Category: Research

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Global stocks Shares

ANN delivered solid FY21 performance with strong financial position

Investment Thesis

  • ANN is a reputable company with international production capability.
  • The 5-yr forward earnings estimates are on the conservative side and capture the moderating growth likely to be seen from the elevated levels experienced in FY21.
  • ANN’s share price trades at a >10% discount in comparison to DCF valuation
  • FX translation should be positive for the Company. 
  •  Raw material cost pressures can be shared with customers and suppliers.
  • ANN has a healthy financial sheet, allowing it to repay cash to shareholders or borrow money to fund acquisitions.

Key Risk

  • Recall of a product.
  • Trade wars escalate, leading to higher tariffs.
  • Increase in competitive pressures.
  • Adverse movements in AUD/USD.
  • The expansion of emerging and developed markets both disappoints.
  • Any worse or better prices for raw materials.

Key highlights of FY21

  •  Sales of $2,027m, up by 25.6% (+22.5% in CC) with Healthcare organic growth of 34.8% and Industrial organic growth of 7.1%. 
  •  EBIT of $338m, up by 56.0% (+51.4% in CC) with margin improving 330bps to 16.7%, driven by higher production volumes, pricing/mix benefit and SG&A operating leverage, partly offset by elevated labour and freight costs combined with increase in inventory provision.
  •  Profit Attributable to ANN shareholders of $246.7m, up by 57.5% (+48.5% in CC) and EPS of 192.2cps (EPS would have been 193.9cps, without Cloud Computing accounting policy change), up by 59.9% (+50.8% I CC). 
  •  Operating Cash Flow of $49.2m (down by 74.3% over pcp) representing cash conversion of 60.9%, negatively impacted due to greater investment in working capital to support top line growth along with pricing impact as well as higher capex to increase capacity in a number of higher demanded products.
  • ROCE saw significant improvement (up +590bps to 19.8% pre-tax and up +550bps to 16.8% post tax), predominantly due to strong EBIT growth.
  • Final dividend of US43.6cps (up +54.3% over pcp), taking full year dividend to US76.8cps, up +53.6% over pcp and representing payout of 40%.
  • Strong financial position with ample liquidity of $464m (cash and committed undrawn bank facilities), conservative gearing profile (net debt/EBITDA of 0.7x vs 0.6x in pcp), well managed debt profile with net debt position below target leverage and no significant upcoming maturities in the next 12-months and investment grade rating of Baa2 by Moody’s.

FY 22 Outlook

Assuming net interest expense in the range of $20-21m, effective tax rate in the range of 22-23% and increased software investments where a portion will now be expensed rather than capitalised and amortised pursuant to the new cloud computing accounting policy resulting in 5-6cps adverse EPS impact, management anticipates EPS to be in the range of 175-195cps. Management further noted on the analyst conference call, “we expect continued demand for Mechanical, Surgical, Life Sciences and internally manufactured Single Use gloves, however, lower demand is expected in areas which benefited most during the onset of COVID-19 .

Company Profile

Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its  Sexual Wellness Global Business Unit group.

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

SUN reported strong FY21 result with plans to deliver a growing business through strategic initiatives

Investment Thesis

  • Management believes it will be difficult to achieve a ROE target of 10% in FY21 due to factors affecting both the underlying ITR and cost to income targets, as well as the historically low interest rate environment, but it hopes to maintain an ordinary dividend payout ratio of 60-80 percent of cash earnings.
  • SUN has a 2-year forward PE-multiple of 15.0x and a fully franked yield of 5.3 percent, which is excellent.
  • A $250 million share repurchase programme should help the company’s stock price.
  • SUN’s Bank has been granted advanced accreditation by APRA, resulting in capital relief.
  •  Banking and general insurance margins outperformed expectations (GI).
  •  The Royal Commission’s recommendations have resulted in positive changes in the sector.
  •  Maintaining net interest margins while maintaining good credit quality in its Bank and Wealth sector.
  •  Management has the ability to continuously maintain an underlying insurance trading ratio of 12 percent and a sustainable ROE of at least 10% in the future.

Key Risk

  • Competition in insurance lines is greater than predicted, affecting pricing, unit growth, and risk management.
  • Continuing high-intensity natural disasters, like the NSW bushfires, which will deplete reinsurance and have an impact on SUN’s profitability.
  • Key milestones for FY21, such as the rollout of the Company’s technology and digital platforms, have not been met.
  • Investment returns are lower than projected.
  • Net interest margins are lower or provisions are larger than projected.
  • An increase in the number of claims.

Key highlights of FY21

  • SUN reported strong FY21 results reflecting cash earnings of $1,064m, up by 42.1% and Group NPAT, up by 13.1% to $1,033m.
  • By segments: Relative to the pcp: (1) Insurance (Australia): PAT of $547m, was up by 42.4%.(2) Banking & Wealth: PAT of $419m was up +69% on net interest margins of 2.07%, up 13bps. (3)NZ: PAT of $200m declined by 18.4% driven lower by General Insurance PAT of NZ$177m, declining 19.2% (mainly due to higher natural hazard costs and lower investment income).
  • SUN reported better top-line growth, with Gross Written Premium (GWP) growth of 5.5 percent in Australia and 9.2 percent in New Zealand, respectively (best insurance top-line performance in almost a decade).
  • Suncorp Bank  home lending grew by 0.8 percent in the second half of 2021, and has grown home loans for six months in a row as of July 31, 2021.
  • The Board declared a fully franked final ordinary dividend of 40cps which brings FY21 total fully franked ordinary dividends to 66cps (on a 79.3% payout ratio, and up from 36cps in FY20, on 60.7% payout ratio), a fully franked 8 cent special dividend, and an on-market share buyback of up to $250m (which should support its share price).

Guidance commentary: (1) FY23 Plan: “The plan intends to deliver a growing business with a sustainable return on equity above the cost of equity throughout the cycle.” The Group is investing in 12 major projects to achieve this, with the program’s advantages beginning to be realised in 2H22. (2) Natural hazard and reinsurance: SUN has increased its natural hazard allowance for FY22 to $980 million. (3) Releases of prior-year reserves: SUN continues to allow for prior-year reserve releases if inflation continues low, releases should be at least 1.5 percent of Group NEP. (4) Operating expenses: The Group’s operating expense base is estimated to be $2.8 billion, including project spending and restructuring charges in fiscal year 22. (6) Capital: SUN remains committed to a 60-80% dividend distribution ratio”.

Company Profile

Suncorp Group Ltd (SUN) provides general insurance, banking, life insurance, and superannuation products and related services to the retail, corporate, and commercial sectors in Australia and New Zealand. The company operates through Personal Insurance, Commercial Insurance, General Insurance New Zealand, and Banking segments.

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

Bapcor delivered record results driven by increased revenue and earnings across all business segments

Investment Thesis:

  • Trading below analysts’ valuation 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in second hand vehicle sales; travellers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilising 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 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 

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:

  • BAP delivered a record result with FY21 revenue up +20.4% over the pcp, driven by increased revenue and earnings across all business segments
  • Pro forma EBITDA and NPAT, were up +28.8%, and +46.5% respectively, over the pcp.
  • The revenue and EBITDA generated by segments are:
  1. Trade: Delivered record revenue of $649m, up by 15.5% and EBITDA of $115m, which is up by 19%
  2. New Zealand: Revenue of $170m, was up 8.8% and EBITDA of $33m, was up 21.2%
  3. Specialist Wholesale (‘SWG’): Revenue of $660m, and EBITDA of $90m was up +26.8% and +42.2% respectively
  4. Retail: Revenue of $369m increased +26.1% and EBITDA of $65m increased +20.1%
  5. Asia: On BAP’s 25% investment in Tye Soon and Thailand, management highlighted revenue up by 26% and profit after tax of $2.2m

Company Description: 

Bapcor Ltd (BAP) 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.

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

Facebook’s Network Effect Moat Source Remains Intact

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

along with the valuable data that they generate, makes Facebook attractive to advertisers in the short and long term. The combination of these valuable assets and expected continuing growth in online advertising bodes well for Facebook, as the firm generates strong top-line growth and remains cash flow positive and profitable. Facebook has increased users and user engagement by providing additional features and apps to keep them engaged within the Facebook ecosystem. With more Facebook user interaction among friends and family members, sharing of videos and pictures, and the continuing expansion of the social graph, we believe the firm compiles more data, which Facebook and its advertising clients then use to launch online advertising campaigns targeting specific users. While utilization of the data is under scrutiny in different markets, we think Facebook’s large audience size will still attract the ad dollars. Growth in Facebook’s average ad revenue per user indicates advertisers’ willingness to pay more for Facebook-placed ads, as they expect high return on investment from the targeted ads.

We believe Facebook will continue to benefit from an increased allocation of marketing and advertising dollars toward online advertising, more specifically social network and video ads where Facebook is especially well positioned. The firm’s Facebook app, along with Instagram, Messenger, and WhatsApp, is among the world’s most widely used apps on both Android and iPhone smartphones. Facebook is taking steps to further monetize its various apps, such as providing interactive video ads. It is also applying artificial intelligence and virtual and augmented reality technologies to various products, which may increase Facebook user engagement even further, helping to further generate attractive revenue growth from advertisers in the future.

We assign Facebook a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Given its ability to profitably monetize its network via advertising, we think Facebook will more likely than not generate excess returns on capital over the next 20 years.

Financial Strength

 In an industry where continuing investments are required to remain competitive and maintain market leadership, we believe Facebook is well positioned in terms of access to capital. The firm has a very strong balance sheet with $62 billion in cash, cash equivalents, and marketable securities and no debt.The firm generated $39 billion cash from operations in 2020, 7% higher than the prior year. We expect faster growth in cash flow during the next five years owing to operating leverage after 2022. Facebook’s strong operational and financial health is demonstrated by the 28% average free cash flow to equity/revenue during the past three years. We project average annual FCFE/sales to be in the 35%-40% range through 2025, as a result of strong top-line growth and slight operating margin expansion beginning in 2022. We do not expect Facebook to issue a dividend as it remains in a rapid-growth phase. The firm may use some portion of its cash, as it remains active on the merger and acquisition front.

Bull Says

  • With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for social network online advertising. 
  • Facebook’s ad revenue per user is growing, demonstrating the value that advertisers see in working with the firm. 
  • The application of AI technology to Facebook’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue.

Company Profile

Facebook is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos, and videos. On the video side, the firm is in the process of building a library of premium content and monetizing it via ads or subscription revenue. Facebook refers to this as Facebook Watch. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Advertising revenue represents more than 90% of the firm’s total revenue, with 50% coming from the U.S. and Canada and 25% from Europe. With gross margins above 80%, Facebook operates at a 30%-plus margin.

 (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
LICs LICs

PGF Dividend Uplift Offers Attractive Yield

Young female explaining new idea to her colleague in creative office.

Last trade price of PM Capital is A$ 1.49. Their Outstanding shares is 390.11 Million. PGF’s provides Public Float which is 279.25 Million. PM Capital Global Earnings Per Share (EPS) is $0.415 while the Price Earning ratio is 3.59 percent. 

Currently, PM Capital’s Annual Yield is 5.03 percent while their Annual revenue TTM is $218.56 Million.

On 24th September 2021, Net Tangible Asset backing per ordinary share before tax accruals is $1.63 while NTA after tax is $1.47. Gross Dividend yield per annum is 9.6 percent.  

The Company also announced that due to its strong profits reserve position, it intends to maintain a minimum dividend of 5.0cps for both the interim and final dividend for FY22, representing a full year FY22 dividend of at least 10cps. As at 30 June 2021, the Company has 5 years dividend coverage at 10cps.

On 12 August 2021, PM Capital Global Opportunities Fund ((PGF)) announced a final dividend for FY21 of 5.0cps, fully franked, a 100% increase on the FY20 final dividend.

The increased dividend announcement represents a significant uplift in yield. Based on the share price at the close of 19 August 2021, the full year dividend declared for FY21 represented a dividend yield of 4.8%. The forecast FY22 dividend would represent a yield of 6.4%, fully franked, which is strong for a global equity focused LIC.

Company Profile 

PM Capital Global Opportunities Fund Ltd. engages in investing in a portfolio of listed securities across global securities markets. Its investment objective is to increase the value of its portfolio by providing long term capital growth. The company was founded on October 1, 2013 and is headquartered in Sydney, Australia.

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

Freshworks becomes a first Indian SaaS start-up to get listed at NASDAQ

This IPO was led by Morgan Stanley, JPMorgan Chase & Co. and Bank of America Corp. Venture capital firm Accel Partners and New York-based technology investment giant Tiger Global Management were early investors in the company.

Freshworks Inc. made a stellar debut on NASDAQ exchange on 22 September, 2021, Wednesday. With this, the company becomes the first Indian ‘SaaS’ company and the first unicorn to be listed on the NASDAQ exchange.

The company was valued at $12.2 billion in its debut after shares opened 21% above the IPO issue price, indicating strong demand for firms that have thrived during the pandemic.

Freshworks boosted revenue about 40% last year after the coronavirus pandemic prompted businesses to go digital, and sales continued to grow in the first half of 2021 while its net loss declined. With 52,500 customers, the company witnessed its revenue growth in the first six months of year 2021 to $169 million, up from $110 million in the first half of 2020. Its net loss shrank to $9.8 million from $57 million which was a year ago, according to its filings.

The shareholding pattern of the company is as shown below:

The company provides a suite of products that helps businesses with customer management, such as a messaging platform and an artificial-intelligence powered chatbot for customer support. The technology offered by Freshworks is used by more than 50,000 companies, including high-profile names such as Delivery Hero SE, Swedish payments firm Klarna, Cisco Systems Inc. and General Electric Co.

About the company:

Freshworks Inc. provides software as a service platform that enables small and medium-sized businesses to support customers through e-mail, phone, website, and social networks. The Company offers multi-product support, a knowledge base, self-service portal, community forums, and tools to leverage mainstream social media for customer support. Freshworks serves customers worldwide. The company was founded by Mathrubootham and Shan Krishnasamy as Freshdesk in 2010 and was rebranded as Freshworks in 2017. Freshworks started from a 700 sq ft warehouse in Chennai and has gone on to disrupt the customer relationship management (CRM) market, where it competes with the likes of Salesforce.

(Source: bloomberg.com, 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
Shares Small Cap

Baby Bunting FY21 results show group revenue surged by 15.6%

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Investment Thesis

  • Mandatory product safety standards for baby goods in Australia limit supply sources and provide barriers to entry to international competitors.
  • BBN has the largest presence in Australia amongst specialty baby goods retailers.
  • Low risk that online sales threaten high service business model of brick-and- mortar stores to showcase goods and in-store advice.
  • Solid growth story via new store openings (targeting 100+ stores network).
  • Strong market shares (currently sits at 30% in a highly fragmented market).

Key Risks

  • Retail environment and general economic conditions in addressable markets may deteriorate.
  • Competition may intensify especially from online retailers such as Amazon, specialty retailers, department stores, and discounted department stores.
  • Customer buying habits/trends may change. Rapid changes in customer buying habits and preferences may make it difficult for the Company to keep up with and respond to customer demands.
  • Higher operating and occupancy costs. Any increase in operating costs especially labour costs will affect the Company’s profitability.
  • Poor inventory control and product sourcing may be disrupted.
  • Management performance risks such as poor execution of store rollout especially into ex-metro areas.

FY21 Results Highlights 

  • Sales of $468.4m were up +15.6%, with same-store comparable sales up +11.3%. Online sales grew by +54.2% and now make up 19.4% of total sales (vs 14.5% in pcp).
  • Gross profit of $173.7m was up +18.3% on pcp, with GP margin up +83bps to 37.1%. Cost of doing business (CODB) as a percentage of sales improved 14bps to 27.8%, aided by store expense leverage and warehouse volume leverage (cost fractionalization).
  • Operating earnings (EBITDA) were up +29.2% to $43.5m (with EBITDA margin up +100bps to 9.3%) and NPAT was up +34.8% to $26.0m.
  • Operating cash flow was weaker versus previous corresponding period (pcp), driven by higher working capital – driven by an increase in inventories and also cycling particularly low levels in the pcp.
  • The Company declared a final dividend of 8.3cps, taking the full year dividend to 14.1cps (up +34.1% on pcp). The Board continues to target a payout ratio in the range of 70-100% pro forma NPAT.
  • Private label sales were up +31.1% vs pcp and now make up 41.4% of group sales (vs 36.5% in FY20). The Company remains on target to achieve 50% of sales from private sales.

Company Profile 

Baby Bunting Group Limited (BBN) is Australia’s largest nursery retailer and one-stop-baby shop with 42 stores across Australia. The company is aspecialist retailer catering to parents with children from newborn to 3 years of age. Products include Prams, Car Seats, Carriers, Furniture, Nursery, Safety, Babywear, Manchester, Changing, Toys, Feedingand others.

(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

Netflix faces increase in competition in the U.S and around the world

Netflix has morphed into a pioneer in subscription video on demand and the largest online video provider in the U.S. and likely the world. Our economic moat rating of narrow is based on intangibles resulting from the use of Big Data stemming from the firm’s massive worldwide subscriber base. Already the largest provider in the U.S., Netflix expanded rapidly into markets abroad as the service now has more subscribers outside of the U.S. than inside. 

The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.” Media firms will continue to reap the benefits of both an additional window for existing content and another platform for new content. Larger firms like Disney+ and WarnerMedia have launched their own SVOD platforms to compete against Netflix. 

Financial Strength 

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The net cash burn was over $2 billion in 2017, over $3 billion in 2018, and $3.5 billion in 2019. As of June 2021, Netflix has $14.9 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($500 million due 2021, $700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($2.7 billion recognized on the balance sheet and over $15 billion not yet reflected on the balance sheet).

Bulls Say’s 

  • Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years.
  • Netflix has built a substantial content library that will benefit the firm over the long term.
  • International expansion offers attractive markets for adding subscribers.

Company Profile 

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, Internet-connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

(Source: Morningstar)

General Advice Warning

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

Categories
Fixed Income Fixed Income

Fidelity Government Income Fund: An appealing Government-focused offering

A blended benchmark of the Bloomberg U.S Government Bond Index (75% weighting) and the Bloomberg U.S Mortgage Backed Securities Index (25%), sticks primarily to government-backed fare (Outside of an occasional in the student loan-backed debt that carries a federal guarantee for atleast 97% of principal and interest) and doesn’t make big interest-rate bets. It plays to its strength in the mortgage portion of the portfolio, which typically accounts for 40% to 60% of assets, drawing on significant investments in proprietary analytics to identify mortgages with more attractive cash flow projections than their prices suggest. As of June 2021, the strategy’s market exposure stood roughly 107% of net assets.

Portfolio

The high-quality, government-focused portfolio tends to hold an overweighting in mortgages relative to its blended benchmark (75% Bloomberg U.S Government Bond Index and 25% Bloomberg U.S Mortgage backed Securities Index), with the team actively adjusting this mix based on valuations. Meanwhile, its allocation to U.S Treasuries accounted for 67% of assets in June 2021, up from 50% at the beginning of 2020. Here, the team favors 30-year fixed rate mortgage with repayment-resistant characteristics. The team has found agency collateralized mortgage obligations to be less attractive recently, trimming its stake to 9% of assets as of June 2021 from 14% at the start of 2020. These securities can be volatile and suffer from bouts of illiquidity, although they typically account for 3% or less of the portfolio and stood at less than 1% as of June 2021.

People

This strategy benefits from experienced leadership and a well-resourced securitized team, supporting a people pillar rating of above average. Sean Corcoran was named as a comanger when lrving left the team. Corcoran, a 19 – year fidelity veteran, previously analyzed commercial MBS and other non-agency fare as an analyst. Corcoran and castagliuolo draw on considerable resources, including eight dedicated structured-products analysts and five macro analysts. Five traders across agency, non-agency and rates markets support the team. In mid-2020, the team hired John Torregrossa, an experienced agency MBS trader with over 15 years experience, to replace veteran trader Steve Langan, who retired in late 2020.

Performance 

Well time adjustments have aided recent performance. In 2019, an increase in its Treasuries allocation helped it to a 6.5% return which bested 75% of category peers. In 2020, the team increased its exposure to mortgages amid the first quarter sell-off, helping the strategy to a 6.9% return, which bested over two thirds of peers.

FGOVX Performance.png

About the Fund

Fidelity Government Income Benefits from a well-resourced team and risk-conscious approach backed by the firms’s deep mortgage analytics. Fidelity’s significant investment in analytics, including a proprietary mortgage model that allows the team to quickly model changes in assumptions regarding borrower repayment behavior to identify mispricings in the mortgage market. 

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

Incitec Pivot’s Fiscal Second Half Enjoys Surge in Fertiliser Price AUD 3.00 FVE Unchanged

Business Strategy and Outlook

Incitec Pivot aims to expand its business around its strong global market share in explosives. This provides an increasingly stable earnings stream relative to volatile earnings from its fertiliser business. Competitive advantages include a duopoly Australian explosives business and global explosives operations. Incitec Pivot is also a dominant player in the Australian domestic fertilizer market and enjoys a degree of domestic fertiliser pricing power from its dominant market share in eastern states, but it is too small to influence global prices.

Explosives earnings are leveraged to mining volumes as much as price and should benefit from long-term global growth in demand for minerals and metals. Additionally, mining strip ratios are expected to increase over time, with more explosives required to mine the same amount of ore. Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria. There will likely be an oversupply of ammonium nitrate in Western Australia to 2020 and in Eastern Australia to 2021. 

Financial Strength

IncitecPivot raised AUD 645 million in new equity at AUD 2.00 per share in the second half of fiscal 2020. In conjunction with positive free cash flows, net debt fell to AUD 1.3 billion at end September, down 45% from AUD 1.9 billion at end March 2020. As at end March 2021, net debt worsened slightly to AUD 1.48 billion, for comparatively modest leverage ND/(ND+E) of 22%, but somewhat elevated net debt/EBITDA just over 2.0. It is pleasing therefore that management has expressed an investment bias to capital-light and faster cash returning projects aligned to the strategy.The equity capital raised in fiscal 2020 increased the company’s liquidity and supports a continued investment-grade credit rating.

Our fiscal 2021 EPS forecast is little changed at AUD 0.10 with full-year results to be released on Nov. 15. The global explosives provider deliberately brought down its Waggaman ammonia plant in late August 2021 in anticipation of Hurricane Ida, with an NPAT impact of USD 21 million. Post-hurricane inspections did not identify any material damage to the Waggaman plant. Incitec Pivot ended March 2021 with net debt of AUD 1.48 billion, for comparatively modest leverage ND/(ND+E) of 22%, but somewhat elevated net debt/EBITDA just over 2.0.

Bulls Say’s

  • Investors enjoy bumper dividends at peak cycle times.
  • Continued growth of the explosives business will reduce earnings volatility.
  • Over the longer term, explosives earnings are favourably leveraged to mining volumes rather than prices, and mine strip ratios are expected to increase over time.

Company Profile 

Incitec Pivot is a leading global explosives company with operations in Australia, Asia, and the Americas. We estimate its share of the global commercial explosives market at about 15%. Explosives contributes 80% of EBIT. Incitec Pivot is also a major Australian fertiliser producer and distributor and is the only Australian manufacturer of ammonium phosphates and urea. Ammonium phosphates are sold in the domestic market and exported.

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.