Category: Research

Categories
LICs LICs

Regal Investment Fund raises $212m through placement and entitlement offers

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

Cash Flow TTM is 16.72%. Regal Investment Fund is a Closed Ended Fund Type. Its dividend in July 2021 is 1.0111%. In June 2021, their revenue was AUD$ 262.81 Million and Net Profit is 174.87 Million.

Price Earnings TTM is 2.4% while Earnings per Share is 1.637. Their Year-to date Return is 34.17% and Premium/Discount percent is almost 1.03%. Regal Investment Fund Dividend Indicated Gross Yield is 25.78%.

On 6 October 2021, RF1 announced it was conducting a Placement and Accelerated Entitlement Offer to institutional and wholesale investors and a General Entitlement Offer to eligible unit holders. Combined the Fund was seeking to raise up to $212m.

RF1 successfully completed the Placement and Entitlement Offers during the month, raising $212m. All units issued under the Placement and Entitlement Offers were issued at a price of $3.79 per unit, representing the NAV of the Fund at 1 October 2021 and a substantial discount to the unit price at the time the capital raising was announced.

Capital raised under the Offer will be allocated to existing strategies in line with the Fund’s investment objective with the aim of further diversifying RF1’s portfolio across both private and public alternative investments. The Manager is covering all fees and expenses associated with the Offer.

Asset Allocation

Asset ClassNet Allocation

Australian EquitiesInternational EquitiesCash & Cash EquivalentsOver the Counter DerivativesUnlisted Unit Trusts
52.8%7.7%25.2%0.6%13.7%

Company Profile 

Regal Investment Fund is a listed investment trust incorporated in Australia. The Fund’s Investment Objective is to provide investors with exposure to a selection of alternative investment strategies managed by Regal, with the aim of producing attractive risk adjusted absolute returns over a period of more than five years with limited correlation to equity markets.

(Source: Bloomberg)

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
IPO Watch

Stellar debut of Nykaa; lists at 80% premium and market cap crosses 1000 billion mark

The issue price of the shares was in the range of INR 1085- 1125 per share, with a lot size consisting of 12 shares amounting to INR 13,500. The subscription in retail category was 12.24 times, in the QIB category 91.18 times and in NII category 112.02 times, taking the whole subscription to 81.78 times.

The proceeds of issue were aimed to use for investment in their subsidiaries (FSN Brands, Nykaa Fashion) for setting up new stores, towards capital expenditure, repayment or prepayment of borrowings, enhancement of visibility and general corporate purposes.

The IPO saw a magnificent listing on the stock exchange by gaining 80% premium, thereby opening at INR 2001 apiece. It closed at a day’s high of INR 2206 per share. The market capitalization of Nykaa exceeded INR 1040 billion.

Founder, MD and CEO Falguni Nayar is very optimistic about the performance of Nykaa. She maintains that beauty and fashion are very high growth businesses with large market size. Nykaa already holds a bunch of brands that they are continuously building. They have recently acquired Dot & Key that adds to their skincare offering. Besides this, Nykaa has entered into inorganic acquisition of 20Dresses, a western wear brand and Pipa Bella, a jewellery brand. The holistic business model of Nykaa makes it a potential investment opportunity.

About the company:

Nykaa is an Indian e-commerce company, founded by Falguni Nayar in 2012 and headquartered in Mumbai. It sells beauty, wellness and fashion products across websites, mobile apps and 76 offline stores. As of 2020, it was valued at ₹85 billion (US$1.1 billion) making it the first unicorn startup headed by a woman in India. 

It sells products which are manufactured in India as well as internationally. In 2015, the company expanded from online-only to an omnichannel model and began selling products apart from beauty. In 2020, it retails over 2,000 brands and 200,000 products across its platforms.

(Source: economictimes.com)

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

Monash IVF Group Ltd reported solid dividend yield of 4.6%

Investment Thesis

  • High barriers to entry with unique expertise and assets. 40-year heritage of leadership in science and innovation in ARS and women’s imaging, coupled with the depth of experience from the doctors and clinical team which will continue to underpin MVF’s future growth and maintain treatment success rates. 
  • Ageing Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favorable demographic tailwinds. 
  • Improving balance sheet with flexibility to execute expansion strategies. Earnings increasingly become diversified as the Malaysian business gains momentum. 
  • Potential earnings diversification and growth via international expansion and increased presence in diagnostics. 
  • Demonstrated capacity to perform well in terms of cost out and earnings growth despite tough conditions (i.e., lower cycle volumes).
  • Transparent and detailed disclosures.

Key Risks 

  • Regulatory risk as changes in government funding may increase patient’s out-ofpocket expenses and thereby volume demand. 
  • Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue 
  • The Australian market does not rebound following this period of downturn. Population of males and females with fertility problems decline. 
  • Loss of key specialists. 
  • Loss of market share especially to low-cost providers, with one already appearing in Victoria.  
  • Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment. 
  • Execution of international forays into Malaysia goes poorly.

FY21 Result Highlights

  • Revenue was up +26.3% to $183.6m underpinned by market share gains and strong industry volumes. 
  • Adjusted EBITDA was up +37.1% to $47.7m, with margin improving to 26% (from 23.9%) despite a +12% increase in marketing expenditure and patient communication digitisation activities and ~$1.7m of further costs for suspension of Ni-PGT genetic testing program. 
  • Adjusted NPAT of $23.3m, was up +61.5% and ahead of profit guidance ($21m-$23m). Reported NPAT of $25.5m was up +116.9%. 
  • MVF Australian FY21 Stimulated Cycles (STIMS) was up +36.6% driven by industry growth of 31.1% and 0.6% market share gains to 21.0%. Management pointed out “in Q1FY21, Monash IVF serviced the pent-up demand/deferred treatment created by the initial COVID-19 related temporary suspension of IVF services. Notwithstanding on-going and sporadic COVID-19 related lockdowns, IVF services have been largely undisrupted and as a result, growth continued throughout the year. Market Share gains were achieved in Victoria, New South Wales, Queensland and Northern Territory whilst the exceptionally high level of market share in South Australia was maintained above 60%. STIM industry growth of 31.1% supported the strong volume growth across the Group bringing the 5-year annual CAGR to 5.6%”. 
  • International STIMS was up +25.1% or 208 cycles. 
  • The positive diagnostics ultrasound performance was driven by obstetrics growth and a shift of activity from public to privately owned clinics. Ultrasound scan volumes were up +12.9% to 92,776 and Non-invasive Pre-natal testing were up +17.8% to 15,877. 
  • MVF appointed five experienced Fertility Specialists and a Medical Director of Genetics. 
  • MVF is opening its Sydney CBD flagship clinic and has earmarked further new clinics in the pipeline for FY22.

Company Profile 

Monash IVF Group Ltd (MVF) offers assisted reproductive technology services, ultrasound services, gynecological services, in-vitro fertilization services, consultancy services and general clinical services to patients in Australia and Malaysia. MVF comprises 40 clinics and ultrasound practices and employs ~100 doctors and has a network of 650 associated health professionals.

(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

Honda Is Fighting the Chip Shortage With a Strong Balance Sheet

Business Strategy and Outlook

Honda’s products and strong financial position should keep it on solid ground, but the competition is fierce and the U.S. market’s move to light trucks, where Honda’s lineup is not as complete as competitors, may be permanent. Ongoing risks include foreign-exchange volatility, a highly competitive U.S. market, and rising steel prices. 

Honda’s brand and reputation for quality drive demand for its vehicles, but its longtime niche in fuel-efficient cars historically positioned the company well to take advantage of consumers seeking more fuel-efficient vehicles. Over 2003-09, the U.S. car/light-truck mix moved to 55%/45% from 46%/54%, but as gas prices fell and light-truck fuel economy improved, cars have lost share to just 24% in 2020. In 2020, cars made up 41% of Honda’s U.S. sales mix.Honda’s car focus gives it an advantage whenever the critical U.S. market has high gas prices, but with cheap oil,  but Honda leaves share on the table in segments such as full-size pickups and large SUVs, as it does not have product in these segments. 

Despite a strong car and crossover lineup, formidable threats remain, such as rising commodity prices. Honda can mitigate this problem by using more common-size vehicle platforms to reduce costs, but even that is no guarantee. 

Honda Is Fighting the Chip Shortage With a Strong Balance Sheet

Honda’s fiscal 2022 second quarter showed more semiconductor shortage problems than rival Toyota. Honda said on its earnings call that the chip shortage impact is worse than it previously thought so it has lowered fiscal 2022 earnings guidance after raising it in August. Operating profit is now guided to JPY 660 billion yen, down from JPY 780 billion, which is the originally guided figure on May 14. Total company revenue, however, is guided to JPY 14.6 trillion, down from JPY 15.45 trillion in August and JPY 15.2 trillion in May. 

Second-quarter total company operating income fell by 29.7% to JPY 198.9 billion, with a JPY 114.1 billion unfavorable variance from lost revenue more than offsetting a JPY 36.7 billion favorable foreign exchange contribution and slightly lower overhead costs.

Financial Strength

Honda’s financial position is excellent, as the company has a small debt load. We estimate Honda’s cash and available credit lines at March 31, 2021, to be about JPY 6.7 trillion. This flexibility is important because it gives the company plenty of room to acquire more capital in the debt markets if needed.Excluding the captive finance company, Honda held about JPY 2.6 trillion in cash at the end of September. We calculate a net cash position at Sept. 30, excluding the captive finance arm, of over JPY 1.8 trillion. As of year-end fiscal 2021, the consolidated company has JPY 3.9 trillion of unused credit lines. Its debt/EBITDA ratio excluding the financing arm is generally well below 1 but was 1.3 in fiscal 2012 due to the Japan earthquake and Thai flooding. We do not see Honda having any problems meeting debt maturities, and we expect the company even before financial services results to be free cash flow positive over our forecast period.

Bulls Says 

  • Honda’s popular vehicles usually allow it to use fewer incentives than the Detroit Three, boosting the firm’s profits and improving the resale value of its vehicles. 
  • Honda enjoys a reputation for quality, especially in America’s large coastal markets, but management is concerned about quality problems in recent years and Honda has slipped in U.S. J.D. Power quality rankings. 
  • In 2020, Honda produced about 96% of its vehicles sold in the U.S. in North America. This means Honda is better positioned than Toyota (71%) to withstand the yen when it is very strong against the dollar.

Company Profile

Incorporated in 1948, Honda Motor was originally a motorcycle manufacturer. Today, the firm makes automobiles, motorcycles, and power products such as boat engines, generators, and lawnmowers. Honda sold 19.7 million cars and motorcycles in fiscal 2021 (4.5 million of which were autos), and consolidated sales were JPY 13.2 trillion. Automobiles constitute 65% of revenue and motorcycles 14%, with the rest split between power products and financial services. Honda also makes robots and private jets.

 (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

Recovery Plan of Qantas is constructive and is ahead of target

Investment Thesis:

  • Attractive way to play the Covid reopen trade for investors  
  • All segments delivering return on invested capital > weighted average cost of capital 
  • Strong position in the domestic market (Qantas Domestic and Jetstar continue to remain the two highest margin earning airlines in the domestic market)
  • Jetstar is well positioned for growth and rising demand in Asia 
  • Partnership with Woolworths for Loyalty bodes well for membership and earnings 
  • Oil price hedging in FY20 could contribute to performance 
  • Increased competition in the international segment
  • Relative to peers, strong balance sheet strength
  • Investment grade credit rating  

Key Risks:

  • Disasters that could hurt the QAN brand
  • Ongoing price led competition forcing QAN to cut prices affecting margins
  • Leveraged to the price of oil
  • Adverse currency movements result in less travel 
  • Labour strikes
  • Depressed economic conditions leading to less discretionary income to spend on travel

Key highlights:

  • QAN’s FY21 revenue declined 58% over pcp as the decline in international operations was partially offset by record performance by Qantas Freight, which combined with 49% fall in operating expenses and 71% decline in fuel expenses saw the Company deliver underlying EBIT loss of $1.5bn vs $395m profit in pcp
  • Covid levels in 2H21 while state borders were open generated enough cash from $6.4bn in 3Q21, with management forecasting net debt to be in target range of $4.5- 5.6bn by end of FY22
  • The Company’s cost-cutting program remained ahead of schedule, with $650m taken out of its cost base during FY21, remaining on track to deliver $850m by the end of FY22 and $1bn in FY23
  • Recent outbreaks and associated domestic and trans-Tasman border closures to have an impact in the order of $1.4bn on the Group’s Underlying EBITDA in 1H22
  • Group Domestic capacity to increase from 38% in 1Q to 53% of pre-Covid capacity in 2Q and rise to ~110% in 2H22
  • Recovery plan progress remains ahead of schedule: The Recovery Plan delivered $650m in savings in FY21, ahead of its $600m target and remains on track to deliver $850m by the end of FY22 and greater than $1bn in ongoing savings by the end of FY23
  • Liquidity boosted by securing a further $0.6bn
  • Balance sheet repair commenced, reducing net debt to $5.9bn by end of FY21 from $6.4bn in 3Q21, with further debt reduction remaining a priority
  • Investment grade credit rating of Baa2 from Moody’s maintained
  • Shareholder distributions scrapped until the Group’s earnings and balance sheet have fully recovered in accordance with the Financial Framework

Company Description: 

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

(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
Funds Funds

Resolution Capital Global Property Securities Fund: A diversified portfolio of stocks of real estate sectors

wherein individual Portfolio Managers hold 25 to 35 stocks each. The Fund’s objective is to exceed the total returns of the Benchmark (FTSE EPRA/NAREIT Developed Index (AUD) Net TRI) after fees on a rolling 3-year basis.           

Downside Risks:

  • Deterioration in Global economy, especially the property market (deterioration of property prices and fundamentals). 
  • The Portfolio Manager/analysts miss-calculate their bottom-up valuation. 
  • Softening in bond yields negatively impacting pricing. 
  • Key person risks, i.e. Andrew Parsons, Marco Colantonio, Robert Promisel, Julian Campbell-Wood and members of the investment team.
  • risk.

Fund Performance & Current Positioning:

(%)FundBenchmarkOut-performance
1-month 2.64%1.90%+0.74%
3-months 14.10%12.29%+1.81%
1-year 26.67%34.93%-8.26%
3-year (p.a.)9.68%7.18%+2.50%
5-year (p.a.)8.65%6.16%+2.49%
Since Inception (p.a.)13.48%12.33%+1.15%

(Source: Resolution Capital)

Fund Positioning:

StockSectorListing% of portfolio*
PrologisIndustrialUS8.10%
Invitation HomesResidentialUS6.50%
WelltowerHealthcareUS4.70%
Kimco Realty CorporationRetailUS4.20%
EquinixData CentresUS4.10%
Essex Property TrustResidentialUS3.60%
Canadian Apartment PropertiesResidentialCanada3.10%
Kilroy Realty CorporationOfficeUS3.10%
CubeSmartSelf-StorageUS2.90%
Mitsubishi Estate CompanyOfficeJapan2.80%
Total43.10%

(Source: Resolution Capital)

Key Highlights:

  • Investment Team:

The investment team is well-resourced with strong credentials and investment experience and is appropriately aligned and remunerated. The PMs have strong credentials and lengthy experience in real estate: Andrew Parsons, Marco Colantonio, Robert Promisel, have at least 30 years industry experience whilst Julian Campbell-Wood has 17 years’ experience. Performance reviews are conducted twice per year and based on Investment performance of all client Funds strategies, Research analysis and outcomes, Compliance with mandate guidelines and Adherence to ESG policies.

  • Investment Philosophy and Process:

In our view, the Fund adopts the bottom-up stock picking fundamental process that most other peers typically follow. A key advantage in the fund’s investment process is the utilisation of their proprietary database to collate their research that enables cross comparisons among regions and sectors to highlight any discrepancies. 

  • Performance:

Although past performance is not an indicator for future performance, it is an indicator of whether the Fund’s strategy has worked in the past. Although the Fund has performed well on an absolute basis, the Fund has underperformed relative to its benchmark in the past year by -8.3%. Nevertheless, over 3- and 5-year, and since inception, the fund has performed well relative to the benchmark.

  • Association with Pinnacle is a positive: 

ASX-listed Pinnacle Investment Management holds a minority 44.5% stake in Resolution Capital whilst key staff own the remaining 55.5%. Pinnacle provides support via distribution and administration services, which is viewed as positive.

About the Fund:

The Resolution Capital Global Property Securities Fund (Unhedged) – Series II provides exposure to a diversified portfolio of stocks within a range of real estate sectors across developed markets (North America, U.K, Europe, and Asia Pacific). The Fund’s objective is to exceed the total returns of the Benchmark (FTSE EPRA/NAREIT Developed Index (AUD) Net TRI) after fees on a rolling 3-year basis.

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

Solid Year for Pendal; Strong Returns to Normalize, but The Hunt for New Money Is Picking Up

Business Strategy and Outlook

Pendal Group is one of Australia’s largest active fund managers, with AUD 139.2 billion in funds under management, or FUM. The business has diversified considerably since being spun out by Westpac in 2007, following the acquisition of U.K.-headquartered JO Hambro in October 2011. 

Pendal’s strategy centres on product, geographic, and asset class diversification. This positions it to capture FUM across various market cycles and fend off competitive pressures from low-cost passive products. It boasts a broad product suite across asset classes, including Australian and global equities, fixed interest and property. Pendal focuses on catering to growing investor needs with large addressable markets, and has seeded 14 funds per year, on average, over the last five years. It has an active pipeline of new products, more recently having launched multiple retirement income and ESG-themed funds. 

The group sources FUM from diversified institutional and adviser clients across Australia, U.S., U.K., and Europe. This provides higher growth opportunities and helps mitigate disruptions from a particular geography. Growth is supported by its strong distribution relationships in each of the region which it operates. Client concentration in its core FUM pool (excluding Westpac which accounts for 12% of total FUM) is relatively low. The 10 largest clients for JO Hambro account for just a third of its FUM. Institutional money currently represents 39% of FUM. 

Solid Year for Pendal; Strong Returns to Normalize, but The Hunt for New Money Is Picking Up 07 Nov 2021 

Pendal’s fiscal 2021 results were unsurprisingly solid, with underlying NPAT up 25% from the prior year to AUD 165 million. Strong markets, investment outperformance and net outflow reductions saw average funds under management, or FUM, grow 14% from the prior year to AUD 108 billion. Base fee margins were resilient at 0.48% and performance fees more than quadrupled. Dividends per share grew 11% to AUD 0.41, representing a payout ratio of 89%.An increasingly diversified clientele and product breadth expands its channels for new money, while relatively low fee margins should help it better withstand fee pressure. The strong performance in fiscal 2021 has improved the momentum of Pendal’s net flows–notably in its U.S. pooled and Australian wholesale channels.

Financial Strength 

Pendal is in sound financial health, with a net cash position of AUD 249 million as of Sep. 30, 2021. The firm has AUD 49 million worth of debt as of Sep. 30, 2021. This was used to fund the acquisition of Thompson, Siegel & Walmsley, or TSW, which has completed in the September quarter of 2021. It was poised to take on about AUD 200 million in debt to help fund TSW’s purchase. However, strong participation in Pendal’s capital raising for TSW has reduced the debt and balance sheet funding required to complete the acquisition. We forecast Pendal’s debt to be discharged within three years. Low capital investment requirements, strong free cash flow, and the balance sheet underpin a high payout of between 80% and 95% of underlying net profit after tax. We expect dividends to broadly match earnings per share growth. Dividends are not fully franked, given the large portion of overseas earnings.

Bulls Say 

  • The diversity of funds / strategies help Pendal grow and hold on to funds under management throughout various market conditions. 
  • The higher-margin overseas JOHCM and TSW businesses give Pendal a stronger organic growth profile than most Australian peers from opportunities in new and existing geographies. 
  • A focus on expanding its product offering with differentiated strategies allows Pendal to stay ahead of emerging investor needs and fend off competition from low-cost passive investments.

Company Profile

Pendal Group is one of Australia’s largest active fund managers. The business is split across three segments: Australian-based Pendal Australia; U.K.-headquartered JO Hambro Capital Management, or JOHCM, and U.S.-based Thompson, Siegel & Walmsley, or TSW. Pendal manages funds across several asset classes via a multiboutique structure. As of Sept. 30, 2021, funds under management, or FUM, stood at AUD 139.2 billion

(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

NEXTDC reports strong results as of ongoing cloud adoption

Investment Thesis

  • Australia is still in the early stages of cloud adoption. The NBN’s implementation will drive demand from cloud providers for NXT’s asset follows more efficient and cheaper broadband. 
  • Extremely high-quality collection of sites.
  • Tier 4 gold centers focus on the premium end where pricing is more stable.
  • NXT has balance sheet capacity to handle more debt and self fund expansion through operating cash flow from the base building. 
  • Capital intensive nature of the sector provides a high barrier to entry.
  • Government adoption of cloud and the subsequent need to outsource present an opportunity.
  • Sticky customers are unlikely to churn which creates a strong customer ecosystem.
  • The Company’s national footprint enables it to scale more effectively than competitors.
  • Margin expansions demonstrate strong operating leverage.
  • Additional capacity has been announced.
  • Given the global demand for data, mergers and acquisitions are on the rise.

Key Risks

  • There is no product diversification (NXT only operates data centres).
  • NXT and competitors have significantly increased their supply of data centres.
  • Delays in the construction or ramp-up of data centres have an impact on the earnings growth profile.
  • Pressures from competitors (price discounting by NXT or competitors).
  • Higher power densities in Australia as a result of increased average rack power utilization.
  • Inadequate customer demand to generate a satisfactory return on investment.
  • NXT’s ability to expand and pursue growth opportunities may be hampered if sufficient capital is not obtained on favourable terms.
  • The risk of leasing (NXT does not own the land or building where its data centres are situated).

FY21 results highlights 

  • Data center service revenue was up +23% to $246.1million and at the bottom end of upgraded guidance of $246m to $251m.
  • Underlying EBITDA increased by +29 percent to $134.5 million, exceeding the company’s revised guidance of $130 million to $133 million.
  • Operating cash flow increased by 148% to $133.2 million.
  • Capex was down -18% to $301 million, falling short of the $380-400 million range.
  • NXT had $1.7 billion in liquidity (cash and undrawn debt facilities) at the end of the fiscal year, and its balance sheet strength is supported by $2.6 billion in total assets, indicating that it is well capitalised for growth.
  • Contract utilisation increased by 8% to 75.5MW. (7) NXT’s customer base increased by 183 (or 13%) to 1,547.
  • Interconnections grew 1,667 (or +13%) to 14,718, and now equates to ~7.7% of recurring revenue.

Company Profile 

NEXTDC Limited (NXT) is a Data-Center-as-a-Service (DCaaS) provider offering a range of services to corporate, government and IT services companies. NXT has a total of five data centers located in major commerce hubs in Australia, with three more due to be completed within the next 2 years. These facilities are network-neutral, meaning they operate independently of telecommunication and IT service providers. Currently NXT has a total of 34.7 MW built for data and serving housing, with a target to reach 104.1MW by the end of 1H18. 

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

Marriott’s Demand Set to Rebound Further in 2022, Aided by Global Leisure and Corporate Pick-Up

that Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, the acquisition of Starwood has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.

Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages.

Future Outlook

It is expected that room growth for Marriott averaging midsingle digits over the next decade  supported by the company having around 20% of all global industry rooms under construction, well above its high-single-digit existing unit share, as of the end of 2020.

With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.

Marriott’s Demand Set to Rebound Further in 2022

Marriott’s third-quarter revenue per available room, or revPAR, improved to 74% of 2019 levels ,up from 56% last quarter ,driven by rate recovering to 96% of prepandemic marks. 

Meanwhile, Marriott’s brand advantage remains intact. Marriott’s EBITDA margins improved to 17.3% from 14.5% a year ago. It is observed that high-teens operating margins in 2030, compared with the low-double-digit prepandemic average, aided by cost efficiency offsetting wage inflation.

It is expected that leisure travel to remain robust, but we expect business travel to recover in 2022. In this vein, Marriott noted that business travel bookings have recently picked up, and that group 2022 revenue on books is down about 20% from 2019, with rooms down 23% and rate up 4%.

Financial Strength

 Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As a result, Marriott has enough liquidity to operate at zero revenue through 2022, and at second half of 2020 demand levels the company was around cash flow neutral. 

 Bulls Say  

  • Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element. 
  • Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to sustainably work from remote locations. 
  • Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.

Company Profile

Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents around 9% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.

 (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
Dividend Stocks Philosophy Shares Technical Picks

Quantitative Equities Continue to be a Drag on Janus Henderson’s Fund Flow Recovery

leaving them more dependent on market gains to increase their assets under management. With USD 419.3 billion in AUM at the end of September 2021, Janus Henderson has the size and scale necessary to be competitive in the industry and is structurally set up to hold on to assets regardless of market conditions, being somewhat diversified across its four main asset class segments–equities (two thirds of managed assets), fixed income (close to a fifth), multi-asset and alternatives (the remainder). 

During that same period, the firm’s organic growth rate averaged negative 5.1%, with a standard deviation of 2.4%, which was worse than the average of its publicly traded peers, with revenue growth and operating margins both trailing the average results for the U.S.-based asset managers. Janus Henderson’s organic growth to be in a negative 2%-4% range annually during 2021-25, with revenue growth and operating margins affected by industry fee compression and the need to spend more to enhance performance and distribution.

Financial strength

Janus Henderson entered 2021 with USD 300 million of 4.875% senior notes due in July 2025, leaving it with a debt/total capital ratio of around 6%, interest coverage of more than 50 times, and a debt/EBITDA ratio (by our calculations) of 0.4 times. The company also had a USD 200 million unsecured revolving credit facility (with a maturity date of February 2024). Under the credit facility, the company’s financing leverage ratio cannot exceed 3 times EBITDA. There were no borrowings under the credit facility at the end of September 2021. Should the firm close out the year in line with our expectations, Janus Henderson will enter 2022 with a debt/total capital ratio of around 6%, interest coverage of close to 70 times, and a debt/EBITDA ratio (by our calculations) of 0.3 times.

The company declared an initial quarterly dividend of USD 0.32 per share during the third quarter of 2017 and has since raised it to USD 0.38 per share. As for share repurchases, the company repurchased approximately 4.0 million shares for USD 100 million during 2018, another 9.4 million shares for USD 200 million during 2019, and during 2020 picked up 8.7 million shares for USD 180 million. In February 2021, Janus Henderson repurchased 8.0 million shares of common stock (which was distinct from its corporate buyback program) from Dai-ichi Life Holdings for USD 230 million. The firm has also repurchased 1.8 million shares for USD 75 million as part of its buyback program since the start of 2021.

Bulls Say’s

  • Janus Henderson is the only offshore-based global wealth manager listed on the Australian Securities Exchange. It provides investors exposure to a growing global wealth sector, with a high bias toward equity strategies.
  • Operating leverage is high, capital demands are low, and when free cash flow generation is strong investors can be rewarded with a good mix of growth and income returns. 
  • Janus Henderson carries added currency risk compared with listed Australian peers, given the primary listing is on the New York Stock Exchange and the base currency is the U.S. dollar.

Company Profile 

Janus Henderson Group provides investment management services to retail intermediary (49% of managed assets), self-directed (21%) and institutional (30%) clients under the Janus Henderson and Intech banners. At the end of September 2021, fundamental equities (56%), quantitative equities (9%), fixed-income (19%), multi-asset (13%) and alternative (3%) investment platforms constituted the company’s USD 419.3 billion in assets under management. Janus Henderson sources 56% of its managed assets from clients in North America, with customers from Europe, the Middle East, Africa and Latin America (30%) and the Asia-Pacific region (14%) accounting for the remainder. Headquartered in London, JHG is dual-listed on the New York Stock Exchange and the Australian Stock Exchange.

(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.