Category: Research

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ETFs ETFs

Schwab U.S. Aggregate Bond ETF: A great core bond holding

U.S.-dollar-denominated investment-grade bond market and harnessing the market’s collective wisdom about the relative value of each bond by weighting bonds according to their market value. This is a sound approach because it promotes low turnover, limits credit risk, and is cost-effective, and because the market does a decent job pricing these bonds. The index weights its holdings by market value and is rebalanced monthly. This yields a conservative portfolio, which limits its return potential but also cuts downside risk and makes for a good complement to stock holdings.

Portfolio:

This portfolio mimics the contours of the taxable U.S. investment-grade bond market, engendering a conservative portfolio relative to the intermediate core bond category average. The fund typically courts a similar amount of interest-rate risk, but as of September 2021, its average effective duration of 6.7 years was slightly higher than the category average, which stood at 6.0 years. U.S. Treasuries account for approximately 39% of this fund’s assets, giving the portfolio its conservative bend. Agency MBS and corporate bonds account for about 27% and 26% of the fund’s total assets, respectively.

People:

Schwab’s passive fixed-income portfolio management team has consistently provided tight index tracking performance. Its thoughtful portfolio construction process and continued investment in technology have distinguished it from the pack. Schwab has a narrower, simpler fund lineup than some of its larger peers, so its fixed-income index management team is smaller. However, it makes efficient use of its resources and is well-equipped to deliver cost-efficient and high-fidelity index tracking for the strategies it manages.

Performance:

The fund’s performance during the trailing 10 years through August 2021 has not been spectacular. It lagged the category average by 29 basis points annually. Although it exhibited slightly less volatility, ultimately its risk-adjusted performance (as measured by Sharpe ratio) ranked just outside of the category’s middle third. The fund also held up much better than category peers during the novel coronavirus-driven sell-off.

(Source: Factsheet from www.schwabassetmanagement.com)

Price:

Analysts find it difficult to analyse expenses since it comes directly from the returns. The fees levied by the share class is under cheap quintile. Analysts expect that it would be able to generate positive alpha relative to its benchmark index.


(Source: Factsheet from www.schwabassetmanagement.com)        (Source: Morningstar)

About ETF:

Schwab U.S. Aggregate Bond ETF SCHZ boasts a low fee and conservative portfolio, traits that make it a great core bond holding. The fund tracks the Bloomberg Barclays U.S. Aggregate Bond Index, which includes investment-grade U.S.- dollar-denominated bonds with at least one year until maturity. The index weights bonds by market value, tilting the portfolio toward the largest and most liquid issues. This approach also harnesses the market’s collective wisdom about the relative value of each security, a prudent approach for the long term. That said, bond-issuing activity influences the composition of this portfolio. Approximately 70% of the fund’s assets carried a AAA credit rating as of September 2021, while the category average was 57%. The fund’s category-relative performance will largely hinge on the performance of credit risky bonds.

(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

After a 54 percent dividend increase, Ansell’s stock is in the spotlight.

Investment Thesis

  • Based on our valuation, ANN’s share price trades at a >10% discount to our DCF valuation.  
  • ANN is a quality business with global manufacturing capabilities.
  • We believe our 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. 
  • FX translation should be positive for the Company.
  • Raw material cost pressures can be shared with customers and suppliers.
  • ANN has a strong balance sheet position with flexibility to return cash to shareholders or borrowing capacity for acquisitions

Key Risks

We see the following key risks to our investment thesis:

  • Product recall.
  • Trade wars escalate, leading to higher tariffs. 
  • Increase in competitive pressures.
  • Adverse movements in AUD/USD.
  • Emerging or developed market growth disappoints. 
  • Any worst or better prices for raw materials.

FY21 key trading metrics 

  • Sales of $2,027m, up +25.6% (+22.5% in CC) with Healthcare organic growth of +34.8% and Industrial organic growth of +7.1%. 
  • EBIT of $338m, up +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 provisions 
  • Profit Attributable to ANN shareholders of $246.7m, up +57.5% (+48.5% in CC) and EPS of 192.2cps (EPS would have been 193.9cps, without Cloud Computing accounting policy change), up +59.9% (+50.8% I CC). 
  • Operating Cash Flow of $49.2m (down -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. Capex increased +36.5% over pcp to $82.7m, however, remained below management’s $95-105m guidance due to temporary delays to shipments and installation as a result of COVID-19, with management expecting FY22 capex spend to be $80-100m. 
  • 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.

Company Description  

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 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
ETFs ETFs

VanEck Australian Property ETF: A sound choice for diversified exposure to Australian REITs

The process sets its universe by screening ASX-listed stocks with a market cap greater than USD 150 million. International companies incorporated outside of Australia are considered as well, provided they generate 50% of their revenue in Australia or have 50% of their total assets in Australia. For existing holdings, the market-cap limit is set at $75 million and the revenue threshold for offshore companies is established at 25%. To meet liquidity requirements, stocks must also have had at least USD 1 million daily trading average over three months and at least 250,000 shares traded per month. Stocks, which make up the top 90% of the investable universe, are equally weighted and capped at 10% at the time of quarterly rebalancing. VanEck has a deep global presence and uses robust daily portfolio monitoring systems and multi-levelled risk management to ensure trading is efficient and compliant. 

Portfolio

The ETF mirrors the composition of the MVIS Australian A-REIT Index. The index consisted of 15 names as of July 2021. The portfolio holds a minimum of 10 stocks and excludes the smaller end of the cap spectrum, while mid-cap exposure is beefed up. Stocks that meet size and liquidity requirements are weighted by their free-float market capitalisation subject to a 10% weighting cap. While about a third held in the portfolio is directly invested in retail A-REITs, it has almost half of the allocation to diversified REITs. Sector exposures are significantly more consistent through time. A-REIT Index owing to limited stock changes in the top of the ASX/200 and the stock exposure limit of 10%. The portfolio is rebalanced every quarter; because of its exposure cap, turnover is typically 20%-40% .

Sub- Industry Weightage
Diversified REITS46.20%
Retail REITS28.00%
Office REITS11.90%
Industrial REITS10.70%
Specialized REITS3.20%
Other/Cash0.00%

                                                Source: MVA-Factsheet

Performance

MVA has closely matched the broader A-REIT market return while delivering standout performance against the category average from its inception through 31 July 2021. The ETF has annually outperformed the category average by 1.4% or 21% on a cumulative basis since inception. 

C:\Users\Akhila\Downloads\performance.png

                Source: MVA-fact-sheet

Fundamentals

No. of securities15
Price/Earnings Ratio*10.66
Price/Book Value Ratio*1.12
Dividend Yield4.26
Weighted Avg. Market Cap (M)$12,362.00 

                                                  Source: MVA-fact-sheet

People

The VanEck investment team is headed by Russel Chesler with Jamie Hannah as his deputy. Chesler is an industry veteran with over 25 years of experience across Sunstone Partners, Perpetual Limited, and Liberty Life. Hannah joined VanEck in 2014 from Source ETF where he was a part of the investment management team. The duo is supported well by two senior associates: Cameron McCormack and Alice Shen.

Price 

The Net Asset Value of the fund (NAV) is $24.88 as on 31 August 2021 while the management cost is 0.35% p.a.n.m.

Top 10 Holdings of VanEck Australian Property ETF

C:\Users\Akhila\Downloads\Top HOLDINGS.png

Source: MVA-fact-sheet

About the fund

The VanEck Australian Property ETF incorporated on 14/10/2013 which  invests in a diversified portfolio of ASX-listed securities with the aim of providing investment returns (before management costs) that closely track the returns of the MVIS Australia A-REITs Index.

The MVIS Australia A-REITs Index is a pure-play Australian sector index that aims to reflect the performance of Australia’s property sector.

The shares outstanding is 23,955,918 and the dividend is paid two times each in a year.

Individual Index components are chosen based on a strict rules-based system that prioritises liquidity, with a minimum of 10 holdings and a maximum weighting of 10% for each. . The underlying index sets itself apart from market-cap-weighted benchmarks with its sensible portfolio size that covers 

 (Source: Morningstar)

General Advice Warning

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

Categories
ETFs ETFs

iShares USD Corporate Bond UCITS ETF: An interesting proposition to gain exposure

The ultimate result is that this allows managers to decide on the portfolio that represents the index’s overall risk profile, while allowing the ETF manager to avoid purchasing bonds that suffer from illiquidity. The management process is highly automated, and managers use proprietary analytical and risk control systems. The key objective is to minimise trading costs, mainly around primary market events (for example, auctions) that cause rebalancing. All trading is executed by the in-house capital markets desk. Bond coupons are reinvested in line with index rules.

Portfolio:

The Markit iBoxx USD Liquid Investment Grade Index measures the performance of the most liquid USD denominated corporate bonds with investment-grade ratings and minimum remaining life of 3 years by issuers from developed countries. To be considered for inclusion, bonds must have a minimum remaining maturity of 3.5 years and a minimum outstanding of USD 750 million. In addition, the index also requires a minimum outstanding of USD 2 billion per issuer. The index is weighted by market capitalisation, subject to an issuer overall cap of 3%.

People:

The strategy is managed by the EMEA core portfolio management team. Sid Swaminathan is the head of the core portfolio management team. This is a large team where portfolio managers specialise in two broad groupings, one focusing on rates and inflation strategies and the other on credit and aggregate funds. The portfolio managers are supported by a large team of analysts and IT professionals, as well as by the global capital markets team.

Performance:

The strategy has delivered returns above the category average in short and long periods over the past 15 years both on a total and risk-adjusted basis. The strategy struggled during the worst of the coronavirus sell-off in March 2020, but it rebounded strongly once the US Federal Reserve cut interest rates from 1.50% to just above 0.00% and started buying corporate-bond ETFs.

The annualized performance (%USD) displayed by this fund as on 31st August, 2021 has been shown below:

(Source: Factsheet from iShares.com)

Price:

The fees levied by the share class is in the cheap category. Analysts expect that this share class will be able to generate positive alpha relative to the category benchmark index, which affirms the outperformance of this ETF.


(Source: Factsheet from iShares.com)                                                       (Source: Morningstar)

(Source: Morningstar)

About ETF:

iShares USD Corporate Bond ETF tracks an index that excludes bonds with maturity below three years, which account for up to 20% of the investable universe. This causes the strategy to have higher duration than all-maturity passive alternatives. This can work both in favour and against investors depending on the path of interest rates. The strategy is expected to deliver returns over a full market cycle; that is inclusive of periods of both rising and falling interest rates. Considering the benefits of low fees and the broad diversification at the sector level, the strategy retains a Morningstar Analyst Rating of Bronze. iShares’ passive bond fund management process and the high level of expertise of the people behind it showcases a positive view of the ETF.

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

Fidelity Australian Opportunities Tenured stock-picker with a unique approach

Approach 

Fidelity analysts use a variety of proprietary models and valuation methodologies to assess earnings, cash flows, and value. Site visits and extensive company management meetings play a critical role in the investment process, as fidelity believes these provide valuable insights into a company’s future prospects.  Each investment analyst covers around 25 companies, grouped along sector lines but sectors are rotated every three to four years. The overall portfolio tends to exhibit a growth bais. 

Portfolio

Fidelity Australian Opportunities is an all-cap domestically focused approach. The portfolio typically holds 40 – 70 stocks with core holdings in large-cap names but a longer portfolio tail of small-cap names. As a result, the average market cap slightly lower than other large-cap peers and around 50-55% of the portfolio sits in the top 10. This means active share hover around 45-50%. Positioning is aligned with a long term view of companies, and the historical average annual turnover has been moderate at about 30-50%, which will also make it reasonably tax effective.

People

Howitt was promoted to portfolio manger soon after joining fidelity in 2004 as an analyst covering banks, insurers and diversified financials. Prior to fidelity, she was an analyst/portfolio manager in AMP capital’s value team and also worked as an consultant with the Boston Consulting Group. Support comes from a wide range of local and global sources, including the Sydney based investment research team and the implementation of an assistant portfolio manager. Each analyst coverage responsibilities for a specific sector and these rotate every three to four year to ensure the analysts continued to produce well rounded insights. 

Performance 

Fidelity Australian Opportunities continues to impress long-term track records. The year 2018 was more Tricky, as positions in blue sky and Lynas materially detracted. The strategy responded well in 2019 as Lynas recovered, while CSL and Wisetech continued their strong appreciation. Despite the volatile markets during calendar 2020, performance was particularly strong, beating the benchmark and most peers. The sector Neutral-Approach protected capital on the downside, with the strong showings from Lynas, Mineral Resources, and BlueScope. Despite no significant sector bets, positions in the materials sector played a key role in the Outperformance, with Howitt’s stock picking talents on full display.

FAO Fund Performance .png
FAO Top Holidings .png

About the Fund

Fidelity Australian Opportunities continues to impress with its quality management and unique approach, bolstered by the firm’s global footprint and top-tier research capabilities. Despite the numerous benefits that come with size and scale, the large footprint of the Fidelity group does create limitations for portfolio construction. Where the firms owns 10% of a company, strategies under the fidelity banner can no longer invest in the stock, though it’s a small price to pay for fidelity’s resources. An adaptive process and tenured portfolio manager set the strategy apart, offering an solid choice for diversified exposure to Australian equities.

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

Cisco’s Software and Subscription Push Providing Investors with Greater Insight and Predictability

its strategic focus of increasing recurring revenue via selling software and services to supplement its hardware products. Software and services were more than half of fiscal 2020 revenue, up from 43% in fiscal 2017. In our view, Cisco embracing software from hardware disaggregation, and even selling networking chips, can help keep demand for its solutions high although some customers rely on cloud-based resources or generic hardware.

The company is the dominant supplier of switches, routers, cybersecurity, and complementary networking products. Cisco’s products are mission critical for network performance, stability, and security. Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends, and we see Cisco as the only one-stop-shop networking vendor. Despite Cisco’s commanding position in switches and routers, IT professionals are increasingly shifting computer workloads to the cloud, in turn buying less data center hardware. Alongside changing its product offerings, Cisco is moving product sales toward subscription-based offerings, which is the preferred method of consumption for cloud-based resources.

Financial Strength

Cisco a financially healthy Company. With a fiscal 2021 debt/capital ratio of 22%, abundant free cash flow generation, and expected on-time debt payments. The company could safely lever back up to fund development projects, acquisitions, and shareholder returns if needed. Cisco has continually exceeded its commitment to return at least 50% of free cash flow, calculated as cash from operating activities minus capital expenditures, to shareholders. Cisco initiated its share repurchase program in 2001, has increased the authorization over time, had about $8 billion remaining at the end of fiscal 2021, with no termination date. 

Cisco has recurrently raised its dividend year over year, and modest annual increases. Even after shareholder returns and debt repayments, the company remains financially flexible with plenty of cash to support acquisitions and its large marketing and R&D expenditures. Growing recurring revenue will provide a steadier income stream, and we expect strong operational and free cash flow generation to continue in the future. Our view is that Cisco will manage its growing war chest with future cash deployments into strategic developments and acquisitions.

Bulls Say’s

  • Cisco’s one-stop-shop ecosystem, from switches to data analytics, should remain valued as more networking customers migrate to hybrid clouds.
  • Despite the rise of public clouds, Cisco should continue to grow its customer base via hybrid cloud and software offerings.
  • The expected rapid proliferation of devices to hit networks should drive customer demand for Cisco products. We foresee Cisco’s hardware as needed for access points, routing, and switching while software is crucial for analytics, security, and intent-based networking.

Company Profile 

Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The infrastructure platforms group includes hardware and software products for switching, routing, data center, and wireless applications. Its applications portfolio contains collaboration, analytics, and Internet of Things products. The security segment contains Cisco’s firewall and software-defined security products. Services are Cisco’s technical support and advanced services offerings. The company’s wide array of hardware is complemented with solutions for software-defined networking, analytics, and intent-based networking. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.

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

Oracle Begins Fiscal 2022 With a Mixed Quarter As Cloud Shines; Shares Overvalued

Revenue in the first quarter increased 4% year over year to $9.7 billion. Once again, cloud services and license support drove the top line upward, growing 6% year over year and accounting for 76% of the firm’s sales in the June quarter. Additionally, adjusted operating margins for the quarter remained flat year over year at 45%, and non-GAAP earnings per share was $1.03, compared with our estimate of $0.94.

The company’s cloud business continues to perform well and grow as a portion of Oracle’s overall sales. Since the cloud business typically offers better margins than the firm’s on-premises business, we view this mix shift positively as the increasing cloud mix will help the company grow its profitability. At the same time, however, we remain aware of the intense competition in the database management market and maintain our fair value estimate of $65 per share. With shares trading around $87, we recommend waiting for a pullback before committing capital to the narrow-moat name.

Within the cloud space, management highlighted a recent Gartner report that reviews Oracle’s strong execution within cloud infrastructure. At the same time, we find it important to highlight that while Gartner positions Oracle as the number three player in the cloud infrastructure space, Amazon and Microsoft (the current number one and two, respectively) have built their cloud infrastructure business over many years. As a result, it’ll be hard for Oracle to displace these two cloud giants off their perches, as doing so would require companies to make cloud infrastructure decisions primarily based on database functionality. 

Additionally, on the call, management stressed the outperformance of its MySQL offering, HeatWave, over Amazon’s and Snowflake’s MySQL offering. While we continue to think Snowflake boasts significant benefits over Amazon due to its customers’ ability to avoid vendor lock-in, we found it compelling that Oracle claimed it plans to make its MySQL product available on competing public clouds. 

Company Profile

Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.

(Source: Morningstar)

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

Sweetened Proposal for Sydney Airport Looks Like Enough; FVE Up to AUD 8.25, Shares Fairly Priced

Long distances between major cities in Australasia means flying is a preferred mode of travel. Despite a rival airport scheduled to open in 2026, we expect Sydney Airport to remain the favoured terminal for business and long-haul leisure travellers for the next decade. This is due to existing infrastructure which is costly to replicate, and proximity to the CBD, affluent suburbs and tourist areas, and connections to roads and public transport. 

Revenue is about evenly sourced from aeronautical and other operations. Aeronautical fees are mostly on a per-passenger basis, with base charges negotiated with airlines every five years. Retail is the largest non-aeronautical contributor, accounting for about 23% of pre-COVID-19 revenue. Duty-free and luxury shopping has threats, given the ability for e-commerce sites to offer lower prices than duty-free, and ESG risks given the reliance on tobacco and alcohol sales. However, in the long run, risks materialising in any particular sub-category should be offset by passenger growth boosting defensive categories such as food, car-rental, parking, souvenirs, and holiday items

Regulators have no power to intervene other than to recommend more regulation. Rather than pushing for more onerous regulation, government and regulators could foster more competition via the new Western Sydney Airport, though we believe this will take more than a decade. 

Catering to the growing middle-class in neighbouring countries remains a growth opportunity. Population and passenger growth should aid Sydney Airport as it can increasingly allocate slots away from domestic and toward international flights. International flights account for about 40% of passengers, but about 70% of passenger revenue.

Sweetened Proposal for Sydney Airport Looks Like Enough; FVE Up to AUD 8.25, Shares Fairly Priced:

Sydney Aviation Alliance has sweetened its pitch for Sydney Airport, now proposing a deal at AUD 8.75 per share. While the new price is only 3.5% higher than the previously rejected AUD 8.45, this time Sydney Airport granted due diligence and said it would support a binding offer at that price. A conclusion is unlikely until 2022 given it will require 4 weeks of due diligence, a binding bid from the consortium, a shareholder vote, and regulatory investigations. A lot could happen between now and then; however, the most likely outcome is a takeover proceeding at the proposed price.

We raise our fair value estimate to AUD 8.25, ascribing a 75% probability a deal proceeds at AUD 8.75, and a 25% weighting to our underlying valuation in the absence of a bid, which is unchanged at AUD 6.70. 

We understand the need for due diligence given the hefty price tag, however, we think it unlikely the due diligence process will uncover anything to disrupt the offer. Sydney Airport is well run, and its assets and books have been scrutinised closely by many parties, and its now public listing. It also has a huge debt load that attracted close scrutiny from creditors in 2020, as well as air safety and security bodies scrutinising its physical assets.

A more likely disruptor is economic or coronavirus news. We maintain our view that regulatory authorities are unlikely to throw up insurmountable concerns about aviation safety, national security, foreign investment, or competition. Competition is the most likely hurdle, if any, given consortium member stakes in other airports.

Bulls Say

  • Sydney Airport’s convenience to the business district and coastal suburbs of Australia’s largest city makes it near impossible to replicate. Rising incomes in nearby nations, and Australia’s growing population bodes well for long-term passenger numbers.
  • A light regulatory regime is unlikely to become significantly more onerous.
  • Sydney Airport has spare landing slots, plus the ability to reallocate slots away from domestic and toward more lucrative long-haul international flights, as passenger traffic grows.

Financial Strength

Financial Strength Sydney Airport’s financial health is fair, with relatively defensive income offset by high debt.Net debt/EBITDA was a high 14 times in fiscal 2021, up from 7.2 in 2019.Management acknowledged the high debt and took appropriate actions to reduce leverage, including cancelling distributions in 2020, delaying capital expenditure, securing additional bank facilities, and raising AUD 2 billion in equity in the September quarter of 2020. We expect calendar 2021 to be the low point for EBITDA, with 2022 forecast to be significantly higher due to fewer and less strict lockdowns. 

Company Profile

Sydney Airport has a lease to operate the facility until 2097. As Australia’s busiest airport, it connects close to 100 international and domestic destinations, and handled more than 40 million passenger movements annually until COVID-19 border restrictions in 2020. Regulation is light, with airports setting charges and terms with airlines, and the regulator monitoring the aeronautical and car park operations to ensure reasonable pricing and service. Retail and property operations are free from regulatory oversight, though political and commercial pressure limits Sydney Airport from overly flexing its pricing muscle, particularly as the government owns the rival Western Sydney Airport, set to open in 2026.

(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

Wisetech FVE Significantly Increased Following Evidence of Strategy

Business Strategy and Outlook

WiseTech Global was founded in 1994 as a software provider to the Australian logistics sector and has since grown organically to become a leading global provider of logistics software as a service, or SaaS. The company has over 6,000 customers, including 19 of the 20 largest third-party global logistics providers, and a customer retention rate of over 99%. WiseTech’s business model generates revenue based on the extent to which customers use its software rather than a traditional subscription model, which usually offers unlimited use within a set time frame. Despite strong revenue growth, WiseTech still comprises less than 5% of the global logistics software market, much of which is created in-house by logistics companies. 

Although WiseTech lacks the scale of much larger enterprise resource planning, or ERP, software providers such as SAP and Oracle, the company’s niche focus and innovative culture have enabled it to outmanoeuvre larger peers. Descartes increased revenue at a CAGR of 14% over the five years to fiscal 2021 we forecast a CAGR of 14% over the next decade. WiseTech’s cloud-based platform is being adopted by logistics companies as a replacement for legacy and in-house developed systems, and we attribute client wins to the superior functionality and usability of the software and proven global SaaS platform.

Financial Strength

WiseTech is in good financial health thanks to its capital-light business model, highly recurring earnings, and narrow economic moat. The company is effectively equity-funded with no debt. Founder and CEO Richard White to remain reluctant to undertake large acquisitions and leverage the balance sheet. However, it’s not uncommon for technology companies to forgo short term profitability for long-term strategic benefits, and we are comfortable with management’s long-term focus.

WiseTech in a much more bullish light and have dramatically raised our earnings forecasts and fair value estimate to AUD 60.00 from AUD 9.00 per share. Our forecast revenue CAGR over the next decade, to 19% from 12% and our terminal EBIT margin to 37% from 32%, both of which add around AUD 14 to the fair value, or 28% of the total fair value increase. WiseTech’s cost of equity to 7.5% from 9.0% and increased the terminal growth rate to 4.9% from 2.2%, both of which add AUD 11 to our fair value or 22% of the total fair value increase.

WiseTech’s fair value increase is largely due to a higher terminal value, as 83% of our prior fair value was attributable to the terminal value. The terminal value increase is driven by the following four factors which have approximately equal impacts. The strong fiscal 2021 result, improved disclosure, and better than expected fiscal 2022 outlook, which increase our confidence in WiseTech’s global expansion strategy.

Bulls Say’s

  • WiseTech has a narrow economic moat based on customer switching costs, as evidenced by a very high customer retention rate of over 99% for the past four years.
  • WiseTech’s revenue is expected to continue growing strongly over the next decade as its logistics software platform replaces in-house and legacy software solutions. A high degree of operating leverage should create even stronger EPS growth.
  • The capital-light business model should enable the balance sheet to remain debt-free, with operating cash flow covering research and development spending and dividend payments.

Company Profile 

WiseTech is a leading global provider of logistics software, and 19 of the largest 20 third-party logistics companies are customers of the firm. The company has a very strong customer retention rate of over 99% per year, and is growing quickly as its global SaaS platform replaces legacy software. The company reinvests around 30% of revenue into research and development, but around 50% of this cost is capitalised, leading to poor cash conversion. Founder Richard White remains CEO and the largest shareholder.

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

WCM Global Growth Increases Final Dividend 25%

Recently, WAM Global Growth provides 2.5 percent per share. 

WCM Global Growth Limited ((WQG)) reported a net operating profit after tax of $48.4 million for fiscal year 21. For FY21, the investment portfolio returned 26.8 percent, with total shareholder returns of 35.6 percent.

The Company declared a final dividend of 2.5cps for FY21, fully franked, a 25% increase over the FY20 final dividend. This represents a 4.5cps full-year dividend, a 12.5 percent increase over the FY20 full-year dividend.

The Board has announced that the next two dividend payments will be increased, with an FY22 interim dividend of 2.75cps and a final FY22 dividend of 3.0cps. These dividends will most likely be fully franked. The increased dividends will be subject to corporate, legal, and regulatory considerations, as well as the Company having sufficient profit reserves and franking credits.

WQG issued Bonus Options on a one-for-three basis in February 2021. The options have an exercise price of $1.50, which represents a 7.4 percent discount to the closing share price on August 19, 2021. The exercise period for the options is until August 31, 2022. 

Shareholders who exercise their options by COB 17 September 2021 and continue to hold the shares on the relevant record date will be eligible for all of the dividends listed above.

Company Profile 

WCM Global Growth Limited (WQG or the Company) is a listed investment company investing in global equities. The Company provides investors with access to an actively managed portfolio of quality global companies found primarily in the high growth consumer, technology and healthcare sectors. The portfolio is managed by WCM Investment Management (WCM), a California-based specialist global equity firm with an outstanding long-term investment track record. WCM’s investment process is based on the belief that corporate culture is the biggest influence on a company’s ability to grow its competitive advantage or ‘moat’. 

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.