Category: Research

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Shares Small Cap

BAP Trading on an attractive FY23E PE Multiple of 18.1x and yield at 3.0%

Investment Thesis

  • Trading below our valuation. 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in secondhand vehicle sales; travelers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilizing their vehicles).
  • Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth).
  • Strong earnings growth profile. 
  • Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers. 
  • Significant distribution network across Australia to leverage from.
  • Ongoing bolt on acquisitions and associated synergies.
  • Growing BAP’s own brand strategy, which should be a positive for margins. BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products.
  • Weak macro story of leveraged Australian consumer and lower growth environment persisting.
  • Thailand represents a meaningful opportunity in our view. 

Key Risks

  • Rising competitive pressures.
  • Value destructive acquisition. 
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
  • Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower. 
  • Integration (and therefore synergies) of recent acquisitions underperform market expectations. 
  • Execution risk around Thailand. 

Key Highlights

  • The Board declared a fully franked interim dividend of 10cps, up +11.1% over pcp. 
  • The balance sheet remained strong with ample liquidity with cash increasing +101.5% over 2H21 to $79.8m and net debt of $203M (up +23.7% over 2H21) leading to a leverage ratio of 1.0x, providing the Company with significant financial flexibility to be able to respond rapidly to acquisition opportunities and continue to invest in high returning projects. 
  • Management continued investments in locations to support Truckline and Autobarn networks, expanded geographic footprint with BAP now having a presence in over 1,100 locations throughout Australia, New Zealand and Thailand, and signed 2 acquisitions adding annualised revenue of $50m at mid-single digit EBITDA multiples (pre-synergies).
  • The Board 

Company Profile 

Bapcor Ltd is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS.

(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
Shares Technology Stocks

Twitter’s strong user growth and monetization keeps firm on track

Business Strategy and Outlook:

Despite the top-line miss, both user growth and revenue per user was impressive, as the firm continues to capitalize on the growing demand for brand and direct response advertising. Twitter’s effort to focus more on advertising opportunities is believed to mix well with its balanced brand and direct response revenue base in the long run, allowing the firm to capture more small- and medium-size business ad revenue and tap further into ecommerce growth. the firm has taken the right steps to focus on generating growth in advertising revenue. Following the sale of MoPub, the firm properly reallocated investment into direct response and commerce offerings, which should allow it to attract more small- and medium-size businesses and balance brand advertising. In addition, Twitter’s efforts to provide easier contextual advertising options combined with further user personalization and improvements to user experience in the app could attract even more brand advertising dollars. With the continuing user growth, it is expected that Twitter’s subscription products to slightly reduce its dependency on advertising.

On the commerce front, Twitter for Professionals profile options will attract more businesses as usage of the platform’s Shop module, which allows businesses to highlight their products to be purchased on Twitter, will drive transaction volume higher. However, the firm does face significant competition on this front, including from the likes of Facebook, Pinterest, and, of course, Amazon.

Financial Strength:

Total revenue came in at $1.6 billion, up 22% from last year, with growth in both advertising revenue (22%) and data licensing and other revenue (15%), bringing total revenue for the year to $5.1 billion in 2021. The firm’s user count increased 13% year over year to 217 million, with U.S. and international users up 3% and 16%, respectively. Management claims user numbers improved because of Twitter’s new single sign on feature and improved notifications that attracted former users to return to the platform. n the fourth quarter, costs and expenses totaled $1.4 billion, an increase of 35%, mainly due to increased investment in research and development as well as sales and marketing. The firm generated operating income of $167 million (11% margin) compared with operating income of $252 million (20% margin) last year

Company Profile:

Twitter is an open distribution platform for and a conversational platform around short-form text (a maximum of 280 characters), image, and video content. Its users can create different social networks based on their interests, thereby creating an interest graph. Many prominent celebrities and public figures have Twitter accounts. Twitter generates revenue from advertising (90%) and licensing the user data that it compiles (10%)

(Source: Morningstar)

General Advice Warning

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

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Global stocks Shares

DaVita Stays Steady on Cautious Guidance for 2022; Shares Fairly Valued

Two businesswomen working late in office look at documents

Business Strategy and Outlook

After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, Morningstar analysts view DaVita’s long-term prospects as solid. 

Once COVID-19 concerns dissipate, Morningstar analysts expect DaVita to get back to more normalized growth trends driven primarily by ESRD trends. Analysts think low- to mid-single-digit revenue growth is likely for DaVita in the long run based on the continued expansion of the U.S. dialysis patient population, mild revenue per treatment growth, and ongoing international expansion. These expectations include ongoing expansion of at-home treatments, and we think DaVita can even benefit from extending the at-home treatment stage for patients, despite its clinic infrastructure. At-home patients still have relationships with clinics and are more likely to continue working and, in turn, remain on more profitable commercial insurance plans for a more substantial part of the 33 months where that is possible before Medicare automatically takes the lead on reimbursement for ESRD treatments. Eventually, most ESRD patients will need in-clinic therapy, too, unless they receive a kidney transplant. Of note, supply and demand for transplants remain greatly mismatched with the average wait list time around four years. But if those dynamics change, DaVita may even be able to benefit, as it has invested in early-stage initiatives to improve transplants. And in general, we think DaVita stands to benefit from the continued growth in the ESRD population however they are treated, and it is even pursuing integrated care models to gain a bigger piece of the treatment pie in the long run. 

With these factors in mind, management has highlighted mid-single-digit operating income and high-single-digit to low-double-digit earnings per share growth targets from 2021 to 2025, which is roughly in line with our assumptions during that period, as well.

DaVita Stays Steady on Cautious Guidance for 2022; Shares Fairly Valued

After trimming guidance for 2021 and expressing caution on 2022 during its third-quarter call, DaVita turned in solid operating results and guided in line with our 2022 expectations on its fourth-quarter call. Morningstar analyst   boosts its fair value estimate to $116 per share from $110 primarily to reflect a change in our long-term U.S. corporate tax rate estimate after previously assuming the tax rate would rise on Democratic policy initiatives, which appear unlikely now. Also, our fair value depends on business conditions normalizing in 2023 and beyond, and despite the near-term constraints, Morningstar analysts continue to see significant intangible assets and cost advantages around DaVita’s top-tier position in dialysis services, which informs our narrow moat rating on the firm. 

Financial Strength 

Like many healthcare services providers, DaVita operates with significant leverage, especially when considering lease obligations. DaVita owed $8.9 billion of debt and held $1.2 billion of cash and short-term investments as of September 2021, or in the middle of its net leverage target range of 3.0 to 3.5 times. Its operating lease obligations of $3.1 billion add another turn, roughly, to leverage. After refinancing many of its obligations, DaVita’s maturity schedule appears easily manageable, though, with big maturities in 2024 ($1.4 billion) and 2026 ($2.6 billion) but limited maturities otherwise. During that time frame, Morningstar analysts expect DaVita to generate at least $1 billion annually of free cash flow, so the company could handle those maturities as they come due through internal means. However, given the firm’s large share repurchase plans, Morningstar analysts think DaVita will seek to refinance its obligations coming due. After $2.4 billion of share repurchases in 2019, the company made another $1.4 billion of share repurchases in 2020 and $0.9 billion of repurchases through September 2021. The company anticipates making significant share repurchases going forward to boost its adjusted EPS growth (8% to 14% goal from 2021 to 2025) above its operating income prospects (3% to 7% goal from 2021 to 2025). It had $1.0 billion remaining on its share repurchase authorization as of September 2021.

Bulls Say

  • Excluding recent COVID-19-mortality challenges, we expect the ESRD patient population to grow at a healthy rate in the U.S. and around the globe for the long run, which should benefit DaVita. 
  • DaVita enjoys top-tier status in the essential dialysis business, and we do not expect competitive dynamics to negatively affect that attractive position anytime soon. 
  • While growing at-home care could change its business model a bit, DaVita could also benefit from ESRD patients being able to continue working and staying on commercial insurance plans.

Company Profile

DaVita is the largest provider of dialysis services in the United States, boasting market share that eclipses 35% when measured by both patients and clinics. The firm operates over 3,100 facilities worldwide, mostly in the U.S., and treats over 240,000 patients globally each year. Government payers dominate U.S. dialysis reimbursement. DaVita receives approximately 69% of U.S. sales at government (primarily Medicare) reimbursement rates, with the remaining 31% coming from commercial insurers. However, while commercial insurers represented only about 10% of the U.S. patients treated, they represented nearly all of the profits generated by DaVita in the U.S. dialysis business.

(Source: Morningstar)

General Advice Warning

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

Categories
Funds Funds

Vanguard Real Estate Index Fund Investor Shares: Low cost, no-frills U.S real estate exposure

Approach

Tracking the MSCI U.S. Investable Market Real Estate 25/50 Index yields a broadly diversified portfolio that captures the full scope of opportunities available to U.S. real estate investors. Market-cap weighting channels the market’s collective wisdom and promotes low turnover, underpinning an Above Average Process Pillar rating. This index selects stocks from the MSCI U.S. Investable Market Index, a broad benchmark the spans the complete U.S. stock market. It adds firms that are classified under the real estate sector. This includes equity REITs as well as real estate management and development firms. The fund excludes mortgage and hybrid REITs, which partially derive their revenue through real estate lending.

Portfolio

REITs represent 96% of this portfolio, with real estate management and development firms rounding out the remainder. REITs are required to distribute at least 90% of their taxable income to shareholders, so this fund consistently generates higher yield than the category average. REITs tend to be more sensitive to interest rates than other equity sectors, partially because interest rates directly affect property values. Additionally, their cash flows from rent collection are relatively fixed, making them somewhat bondlike. REITs’ interest-rate sensitivity depends on their lease durations. For example, office REITs (11% of portfolio) tend to be quite sensitive because of their longer lease cycles, but the shorter leases of residential REITs (14%) make them less responsive. Industrial (11%) and retail REITs (9%) tend to fall in the middle. This fund sprinkles investment across an array of property types, ensuring that its fate isn’t tied to a bet on interest rates or one industry’s performance. 

Performance

Specialty REITs have fared very well over the past few years. REITs that own and operate cell towers, like Crown Castle International CC and American Tower ATC, have turned in especially strong performance. This fund invests in specialty REITs more heavily than the category average, so it has reaped strong growth from these sound performers. Specialty REITs tend to be more volatile than other property types, but they have also demonstrated the potential for stronger returns. 

About the Fund

The investment seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments. The advisor attempts to track the index by investing all, or substantially all, of its assets-either directly or indirectly through a wholly owned subsidiary, which is itself a registered investment company-in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund is non-diversified.

(Source: Morningstar)

General Advice Warning

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

Categories
Global stocks Shares

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

Investment Thesis:

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

Key Risks:

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

Key highlights:

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

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

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

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

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

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

Company Description: 

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

(Source: Banyantree)

General Advice Warning

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

Categories
Global stocks Shares

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

Investment Thesis:

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

Key Risks:

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

Key highlights:

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

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

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

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

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

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

Company Description: 

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

(Source: Banyantree)

General Advice Warning

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

Categories
Dividend Stocks Shares

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

Business Strategy and Outlook

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

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

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

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

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: Morningstar)

General Advice Warning

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

Categories
Shares Technology Stocks

REA reports solid revenue up by 25%, EBITDA up by 27%

Investment Thesis:

  • Clear no. 1 market position in online property classifieds, with consumers spending over more time on realestate.com.au app than the number two website. 
  • Growth opportunities via expansion into Asia and North America.
  • Recent strategic partnerships with National Australia Bank (property finance) could potentially be positive in the long term. 
  • Upside in key markets – particular in areas where REA is under-penetrated and could potentially win market share from competitors. 
  • New product developments to increase customer experience. 
  • Regular price increases help offset listing pressure. 

Key Risks:

  • Competitive pressures lead to a further de-rating of the PE-multiple.
  • Volume (listings) outlook remains subdued in the near term. 
  • Execution risk with Asia/North America strategy.
  • Failing to get an adequate return on the recent acquisition of iProperty.
  • Value/EPS destructive acquisitions. 
  • Decline in Australian property market.
  • Given REA trades on a very high PE-multiple, underperforming to market estimates can exacerbate a share price de-rating.
  • Recent tightening of lending practices by banks would affect Financial services business.

Key highlights:

  • REA reported a strong 1H22 result which was largely in line with expectations. 
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%. 
  • The core Australian residential business did the heavy lifting, with revenue up +31%, driven by solid residential buy listings growth of +17% over the half (up +11% in 1Q & up +22% in 2Q despite lockdowns in Melbourne & Sydney).
  • Management did note that listings in Jan-22 had been unusually high which may lead to a decent 3Q performance, however 4Q is likely to be lower.
  • The current negative sentiment towards technology stocks in an increasing interest rates environment also adds further pressure to REA’s share price.
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%.
  • REA delivered positive operating jaws over the half = revenue up +25% – operating expenses growth +17%, with growth in costs driven by higher headcount and salaries in a tight labour market.

Company Description: 

REA Group (REA) provides online property listings, web management, financial services and data analytics to the real estate industry via advertising services. For consumers, REA offers the largest online real estate search engine in Australia. The Company also has operations and growing presence in Asia and other parts of the world.

(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
Shares Small Cap

Stevanto’s Near Term Outlook Foresight Uncertain

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

Business Strategy and Outlook

Stevanato is the market leader in pen cartridges and presterilized vials and holds the number position in prefillable syringes (behind Becton Dickinson). The company is a key supplier in the drug delivery supply chain, and provides drug containment and primary packaging solutions to 41 of the top 50 global pharma companies. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products. 

Stevanato aims to increase the percentage of product sales from high value solutions, which refers to products with proprietary intellectual property and greater complexity, such as presterilized drug containment and integrated self-injector pen and wearable devices. The company is prioritizing investment in research and development and broadening its offering through M&A. Capacity expansion is also a key component of Stevanato’s long-term strategic plan, and capital expenditures are likely to remain elevated over the next year or two. Competition for skilled employees is extreme, and future growth will depend on effectively hiring and retaining talent. 

Both the biopharmaceutical and diagnostic segments are expected to benefit from an increased contribution in high value solutions over time, which has been growing 20% year over year and now represents about 23% of consolidated revenue. It is anticipated the ongoing shift to high-value will provide a material tailwind for margin over the next five to 10 years, and also contribute to robust top line growth. It is seen an uncertain near-term outlook for the business, with both positives and negatives related to the ongoing pandemic. Some drug trials have postponed or delayed, leading to lower sales growth for some customers’ drug portfolios. However, this has been mitigated by the pressing need for vaccines and treatments, which has allowed Stevanato to enjoy compound annual top line growth near 25% over the last two years. The company supplies vials and syringes to about 90% of currently approved vaccines.

Financial Strength

Stevanato has a sound financial position.As of September 2021, total cash position in excess of long-term debt on the balance sheet was EUR 154 million. This was mainly related to the firm’s IPO from July 2021, which raised EUR 154 million. In analysts’ view, Stevanato has more than sufficient capital to fund increasing capacity investment, and it can also be seen the potential for tuck-in acquisitions to broaden the firm’s value proposition in the drug delivery supply chain.In the near term, however, Stevanato’s expansion plan is likely to be the focus of capital deployment. Because of a higher level of capital investment, the company reported free cash flow of negative EUR 9.9 million for the third quarter of 2021. It is anticipated significant earnings and cash flow growth over the next few years, and while free cash flow is likely to be close to flat in 2022, it is anticipated free cash flow above EUR 20 million in 2023. It is believed that it’s possible that some additional debt might be needed to cover cash flow needs, but, considering Stevanato’s current low degree of financial leverage, it is not to be concerned with an increase in debt at or below EUR 500 million.

Bulls Say’s

  • Stevanato has room to bring customers up the value chain to higher-value products and services, giving it a lengthy tailwind for earnings growth and margin expansion. 
  • In contrast to peers, Stevanato can use in-house produced glass vials and syringes for integrated selfinjector systems, reducing the number of vendors for customers and providing Stevanato with a possible cost advantage. 
  • As large economies such as India and China implement more stringent pharmaceutical standards, Stevanato stands to become a key cog in the supply chain in those countries.

Company Profile 

Italy-based Stevanato Group is a provider of drug containment, drug delivery and diagnostic solutions to the pharmaceutical, biotechnology and life sciences industries. It delivers an integrated, end-to-end portfolio of products, processes, and services that address customer needs across the entire drug life cycle including development, clinical, and commercial stages. Stevanato’s revenue is geographically diversified, with 60% of sales from Europe, the Middle East and Africa (EMEA), 27% in North America, 10% in Asia-Pacific (APAC), and 3% in South 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.

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Aecom Poised To Benefit From Favourable Long-Term Tailwinds In Infrastructure and Sustainability Solutions

Business Strategy and Outlook

In recent years, Aecom has transformed its portfolio and focused on growing its professional services business. The firm is in the process of exiting several business lines including fixed-price combined cycle gas power plant construction, at-risk oil and gas construction, and international at-risk construction projects. Furthermore, in January 2020, Aecom completed the sale of its management services business. It is seen Aecom’s transformation favourably and believe that the strategic shift will result in a less volatile and more profitable portfolio.

Furthermore, Aecom has improved its profitability thanks to several recent initiatives, including a $225 million general and administrative cost reduction plan completed in fiscal 2019, real estate consolidation, and a plan to exit over 30 countries to focus on the most profitable markets. It is encouraging that Aecom’s margin expansion thus far and see room for further upside, especially in the international business. It can be noted that there is a significant difference in profitability between the Americas and international segments: the adjusted operating margins on a net service revenue basis are in the mid-teens in the former but only mid-single digits in the latter. Considering an over 1,000-basis-point differential, it is viewed as room for further margin expansion in the international segment, and it is alleged the firm will continue to work to narrow the gap by further simplifying the business and completing its planned 30 country exits to focus on higher-margin markets. 

Analysts remain optimistic about the long-term outlook for Aecom as it is alleged that it’s poised to benefit from favourable long-term tailwinds in infrastructure and sustainability solutions. The company has a strong competitive position in the transportation, water, and environment end markets. As such, it is likely, Aecom is well positioned to capitalize on opportunities created by a growing focus on ESG concerns, including areas such as electrification of transit, clean water, and PFAS.

Financial Strength

At Dec. 31, 2021, the company owed roughly $2.2 billion in long-term debt while holding approximately $1.1 billion in cash and equivalents. Debt maturities are reasonably well laddered over the next few years. Additionally, Aecom can tap into its $1.15 billion revolving credit facility. It is projected that Aecom will generate average annual operating cash flow of approximately $700 million over the next five years. Considering that an investment-grade credit rating can have strategic importance for E&C firms and boost competitiveness in winning new awards, it is likely, Aecom to prioritize paying down its debt balance. In the long-run, it is anticipated the firm to maintain its leverage ratio within management’s target range of 2.0 times to 2.5 times. Additionally, it is alleged that management will continue to allocate excess capital to opportunistic stock repurchases.

Bulls Say’s

  • Thanks to its diversified portfolio, it is anticipated Aecom to take advantage of growth opportunities in sectors with favourable long-term prospects, including transportation and water. 
  • Through its Aecom Capital segment, the firm should be able to capitalize on growth in public-private partnerships (P3), which I said to have some economic moat potential due to customer switching costs. 
  • Following the 2015 acquisition of Hunt Construction, Aecom became the leading nationwide builder of iconic sports arenas, such as the Los Angeles Rams NFL stadium.

Company Profile 

Aecom is one of the largest global providers of design, engineering, construction, and management services. The firm serves a broad spectrum of end markets including infrastructure, water, transportation, and energy. Based in Los Angeles, Aecom has a presence in over 150 countries and employs 51,000. The company generated $13.3 billion in sales and $701 million in adjusted operating income in fiscal 2021

(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.