Category: Research

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Shares Small Cap

Genworth will find it Challenging to Grow its LMI Business In the face of Slow Credit growth and Increased Competition

Arch Capital Group received Australian Prudential Regulation Authority, or APRA, approval to enter the market in 2019 and announced it would acquire Westpac’s LMI business in 2021. This marked increased competition for Genworth and QBE in Australia.

LMI protects a lender against a potential gap between the outstanding loan amount plus costs and the sale proceeds from the mortgaged property. While it’s the lender who is protected and decides whether to purchase LMI, the premium is paid by the borrower. Low growth in high loan/value ratio, or HLVR loans, due to low system wide home loan growth, as well as banks being more risk-averse after the Royal Commission and tightening of lending standards is expected. An economic backdrop where Australians are holding historically high levels of home-loan debt, and wage growth is low, makes strong credit growth and a significantly stronger appetite for loans with higher LVRs unlikely.

Key Investment Considerations

  • Higher-risk home loan exposure means Genworth is very sensitive to the Australian economy, particularly employment and house prices. In a downturn, it faces the likely lower premiums, higher claims and reduced investment returns.
  • The full-recourse nature of Australia’s home loans reduces potential claims risks and in a benign economy it has proved profitable, earning profits in all but two years of its roughly 50-year history.
  • A sound balance sheet means there is the prospect of further capital-management initiatives.

Financial strength

Genworth is regulated by APRA to maintain a certain prescribed capital level, or PCA. Genworth’s PCA is driven primarily by its LMI concentration risk charge (which is mainly based on its probable maximum loss based on a three-year economic or property downturn of an APRA determined 1-in-200 year severity level) and insurance risk charge (the risk that net insurance liabilities are greater than the value determined by the actuary). Genworth targets a regulatory capital base of 1.32 times-1.44 times its PCA, which it has been consistently above. The PCA as at March 31, 2021, is a healthy 1.63 times.

Bulls Say

  • Fiscal and monetary stimulus cushion the economic downturn in Australia, resulting in a rise in

delinquencies but allows Genworth to remain profitable and continue to generate profits over the longer term.

  • A sound balance sheet provides the capacity to continue to institute capital management initiatives, including special dividends and buying back more shares.
  • The recent relaxation of some macro-prudential measures and low cash rates may spur lenders to issue more investor and HLVR home loans, which Genworth is well positioned to benefit from.

Company Profile

Genworth Mortgage Insurance Australia listed on the Australian Securities Exchange in 2014 after its U.S.-based parent, Genworth Financial Inc. (NYSE: GNW), sold down its stake. It has since exited. With a history spanning over 50 years, Genworth Australia is a provider of lenders’ mortgage insurance, or LMI, in Australia. In Australia, LMI is predominantly purchased on loans with a loan/value ratio, or LVR, above 80%. LMI protects a lender against a potential loss (gap) between the outstanding loan amount and sale proceeds on a delinquent loan property. LMI does not protect the borrower, however the premium is paid by the borrower. It’s regulated by the Australian Prudential Regulation Authority, or APRA, which requires it to meet minimum regulatory capital requirements.

(Source: Morningstar)

General Advice Warning

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

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IPO Watch

SEBI has put the IPOs of GoAir and Aditya Birla MF on hold.

According to Sebi’s most recent reports on the status of offer documents filed for public fund-raising, its observations on Aditya Birla MF’s offer document were “held in suspension.” Sebi cited the same grounds for rejecting GoAir’s IPO. If a firm or its group companies are the subject of a regulatory enquiry, Sebi normally holds off on giving its approval to a fund-raising strategy.

Sebi is reviewing GoAir’s group firm Bombay Dyeing for financial irregularities and fraud linked to a contract between Bombay Dyeing and SCAL Services, according to the IPO paperwork. An investigation began when one of Bombay Dyeing’s shareholders filed a complaint. GoAir filed a draught prospectus with the Sebi in May to fundraise Rs 3,600 crore.

Two of Aditya Birla MF’s sponsors, Aditya Birla Capital and the Indian branch of Sun Life Group of Canada, planned to offer 3.9 crore shares of the business to cut their joint interest by around 13.5 percent.

Sebi is apparently looking into a series of transactions between Aditya Birla Finance, a fund house’s group firm that has filed for an IPO, and CG Power’s backers, the Thapar family. The agreements were made in 2016.

Source: economictimes

General Advice Warning

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

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Global stocks Shares

Endeavour’s Leadership: Encouragement in Sustainable Cost Advantages of liquor market

Woolworths’ divestment of Endeavour separated the ESG risk of alcohol retailing and gaming machine operation from the broader supermarkets business and provided investors with the ability to tailor their risk exposures to each business. The impetus for divestment had risen in the years leading up to the separation of Endeavour as a standalone company along with the emergence of social oriented investment.

Endeavour’s business is divided into two segments. Its retail segment is Australia’s leading vertically integrated omnichannel liquor retailer, while Endeavour’s hotels segment provides hospitality services and gambling operations.

Company’s Future Outlook

We expect consumer demand for alcohol to be relatively steady through the economic cycle, exhibiting attributes of consumer defensives. For instance, like in food, liquor spending grew at around or above the 30-year average growth rate of 7% in fiscal years 2008 and 2009, respectively. However, data stretching back to the last Australian recession suggests liquor demand isn’t always recession-proof. According to the Australian Bureau of Statistics, Australian consumers significantly cut back on drinking in fiscal 1991 and liquor retailing took over two years to recover to its fiscal 1990 levels.

We estimate the Australian hotels market will predominantly be driven by the same factors as the off premises retail liquor market, namely population growth and inflation. We estimate a total market size at AUD 15 billion in fiscal 2020 and anticipate this to grow at a CAGR of 6% from lockdown-affected calendar 2020 to AUD 27 billion by fiscal 2030

Bulls Say

– Endeavour’s dominant retail market share of 47% is multiples of its closest competitors and provides a source of long-term sustainable cost advantage.

– Endeavour’s partnership agreements with Woolworths allow the business to leverage the scale and capabilities of Australia’s largest supermarket.

– Endeavour’s wide economic moat, strong competitive positioning and strong balance sheet will underpin a sustainable and steadily growing dividend.

Company Profile

Endeavour Group Ltd is an Australian drinks retailer of products such as liquor and operator of various licensed hospitality venues. Its portfolio of brands include Dan Murphy’s, BWS, Pinnacle Drinks, ALH Hotels, Jimmy Brings, Langton’s, among others.

(Source: Morningstar)

General Advice Warning

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

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Shares Technology Stocks

ARB Is an Attractive Business, but the Price Needs to Improve

Shares in ARB trade at a material premium to our unchanged fair value estimate of AUD 19.50. Granted, ARB is a high quality company. The firm’s ranges of vehicle accessories have established significant brand strength in Australia, underpinning our narrow economic moat rating for the firm.

The firms is extremely well-run and assign ARB an Exemplary capital allocation rating based on our assessment of balance sheet risk, investment efficacy, and shareholder distribution. We expect ARB to enjoy some operating leverage as its store network expands and its international businesses, most notably in the U.S., improve scale. But we do not believe the firm’s international foray will replicate the success enjoyed domestically.

The firm has been unable to enjoy this pricing premium offshore, as demonstrated by lower segment margins. In our view, ARB’s current lofty share price indicates domestic success is being extrapolated by investors to the firm’s international business.

Financial Strength

ARB’s balance sheet is in pristine condition. At Dec. 31, 2020, the company had no debt and a net cash position of AUD 84 million. This is despite major investment in the Thailand and Victoria warehouses and continued new store rollouts. We forecast the firm remaining in a net cash position through fiscal 2021, with short-term financing facilities providing further headroom in the balance sheet to meet cash flow requirements. The firm’s major funding requirements are store rollouts, international expansion, and working capital in line with growing sales.

Bulls Say

  • Online competition is not a significant threat to ARB’s business. Products usually require professional fitting (often in ARB stores), and the often heavy and bulky accessories can make delivery cost prohibitive.
  • ARB’s range of vehicle accessories have established significant brand strength, underpinning its narrow economic moat, allowing the firm to enjoy pricing power and high returns on invested capital.
  • ARB has opportunities for growth with store roll-outs in Australia and continued overseas expansion.

Company Profile

ARB Corporation designs, manufactures, and distributes four-wheel-drive and light commercial vehicle accessories. The firm has carved a niche with aftermarket accessories including bull bars, suspension systems, differentials, and lighting. ARB operates manufacturing plants in Australia and Thailand; sales and distribution centers across several countries. The Australian division, which generates the vast majority of group earnings, distributes through the ARB store network, ARB stockiest, new vehicle dealers, and fleet operators.

(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
IPO Watch

Since its IPO, shares of Aussie Broadband (ASX:ABB) have increased by about 50%.

The corporation is likely to outperform its FY21 prospectus prediction. In its brochure, Aussie Broadband indicated that its standardised EBITDA for FY21 would be $12.3 million. The costs associated with the company’s first public offering are excluded from normalised EBITDA (IPO).

Aussie Broadband now estimates standardised EBITDA for the entire year to be between $17 million and $20 million, following two upgrades — one in the half-year report and the other in late May. This might put you 63 percent ahead of the prospectus.

Significantly higher rates of growth in the retail and business areas, as well as good cost control and marketing rebates, are credited with the improvements. One potential flaw in that estimate is that it only thinks Victoria’s May snap lockout will last one week, when it was later extended for a second week. Due to increased broadband consumption, Aussie Broadband’s costs tend to rise during certain times. It’s unclear how much of an impact this will have on the company’s full-year EBITDA.

About Aussie Broadband

Aussie Broadband Ltd is a telecommunications company. It provides NBN subscription plans and bundles to residential homes, small businesses, not-for-profits, corporate/enterprise and managed service providers. The company services all states and territories in Australia.

Source: MSN

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

ASX welcomed three new IPOs

“With a total identifiable 1.1 million ounce JORC Mineral Wealth platform and 100% ownership of the area’s only gold mill, our goals are to illustrate the actual capabilities of this property package and maximise lengthy business value,” stated managing director Alexander Scanlon.

Wilson Asset Management Strategic Value (ASX:WAR)

This is the eighth LIC handled by Wilson and the second to list since COVID-19, following Salter Brothers’ listing earlier this month. It will, according to Wilson, benefit from the ability that the market has mispriced.

WAM Strategic Value seeks to produce exceptional risk-adjusted returns from a portfolio predominantly comprised of discounted asset opportunities identified utilising the established market-driven investment process we have created over the last two decades,” the company said in a statement to shareholders on Friday.

Camplify (ASX:CHL)

Campervan and motorhome renting community focused on the Australia and UK markets, completed the trio of new ASX IPOs that debuted today. Camplify went public after raising $11.5 million and reporting that its initial public offering (IPO) was almost four times oversubscribed, with customers being urged to acquire shares in the IPO and strongly supporting it. It is also supported by Apollo Tourism and Leisure (ASX:ATL), one of the ASX’s few other caravan specialists, who invested in the company in 2017 and now has a 17.8% share.

Source: MSN

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 Technical Picks

Vornado Should Benefit From New York’s Office Recovery

The company now generates about 90% of its net operating income from New York City. While the focus is certainly on premier office properties, Vornado continues to invest in high-quality retail. Around 60% of companywide NOI comes from New York office properties, with New York retail generating around one fifth of total NOI.

In contrast with its New York office REIT peers, Vornado has made a concentrated bet on developments in the Penn District submarket just east of the Hudson Yards megaproject. The new development should have positive knock-on effects by increasing foot traffic and rents, as the project adds activity to a once-drab slice of Manhattan. Despite investor concern about oversupply in the region and the spectre of a massive rise in remote work due to the coronavirus pandemic, New York will remain a hub for global talent in the long run. With its enviable roster of blue-chip office and retail tenants, Vornado should benefit from healthy rent collections despite the coronavirus crisis.

Vornado only owns two non-New York properties in well-located central business districts in Chicago and San Francisco. In San Francisco, 555 California Street has benefited from healthy tech office demand in a supply-constrained region. In Chicago, the Merchandise Mart has likewise performed well, emerging as a hub for tech office users in the Midwest. With the completion of the Art on the Mart digital exhibition in 2018, the building is set to continue to benefit from its great location and iconic status within the Chicago office market.

Financial Strength

We view Vornado’s balance sheet as a slight concern, with the firm carrying more debt than many of its already bloated office REIT peers. We forecast 2021 debt/adjusted EBITDA to be around 11 times, with adjusted EBITDA/interest of 3.4 times. We forecast debt/EBITDA to decline gradually over the next 10 years. As a real estate investment trust, Vornado Realty is required to pay out at least 90% of its income as dividends to shareholders. Vornado’s 2020 dividend payout represented an elevated 110% of its funds from operations figure, although this is slightly obscured by acute COVID-related cyclicality.

Company’s Megaproject

Vornado’s well-located portfolio of office and retail assets attracts the highest-quality tenants. Developments near the Hudson Yards megaproject should pay off as the company benefits from increased property values in that region. Vornado’s Chicago and San Francisco properties represent some of the best assets in those markets.

Company Profile

Vornado owns and has ownership interest in Class A office and retail properties highly concentrated in Manhattan, with additional properties in San Francisco and Chicago. It operates as a real estate investment trust.

(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

Burlington Should benefit by apparel Sales as Pandemic Ebbs and American Life Normalizes

). Although the present environment poses unique challenges, the off-price sector has performed well in such situations historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Burlington’s strong inventory management operations hold inventory turnover above that of full-price stores, driving traffic with a fast-changing assortment. We believe off-price chains are valuable to manufacturers looking to sell excess product, as they offer flexibility, prompt payment, and discretion by avoiding advertising the brands they carry (important to producers looking to protect conventional channel pricing power). Product availability should stay high, as vendors’ production forecasting is complicated by factors such as mercurial customer preferences, channel diffusion, and unpredictable weather.

We believe off-price retailers such as Burlington are better positioned than other physical sellers to fend off digital rivals. The treasure hunt experience and low-frills environment enable steep discounts relative to the full-price channel (up to 60% for Burlington), limiting price gaps. Shipping and return costs (in addition to vendors’ restrictions) also limit the discounts digital sellers can offer.

Financial Strength

Burlington had reduced leverage meaningfully since its 2013 initial public offering (fiscal 2013 net debt was around 3.3 times EBITDA, versus a 0.7 mark in fiscal 2019, before the pandemic), and we expect growth and ample cash flows to keep the balance sheet strong despite ambitious expansion plans. We expect Burlington will take more than a decade to reach its 2,000-unit footprint target, in addition to relocations of existing stores. Considering Burlington’s store network is mostly leased and its payback period averages less than three years, we expect the firm to dedicate around 4% of sales to capital expenditures over the next decade (roughly $500 million on average annually). We expect the firm will continue to return excess capital to shareholders via buybacks after a pandemic-related pause; however, we expect this to eventually be augmented by a dividend approaching 40% of earnings (which we forecast the firm to initiate in fiscal 2023). We assume roughly 45% of long-term annual operating cash flow is returned to shareholders via repurchases. Burlington could pursue acquisitions of regional chains or other concepts (including operations outside the United States) to accelerate its growth, though we do not incorporate any such purchases into our forecasts because of the uncertain timing and nature of any deal.

Bulls Say

-With low prices spurred by efficiency, relatively high inventory turnover, and a differentiated value proposition to customers, Burlington should be relatively well protected from digital rivals.

– As Burlington’s assortment shifts toward more advantaged categories for the off-price channel (such as ladies’ apparel and home), performance should continue to improve.

– Burlington should be able to downsize its locations’ average square footage as it adds new, smaller stores and relocates existing inefficient units, boosting margins and the customer experience.

Company profile

The third-largest American off-price apparel and home fashion retail firm, with 761 stores as of the end of fiscal 2020, Burlington Stores offers an assortment of products from over 5,000 brands through an everyday low price approach that undercuts conventional retailers’ regular prices by up to 60%. The company focuses on providing a treasure hunt experience, with a quickly changing array of merchandise in a relatively low-frills shopping environment. In fiscal 2020, 21% of sales came from women’s ready-to-wear apparel, 21% from accessories and footwear, 19% from menswear, 19% from home décor, 15% from youth apparel and baby, and 5% from coats. All sales come from the United States.

(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 Shares

Costco’s Sales Growth Remains Strong Even as Comparisons Become Harder, but the Shares Seem Rich

Its 21% revenue growth impressed considering the chain lapped the early days of the pandemic (which included significant customer stock-up activity), but we mostly attribute the results to transitory factors. So, our long-term forecast still calls for mid-single-digit percentage sales growth and 3%-4% adjusted operating margins. We suggest investors seek a more attractive entry price, particularly considering elevated uncertainty as the customer habits normalize.

Costco posted 15% comparable growth excluding fuel and foreign exchange, well ahead of our 8% target, with the outperformance likely a result of greater-than-expected demand for discretionary items and recovering warehouse traffic (stimulus likely also played a role). Costco’s 3.7% operating margin was about 50 basis points higher than its prior-year mark and our estimate, reflecting cost leverage and reduced pandemic-related expenditures.

We are encouraged that around 70% of orders of big, bulky items (generally higher-value items like furniture, exercise equipment, and electronics) are being fulfilled by Costco Logistics, which the company purchased in early 2020. We believe the shift to in-house fulfilment will lift the profitability of orders of such goods as well as delivery times and customer service levels. We also believe these larger items remain an opportunity for Costco to benefit from rising e-commerce penetration, allowing for a broader assortment than what is available in-warehouse. While we continue to expect that the core of the value proposition will remain instore (as much of Costco’s assortment skews toward bulky, low-priced consumer goods that are difficult to ship economically), we support the company’s targeted investments in expanding its digital capabilities, which also include its growing online grocery offering.

Costco Wholesale Corp Company Profile

The leading warehouse club, Costco has 795 stores worldwide (at the end of fiscal 2020), with most sales derived in the United States (73%) and Canada (13%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 42% of fiscal 2020 sales, with hardlines 17%, ancillary businesses (such as fuel and pharmacy) nearly 17%, fresh food 14%, and softlines 10%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 6% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

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® Emerging Markets Z FZEMX

He joined Fidelity in 2006 as an analyst, and then built strong track records at Fidelity Pacific Basin FPBFX from 2013 and Fidelity Emerging Asia FSEAX from 2017 until he became the successor to this fund’s previous manager in February 2019. Since taking over the following October, Dance has leaned on Fidelity’s deep emerging- markets analyst team for support, a strong group that continues to play a role here as Dance learns more about the emerging markets he didn’t invest in at his previous charges.

Dance, a successful regional strategy manager, still must show he can consistently apply his process to a broader universe. He’s a growth-oriented investor who buys four kinds of stocks–sustainable growers, niche companies, firms with macroeconomic tailwinds, and special situations–and holds them for three to five years.

Dance considers regional economics and macro views more than many of his peers, looking to accumulate exposure in regions or sectors in which he sees high growth potential. He turned defensive in February 2020 after learning of the coronavirus outbreak in China, selling expensive stocks like Brazilian investment manager XP while buying consumer staples stocks like Angel Yeast and healthcare stocks like Shenzhen Mindray.

The portfolio reflects Dance’s preferences. Its average holding has better profitability metrics and competitive advantages than those of its MSCI Emerging Markets Index benchmark and diversified emerging markets Morningstar Category. Such stocks often come at a cost: The portfolio’s average valuation measures like price/earnings, price/book value, price/sales, and price/cash flow are higher than those of its benchmark and typical peer. Despite some price risk, Dance has succeeded at his previous charges with this approach, so there’s reason for optimism.

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.