Category: Research

Categories
Global stocks Shares

FedEx Ground Margins Grappling With Wage/Cost Inflation, but Improvement Still Likely

Business Strategy and Outlook

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape–FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

Leading up to the pandemic, ground margins were grappling with heavy network investment, the gradual mix shift to lower-margin B2C deliveries, lost Amazon revenue, and a pullback in B2B shipments. That said, the pandemic driven e-commerce shift and related surge in residential package delivery demand, coupled with a massive uptick in parcel carriers’ pricing power drove a resurgence in FedEx’ profitability. Recovering B2B activity has also played a material role. Material labor constraints emerged in recent quarters, setting margins back . Therefore, Morningstar analysts assuming management will be able to mitigate some of these headwinds with increased productivity, and ground margins should see some recovery in the quarters ahead.

In general, FedEx’ extensive international shipping network is extraordinarily difficult to duplicate and domestic/international e-commerce tailwinds should remain favorable for years to come (outside a major recession). Despite Amazon insourcing more of its own U.S. last-mile package deliveries, FedEx continues to bolster its ground and express capabilities and is well positioned to serve the myriad other retail shippers pursuing e-commerce, not to mention its entrenched relationships in B2B delivery. The TNT integration has made headway, and expects efforts to bear more fruit in Europe as FedEx finalizes the integration by May 2022.

Financial Strength

Total debt approached $21 billion as of fiscal year-end 2021 (ended May), down slightly from $22 billion in fiscal 2020. Since May 2017, FedEx has borrowed around $7 billion (net) to finance aircraft purchases, sorting facility expansion and automation, pension funding, dividends, and periodic share repurchases. This partly reflects $3 billion of unsecured debt issued in April 2020 to increase financial flexibility as the pandemic hit, and to pay off part of its commercial paper program. FedEx ended fiscal 2021 with $7 billion in cash and equivalents, up from $5 billion. Total debt/adjusted EBITDA came in near 2 times in fiscal 2021, which represents improvement from 3.3 times in fiscal 2020, as the operating backdrop improved significantly. We expect that metric to hold relatively steady in fiscal 2022. Adjusted EBITDA excludes mark-to-market pension charges and nonrecurring costs.

Bull Says

  • Outside a prolonged recession, FedEx’s U.S. ground package delivery operations should continue to enjoy robust growth tailwinds rooted in favorable ecommerce trends.
  • FedEx’s massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.
  • During its nearly five-decade history, FedEx has weathered multiple economic cycles. While short term results may suffer, the firm’s powerful parcel delivery network is firmly established.

Company Profile

FedEx pioneered overnight delivery in 1973 and remains the world’s largest express package provider. In its fiscal 2020 (ended May 2020), FedEx derived 51% of revenue from its express division, 33% from ground, and 10% from freight, its asset-based less-than-truckload shipping segment. The remainder comes from other services, including FedEx Office, which provides document production/shipping, and FedEx Logistics, which provides global forwarding. FedEx acquired Dutch parcel delivery firm TNT Express in 2016. TNT was previously the fourth-largest global parcel delivery provider.

 (Source: Morningstar)

General Advice Warning

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

Categories
ETFs ETFs

HACK aims to track the performance of an index that provides exposure to the leading companies in the global cybersecurity sector.

Approach

The index tracks the performance of the exchange-listed equity securities of companies across the globe that (i) engage in providing cyber defence applications or services as a vital component of its overall business or (ii) provide hardware or software for cyber defence activities as a vital component of its overall business. The fund invests at least 80% of its total assets in the component securities of the index and in ADRs and GDRs based on the component securities in the index.

Portfolio

An ETF Model Portfolio is a carefully selected portfolio of exchange traded funds (ETFs) and other exchange traded products constructed and managed by a professional investment manager.

The investment manager typically also provides regular reporting on the portfolio’s performance, along with ongoing communication on changes to the portfolios, the rationale for doing so, and broader commentary on the micro and macro environment.

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.

  • Strategic asset allocation (SAA) ETF model portfolios: Built using forward-looking 10-year expected returns and risk for a diversified range of major asset classes.
  • Dynamic asset allocation (DAA) ETF model portfolios: Utilise return/risk parameters from SAA, rebalanced quarterly based upon BetaShares’ modelling of asset class misevaluations, risk objectives and economic considerations.
  • Dynamic Income model portfolios: Aim to produce total returns that are similar to the dynamic ETF models, but are weighted towards income rather than capital growth.
  • Pension Risk-Managed Model Portfolios: Uses ETPs that aim to provide enhanced income returns and/or less volatile returns through a systematic risk-management overlay.

People

dam 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. Alex is responsible for leading the strategy and overall management of the business. Prior to co-founding BetaShares, Alex was closely involved in the establishment and development of several leading Australian financial services businesses including Pengana Capital and Centric Wealth. 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. Annabelle is a member of the BetaShares marketing team focusing on social media and content. Anthony is responsible for supporting the investment and operations functions at BetaShares. Anton is BetaShares’ internal legal adviser and is also responsible for managing the compliance function.  Ben is responsible for supporting the distribution of BetaShares funds to advisers across the Victoria and South Australia regions. Benjamin is a member of the BetaShares Distribution team, responsible for assisting with client inquiries.

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. Cameron’s responsibilities span supporting all distribution channels and working alongside the portfolio management team. Prior to joining BetaShares, Cameron was a portfolio manager at Macquarie Asset Management, and was responsible for the structuring and management of Macquarie’s listed and unlisted structured product offering. Cameron’s other experience includes Head of Product at Bell Potter Capital, working on JP Morgan’s Equity Derivatives desk and at Deloitte Consulting.

Performance 

The ETFMG Prime Cyber Security ETF was the first ETF to focus on the cyber security industry. It tracks an index of companies involved in hardware, software and services, classifying the underlying stocks as either infrastructure or service providers. Top holdings include Cisco Systems, Akamai and Qualys.

About Fund

FactSet ETF Analytics Scoring Methodology is one of the first wide-ranging and robust methodologies for evaluating, comparing and contrasting exchange-traded funds. The researchers and analysts at FactSet developed the system. The result of thousands of hours of research, debate and testing, FactSet ETF Analytics Scoring Methodology provides a comprehensive structure for investors to analyze ETFs. FactSet’s quantitative system allows an investor to evaluate a fund at a glance, aggregating a sweeping range of detailed, often-difficult-to-obtain data points. FactSet’s Letter Grade combines the Efficiency and Tradability score evaluating costs to the investor. The combined score is assigned a letter grade (A-F) providing an institutional-caliber view on how well run and how liquid the ETF is. Efficiency includes risks, which are potential costs. Funds that minimize these risks can be more efficient.

(Source: Betashare)

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.

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Categories
Funds Funds

Realindex Australian Share-Class A: A well versed, Economical Option with Good Background

Approach
Realindex uses a systematic index method employing four equally weighted measures of a company’s economic size to rank and weight stocks in the portfolio. These criteria are adjusted sales, cash flow, and dividends and latest available adjusted book value. Additional earnings quality, near-term value, and debtcoverage filters act to reduce exposure to stocks with greater uncertainty. A signal was also introduced in November 2015 that downweights stocks with negative momentum and overweights stocks with positive momentum. As a part of its endeavor to improve current metrics, Realindex has more recently refined the book value metric to factor in intangibles as well by adjusting it with capitalize R&D and marketing expenses. The filters have contributed to a value bias and tilt to established companies that typically trade at a discount. This alternative approach to traditional index investing aims to eliminate the relationship between portfolio weighting and over/undervaluation associated with weighting a portfolio by market cap. The portfolio is rebalanced quarterly, resulting in average annual turnover of about 15%. The team handles all aspects of research, portfolio management, implementation, and execution with a focus on minimizing trading costs and market impact.


Portfolio
Realindex constructs a diversified, value-leaning portfolio. The strategy’s factors and price filters can lead to some differences relative to the more commonly used S&P/ASX 200 Accumulation Index. For example, the portfolio typically has lower price/book ratios and higher dividend yields. Realindex’s absolute weighting to most sectors remains relatively stable because the fundamental size characteristics tend not to fluctuate wildly unlike the sector weights fluctuation in market-cap benchmarks. Other deviations have been a historic tilt away from healthcare and real estate. Relative to the category index, S&P/ASX 200 Index, the strategy is value-focused and yield-oriented. Large-cap bias is apparent in the portfolio, but it is relative to the category average. As of November 2021, the portfolio was overweight in financial services and underweight in resources and healthcare. Realindex’s portfolio, traditionally, has remained quite similar to market-cap benchmarks overall. Historically, active share has hovered around 20%.

People
Realindex has been through a significant phase of transition in the past couple of years bought about by the end of the partnership with RAFI and the exit of a few senior portfolio managers. This has provided an opportunity for Realindex to revamp its overall team structure and bring on experienced investment professionals. The experienced David Walsh has joined as the head of investment, leading portfolio management and research, which Scott Hamilton leads. With the hires of Joana Nash and Ron Guido as experienced senior quant portfolio managers, Realindex has also beefed up its quant research capabilities.
The team is nimbler now for prioritization and effective collaboration on research initiatives and efficient implementation of the research outcomes, although it is preferred to have clearer lines between the research and portfolio management teams. The visible progress made in the trailing 18 months in research projects (for example, ESG factor impact on price and incorporating intangibles into the book value) augmenting the investment process through the implementation of novel signals is testimony of the team’s collective ability. The recent departure of experienced senior portfolio manager Raelene De Souza is unfortunate. Historically, Realindex has been successful in attracting top investment talent. But the length of their association with the firm has been shorter than it is prefered.


Performance
Realindex Australian Shares has delivered impressive peer-relative performance from inception through February 2022. Its five-year return of 8.5% per year as of February 2022 has easily outpaced the category average but only matched the broader market’s index return, indicating the tough environment it has been for value managers. This performance is principally attributed to the overweighting in materials, underweighting in healthcare, and energy. Better stock inclusion from the resources and consumer cyclical sectors has been additive too. Specifically, overweightings in BHP Group and Wesfarmers has added to performance and offset marginally by the overweighting in Westpac Banking. Amid the pandemic-induced uncertainties across the market, the strategy was admirably more resilient than the average category manager. The impressive outperformance was largely fueled by the strategy’s overweighting in materials, consumer cyclical, and consumer staples (a recurring theme across short- and long-term performance), although slightly offset by its overweighting in financial services. Over the trailing year through February 2022, the strategy has outperformed the S&P/ASX 200 Index but marginally stayed below the category average as value stocks have staged a reversal.

About Fund:
Realindex forms a universe of Australian companies based on accounting measures.Factors such as quality, near – term value and momentum are applied to form a final portfolio of companies. The resulting portfolio has a value tilt relative to the benchmark and provides the benefits of being lower in cost, lower turnover and highly diversified compared to traditional active investment strategies. Realindex overhauled its investment team with an aim to create a nimbler team structure and has hired investment professionals with a high skillset and experience level. The new team has made real progress in the trailing 18 months defining the research agenda and prioritizing projects in terms of their potential to value add. These developments paint a positive picture for the strategy; however, investors should note that the team’s tenure is short and Realindex’s track record in team turnover has not been impressive. As such, it is alleged for the investment team to exhibit longevity before experts’ conviction level is strengthened.

(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Cheap passive exposure to Australian fixed income

Approach

This strategy aims to track the Bloomberg Ausbond Composite 0+ Index with a tracking error of 0.05% per year or less (before fees). IShares is typically able to achieve full replication of the government-bond component in the portfolio because of ample liquidity and breadth. To alleviate liquidity challenges, the firm uses stratified sampling to acquire corporate and supranational exposures–an industry-standard approach, but one in which iShares excels thanks to its sophisticated global trading systems and experienced team. When the team can’t buy all the bonds in the index at a reasonable price, it will instead buy a basket of bonds that has similar credit and duration risks within allowable tolerance ranges. The team also employs strategies like securities lending to generate additional returns, helping to offset the performance drag from factors like fees and trading costs. IShares’ scale further minimises trading costs; a large active book and the firm’s ETF business allow for cross-trades and wide broker access. IShares thus executes trades cheaply, which is crucial in index fund management. It’s worth noting that Bloomberg’s index assumes distributions earn no interest, whereas iShares may accrue interest on its distribution cash balances. This may cause some tracking error, but ultimately it is a positive tailwind.

Portfolio

This strategy aims to fully replicate the Bloomberg AusBond Composite 0+ Index. Factoring cost, liquidity, and existing diversification if it doesn’t make sense to own all the bonds on issue, it will use stratified sampling to buy a basket of bonds with similar credit and duration risks. As of 28 Feb 2022, the index was composed of government and semigovernment bonds (85%), supranationals (5%), and corporate bonds (9%). The fund invests in high-quality bonds, with AAA rated debt constituting 71% of the benchmark’s quality exposure. Banks and other financials issue most of the credit in the index. The fund’s duration continues to increase with the benchmark as yields mostly hovered around historic lows barring the recent spike, up from 4.95 years at October 2016 to 5.8 years at 28 Feb 2022. The lengthening duration is a result of Commonwealth Government Bonds being issued at longer tenures, such as 30 years. But it means the fund faces the risk of rising yields globally, when we would expect active managers in this space to outperform their long-duration passive peers. Overall credit quality and appropriate diversification make this strategy an appropriate core exposure.

Performance: In terms of Annualised and Cumulative basis

Top 10 Holdings of the fund

About the fund

The fund aims to provide investors with the performance of the Bloomberg Aus Bond Composite 0+ Yr Index SM, before fees and expenses. The index is designed to measure the performance of the Australian bond market and includes investment grade fixed income securities issued by the Australian Treasury, Australian semi-government entities, supranational and sovereign entities and corporate entities.

(Source: Morningstar)

General Advice Warning

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

Categories
Global stocks Shares

We Expect Avery Dennison Will Enjoy Another Year of Strong Growth in 2022

Business Strategy and Outlook

 Avery Dennison is the largest supplier of pressure-sensitive adhesive materials and passive radio frequency identifiers in the world. Rising consumer packaged goods penetration in emerging markets should add to label growth, while growth in omnichannel retailing will aid RFID sales at Avery Dennison.

Avery sells pressure-sensitive materials to a highly fragmented customer base that converts specialty film rolls into labels for companies such as Kraft Heinz or Amazon. The concentrated market positions of Avery and competitor UPM Reflactac give each bargaining power over their customers. The labels and graphics materials, or LGM, and industrial and healthcare materials, or IHM, segments account for roughly 74% of company revenue. They convert paper, vinyl, and adhesives into composite films that become shipping labels, automotive graphics, and special-use tapes and films. While demand for these products is stagnant in developed markets, and expect Avery’s large emerging market footprint (around 40% of revenue for these segments) to drive mid-single-digit revenue growth.

 Avery’s Retail Branding and Information Systems segment, or RBIS, makes up 26% of sales and produces a mixture of apparel graphics, product tags, and passive radio frequency identifiers or RFID. While RFID accounts for around 25% of the segment’s revenue, it has grown rapidly in recent years and has increasingly become the focus of Avery’s RBIS segment. RFID products are typically integrated into product tags in industries which have both a diverse inventory and where UPC scanning is cumbersome or labour-intensive, such as apparel. Avery’s recent strategy shift to focus on reducing both costs and prices of the technology in order to gain share demonstrates the commoditized nature of these products. Even so, and think Avery will at least be able to grow with the market, or between 15% and 20% per year. The remainder of segment revenue comes from the application and production of apparel graphics and tags. It is expected expect revenue growth of these end uses to remain mixed, dependent largely on shifting fashion preferences.

Financial Strength

Avery Dennison is in very good financial health. The company ended 2021 with net debt/EBITDA of roughly 2.2, which gives the firm room to manoeuvre with regard to additional acquisitions, opportunistic share buybacks, or to boost its dividend. This remains just below management’s target range of 2.3-2.6, aimed at preserving its BBB credit rating. Avery’s target range of debt remains manageable, and shouldn’t become a material burden even if economic conditions worsen. Thanks to the amount of business Avery derives from consumer staples, cash flows usually remain relatively stable throughout the economic cycle.

Bulls Say’s

  • Emerging-market adoption of consumer-packaged goods will provide a long runway for sales growth. 
  • As RFID technology becomes widely adopted, Avery’s growth should receive a hefty tailwind. 
  • Avery’s dominance in retail branding information systems should lead to widening segment margins

Company Profile 

Avery Dennison manufactures pressure-sensitive materials, merchandise tags, and labels. The company also runs a specialty converting business that produces radio-frequency identification inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for the majority of total sales.

(Source: MorningStar)

General Advice Warning

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

Categories
Global stocks Shares

Mondelez’s management refraining from quantifying its cost-saving aims

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Business Strategy and Outlook

Since taking the helm at Mondelez four years ago, CEO Dirk Van de Put has orchestrated a plan to drive balanced sales and profit growth by empowering local leaders, extending the distribution of its fare, and facilitating more agility as it relates to product innovation (aims that are hitting the mark). It wasn’t surprising reigniting the top line was at the forefront of its strategic direction. More specifically, Mondelez targets 3%-plus sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends at home and abroad. Further, it has looked to acquire niche brands to build out its category and geographic exposure, which is seen to be prudent. 

But despite opportunities to bolster sales, it weren’t anticipated the pendulum to shift entirely to top-line gains under Van de Put’s watch; rather, based on his tenure at privately held McCain Foods and past rhetoric, it is alleged driving consistently profitable growth would be the priority. As such, the suggestion showcase that Mondelez is poised to realize additional efficiency gains through fiscal 2022 favorably. While management has refrained from quantifying its cost-saving aims, it is seen an additional $750 million in costs (a low- to mid-single-digit percentage of cost of goods sold and operating expenses, excluding depreciation and amortization) it could remove (on top of the $1.5 billion realized before the pandemic). It is foreseen this can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities. 

It isn’t likely that, these savings to merely boost profits, though. In this vein, management has stressed a portion of any savings realized would fuel added spending behind its brands in the form of research, development, and marketing, supporting the brand intangible asset underpinning Mondelez’s wide moat. This aligns with analysts forecast for research, development, and marketing to edge up to nearly 7% of sales on average over the next 10 years (or about $2.4 billion annually), above historical levels of 6% ($1.7 billion).

Financial Strength

In assessing Mondelez’s balance sheet strength, it isn’t foreseen any material impediments to its financial flexibility. In this vein, Mondelez maintained $3.5 billion of cash on its balance sheet against $19.5 billion of total debt as of the end of fiscal 2021. Experts forecast free cash flow will average around 15% of sales annually over Experts 10-year explicit forecast (about $5.2 billion on average each year). And it is in view that returning excess cash to shareholders will remain a priority. Analysts forecast Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2031 (implying a payout ratio between just north of 40%), while also repurchasing around 2%-3% of shares outstanding annually. It is held Mondelez has proven itself a prudent capital allocator and could also opt to add on brands and businesses that extend its reach in untapped categories and/or geographies from time to time–although it is unlikely believe it has much of an appetite for a transformational deal. It is alleged the opportunity to expand its footprint into untapped markets–such as Indonesia and Germany–or into other adjacent snacking categories (like health and wellness) could be in the cards. Recent deals have included adding Tate’s Bake Shop for $500 million in 2018, Perfect Snacks (in 2019, refrigerated snack bars), Give & Go (2020, an in-store bakery operator),and Chipita (2021, Central and Eastern European croissants and baked goods) to its fold. But at just a low-single-digit percentage of sales, none of these deals are material enough to move the needle on its overall results.

Bulls Say’s

  • Mondelez’s decision to empower in-market leaders and fuel investments behind its local jewels (which historically had been starved in favor of its global brands) stands to incite growth in emerging markets for some time. 
  • Experts suggest the firm is committed to maintaining a stringent focus on extracting inefficiencies from its business, including the target to shed more than 25% of its noncore stock-keeping units to reduce complexity. 
  • Management has suggested it won’t sacrifice profit improvement merely to inflate its near-term sales profile, which is foreseen as a plus.

Company Profile 

Mondelez has operated as an independent organization since its split from the former Kraft Foods North American grocery business in October 2012. The firm is a leading player in the global snack arena with a presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles. Mondelez’s portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm derives around one third of revenue from developing markets, nearly 40% from Europe, and the remainder from North America. 

(Source: MorningStar)

General Advice Warning

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

Categories
Shares Small Cap

COE’s results with production of 1.57 MMboe, up +31%; sales volumes of 2.02 MMboe, up +67%, and sales revenue of $95.4m, up +96%.

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Investment Thesis:

  • Strong FY22 guidance provided by management. 
  • Sole will provide significant uplift in production and free cash flow. 
  • Sole’s volumes are mostly contracted out, which provides greater certainty at reduced exposure to price movements. 61% of COE’s 2P reserves (Proved and probable reserves) are under take-or-pay contracts, with uncontracted gas predominantly from 2024 onwards. 
  • Upside from COE’s exploration activity around Gippsland and Otway Basin. 
  • Strong management team led by CEO/MD David Maxwell, who has over 25 years industry / developing LNG projects with companies such as BG Group, Woodside Petroleum and Santos Ltd. 
  • Favorable industry conditions on the east coast gas market – with tight supply could lead to higher gas prices. 
  • Potential M&A activity – especially considering recent de-rating.

Key Risks:

  • Execution risk – Drilling and exploration risk.
  • Commodity price risk – movement in oil & gas price will impact uncontracted volumes. 
  • Regulatory risk – such as changes in tax regimes which adversely impact profitability. 
  • M&A risk – value destructive acquisition in order to add growth assets.
  • Financial risk – potentially deeply discounted equity raising to fund operating & exploration activities should debt markets tighten up due external macro factors.

Key Highlights:

  • COE’s management announced strong guidance relative to FY21: FY22 production guidance 3.0 – 3.4 MMboe (FY21: 2.63 MMboe); sales volume 3.7 – 4.0 MMboe (FY21: 3.01 MMboe); underlying EBITDAX $53 – $63m (FY21: $30m); capex of $24 – 28m (FY21: $32.3m).
  • COE achieved record results with production of 1.57 MMboe, up +31%; sales volumes of 2.02 MMboe, up +67%, and sales revenue of $95.4m, up +96%.
  • The +31% increase in total production to 1.57 MMboe, was driven by higher production from the Sole field and higher sales volumes contributed to a +163% increase in underlying EBITDAX to $25.5m.
  • COE was able to improve performance at Orbost Gas Processing Plant to drive earnings: Underlying EBITDAX up +163% to $25.5m; underlying net loss after tax of $6.0m (H1 FY21: $17.4m loss).
  • Step-change in total company gas production: H1 FY22 average daily rate of 50TJ/day, up +39% relative to 1H21 average daily rate of 36 TJ/day.
  • Athena Gas Plant sales began after successful commissioning.
  • COE retained a solid balance sheet with $92.2m in cash reserves at 31 December 2021.

Company Description:

Cooper Energy Ltd (COE) is an oil & gas exploration company focusing on its activities in the Cooper Basin of South Australia. The Company’s exploration portfolio includes six tenements located throughout the Basin. Gas accounts for the major share of the Company’s sales revenue, production and reserves. COE’s portfolio includes: (1) gas production of approximately 7PJ p.a. from the Otway Basin, most of which comes from the Casino Henry gas project which it operates. (2) COE is developing the Sole gas field to supply 24 PJ of gas p.a. from 2019. (3) Oil production of approximately 0.3 million barrels p.a. from low-cost operations in the Cooper Basin.   

(Source: Banyantree)

General Advice Warning

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

Categories
Global stocks Shares

AIG Targeting for an underlying combined ratio below 90% by the end of 2022

Business Strategy and Outlook

The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, had noncore businesses it needed to shed, and had material issues in its core operations that it needed to fix. It is encouraging, however, by the recent progress in terms of improving underwriting margins, and the plan to take out $1 billion in costs by 2022 would be another material step. In 2020, the impact of the coronavirus has obscured the company’s progress, but it is held results over the past year have been encouraging. COVID-19 losses to date have been very manageable. As a percentage of capital, losses have stayed well within the range of historical events that the industry has successfully absorbed in the past. 

The longer-term picture looks relatively bright. The pricing environment has not been particularly favorable in recent years. However, in 2019, pricing momentum picked up in primary lines, and this positive trend only accelerated in 2020. More recently, pricing has started to plateau, but the industry has enjoyed the highest pricing increases it has seen since 2003. While higher pricing is necessary to some extent to offset lower interest rates and a rise in social inflation, pricing increases appear to be more than offsetting these factors. As a result, commercial P&C insurers are experiencing a positive trend in underlying underwriting profitability, and potential for a truly hard pricing market can be seen, similar to the period that followed 9/11. 

It is seen AIG has made material progress in improving its under/over the past couple of years, and has set a target for an underlying combined ratio below 90% by the end of 2022. Assuming an average level of catastrophe losses, it is likely this is a level that would allow P&C operations to achieve an acceptable level of return, and a harder pricing market may make hitting this target easier.

Financial Strength

It is alleged AIG’s balance sheet is sound, although the company is arguably in a somewhat weaker position than peers until it can improve profitability. Equity/assets was 13% at the end of 2021. This level is lower than P&C peers but reasonable if AIG’s life insurance operations, which operate with higher balance sheet leverage, are considered. During 2014, the company reduced its debt load by about $10 billion and eliminated much of its high-coupon debt, which improved its financial flexibility. Barring any unforeseen events, it is anticipated the company has room to continue to return capital to shareholders, and management had been returning a lot of capital to shareholders, in part through divestitures and some restructuring, although in recent years management has curtailed buybacks as AIG pivoted toward growth and acquisitions have become part of the strategic plan

Bulls Say’s

  • The aftermath of AIG’s issues during the financial crisis occupied much of management’s attention for quite some time. With these issues resolved, management can focus on the company’s operations, and there could be ample scope for improvement. 
  • AIG has demonstrated progress in improving underwriting margins in its P&C business. 
  • The current focus on risk-adjusted returns sets a proper course for the company, and just increasing profitability to the level of its peers would represent a material improvement.

Company Profile 

American International Group is one of the largest insurance and financial services firms in the world and has a global footprint. It operates through a wide range of subsidiaries that provide property, casualty, and life insurance. Its revenue is split roughly evenly between commercial and consumer lines. 

(Source: MorningStar)

General Advice Warning

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

Categories
Shares Small Cap

Airbnb Limiting Pebblebrook To Push Its Rates

Business Strategy and Outlook

Pebblebrook Hotel Trust is the largest U.S. lodging REIT focused on owning independent and boutique hotels. After Pebblebrook merged with LaSalle Hotel Properties in December 2018, the company owns 53 upper-upscale hotels, with more than 13,000 rooms located in urban, gateway markets. Pebblebrook’s combined portfolio has a higher revenue per available room price point and EBITDA margin than its hotel REIT peers. 

The recent merger with LaSalle provides Pebblebrook some new avenues to create value for shareholders. The company doubled in size while taking on only a portion of the general and administrative costs, making the combined company more efficient. Pebblebrook’s CEO, Jon Bortz, previously ran LaSalle and acquired many of the hotels in that portfolio. His knowledge of those hotels combined with management’s demonstrated ability to maximize margins should allow him to implement cost-saving initiatives that drive up margins. Additionally, management has begun an extensive renovation program across both the LaSalle portfolio and the legacy portfolio that will drive EBITDA gains over time. 

In the short term, the coronavirus outbreak significantly affected the operating results for Pebblebrook’s hotels, with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations allowed leisure travel to quickly return, driving high growth in 2021. It is held the company should continue to see strong growth in 2022 and beyond as business and group travel eventually returns to 2019 levels by 2024 in analysts base-case scenario. However, there are several factors that will remain headwinds for hotels over the long term. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing hotels from pushing rate increases even though it is nearing full occupancy on many nights. Finally, while the shadow supply created by Airbnb doesn’t directly compete most nights, it does limit Pebblebrook’s ability to push rates on nights when it would have typically generated its highest profits.

Financial Strength

Pebblebrook is in solid financial shape from a liquidity and a solvency perspective after the merger with LaSalle, but it is alleged that additional assets sales will put the company in great financial shape. The company seeks to maintain a solid but flexible balance sheet, which is anticipated will serve stakeholders well. Pebblebrook does not currently have an unsecured debt rating. Instead, it uses secured debt on its high-quality portfolio and takes out unsecured term loans. Debt maturities in the near term should be manageable through a combination of refinancing and the company’s free cash flow. Additionally, the company should be able to access the capital markets when acquisition opportunities arise. It is projected 2024, the year it is likely operations will fully return to normal, net debt/EBITDA and EBITDA/interest will be roughly 7.4 and 4.2 times, respectively, both of which are slightly outside of the long-term range for the company but should continue to improve over time.As a REIT, Pebblebrook is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cash flow from operating activities, providing plenty of flexibility for capital allocation and investment decisions. It is held Pebblebrook will continue to be able to access the capital markets given its current solid balance sheet and its large, higher-quality, unencumbered asset base.

Bulls Say’s

  • Potentially accelerating economic growth may prolong a robust hotel cycle and benefit Pebblebrook’s portfolio and performance. 
  • The acquisition of the LaSalle Hotel Trust portfolio provides management many renovation opportunities to drive revenue and margin growth. 
  • After the merger, Pebblebrook’s larger size could increase the company’s negotiating power with online travel agencies.

Company Profile 

Pebblebrook Hotel Trust currently owns upper-upscale and luxury hotels with 13,247 rooms across 53 hotels in the United States. Pebblebrook acquired LaSalle Hotel Properties, which owned 10,451 rooms across 41 U.S. hotels, in December 2018, the company current Pebblebrook CEO founded in 1998, though management has sold many of those hotels over the past few years. Pebblebrook’s portfolio consists mostly of independent hotels with no brand affiliations, though the combined company does own and operate some hotels under Marriott, Starwood, InterContinental, Hilton, and Hyatt brands. 

(Source: MorningStar)

General Advice Warning

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

Categories
Shares Small Cap

Qantas Airways – Omicron impact on 2H22 underlying EBITDA of ~$650m

Investment Thesis:

  • Attractive way to play the Covid reopen trade for investors.  
  • Aiming for all segments to deliver return on invested capital > weighted average cost of capital.
  • Strong position in the domestic market (Qantas Domestic and Jetstar continue to remain the two highest margin earning airlines in the domestic market).
  • Jetstar is well positioned for growth and rising demand in Asia. 
  • Partnership with Woolworths for Loyalty bodes well for membership and earnings.
  • Oil price hedging in FY22 could contribute to performance.
  • Increased competition in the international segment.
  • Relative to peers, strong balance sheet strength; investment grade credit rating.

Key Risks:

  • Disasters that could hurt the QAN brand.
  • Earnings recovery gets pushed out again due to travel restrictions or return of another Covid-19 variant. 
  • Ongoing price led competition forcing QAN to cut prices affecting margins.
  • Leveraged to the price of oil. 
  • Adverse currency movements result in less travel.
  • Labor strikes. 
  • Depressed economic conditions leading to less discretionary income to spend on travel. 

Key Highlights:

  • Omicron impact on 2H22 underlying EBITDA of ~$650m (after mitigations) with operating expenses for 2H22 to include ~$180m of inefficiencies and ramp up costs.
  • Domestic capacity to be 68% of pre-Covid levels in 3Q22, increasing to 90-100% in 4Q22, equating to total FY22 capacity of ~60%.
  • International capacity to be 22% of pre-Covid levels in 3Q22, increasing to 44% in 4Q22, equating to FY22 capacity of 18%.
  • Loyalty on track to deliver more than $1bn gross cash receipts in FY22 and remains committed to its target of $500-600m underlying EBIT by FY24 after returning to double-digit growth by end of CY22.
  • Net capex (excluding land proceeds) in FY22 of $850m and in FY23 of $2.3-2.4bn.
  • Underlying D&A in FY22 of $1.8bn.
  • Net debt within the $4.4-5.5bn target range by end of FY22 and at the bottom half of range from FY23 onwards.
  • The Recovery Plan delivered $840m in savings since the start of the program and remains on track to deliver greater than $900m by the end of FY22.
  • Balance Sheet repair continued with net debt reduction of -9.8% over pcp to $5.5bn (now within target range), refinancing A$300m bond maturing in May 2022.
  • Total liquidity of $4.3bn including $2.7bn cash and committed undrawn facilities of $1.6bn maturing in FY23 and FY24.
  • Investment grade credit rating of Baa2 from Moody’s maintained. 
  • Shareholder distributions remain on hold. 
  • 1H22 fuel cost declined -75% compared to pre-Covid-19 to $0.5bn, primarily due to a -74% reduction in fuel consumption. 

Company Description:

Qantas Airways Ltd (QAN) provides passenger and freight air transportation services in Australia and internationally. QAN also operates a frequent flyer loyalty program. QAN was founded in 1920 and is headquartered in Mascot, Australia.

(Source: Banyantree)

General Advice Warning

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