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Global stocks Shares

Gilden has approximately 80% market share in printwear basics and acquisitions have made it a stronger player in fashion basics

Business Strategy & Outlook

Gildan Activewear lacks a moat, which has put it in a difficult position as it navigates disruption from the coronavirus pandemic and inflation. While Gildan began a private-label men’s underwear contract with wide-moat Walmart in 2019, this product has largely replaced Gildan-branded underwear and only partially offsets losses in other areas. Narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other critical retailers. Mass retailers reportedly account for more than 60% of total underwear sales in the United States. Gildan has purchased a few notable brands, including Gold Toe (socks) and American Apparel (inexpensive fashion/printwear), having invested about $500 million in acquisitions since 2014. The company, though, no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its total yearly hosiery and underwear sales declined 21% between 2017 and 2021. 

There is a possibility that Gildan may end some of its hosiery programs to concentrate on its private-label business. Gildan’s success in printwear to its investments in the category and its cost-efficient production model. The firm has approximately 80% market share in printwear basics and acquisitions have made it a stronger player in fashion basics. Gildan’s printwear benefits from its strong supply chain as most of its clothing is manufactured in company-owned factories in low-wage, developing countries. Moreover, Gildan, unlike rivals, owns yarn-spinning factories in the U.S. that may improve its efficiency. In 2021, it bolstered its U.S. production with the acquisition of Frontier Yarns for about $170 million. Gildan’s investments have lowered its production costs, a permanent cost advantage hasn’t been created as its processes can be replicated by competitors and cost savings may be lost to lower prices.

Financial Strengths

In a move, Gildan cut spending to conserve cash during the COVID-19 crisis in 2020. Specifically, the firm lowered selling, general, and administrative expenses by 20%, suspended its dividends and share repurchases, and reduced its capital expenditures. However, as its results and finances improved in 2021, it stepped up cash usage, with capital expenditures of $127 million (4.4% of sales), about $250 million in share repurchases, and $90 million in dividend payments. Capital expenditures will rise to 6%-7% of sales over the next three years due to building projects and efficiency investments. Over the next decade, annual average repurchases of about $330 million and an annual average dividend payout ratio of 23%. Gildan’s total liquidity is solid. As of the end of September 2022, the firm had $920 million in debt, but also $69 million in cash and $680 million available on its revolving credit facility. Gildan will generate about $227 million in free cash flow to equity in 2022, more than enough to cover its obligations. Gildan renegotiated its debt covenants in June 2020 to avoid a possible violation. The firm closed 2019 with net debt/adjusted EBITDA of about 1.4 times, but this increased to 3.0 times at the end of 2020 because of the increased debt and a 70% drop in adjusted EBITDA for the year. However, its net debt/adjusted EBITDA fell to 0.6 times at the end of 2021 on debt reduction and higher EBITDA.

Bulls Say

  • Gildan has dominant market share in printwear basics and has invested in a low-cost production and distribution process to maintain its position. This business is recovering from the severe impact of the pandemic.
  • In 2019, Gildan won a contract with Walmart to supply men’s underwear for its in-house brand called George. While a blow to its branded business, the deal increased Gildan’s shelf space in the category.
  • Gildan’s Back to Basics efficiency strategy should allow it to hold operating margins around 18%, an improvement from prepandemic levels of about 15%.

Company Description

Gildan is a vertically-integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery. Its primary market is the sale of blank T-shirts and other apparel to wholesalers, major clothing brands, and printers (printwear). Gildan also sells branded clothing through retail and direct-to-consumer channels. Brands include Gildan, American Apparel, Comfort Colors, and Gold Toe. Gildan produces most of its clothing at factories in Latin America. The Montreal-based company generates most of its sales in the U.S. and was incorporated in 1984.

(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.

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Global stocks Shares

GrainCorp has historically handled up to 60% of the east-coast grain crop and 30% of the country’s total grain exports

Business Strategy & Outlook

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. However, the firm hasn’t carved an economic moat, and forecast returns on invested capital to trail the firm’s cost of capital over the long term. GrainCorp’s core Australian grain storage and logistics business is heavily reliant on favorable weather patterns. Accordingly, it has had some strong years during bumper grain harvests, but with a high fixed-cost base, even after substantial asset reduction, earnings can quickly evaporate in poor seasons. While the company’s upcountry storage network would be difficult to replicate from scratch, on-farm storage is a competitive threat, particularly in drought years when a larger share of the crop moves direct from farm to customer, bypassing GrainCorp’s storage network. Port competition has also increased in recent years, and regulation remains high. In a bumper harvest year, GrainCorp has historically handled up to 60% of the east-coast grain crop and 30% of the country’s total grain exports, but in a poor year, these market shares can trend closer to 30% and below 5%, respectively. GrainCorp’s market share of the eastern grain crop stabilized at levels near 40% over time, and export share above 20%, representing an average crop year.

Beyond storage and logistics, the grain marketing segment competes domestically and internationally against other major commodities trading houses such as Cargill and Glencore. This is a competitive market, and GrainCorp isn’t having any advantage relative to these large global players. The firm will likely remain at the mercy of Australian grain competitiveness relative to global pricing. Similarly, GrainCorp’s oil crushing and refining business remains competitive. Profitability is expected in this segment to improve due to cost-savings measures and ongoing growth, the segment doesn’t enjoys durable competitive advantages.

Financial Strengths

GrainCorp’s capital structure is reasonable. It comprises debt and equity, with noncore debt associated with the funding of grain marketing inventory. As a result of swings in crop prices, GrainCorp’s cash flow and working capital requirements can be volatile, so the company will need to draw down on debt on demand. As at Sept. 30, 2022, core debt (net debt less commodity inventory) was cash-positive and total net debt was AUD 540 million. There’s a risk that earnings pressure in drought-affected years could test debt covenants with its bank lenders. The primary metrics are its net debt/capital gearing ratio and EBITDA/interest ratio. Gearing ratios can be volatile, given the swings in inventory levels. The net debt gearing ratio (net debt/net debt plus equity) sat at over 27% as at Sept. 30, 2022 due to high inventory levels. Accordingly, core debt gearing (core debt/core debt plus equity) was negligible. Management doesn’t disclose the minimum EBITDA/interest ratio. In fiscal 2020, this ratio was about 4 times on an adjusted basis, but improved to 13 times and 20 times in fiscal 2021 and 2022, respectively.

Bulls Say

  • With strategic processing, storage, and transportation assets, GrainCorp’s size gives the company scale advantages over regional competitors.
  • Global thematic, such as increased food demand, particularly in Asia, should benefit agribusinesses such as GrainCorp.
  • Despite divesting the malt business, GrainCorp has entered into a new grains derivative contract which assists with smoothing out earnings through the cycle.

Company Description

GrainCorp is an agribusiness with an integrated business model operating across three divisions. The company operates the largest grain storage and logistics network in eastern Australia. GrainCorp

provides grain marketing services to all major grain-producing regions in Australia, as well as to

Canadian and U.K. growers. The company has also diversified into edible oil refining and supply, and bulk liquid storage.

(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

Nufarm’s primary competitive strengths are marketing scale, dominant position in the Australian market, formulation expertise, and marketing skills

Business Strategy & Outlook

Nufarm is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into all major world markets. The company is leveraged to growing demand for crops for biofuels, and food from rapidly industrializing markets such as China and India. Growth should come from astute brand and offshore business investments and from a customer service-focused strategy. However, the global crop-protection markets are competitive and earnings are cyclical, given a reliance on seasonal conditions. Sumitomo Chemical’s investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia. Continued growth in food demand in industrializing nations should underwrite long-term earnings growth. Nufarm’s primary competitive strengths are marketing scale, dominant position in the Australian market, formulation expertise, and skills in marketing post-patent crop-protection products. Global expansion in recent years reduced dependency on the domestic market. The company’s dominance in Australia has become less certain, with glyphosate pricing coming under considerable pressure. Due to the competitive nature of its markets, lack of pricing power and exposure to cyclical agricultural demand, Nufarm doesn’t possess an economic moat. Returns on invested capital have historically failed to meet the cost of capital.

In addition to its crop-protection business, Nufarm has a seed technologies business. With this, it aims to broaden its portfolio of products, all of which are targeted to improve agricultural yields. Nufarm has a growing presence in North America and Europe. Sound sales momentum has been evident in North America and Europe. Several Chinese companies have previously expressed interest in acquiring Nufarm, but withdrew either because of too high a price demanded by the board, or because of reduced availability of debt. In 2010, Japanese company Sumitomo Chemical bought 20% of Nufarm, subsequently increasing its stake to 23% before diluting to 16% and then selling out completely in 2022.

Financial Strengths

Nufarm’s balance sheet is in great shape. In early April 2020, the company received AUD 1.2 billion net sale proceeds from major shareholder Sumitomo, for the sale of its South American crop protection and seed treatment operations in Brazil, Argentina, Colombia, and Chile. This significantly bolstered the finances at a very fortuitous time, coming mid coronavirus. Prior to this in January 2020, group net debt had stood at a whopping AUD 1.6 billion. Nufarm’s under-leveraged balance sheet remains a strength. At Sept. 30, 2022, net debt stood at a modest AUD 204 million excluding leases, leverage of just 9% and annualized net debt/EBITDA of 0.5 is very comfortable. Leverage is well below management’s net debt/EBITDA target range of 1.5 to 2.0. Nufarm is to be unleveraged within a year all else being equal. It would be wise for the company to remain modestly leveraged at most, given vagaries of the weather, earnings seasonality, and new product ramp-up requirements.

Bulls Say

  • Nufarm benefits from potential strength in soft commodities markets.
  • Nufarm has well-established distribution platforms in most major global agricultural markets.
  • Product and geographic diversification helps reduce earnings volatility.

Company Description

Nufarm Limited is a global crop-protection company that develops, manufactures, and sells a range of crop-protection products, including herbicides, insecticides, and fungicides. Nufarm sells its products in most of the world’s major agricultural regions, and operates primarily in the off-patent segment of the crop-protection market. Nufarm operates along two business lines: crop protection and seed technologies.

(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.

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Global stocks Shares

With the bank’s acquisition of MB Financial, Fifth Third’s share has improved substantially in the Chicago area

Business Strategy & Outlook

Fifth Third’s reputation as a solidly profitable bank took a hit during the financial crisis. The bank regularly reported returns on equity that exceeded 17% before 2007, largely because of a strong line of fee-income businesses. In 2007, primarily because of weakness in some of the bank’s most significant markets–Ohio, Michigan, and Florida–loan losses began to pile up. Although management could not avoid the impact of operating in hard-hit economies, a generally increasing appetite for risk compounded the bank’s problems. Over the course of 2008-09, loan-loss provisions ate up more than 100% of net interest income. Since the crisis, much has changed, and management has made improvements to the underwriting process and generally improved the bank’s risk management. Fifth Third has emerged from the crisis as one of the Midwest’s more stable banking franchises, with strong deposit share across several large cities in Ohio and Michigan. With the bank’s acquisition of MB Financial, Fifth Third’s share has improved substantially in the Chicago area. 

The bank is also entering a new stage of better cost controls, which when combined with coming rate hikes, should set up the bank for solid operating leverage for years to come and a consistent sub-60% efficiency ratio. These are all necessary moves as the bank figures out how to buoy returns in a post-Worldpay existence. Better card analytics, increased capital markets and M&A offerings, and bolt-on acquisitions should continue to help drive growth in revenues. Fifth Third has experimented with partnerships with financial technology firms, such as GreenSky, the bank has bolstered its investment banking franchise with bolt-on acquisitions, and the bank’s latest acquisition of Dividend Finance should produce steady loan growth for years. The bank has performed from a credit perspective this time around, much better than during the financial crisis. Overall, Fifth Third is a dependable Midwest operator with improved risk management, decent market share in key geographies, and particular strength among its core middle-market clients.

Financial Strengths

Since the financial crisis, Fifth Third had steadily built its capital base to what is considered a healthy level. The bank reported a common equity Tier 1 ratio of 9.1% as of September 2022, in line with management’s target of roughly 9%. Fifth Third is adequately capitalized to withstand future losses while also funding growth.

Bulls Say

  • A strong economy and higher rates are all positives for the banking sector and should propel revenue and profitability even higher for Fifth Third. 
  • Fifth Third’s latest acquisition of Dividend Finance should drive outsized and profitable loan growth for years to come. 
  • Fifth Third may still have additional cost savings waiting in the background, potentially allowing the bank to outperform peers in an otherwise inflationary expense environment.

Company Description

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati. The company has over $200 billion in assets and operates numerous full-service banking centers and ATMs throughout Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia, and North Carolina.

(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

Tabcorp (TAH) delivered a solid 1H22 result which came in ahead of expectations

Investment Thesis

  • The demerger of its Lotteries & Keno business (to be named The Lottery Corporation) from its Wagering & Media business (to be named Tabcorp) could unlock shareholder value as standalone business.
  • Subdued outlook for wagering business and cost pressures likely to keep a lid on margin expansion in the near term.
  • Positive regulatory changes could drive out smaller uneconomical corporate bookmakers.
  • Potential capital management initiatives.

Key Risks

  • Competitive pressures within the core Wagering business.
  • Loss of market share.
  • Lack of product development.
  • Cost blowouts with failed investment in Sun Bets business in the UK.
  • Adverse outcome from any regulatory change.
  • The demerger fails to get all necessary approvals.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenue of $2,934m was up +2.2%, variable contribution was mostly flat (-0.9%) at $942m and underlying EBITDA of $529m was down -5.5% vs pcp, mainly reflecting the impact of Covid-19 with a strong performing Lotteries and Keno businesses being offset by Wagering & Media and Gaming Services (impacted by venue restrictions and trading). Management delivered a further $16m in savings in 1H22 from 3S optimization program, bringing total savings to date from the program to approximately $46m.
  • The Company declared an interim dividend of 6.5 cents per share, which is down -13.3% on pcp and represents a payout ratio of 77% of net profit before significant items (and at the top end of 70 – 80% range). 
  • Underlying NPAT of $187m was down -9.7% on pcp.
  • Lotteries & Keno. Revenues of $1,784m were up +10.9%, with EBITDA of $358m up +15.1% (margin up +80 bps on pcp). Segment earnings were driven by strong growth in Lotteries revenue (Jackpot games up; active registered customers up +5% and very strong digital growth of +26%) and Lotteries VC margin (digital growth drove margin expansion; 3S savings initiatives). This was partly offset by Keno revenue being impacted by retail shutdowns, which also had an adverse impact on reported margins.
  • TAH is on track to implement the demerger of its Lotteries & Keno business (to be named The Lottery Corporation) from its Wagering & Media business (to be named Tabcorp) no later than June 2022, subject to all necessary approvals. The Company expects to incur one-off costs of up to $275m and ongoing incremental costs of $40-45m p.a. further, The Lotteries and Keno business will target gearing levels of around 3.5x to 4.0x and the wagering & gaming business will target gearing of 1.0x to 1.5x.

Company Description

Tabcorp Holdings Ltd (TAH) is an integrated gambling and entertainment company listed in Australia, with operations overseas. The business operates three key segments – Wagering & Media, Keno and Gaming Services. These services are delivered to customers through TAH’s retail, digital and Sky media platforms.

(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.

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

A2M’s share price jumped on the results announcement with management announcing expectations to deliver revenue growth in FY22

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

Investment Thesis

  • Inventory issue remains a downside risk but can also provide upside surprise should management work through the excess inventory in its distribution channels. It appears the inventory is at target levels for some of the key channels.
  • Wining market share in Australia and China.
  • Growing consumer demand for health and well-being globally.
  • Demand growth in China for premium infant formula product.
  • Expansion into new priority markets, aided by the capabilities of Fonterra.
  • US expansion provides new markets + opportunities.
  • Key patents provide barrier to entry.
  • Takeover target – the Company was the subject of a takeover bid in 2015.

Key Risks

  • Management fails to meet its revised FY21 guidance.
  • Chinese demand underperforming market expectations.
  • Disruption to A2 milk supply.
  • Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
  • Expiration of A2M’s intellectual property rights may weaken or be infringed by competitors.
  • Withdrawal of A2M product from international markets due to market share loss OR lack of market penetration.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenue: The outlook for revenue in FY22 has improved since the start of the year with the Company still expecting 2H22 revenue (including MVM) to be significantly higher than 2H21, but

with growth now expected on 1H22 and for FY22 which is ahead of initial expectations due mainly to growth in China label and English label IMF. 

  • Gross profit: The improved outlook for revenue in 2H22 should result in higher gross profit than previously expected. However, this is likely to be offset by cost of goods sold headwinds related to increasing milk, ingredient and packaging costs. Accordingly, the Company still expects 2H22 gross margin percent to be broadly similar to 1H22.
  • Earnings: “Revenue improvement is not expected to translate into higher earnings as the Company significantly increases brand and other reinvestment consistent with its growth strategy”.
  • Operational cash conversion: “is likely to be less than 100% in FY22 due mainly to the business expecting to hold higher inventory and an increase in other working capital, as well as MVM needing to make a payment to CAHG in connection with a2MC’s acquisition of its 75% interest in MVM that completed in 1H22

Company Description

The a2 Milk Company Limited (A2M) sells a2 brand milk and related products. The company owns intellectual property that enables the identification of cattle for the production of A1 protein free milk products. It also sources and supplies a2 brand milk in Australia, the UK and the US, exports a2 brand milk to China, and distributes and markets a2 brand milk and a2 Platinum brand infant nutrition products in Australia, New Zealand, and China.

(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.

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

TPW’s performance till date suggests it is well positioned to benefit from the structural tailwind behind the migration of offline to online sales

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality(AR).

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses.
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures) Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower.
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.Group contribution margin was up +18% and represents 13.8% of revenue, which is in line with management’s stated target range of 12 – 15%.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m. Full year EBITDA margin of 5.1% was above management’s target range of 2-4% for the half, however this is expected to fall back into the range over FY22 as the full cost of the investments made in 1H22 materialize in 2H22. 
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 
  • (5) TPW continues to produce attractive levels of cash flow and operates
  • a negative working capital model, which continues to benefit its balance sheet strength. The
  • Company has no debt and closed the half with $105.5m in cash. 

Company Description

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products.

(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.

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

Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure

Business Strategy & Outlook

In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and it can be anticipated to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers to focus on redirecting capital toward infrastructure upgrades and higher-margin Montserrat day hospitals is viewed as a positive strategic step. Improvement in systems is key to improving efficiency. Pathology is an increasingly technologically driven service and the company intends to invest in a new laboratory information system, automation, and digitization through to fiscal 2024. However, while the system upgrades as necessary to restore earnings growth, one won’t see the company building an advantage over rival Sonic Healthcare, which is also continuously improving its systems.

Virtually all revenue is earned directly from Medicare via bulk-billing in the pathology and imaging segments. Healius’ organic volume growth in its core pathology segment has typically ranged between 3% and 5% and a similar rate over the 10-year forecast period can be seen. The volume growth is underpinned by population growth, aging demographics, higher incidence of diseases, and wider adoption of preventive diagnostics to manage healthcare costs. In addition, the number of tests available is expanding. Increasing complexity of tests, such as veterinary and gene-based testing, is also resulting in average fee price increases. Pathology has a high fixed cost of operation and thus benefits from volume growth to drive lower cost-per-test outcomes. Higher testing volumes result in a lower cost-per-test as labor, equipment, leases, transportation, and overhead costs are all leveraged. In 2013, the Australian government placed a freeze on Medicare fee rates but resumed indexation in fiscal 2021 for diagnostic imaging.

Financial Strengths

After divesting its medical centers, Healius boasts significant balance sheet flexibility. While the sale proceeds were used predominantly to retire debt, Healius also returned AUD 200 million to shareholders in the form of share buybacks in calendar 2021. Nonetheless, in the absence of major acquisitions, the net debt/EBITDA to remain under 2.0 times over the forecast period compared with Healius’ leverage target range of 1.7-2.2 times and its debt covenant of 3.5 times. At June 2022, Healius reported AUD 525 million in net debt, representing net debt/EBITDA of 1.0 times pre-AASB 16. Given the material operating leverage in the business, it is prudent for financial leverage to be at a comfortable level given the uncertainty surrounding COVID-19 testing. Following Healius’ improvement program in the near term, the free cash flow prior to dividends is to settle around 96% of net income at midcycle. The high cash conversion affords Healius to maintain the forecast dividend payout ratio of 60%, within Healius’ 50%-70% target range.

Bulls Say

  • On top of the base level of COVID-19 testing that is likely to continue, Healius is well-positioned for underlying trends in preventive diagnostic treatments and outpatient care in its day hospitals.
  • Simplifying the business via the sale of its medical centers is a positive indicator for the ultimate success of the company’s turnaround.
  • Advances in technology and personalized medicine are increasing the number of complex and gene-based tests available to patients, which are typically higher-margin.   

Company Description

Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue are almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.

(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

QBE manages a sizable investment portfolio of about USD 27 billion as of June, 2022

Business Strategy & Outlook

QBE Insurance is an international property and casualty insurance company with around USD 20 billion of annual gross written premiums. It writes about 25% of its annual premiums in its home region of Australia and New Zealand, which accounts for more than half of the groups underwriting profit. Other key markets include North America, Europe, and Asia Pacific. QBE is predominantly focused on specialty insurance lines, but the offering is extremely wide ranging across property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health. The size and diversity of insurance is built on the back of hundreds of acquisitions made over decades. The extended period of global growth via acquisition failed to deliver the cost-synergies or scale benefits management had hoped. The strategy has rightfully shifted, and progress is being made in turning the business around. The balance sheet has been strengthened and operational efficiency improving. The way senior management has reshaped insurance portfolios, cut costs, tightened underwriting standards and increased accountability across the group is likable. In addition to divesting several businesses, a greater focus on returns has led to group wide improvement in attritional claims. While reducing premiums, decisions to reduce exposure to certain areas–for example, large commercial properties, and properties in higher risk areas–has improved profitability and reduced volatility.

The performance of investment markets brings another element of volatility to earnings. QBE manages a sizable investment portfolio of about USD 27 billion as of June 30, 2022, being both policyholder and shareholder funds. Around 90% is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and–to a lesser extent–equity market. The returns are to remain suppressed in the short-term but will gradually recover as global cash rates normalize.

Financial Strengths

QBE Insurance is in sound financial health. After a multi decade strategy of growth by acquisition, a much-needed period of consolidation has included the exit from Latin America, North American personal lines, a number of Asian markets where the group lacks scale, and underwriting agencies and travel insurance in Australia and New Zealand. QBE Insurance held USD 3 billion in gross debt with a debt/equity ratio of 32.4% at June 30, 2022. Debt/total capital of 24.5% is within management’s 15%-30% target. QBE’s prescribed capital amount, or PCA, multiple is 1.77 times, at the top of the group’s 1.6-1.8 times target range.

Bulls Say

  • Rising insurance premiums, underwriting discipline, productivity initiatives, and focus on profitable growth, to drive consistent excess returns.
  • The U.S. operations have significant upside potential. There could be few years of disappointment to eventually lead to premium rates reflective of the underlying insured risks.
  • The strong balance sheet and positive premium pricing supporting dividend growth and the return of surplus capital to shareholders.    

Company Description

QBE Insurance is an international property and casualty insurance company. It writes about 25% of its annual gross written premiums in its home region of Australia and New Zealand, which accounts for more than half of the group’s underwriting profit. Other key regions include North America and Europe. QBE Insurance offers a number of personal, commercial, and specialty lines, including property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health.

(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

News Corporation is better placed than peers in the publishing space to transition its print business to the digital age

Business Strategy & Outlook

News Corp operates in an industry undergoing significant changes, with the traditional print-based publishing business model being dismantled by proliferating news and information outlets in the digital space. This is compounded by ever improving means for consumers to access them, driven by mobility and continuing device innovation. Consequently, News Corporation faces enormous structural headwinds, with consumers migrating from newspapers to the digital arena and advertisers following suit. Having said that, News Corporation is better placed than peers in the publishing space to transition its print business to the digital age. It has some of the most venerable masthead brands in the industry (The Wall Street Journal, The Times), and boasts significant editorial resources, especially compared with those of its rivals, which have been dwindling. The company’s financial position is solid, having split in 2013 from Twenty-First Century Fox, with no debt on the balance sheet. Even with the recent consolidation of Foxtel’s debt and a string of acquisitions, News boasts sufficient financial strength to transition the business to the digital age while also exploring opportunities to diversify away from the traditional newspaper business. Recent efforts to simplify the group are also positive, while a USD 1 billion buyback was announced in August 2021. 

While News Corporation deals with the structural challenges facing its publishing business, the company was partly shielded by its Australian pay-television operations in 65%-owned Fox Sports and Foxtel. Unfortunately, these two businesses are also coming under severe pressure from digital streaming alternatives to pay TV. On the positive side, the 61%-owned REA Group’s growth outlook remains robust in the online real estate classifieds space and the Move (acquired in November 2014) is making strong progress in the U.S. digital property

Financial Strengths

News Corporation is in solid financial health. It currently has a net debt position of just USD 1.2 billion, or 0.7 times EBITDA. Furthermore, the legacy newspaper publishing business is still generating solid free cash flow, albeit at a declining rate, augmented by resilient earnings from REA Group. Consequently, the company is well placed financially as it attempts to transition the publishing business model to the digital age, while also exploring opportunities to diversify away from it. In November 2021, management began a share buyback. Even after closing several acquisitions in 2022, News can repurchase up to USD 1 billion worth of shares and still keep net debt/EBITDA below 1.5. However, the last time News instituted a buyback in 2013 due to a “lazy” balance sheet, it only repurchased 14% of the USD 500 million program, even though the stock price was much lower during that time.

Bulls Say

  • News Corporation’s strong financial position and still-solid free cash generation separate the company from its s
  • The solid balance sheet provides management with critical flexibility, as it attempts to navigate the treacherous
  • News Corporation also boasts a number of resilient online property classified assets in Australia and the U.S., ones that add to its cash flow profile and provide a template for the kind of businesses that management wishes to acquire as part of a diversification strategy.

Company Description

News Corporation is a diversified media conglomerate with a large presence in the U.S, the U.K., and Australia. Key brands include The Wall Street Journal, Herald Sun, and The Times. The company also has a strong presence in the Australian pay-TV market through Fox Sports and Foxtel (both 65%- owned), while its 62%-owned REA Group is the dominant real estate classified business in Australia. In addition, it owns HarperCollins, one of the largest book publishers globally, and also has a substantial digital property advertising business (Move) in the U.S.

(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.