to clients.

People

Adam O’Connor is a member of the BetaShares Distribution team responsible for supporting Institutional and Intermediary Broker and Adviser channels. Prior to joining BetaShares, Adam worked in stockbroking and advisory with Bell Potter Securities. Adam holds a Bachelor of Laws with Honours and a Bachelor of Business (Finance) from the Queensland University of Technology. Adam also holds a Diploma of Stockbroking from Deakin University and is an accredited Financial Adviser in Securities and Managed Investments and Superannuation. Brendan is responsible for growing and servicing BetaShares Adviser business clients across Western Australia. In this role, Brendan is focused on educating advisers about the role and benefits of ETF’s and SMA’s in client portfolios and sharing updates on the expanding range of strategies available across the BetaShares product suite.

Alex is a member of the BetaShares Distribution team, responsible for supporting Institutional and Intermediary Broker channels. Alexander is a member of the BetaShares Distribution team, responsible for client inquiries and supporting the sales team. Alistair is a member of the BetaShares Distribution team, responsible for supporting Institutional and Intermediary Broker channels, as well as supporting the firm’s capital markets activities. Benjamin is a member of the BetaShares Distribution team, responsible for assisting with client inquiries. Craig is responsible for growing and servicing BetaShares Adviser business clients across Queensland. In this role, Craig is focused on educating advisers about the role and benefits of ETF’s in client portfolios, and sharing updates on the expanding range of strategies available across the BetaShares product suite. 

Performance 

Past performance is not an indicator of future performance. Returns are calculated in Australian dollars using net asset value per unit at the start and end of the specified period and do not reflect brokerage or the bid ask spread that investor incur when buying and selling units on the ASX. Returns are after fund management costs, assume reinvestment of any distributions and do not take into account tax paid as an investor in the Fund. Returns for periods longer than one year are annualised. Current performance may be higher or lower than the performance shown.

About Fund

BetaShares Funds can be bought or sold during the trading day on the ASX, and trade like shares. ASX CODE BEAR BLOOMBERG CODE BEAR AU IRESS CODE BEAR.AXW IRESS INAV CODE BEARINAV.ETF DISTRIBUTIONS ANNUAL MGT FEE 1.19% P.A. EXPENSES CAPPED AT 0.19% P.A. INDIRECT COSTS 0.10% P.A. FUND INCEPTION 6 JUL 12 BENCHMARK S&P/ASX ACCUMULATION 200.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Icon boasts impressive margins compared with similar-size peers

Business Strategy and Outlook

It is held Icon possesses all the necessary elements to win share in the late-stage contract research organization market: global capabilities, full-service offerings, extensive regulatory and clinical expertise, investment in innovation and technology, and operational excellence. Icon is one of a handful of CROs with the global infrastructure to carry out late-stage, multinational trials and hone international regulatory expertise. 

Icon competes in one of the most lucrative areas of the CRO market: long, complex trials that require hundreds if not thousands of patients and thus have ample room for missteps. Late-stage trials consume a significant portion of drug patent lives, making reduction in clinical trial time a priority for CROs and their customers. Icon has done well in focusing on driving trial efficiencies, with consulting services and technology for patient identification and clinical trial management. As a result, it is anticipated that the firm will profit from near-term increases in outsourcing, but it is closely watched nascent trends in drug development, including the potential of real-world evidence and the use of data and analytics to reduce a drug’s time to market. 

The firm’s historically conservative approach to capital allocation and investment has kept revenue growth relatively moderate in the past few years–in the midsingle digits, save for a boost in 2012 through 2014 due to capacity expansion after a couple of lucrative deals with Big Pharma companies. In July 2021, Icon completed the $12 billion purchase of competitor PRA Health Sciences. While it is alleged an increase in returns and cost-saving synergies realized within four years, the returns will nevertheless be partially diluted by goodwill due to the 30% premium that Icon paid. Operationally, Icon boasts impressive margins compared with similar-size peers. Its disciplined acquisition strategy has kept returns above its cost of capital and strengthened its core competencies, making it the closest pure play in the late-stage CRO industry. It is likely the company will be able to maintain operational excellence over time.

Financial Strength

Icon has historically maintained a conservative balance sheet. It ended 2021 with over $750 million in cash and cash equivalents. Icon completed its acquisition of PRA Health Sciences in July 2021 for $12 billion. It financed the deal with 48% cash and 52% stock. Icon raised $6 billion of debt to finance the PRA Health deal. It was broken into two instruments: $5.5 billion of floating term loan B notes over a seven-year period and $500 million in a fixed high-yield bond over a five-year period. Even though Icon took on significant leverage to fund this acquisition, there aren’t any major liquidity concerns as the company has demonstrated its operational discipline. Both Icon and PRA have strong records of positive free cash flows and maintain healthy balance sheets

Bulls Say’s

  • Icon is highly exposed to the late-stage CRO industry, which due to its complexity is conducive to long-term competitive advantages. 
  • The company’s operational discipline should support strong earnings growth and high returns as Icon expands. 
  • As an Irish company, Icon benefits from a lower tax rate than many of its peers based in the United States.

Company Profile 

Icon is a global late-stage contract research organization that provides drug development and clinical trial services to pharmaceutical, biotechnology, and medical device firms. While the vast majority of its revenue comes from clinical research, Icon also offers ancillary services such as laboratory and imaging capabilities. The company is headquartered in Ireland. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Losses Mount for Flight Centre Despite Progressive Release of Pent Up Demand

Business Strategy & Outlook

A wave of COVID-19-induced damages has been inflicted on Flight Centre since March 2020. Government restrictions on travel and border control (international, domestic), grounding of airline capacity and strict lockdown measures on consumers have created an unprecedented squeeze on the group. The measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the malaise.

Flight Centre is one of the world’s largest travel agents, but it still generates substantial earnings in Australia and New Zealand. Unrivalled scale and brand strength in the domestic travel market has delivered buying power and pricing flexibility that resulted in high returns on capital. Flight Centre has a strong network of services that has driven solid end-user traffic and bookings over the past 20 years, but it is not believable that this is sufficient to protect the company against online competitors over the next 10 years. Because of the discretionary nature of travel and high levels of operating leverage, earnings can be very volatile. During the financial crisis, net profit after tax fell to AUD 38 million in fiscal 2009 from AUD 143 million in fiscal 2008. The company is heavily loss-making during the current 2020 pandemic also. This inherent volatility means fair value uncertainty is high.

Flight Centre’s significant scale and extensive store network have made the firm a key distribution channel for travel suppliers and generated cost advantages that enable it to offer competitive prices. However, with the threat from online competitors increasing, the physical stores are likely to increasingly lose relevance longer term. From about 2005, facing a maturing domestic market, the company increased its focus on offshore markets, particularly the United Kingdom and United States. The group made several offshore acquisitions during this period. The company is also increasingly focused on corporate travel, which is more structurally resilient than leisure.

Financial Strengths

As at the end of December 2021, there was AUD 1,059 million of available liquidity, thanks to the AUD 700 million injected by shareholders in April/May 2020 and two convertible bond issues totalling AUD 800 million. This is sufficient liquidity for Flight Centre to see through until late 2023, even if total transaction volume remains at current depressed levels.

Bulls Say

  • A strong balance sheet allows Flight Centre to take advantage of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to more effectively address specific market segments.
  • Brand strength provides a potent underpinning for the blended online/physical store offering.
  • Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favorable deals with travel providers.

Company Description

Flight Centre Travel is one of the biggest travel agencies in the world. It operates an extensive network of shops globally, most of them located in Australia, the United States, and Europe. The group participates across the whole spectrum of the travel services market, including leisure travel retailing, in-destination experiences, corporate travel arrangement, and youth travel retailing. The services are facilitated via some 40 brands, with Flight Centre being the flagship brand in the leisure segment and FCM Travel the key brand in the corporate.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

We See a Long Growth Runway for Allegion’s Seamless Access Strategy

Business Strategy & Outlook

Allegion, a global leader in security products and solutions, was spun off from Ingersoll-Rand in December 2013. No longer forced to compete for capital from a conglomerate parent, Allegion is now able to employ a more robust acquisition strategy to expand its scale, technological capabilities, and product portfolio. At over 70% of sales and 80% of segment profitability, Allegion’s Americas segment is the firm’s largest and strongest business, with a leading position in locks, exit devices, and door controls. The Americas business has been the key driver of Allegion’s stable, industry-leading profitability, which is a testament to the firm’s market position and pricing power. the Americas business to post mid-to-high single-digit organic growth after the coronavirus-fueled downturn in 2020-21 as the segment capitalizes on increased retrofit and upgrade spending across commercial and residential end markets that is drive by the convergence of electronics and mechanical security solutions, elevated U.S. residential construction, and strategic acquisitions. The segment’s already strong profit margins should benefit from a mix-shift to higher-priced electronics products and operating leverage on increased volumes, partially offset by structurally lower profit margins from the acquired access technologies business.

The company’s international businesses are subscale, which factors into the segment’s weak margin performance relative to Allegion’s strong Americas segment; however, the company is working diligently to keep strengthening these businesses through restructuring, channel development, and strategic acquisitions that build scale and expand the company product portfolio. These initiatives appear to be working as the international segment reported record profitability in fiscal 2021 (11% adjusted operating margin). The international segment profitability will continue to improve as these initiatives take hold. Like the Americas segment, this segment should also benefit from the convergence of electronic and mechanical security technology.

Financial Strengths

As part of the spinoff transaction in 2013, Allegion paid a $1.3 billion one-time dividend to Ingersoll-Rand. Allegion issued a commensurate amount of debt in 2013 to fund the dividend to its former parent. Since then, Allegion’s gross debt/EBITDA leverage ratio has improved to approximately 2.0 currently. Management continues to target an investment-grade rating on its debt going forward. 

Allegion has approximately $1.4 billion of outstanding debt, which consists of approximately $250 million outstanding on the company’s term facility, $400 million of 3.2% senior notes due in 2024, $400 million of 3.55% senior notes due in 2027, and $400 million of 3.5% senior notes due in 2029. In 2021, Allegion incurred about $50 million of net interest expense and generated approximately $618 million of adjusted EBITDA, which equates to a comfortable EBITDA coverage ratio of about 12 times. The Allegion’s use of leverage is reasonable, and the company’s free cash flow generation should comfortably support its debt service requirements and future capital allocation decisions. Given the firm’s reasonable use of leverage and consistent free cash flow generation, the Allegion’s financial health is satisfactory.

Bulls Say

  • Allegion’s strong market position and pricing poourr in North America should continue to support the firm’s stable, industry-leading profitability.
  • The convergence of electronic and mechanical security products and increased infrastructure spending should drive sales growth and margin expansion opportunities.
  • Allegion generates strong free cash flow and is a balanced capital allocator. The company can continue to use its free cash flow to increase its dividend, repurchase shares, and make value-accretive acquisitions and invest in lead-edge technology ventures.

Company Description

Allegion is a global security products company with a portfolio of leading brands, such as Schlage, von Duprin, and LCN. The Ireland-domiciled company was created via a spinoff transaction from Ingersoll-Rand in December 2013. In fiscal 2021, Allegion generated 68% of sales in the United States. The company mainly competes with Swedish-based Assa Abloy AB and Switzerland-based Dormakaba.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Coinbase Falls From Grace in Q1 as Falling Revenue Meets Rapidly Increasing Costs

Business Strategy and Outlook

As the leading U.S.-based cryptocurrency exchange, Coinbase has positioned itself as the reliable on-ramp into the cryptocurrency space for new and experienced cryptocurrency traders alike. The company’s reputation, regulatory compliance, and track record as a custodian have allowed it to maintain transaction fees above many of its peers despite operating in a crowded field with hundreds of competing firms trying to grab market share in the rapidly growing space. Unlike traditional exchanges in the U.S., Coinbase fulfills multiple roles in the trading ecosystem by acting as an exchange, asset custodian, and broker. Coinbase has continued to branch off into adjacent businesses offering cryptocurrency collateralized loans, a crypto debit card, blockchain infrastructure support, and data analytics services. 

While these new businesses expand the company’s presence in the cryptocurrency space and add new revenue streams, the company still earns the majority of its income through the transaction fees traders pay when they trade on Coinbase’s platform. These fees are charged as a percentage of trade’s total value. This creates a strong correlation between Coinbase’s trading fee revenue and the size cryptocurrency market. 

Due to its breadth of its service offerings and the connection between cryptocurrency prices and trading revenue, Coinbase’s short- and long-term results are deeply tied to the health and growth of cryptocurrencies as an asset class. Cryptocurrency adoption continues to rise but questions regarding the long-term viability of cryptocurrency, the role of speculation in current market prices remain unanswered. Additionally, Coinbase has dramatically increased its spending in recent quarters, creating the prospect of a prolonged period of unprofitability should cryptocurrency prices and trading volume not increase in short order. Given the speculative nature of cryptocurrency prices, this reliance on market conditions will create considerable uncertainty in Coinbase’s results going forward.

Financial Strength

Coinbase is in an excellent financial position, particularly after receiving an influx of capital from private-investment-in-public-equity investors coinciding with its direct listing on the Nasdaq exchange. Coinbase saw a spike in trading volume in 2021, leading the company to generate more net income in the first quarter of the year than in the entirety of 2020. As a result, the company ended March 2022 with more than $6 billion in cash and $1.3 billion in cryptocurrency against less than $3.4 billion in debt. The decision to keep strong cash reserves makes sense given how volatile the company’s revenue generation can be. Coinbase needs to keep sufficient financial reserves to protect itself in the event of a major market collapse. Keeping the company relatively unleveraged will be an important step in keeping the exchange financially secure in the long term through market cycles.

Bulls Say’s

  • Coinbase has established itself as the leading U.S. cryptocurrency exchange and established a strong reputation for security in an industry filled with risk for traders. 
  • Coinbase has been able to accelerate the rate at which it lists new cryptocurrencies, giving the company more exposure to the growth of the asset class. 
  • There is a global market for cryptocurrency. Regulatory approval from international regulators will allow Coinbase to expand its operations and increase its footprint globally

Company Profile 

Founded in 2012, Coinbase is the leading cryptocurrency exchange platform in the United States. The company intends to be the safe and regulation-compliant point of entry for retail investors and institutions into the cryptocurrency economy. Users can establish an account directly with the firm, instead of using an intermediary, and many choose to allow Coinbase to act as a custodian for their cryptocurrency, giving the company breadth beyond that of a traditional financial exchange. While the company still generates the majority of its revenue from transaction fees charged to its retail customers, Coinbase uses internal investment and acquisitions to expand into adjacent businesses, such as prime brokerage, data analytics, and collateralized lending.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Sysco’s Cost Advantage and Growth Strategy Are Driving Impressive Market Share Gains

Business Strategy & Outlook

The Sysco possesses a narrow moat, rooted in its cost advantages. The firm benefits from lower distribution cost given its closer proximity to customers, complemented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pracademic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (3% of pracademic sales) and a 10% increase in independent restaurant customers.

In 2021, Sysco laid out its three-year road map, termed “recipe for growth” which will be funded by the elimination of $750 million in operating expenses between fiscals 2021 and 2024. The plan should allow Sysco to grow 1.5 times faster than the overall food-service market by fiscal 2024. Sysco is investing to eliminate customer pain points by removing customer minimum order sizes while maintaining delivery frequency and lengthening payment terms. It improved its CRM tool, which now uses data analytics to enhance prospecting, rolled out new sales incentives and sales leadership, and is launching an automated pricing tool, which should sharpen its competitive pricing while freeing up time for sales reps to pursue more value-added activities, such as securing new business. Sysco also developed the industry’s first customized marketing tool, harnessing its significant customer data to generate tailored messaging that should resonate with each customer, a tool that has been increasing Sysco’s share of wallet. Further, Sysco has switched to a team-based sales approach, with product specialists that should help drive increased adoption of Sysco’s specialized product categories such as produce, fresh meats, and seafood. Lastly, Sysco is launching teams that specialize in various cuisines (Italian, Asian, Mexican) that should drive market share gains in ethnic restaurants. Looking abroad, Sysco has a new leadership team in place for its international operations, increasing the confidence that execution will improve.

Financial Strengths

The Sysco’s solid balance sheet, with $4 billion of cash and available liquidity (as of March) relative to $11 billion in total debt, positions the firm well to endure the pandemic. Sysco has a consistent track record of annual dividend increases, even during the 2008-09 recession and the pandemic. A 5%-10% annual increases each year the forecast, maintaining its target of a 50%-60% payout ratio. 

Sysco has historically operated with low leverage, generally reporting net debt/adjusted EBITDA of less than 2 times. Leverage increased to 2.3 times after the fiscal 2017 $3.1 billion Brakes acquisition, and above 3 times in fiscals 2020 and 2021, given the pandemic. But the leverage will fall back below 2 times by fiscal 2024, given debt paydown and recovering EBITDA.  Calls for free cash flow averaging 3% of sales annually over the next five years. In May 2021, Sysco shifted its priorities for cash in order to support its new Recipe for Growth strategy. It’s new priorities are capital expenditures, acquisitions, debt reduction when leverage is above 2 times, dividends, and opportunistic share repurchase. Its previous priorities were capital expenditures, dividend growth, acquisitions, debt reduction, and share repurchases. In fiscal 2023-24, as it invests to support accelerated growth, Sysco should spend 1.4% of revenue on capital expenditures, falling to 1.1% thereafter. In fiscal 2021 Sysco completed the $714 million acquisition of Greco and Sons and the $500 million acquisition of The Coastal Companies.To invest about $100 million to $200 million annually on acquisitions thereafter. Finally, the model $500 million-$600 million in annual expenditures to buyback about 1% of outstanding shares annually. A prudent use of cash when shares trade below the assessment of intrinsic value.

Bulls Say

  • As Sysco’s competitive advantage centers on its position as the low-cost leader,  Sysco should be able to increase market share in its home turf over time.
  • Sysco has gained material market share during the pandemic, allowing it to emerge a stronger competitor.
  • The company is performing well under the leadership of CEO Kevin Hourican (in place since 2020), with his Recipe for Growth strategy driving improved sales growth and profit margins.

Company Description

Sysco is the largest U.S. food-service distributor, boasting 17% market share of the highly fragmented food-service distribution industry. Sysco distributes over 400,000 food and nonfood products to restaurants (66% of revenue), healthcare facilities (9%), education and government buildings (8%), travel and leisure (5%), and other locations (14%) where individuals consume away-from-home meals. In fiscal 2021, 83% of the firm’s revenue was U.S.-based, with 8% from Canada, 3% from the U.K., 2% from France, and 4% other.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

nib holdings Ltd (NHF) reported revenue grew +8.3% to $1.4bn and is forecasted to become profitable in FY23

Young woman trading stock market by touching.

Investment Thesis:

  •  Given Australia’s growing and ageing population, there will be increased demand for health care services. This will add additional pressure on Australia’s public health care system and the Federal budget and an increased dependence on private health care insurers. NHF offers exposure to the business model of providing a funding mechanism for the high-growth health care sector. Healthcare spending is expected to grow at 5-10% per annum, so without significant tax hikes, the government cannot afford for people to shift back to the public healthcare system.
  • Given underlying increases in average premium rates of around 5 – 6% p.a., some policyholder growth (especially at the 30-34-year-old segment), and exposure to upstart investments, we estimate that NHF offers close to double-digit underlying growth in the medium term.
  • Solid management team.
  • Cost-out strategy which improves the company’s expense ratio. 
  • Incentives and benefits encourage PHI take-up. They include 1. Tax benefits and penalties for Australian residents (via Lifetime Health Cover, Medicare Levy Surcharge and means tested rebate); and 2. Shorter wait times, a choice of specialist doctor/hospital and coverage of ancillary health services support.
  • Growth runways through the JV with Tasly Holdings Group, and also international expansion, through product offerings like NISS

Key Risks:

  • Intensifying competition between top 6 players, putting policy growth targets at risk and any Increases in expected marketing spend going forward will no doubt add further strain on earnings growth.
  • Policyholders decline unexpectedly despite the encouraging incentives and the Australian Government struggling with the rapid increase in healthcare spending and health services demand.
  • Registered health insurers cannot increase premium rates without approval from the Government/Minister for Health/PHIAC/APRA. This leaves NHF’s ROE and margins exposed to a political process and pressures if the company is deemed too profitable.
  • Regulatory changes especially relating to any changes to tax incentives and benefits which encourage take up of PHI. 
  • Higher than expected lapse rates and claims inflation as a result of poor insurance policy design, aging population, and costs of new medical equipment, procedures and treatments;
  • Poor negotiations with healthcare providers such as private hospital operators leading to unfavorable contractual terms;
  • Lower than expected investment returns

Key highlights:

nib holdings Ltd (NHF) reported 1H22 – relative to the pcp, group underlying revenue grew +8.3% to $1.4bn; Group underlying operating profit (UOP) increased +28.5% to $109.6m; NPAT of $81.2m was up +24.7%. NHF’s Arhi (Australian Residents Health Insurance) recorded an uplift in net arhi policyholder growth of +2.8% to 653,000 new policyholders; whilst NHF’s New Zealand segment reported strong performance, with revenue growth of +13.8%, partially offset by poor but expected performance in international inbound and travel businesses, which reported a loss of $7.4m, and -$7.9m, respectively, as the Government continues to enforce measure to contain Covid. On the conference call with NHF, management did expect in the near-term, the iihi and travel segment to gradually return to normal as countries reopen international borders. Both segments are forecasted to become profitable in FY23. 

  • 1H22 Results Highlights. Relative to the pcp: (1) Group underlying revenue $1.4bn, up +8.3%, driven by strong premium revenue growth of +8.2% upon uplift in policyholders, and Covid related disruption to elective surgery and allied healthcare, partially offset by NHF’s international students and travel insurance businesses. (2) Group claims expense $1.1bn, up +6.4% with ongoing uncertainty around deferred treatment and future claims. (3) Group underlying operating profit $109.6m, up +28.5%. (4) NPAT of $81.2m, up +24.7%. (5) The Board declared an interim dividend of 11.0cps, fully franked (versus 10.0cps in 1H21). (5) Management does “expect and account for an inevitable ‘catch-up’ in deferred treatment now estimated at $59.2m”.
  • Performance by Segments. Relative to the pcp: (1) Australian Residents Health Insurance (arhi). Premium revenue of $1,151.0 was up +7.8% driven by policyholder growth, up +2.8% to over 653k. Claims expense of $917.1m, was up +4.9%, as Covid impacts offset increase in deferred claims liability, and effect of catch up in pcp. UOP of $123.6m, was up +39.8%. Normalised net margin continues to be in the 6-7% range. (2) New Zealand. Premium revenue of $144.4m, was up +13.8% due to policyholder growth of +4.1%, price adjustments to reflect inflation and favorable FX. Claims expense increase +17.2% to $92.9m due to policyholder increase and +12.3% claims inflation. UOP of $9.2m was down -12.4%. Net margin declined to 6.3% reflecting investment in the core system. NHF noted “the outlook for our Kiwi business is positive with favorable market conditions and the acquisition of Kiwi Insurance Limited which should be completed in 2H22. We expect 3-5% growth in policyholders for FY22”. (3) International inbound health insurance (iihi). Premium revenue was up +2.7% to $59.9m on strong performance in workers business especially through the Pacific and Australia Labor Mobility (PALM) scheme, offset by NHF’s student business with restrictions on international students. Claims incurred of $47.9m was up +20.4%. Underlying operating loss of $7.4m, was weaker than the $0.3m profit in the pcp. (4) nib Travel. Operating income of $8.2m was materially stronger than the $4.4m in the pcp. Underlying operating loss of -$7.9m was -1.3% lower than the pcp. NHF’s management noted that nib Travel’s loss was as expected, with the business still heavily impacted by border closures and travel restrictions.
  • Outlook. While NHF did not provide specific quantitative earnings guidance, management did note: “Strong arhi performance and New Zealand and international workers profitability are offsetting current loss making in international students and travel. Expect that support to continue while necessary”. (1) Australian Residents Health Insurance (arhi). Net policyholder growth ~3%; Claims escalation associated with “catch up” in deferred treatment fully provisioned; Return to net margin target 6-7% over time. (2) New Zealand. FY22 net policyholder growth 3-5%; Kiwi Insurance acquisition expected to complete in 2H22. (3) International inbound health insurance (iihi). Gradual return of travel domestically and internationally in CY22; Return to profitability in FY23. (4) nib Travel. Heightened demand for skilled migration to continue; Gradual return of international students as travel restrictions ease; Return to profitability in FY23.

Company Description: 

nib Holdings Limited (NHF) is the Australian private health insurer. NHF operates in four divisions which are private health insurance, life insurance, travel insurance and related health care activities. 

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

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Inflated Raw Material Costs In Conjunction With Significant Market Competition To Impede Growth For Catalent Inc.

Business Strategy and Outlook

Catalent is a leading contract development and manufacturing organization, or CDMO. The company has an extensive network of partnerships with pharmaceutical and biotechnology firms that leverage its expertise and scale to optimize drug production and avoid the risks of in-house drug manufacturing. The challenges and compliance risks associated with changing a drug’s manufacturing process create a sticky relationship for Catalent’s customers. Drug companies tend to stick with trusted suppliers with good track records of regulatory compliance, which makes them unlikely to switch to a different CDMO. Catalent provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Outsourcing penetration is anticipated to continue incrementally increasing, driven by the complexities of biologics manufacturing. 

Biologics are large, complex molecules such as antibodies, recombinant proteins, vaccines, and cell and gene therapies. Catalent’s biologics segment accounted for 48% of its fiscal year 2021 revenue. The biologics manufacturing process requires around-the-clock maintenance, with an emphasis on maintaining the integrity of the cell and its DNA as well as keeping the cells free of contaminants. The same cell line reproduces to continue making the product until the end of the drug’s life. Therefore, for clients to switch manufacturers would require establishing a new cell line that would result in variations, or transferring the technology, which makes it vulnerable to changes as well. Biopharma customers are likely to continue outsourcing to CDMOs in order to benefit from access to flexible capacity and manufacturing improvements. According to Industry Standard Research, only one third of pharmaceutical manufacturing is currently conducted in-house while two thirds are outsourced.

Financial Strength

Catalent is in fair financial health, and the business is expected to continue providing a steady stream of cash. The company has historically utilized debt, particularly for acquisitions. Catalent ended 2021 with $3.2 billion in total debt after completing several acquisitions over the last few years of biologics-focused businesses, cell and gene therapy companies, and a gummies manufacturer. Catalent is focused on expanding its biologics capabilities to meet increased demand for complex biologics manufacturing and diversify its offerings to customers. The company is expected to be able to meet its financial obligations thanks to continued strong growth. At the end of 2021, Catalent had nearly $900 million in cash and equivalents, which is considered a healthy amount to support additional growth.

Bulls Say’s

  • Contract development and manufacturing organizations like Catalent have sticky businesses with long-term contracts and high switching costs for its customers. 
  • As drug portfolios are increasingly made up of complex drugs like biologics and emerging therapies, Catalent’s biopharma customers will be more reliant on outsourced manufacturing. 
  • With its global scale, Catalent is less dependent on any one customer or drug, which allows it to better absorb unexpected late-stage trial failures or drops in demand.

Company Profile 

Catalent is a contract development and manufacturing organization, or CDMO. It operates under four segments: biologics, softgel and oral technologies, oral and specialty delivery, and clinical supply services. Catalent derives its revenues primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Catalent has over 50 facilities across four continents.

(Source: MorningStar)

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