Category: Research

Categories
Global stocks Shares

Management Is Optimistic About GM’s Future, as shown by the dividend resumption

Business Strategy & Outlook

The General Motors with a competitive lineup in all segments, combined with a reduced cost base, finally enabled it to have the scale to match its size. The head of Consumer Reports automotive testing even said Toyota and Honda could learn from the Chevrolet Malibu. The GM’s earnings potential is excellent because the company has a healthy North American unit and a nearly mature finance arm with GM Financial. Moving hourly workers’ retiree healthcare to a separate fund and closing plants drastically lowered GM North America’s breakeven point to U.S. industry sales of about 10 million-11 million vehicles, assuming 18%-19% share. The more scale to come from GM moving its production to more global platforms and eventually onto vehicle sets over the next few years for even more flexibility and scale. GM makes products that consumers are willing to pay more for than in the past. It no longer has to overproduce trying to cover high labor costs and then dump cars into rental fleets (which hurts residual values). GM now operates in a demand-pull model where it can produce only to meet demand and is structured to do no worse than break even at the bottom of an economic cycle when plants can be open. The result is higher profits than under old GM despite lower U.S. share. It now seeks roughly $300 billion in total revenue by 2030 with about $80 billion from many new high-margin businesses such as insurance, subscriptions, and selling data, while targeting 2030 total company adjusted EBIT margin of 12%-14%, up from 11.3% in 2021 and 7.9% in 2020. The actions such as buying Cruise, along with GM’s connectivity and data-gathering via OnStar, position GM well for this new era. Cruise is offering autonomous ride-hailing with its Origin vehicle, and GM targets $50 billion of Cruise revenue in 2030. GM is investing over $35 billion in battery electric and autonomous vehicles for 2020-25 and is launching 30 BEVs through 2025 with two thirds of them available in North America. Management also targets over 2 million annual BEV sales by mid decade and in early 2021 announced the ambition to only sell zero-emission vehicles globally by 2035.

Financial Strengths

GM’s balance sheet and liquidity were strong at the end of 2021, apart from $11.2 billion in underfunded pension and other postemployment benefit obligations, an improvement from $30.8 billion at year-end 2014. Management targets automotive cash and securities of $18 billion and liquidity of $30 billion-$35 billion. As per the calculation that at June 30, GM had automotive net cash and securities, excluding legacy obligations but including Cruise, of $4.6 billion, about $3.15 per diluted share. Global pension contributions in 2022 are expected at about $570 million, with about $500 million of that amount for non-U.S. plans. Auto and Cruise debt at June 30 is $16.9 billion, mostly from senior unsecured notes and capital leases. Credit line availability is about $17.5 billion across three lines with one of those lines being a 364-day $2 billion line allocated exclusively to GM Financial. The other two automotive lines are a $4.3 billion line expiring in April 2024 and an $11.2 billion line. The $11.2 billion line has $9.9 billion available until April 2026 while the remaining portion is available until April 2023. GM fulfilled its UAW VEBA funding obligations in 2010. As per calculation 2021 automotive and Cruise debt/adjusted EBITDA at 1.3, excluding legacy obligations and equity income. Automotive debt maturities including capital leases are about $463 million in 2022.

Bulls Say

  • GMNA’s break even point of about 10 million-11 million units is drastically lower than it was under old GM. Earnings should grow rapidly as GM becomes more cost-efficient. 
  • GM’s U.S. hourly labor cost is about $5 billion compared with about $16 billion in 2005 under old GM. 
  • GM can charge thousands of dollars more per vehicle in light-truck segments. Higher prices with fewer incentive dollars allow GM to get more margin per vehicle, which helps mitigate a severe decline in light vehicle sales and falling market share.

Company Description

General Motors Co. emerged from the bankruptcy of General Motors Corp. (old GM) in July 2009. GM has eight brands and operates under four segments: GM North America, GM International, Cruise, and GM Financial. The United States now has four brands instead of eight under old GM. The company lost its U.S. market share leader crown in 2021 with share down 280 basis points to 14.6%, but the GM to reclaim the top spot in 2022 as 2021 suffered from the chip shortage. GM Financial became the company’s captive finance arm in October 2010 via the purchase of AmeriCredit.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

ARB retained a strong balance sheet with cash reserves of $52.7m and no debt at FY22-end

Investment Thesis:

  • Current trading multiples adequately price in the near-term growth opportunities, in our view. 
  • Experienced management team and senior staff with a track record of delivering earnings growth.  
  • Strong balance sheet with no debt at FY22-end.
  • Strong presence and brands in the Australian aftermarket segment.
  • Growing presence in Europe and Middle East and potential to grow Exports.
  • Growth via acquisitions

Key Risks:

  • Higher than expected sales growth rates. 
  • Any delays or interruptions in production, especially in Thailand which happens on an annual basis.
  • Increased competition in the Australian Aftermarket especially with competitors’ tendency to replicate ARB products.
  • Slowing down of demand from OEMs. 
  • Poor execution of R&D.
  • Currency exposure

Key Highlights:

  • FY22 Results Highlights. Relative to the pcp: Sales of $694.5m, was up $71.5m or +11.5% over the previous year sales of $623.1m. Continuing sales growth was strong, driven by Australian Aftermarket and Export categories, whilst sales to Original Equipment Manufacturers were in line with last year as previously communicated, and considering the significant +33.9% sales growth achieved in the prior year, despite management highlighting “continuing constraints in new vehicle availability and ongoing personnel and supply chain challenges”. Management noted “sales to the Australian Aftermarket and Export markets were significantly impacted in the second half by the emergence of the Omicron Covid-19 variant in January and February 2022, resulting in abnormally high staff absenteeism, and by ongoing limited new vehicle availability. Sales into Export markets were also impacted in the second half by the outbreak of war in Ukraine”. 
  • Profit before tax of $165.7m, up +10.4% was broadly in line with sales revenue growth of +11.5%.
  • Earnings (NPAT) of $122.0m, up +8.1% on the reported NPAT of $112.9m in the previous year.
  • Cash flows generated from operations of $84.6m declined by $18.6m compared with the previous year due to an increase in inventories of $50.7m as ARB looked to mitigate increased supply chain lead times and ongoing disruptions. 
  • ARB currently has a larger than normal capex programme due to the anticipated completion of the new 30,000 square metre factory in Thailand in December 2022, ongoing construction of the corporate head office in Melbourne, Australia, and development of ARB New Zealand site in Hamilton, New Zealand, to consolidate the Beaut Utes and Proform businesses. 
  • The Board declared a final fully franked dividend of 32.0cps, which brings total dividends to 71.0cps fully franked, up +4.4% compared with last year. 
  • ARB retained a strong balance sheet with cash reserves of $52.7m and no debt at FY22-end. 
  • Performance Highlights by Segment. ARB saw strong sales growth of 25.6% in 1H22, which contrasts to a small decline of -1.1% in sales in 2H22, compared with the pcp. Comparing 2H22 versus 1H22: Australian Aftermarket. Sales of $183m in 2H22 versus $191m in 1H22 represent a -4.0% decline. Australian Aftermarket sales remained relatively consistent at 53.8% of ARB’s sales. According to management, “new vehicle sales in Australia declined by 2.1% over the last financial year, however new vehicle sales of ARB’s target vehicles, being four-wheel drive utilities and SUVs, grew by 0.3%. Demand for second hand 4WD vehicles globally continues to be strong and product sales for used 4WD vehicles remains an important part of ARB’s business”. ARB opened four new stores in Melton and Sale, Victoria, in Rutherford, New South Wales, and in Karratha, Western Australia. This brings the total number of ARB stores to 74, of which 30 are Company owned. 
  • Export. Sales grew +17.4% over FY22 and represented 38.7% of ARB’s sales, up slightly on FY21. Sales of $131m in 2H22 versus $138m in 1H22 represent a -5.1% decline.  Over FY22, sales growth was achieved in all regions: the Americas, Asia/Pacific and the Rest of the World, despite constraints in new vehicle availability especially in the UK where ARB’s operations are heavily reliant on product fitment to new vehicles rather than fitment to used vehicles”. 
  • Original Equipment Manufacturers. Segment sales equate to 7.5% of ARB’s total sales. Despite sales of $21m in 2H22 versus $30m in 1H22 representing a -29.8% decline, ARB saw overall FY22 OEM sales growth of +0.2% after a record +73.9% sales increase last year. According to management, the decline in 2H22 OEM sales “was expected and reflects the timing of new contracts and OEMs stocking up during calendar 2021 for new model releases”.

Company Description:

ARB Corporation Ltd (ARB) designs, manufactures, distributes, and sells 4-wheel drive vehicle accessories and light metal engineering works. It is predominantly based in Australia but also has presence in the US, Thailand, Middle East, and Europe. There are currently 61 ARB stores across Australia for aftermarket sales.

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Blackmores has seen strong growth in its international segment

Business Strategy & Outlook

Blackmores’ customer profiles are very different in its two key markets, Australia and China. Vitamin-taking Australians tend to be older or females either before or during pregnancy, while in China the market is dominated by young, online shoppers who view international vitamin and dietary supplements as luxury purchases. Nonetheless, the importance of perceived product quality—largely

an extension of brand positioning—is common to both customer groups. Blackmores’ brand intangible assets support its narrow economic moat. Blackmores’ position within the core Australian market as stable and the market as well penetrated. Actual performance in Australia is clouded by informal exports of products purchased for the daigou channel and sent to China. In fiscal 2021, roughly 9% of ANZ sales were ultimately sent to China. While this contribution remaining below 10% due to coronavirus and regulatory changes requiring daigous to register as businesses and pay taxes, this will be offset by growth in the direct China segment.

China presents a large opportunity for Blackmores as it is the second-largest global VDS market after the U.S, and it will contribute roughly 30% of group revenue at mid-cycle. Other than the informal daigou trade, Blackmores primarily distributes into China via cross-border e-commerce where the product is sold on online platforms. Further opportunity lies in establishing a sizable offline retail business, but this hinges on the company obtaining regulatory approval. Blackmores has seen strong growth in its international segment, which now contributes more to earnings than the China segment

and is forecast to remain larger. The segment is largely composed of regions in Southeast Asia including Malaysia, Thailand and Indonesia. Blackmores aims to continue the momentum after entering India in 2021 and gaining halal accreditation to serve Muslim consumers, particularly in Indonesia.

Financial Strengths

Blackmores is in a solid financial position with net cash of AUD 92 million as at June 2022. It should maintain its net cash position over the forecast period and afford a 45% dividend payout ratio. Free cash flow conversion of net income has averaged 102% over the preceding five years (before acquisitions), above the average 54% dividend payout ratio. Free cash conversion of net income to average 93% over the next five years.

Bulls Say

  • A reputation for quality is fundamental in the VDS market and Blackmores’ reputation is untarnished.
  • Bar fiscal 2020, the company has earned returns on invested capital well above its single-digit cost of capital, demonstrating its brand strength and associated pricing power.
  • Blackmores’ new CEO brings experience in navigating international brand sales and distribution in Asian markets which should allow the company to progress its business outside of Australia.

Company Description

Blackmores is a leading Australian vitamin and health supplement manufacturer and is the larger of two major vitamin brands by market share in Australia. Overseas sales also contribute a significant amount to earnings, particularly from Southeast Asia and the Chinese market via both formal (cross-border e-commerce) and informal (daigou) sales channels.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

The Continued Recovery of the Hotel Industry Will Drive High Growth for Park Hotels

Business Strategy & Outlook

Park Hotels & Resorts is the second largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all the international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper upscale hotels that should help to diversify Park’s hotel brands to include Marriott, Hyatt, and IHG hotels. In the short term, the coronavirus significantly impacted the operating results for Park’s hotels with high-double-digit RevPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations across the country allowed leisure travel to quickly recover, leading to significant growth in 2021 and 2022. The company should continue to see strong growth as business and group travel also recover to Prepandemic levels with Park eventually returning to 2019 levels by 2024. However, the hotel industry will continue to face several long-term headwinds. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing Park from pushing rate increases. Finally, while the shadow supply created by Airbnb doesn’t directly compete with Park on most nights, it does limit Park’s ability to push rates on nights where it would have typically generated its highest profits. Still, the Park does have some opportunities to create value. Management has only had control of the portfolio for three years, and there is some additional growth that can be squeezed out of current renovation projects. The Chesapeake acquisition should provide an additional source of growth as the company drives higher operating efficiencies across this new portfolio. The pandemic could create additional opportunistic ways for Park to grow the portfolio.

Financial Strengths

Park is in solid financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which will serve stakeholders well. Park does not currently have an unsecured debt rating. Instead, Park utilizes secured debt on its high-quality portfolio. Currently, the majority of Park’s debt is secured by five of its largest hotels, leaving Park with 39 consolidated hotels that are free of debt encumbrance. Even if Park is unable to pay its debt obligations, the company can return the collateral secured by its debt to the lenders and proceed with its unencumbered business essentially debt free. That said, debt maturities in the near term should be manageable through a combination of refinancing, the company’s free cash flow, and the large cash position Park currently has on their balance sheet. Additionally, the company should be able to access the capital markets when acquisition opportunities arise. In 2024, which is the year hotel operations should return to normal, net debt/EBITDA and EBITDA/interest will be roughly 4.1 and 4.2 times, respectively, both of which suggest that the company should weather any future economic downturn and that it would be able to selectively acquire assets as the market recovers. As a REIT, Park is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cashflow from operating activities, providing Park plenty of flexibility to make capital allocation and investment decisions. The Park will continue to be able to access the capital markets given its current solid balance sheet and its large, higher-quality, unencumbered asset base.

Bulls Say

  • Potentially accelerating economic growth may prolong a robust hotel cycle and benefit Park’s portfolio and performance. 
  • Low leverage gives Park greater financial flexibility to be opportunistic with new investments or return more capital to shareholders through dividend growth or share buybacks. 
  • Park’s management identified several enhancement initiatives that it can execute to drive EBITDA higher on the newly acquired Chesapeake portfolio.

Company Description

Park Hotels & Resorts owns upper-upscale and luxury hotels with 27,224 rooms across 45 hotels in the United States. Park also has interests through joint ventures in another 4,297 rooms in seven U.S. hotels. Park was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017, so most of the company’s hotels are still under Hilton brands. The company has sold all its international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Megaport has a stronger focus on growing revenue and EBITDA margins rather than chasing growth at any cost

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and datacenter regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take a number of years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Cash balance of $82.5m plus access to a $25m credit facility, management is confident in achieving positive FCF. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.
  • MP1 has reported attractive trends in LTV to CAC ratio and customer churn (declining churn will also drive LTV to CAC ratio higher). 
  • Management has a stronger focus on growing revenue and EBITDA margins rather than chasing growth at any cost. 

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key Highlights:

  • FY22 results summary. Group revenue was up +40% to $109.7m, driven by growth across regions with the North American market (NAM) delivering the largest growth at +49% YoY to $57.8m. American is MP1’s single biggest contributor to NAM and accounted for 51% of group revenues in June-22, with the majority of the contracts now denominated in U.S. dollars (USD). Monthly Recurring Revenue (MRR) of $10.7m at the end of June-22 was up +43% YoY suggests solid momentum going into FY23. Revenue performance by region: North America up +49% to $57.8m; Asia Pacific up +30% to $33.5m; and Europe up +33% to $18.4m.
  • key operating metrics performance YoY – data centres up +3% to 787; Cloud On Ramps up +19% to 278; Ports up +24% to 9,545; Megaport Cloud Router (MCR) up +46% to 731; Megaport Virtual Edge (MVE) up +248% to 73; and Total Services up +26% to 27,383. 
  • Gross profit (profit after direct network cost and partner commissions) was up +62% to $68.3m, with GP margin improving +800bps to 62%. Direct network costs were up +8% YoY with 26 new data centres added to the network and capacity upgrades on intra-regional routes. Partner commissions were up +36% YoY, in line with revenue growth and expected to grow as Company builds momentum in the indirect sales channel. Normalised operating earnings (EBITDA) loss of $10.2m was +23% above FY21 loss of $13.3m, with margin improving from -17% to -9%. Operating expenses of $78.5m were up +42% YoY driven by investments in Scale Up and Scale Out projects. Management noted 4Q22 EBITDA was positive with the business starting to realise the benefits from operating leverage. The Company ended the year with cash and equivalents position of $82.5m, down from $136.3m in pcp. However, the Company remains well funded and has access to a $25m credit facility to provide additional flexibility.
  • Tightening the belt and focusing on margins. Other key items of note from the results: There is a strong focus on growing revenue and EBITDA margins in FY23, which is a positive in the current environment where investors are questioning the ability of high growth companies to deliver margin and profit growth. The group exit EBITDA margin for 4Q22 was positive – Group 5%, APAC 64%, EMEA 45% and NAM 23%. Further, with the current cash and credit facility, management is confident in achieving positive FCF. 
  • Management provided good colour around customer churn, showing a significant drop in customer churn after 2 years. Overall, MP1 has a customer churn of approx. 7% p.a. and is expected to continue to decline. 
  •  MP1 reported LTV (Lifetime Value) to CAC (Customer Acquisition Cost) ratio of 6.3x for FY22, which is below FY21 levels as MP1 invested in additional sales capabilities (indirect sales channel). Nonetheless this is an attractive LTV-CAC ratio, and, with a declining customer churn, management expects this ratio to trend higher going forward.  

Company Description:

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Bread Financial Faces Challenges as It Looks to Resume Growth After Spinning Off Assets

Business Strategy & Outlook

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private label credit cards and buy now-pay later businesses being its only two product lines. However, Bread’s retail credit card business is under pressure. The company has historically targeted midsize retailers for its partnerships. This strategy has led to a partnership base that is weighted toward mall-based retailers, which are in decline due to increased online shopping. Many of Bread’s retail partners have already filed for bankruptcy, including the Ascena Retail Group in July 2020 and Forever 21 in 2019. Bread has also suffered defections, losing Wayfair and Meijer to Citi in 2020 and BJ’s Wholesale Club to Capital One at the start of 2022. The retail partner loss is an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

Bread must also now contend with rising competitive threats from buy now-pay later firms, which are targeting the U.S. retail market and seek to sign agreements with Bread’s partners. These firms are still a relatively small part of U.S. retail, but Bread takes the threat seriously. The company’s acquisition of the original Bread, a buy now pay later company, as well its decision to adopt its name as its own was done with the intent of accelerating the deployment of its own competing offering. As part of the spinoff of LoyaltyOne, Bread used the proceeds from the transaction to reduce its considerable debt load. This strategy favorably as Bread is heavily leveraged, especially when considering the low credit quality of its receivable portfolio, which has historically seen net charge-offs well above industry averages. More needs to be done to put Bread in a good financial position, but the spinoff and the related debt reduction are a material improvement to Bread’s balance sheet. However, this does place Bread in an awkward position should credit conditions deteriorate industry wide, as the bank is among the most credit sensitive firms that cover.

Financial Strengths

When viewed as a single consolidated company, Bread Financial is a heavily leveraged firm. Bread finished 2021 with a tangible asset to tangible equity ratio of 15.1. The company accomplished this leverage by holding its banks as subsidiaries and keeping around $2 billion of its debt at the parent level. With the spinoff of LoyaltyOne now complete there are no longer any revenue-generating assets held at the parent level, and Bread will need to reconsolidate itself as a single entity or have its subsidiary banks make regular distributions up to the parent company to support its debt. The banks themselves are well capitalized with $3.3 billion in equity and a combined common equity Tier 1 ratio of 20.1% as of the end of June 2022. However, the banks are guarantors of the parent company’s debt, and the company will likely have to rely on further distributions from the banks. The degree of leverage also restricts Bread’s flexibility to invest in its businesses and respond to competitive threats. One of the key reasons that Bread sold its Epsilon business was that the firm did not believe it had the ability to make the kind of investments necessary to support the enterprise. There is precious little room for the company to maneuver, and its debt costs have already risen. In late 2020, the company issued 7% unrated debt to do a partial paydown of its credit line, which at the time was costing the company roughly 1.9%. The debt paydown that was a part of the LoyaltyOne spinoff, and in the future, one would like to see the company continue to manage its debt levels, particularly as economic fears intensify.

Bulls Say

  • Bread Financial’s restructuring efforts have been highly successful at reducing the company’s costs. This has allowed it to adjust effectively for its smaller size and retain profitability. 
  • Many of Bread Financial’s partners rely on it for data collection and loyalty programs. Switching costs protect these partnerships from competitive threats. 
  • The company’s credit card business is well capitalized, which will help protect the firm if credit results deteriorate.

Company Description

Formed by a combination of J.C. Penney’s credit card processing unit and The Limited’s credit card bank business, Bread Financial is a provider of private label and co-branded credit cards, loyalty programs, and marketing services. The company’s most financially significant unit is its credit card business that partners with retailers to jointly market Bread’s credit cards to their customers. The company also retains minority interest in its recently spun off LoyaltyOne division, which operates the largest airline miles loyalty program in Canada and offers marketing services to grocery chains in Europe and Asia.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

RMD Delivered Another Solid FY22 and Quarterly Results

Investment Thesis:

  • Global leader in a significantly under-penetrated sleep apnea market. 
  • High barriers to entry in establishing global distribution channels. 
  • Strong R&D program ensuring RMD remains ahead of competitors.
  • Momentum in new mask releases. 
  • Bolt-on acquisitions to supplement organic growth.
  • Leveraged to a falling Australian dollar. 

Key Risks:

  • Disruptive technology leading to better patient compliance.
  • Product recall leading to reputational damage.
  • Competitive threats leading to market share loss.
  • Disappointing growth (company and industry specific).
  • Adverse currency movements (AUD, EUR, USD).
  • RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation.

Key Highlights:

  • 4Q22 group revenue of $915m was up +4% YoY (or up +8% in constant currency), driven by Americas Devices (up +11%) and Americas Masks & Other (up +13%). Revenue growth was driven by demand and competitor’s ongoing product recall. RMD did not drive any incremental revenue from Covid-19 related demand during the quarter versus the $20m benefit in the prior year quarter. Excluding the impact of Covid-19 related demand in the prior year, revenue increased by +10% on a constant currency basis. Rest of the World (RoW) revenue was a drag on group performance over the quarter (negatively impacted by currency), with RoW Devices down -10% YoY and RoW Masks & Other down -4% YoY.
  • Operating gross profit margin increased by 50bps to 57.8% in the June quarter, driven by improvement in average selling prices (ASP) in a positive product mix (higher margin high acuity patients), which was partially offset by higher freight and manufacturing costs, negative geographic mix and unfavourable foreign currency movements.
  • SG&A expenses for the fourth quarter increased by +7% or in constant currency terms increased by +11% over the June quarter, driven predominantly by increases in employee-related costs and T&E expenses. R&D expenses for the quarter increased by 7% or in constant currency terms increased by 11%.
  • Operating profit (EBIT) for the June quarter increased by +4% to $271.5m, driven by revenue growth and gross profit margin improvement, partially offset by higher operating expenses. Effective tax rate for the June quarter was 17.6% versus 21.5% in the prior year quarter.
  • NPAT for the quarter increased by +10% to $219.2m and diluted earnings per share for the quarter of $1.49 was also up +10% YoY. 
  • RMD ended the fourth quarter with a cash balance of $274m. As at June-30, RMD had $780m in gross debt and $500m in net debt. As at June-30, RMD had approximately $1.4bn available for drawdown under their revolver facility.

Company Description:

ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio). 

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health

Business Strategy and Outlook 

As a new public company, Bausch & Lomb will be primarily focused on ramping up research and development to become more competitive in its key markets of contact lens and solution, eyecare surgery, and ophthalmic pharmaceuticals. Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health since the collapse of the historical Valeant business, which drew both financial resources and time from senior leadership. With Joe Papa moving to Bausch & Lomb as CEO, the company will have a leadership team that is already very familiar with the business, both areas of strength and product lines that may require more investment. While the near-term results are sure to be lumpy as Bausch finds its footing as public company and incurs short-term separation costs, the business should achieve consistent profitability in the longer term—justifying the narrow economic moat rating—and even if growth continues to trail peers, the returns on invested capital to remain at a decent level, further evidence of underlying business strength.

Bausch’s research and development efforts to focus initially on the contact lens, cataract equipment, and intraocular lens markets. The contact lens business is a market that requires consistently high rates of investment, and Bausch recently entered the daily silicone hydrogel sub-market with the launch of its premium Infuse lens. This lens will be further expanded for toric and presbyopia patients within the next few years. In the surgical space, Bausch trails market-leader Alcon with an approximate 20% share in cataract and vitrectomy (compared with Alcon’s 50%), and the company is overdue for a launch of a new phacoemulsification system, as well. A new phaco launch within five years, which should provide a boost to growth and profits considering the high-margin nature of newer systems. Bausch currently does not have much of a presence in premium intraocular lenses, and also it will be a main research focus for Bausch as the company attempts to play catch up with its peers.

Financial Strength

Bausch & Lomb has adequate financial strength. Following the spinoff from Bausch Health, the company will hold about $2.5 billion of debt with an additional $500 million on a revolver, and the firm will have debt/EBITDA leverage of about 2.9 times. While this is higher than the initial post-spinoff leverage target of 2.5 times, current leverage is reasonable, and the company will work to somewhat reduce leverage over the next few years from free cash flow, it will average over $500 million per year through the five-year explicit forecast period. Interest coverage ratios remain high, as well. The operating income to exceed 2.5 times interest costs for the foreseeable future, and the interest coverage to rise over time. On the other hand, though, some risk related to rising interest rates, which may increase interest expense over time, considering that Bausch’s $2.5 billion term loan is a floating debt instrument. Still, on balance, it  does not show that Bausch faces material financial risk, and the firm would be able to handle any marginal increases in debt service costs

Bulls Say’s

  • As a standalone public firm, Bausch & Lomb will have the necessary financial flexibility to make investments for the longer term, and patient investors could be rewarded. 
  • Bausch & Lomb stands to benefit from several secular trends in eyecare: an increasing prevalence of myopia, demand for better eye care from a growing middle class in emerging markets, and an aging population. 
  • Investors’ worry about Bausch & Lomb’s potential exposure to Bausch Health debts is misplaced, as the firm now operates as a separate legal entity and therefore should be valued as an independent company.

Company Profile 

Bausch & Lomb, headquartered in Laval, Quebec, Canada, is the fourth-largest vision care company by sales in the United States and the market leader in consumer vision care in India and China. The firm, which was previously a subsidiary under parent company Bausch Health, was spun off to become a public company once again in May 2022. The firm reports in three segments—vision care and consumer (60% of revenue), surgical (20%), and ophthalmic pharmaceuticals (20%). The company is geographically diversified, with 48% of revenue in the Americas, 30% from EMEA, and 22% from Asia-Pacific countries.

 (Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

CNH Industrial Posts Solid Second-Quarter Results, Despite Supply Headwinds

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy & Outlook

CNH Industrial provides customers an extensive product portfolio of off-highway products. The CNH will continue to be a top-two player in the agriculture industry. For generations, the company’s agriculture equipment has garnered intense brand loyalty among farmers. Customers value CNH Industrial’s high-quality and strong performing products, in addition to its robust dealer network. In developed markets, CNH Industrial helps customers reduce the total cost of ownership through improved fuel efficiency, limited machine down-time and consistent parts availability. The company’s off-highway strategy manufactures agriculture and construction equipment. CNH addresses the agriculture market with three brands: Case IH (targets large grain farmers) and New Holland (serves small grain, livestock farmers) make full lines of agriculture equipment, while Steyr is mainly a tractor manufacturer. The agriculture business is well positioned to compete with peers, but the construction business will need to optimize its dealer network, product portfolio and manufacturing operations to be competitive.

 In early 2022, CNH spun off its on-highway business. The commercial vehicles and powertrain businesses will be owned by the Iveco Group. This decision was a prudent move for shareholders. With the demerger, management will now shift its focus to the more profitable, off-highway business. As a strong number-two player in agriculture markets, the CNH maintains its market share over smaller local and regional competitors with its full line of agriculture machinery. In addition, the company’s high exposure to agriculture markets will bode well, as demand for new machinery will remain robust in the near term. CNH Industrial has exposure to end markets that have attractive tailwinds. In agriculture, demand for crops will be strong in the near term, largely due to robust demand from China and tight global supplies. In construction, the increased infrastructure spending in the U.S. will be a benefit in the near term.

Financial Strengths

CNH Industrial maintains a sound balance sheet. Outstanding industrial debt (excluding Iveco Group) at the end of 2021 stood at $9.2 billion. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total finance arm debt came in at $15.9 billion in 2021, along with $19.4 billion in finance receivables and over $800 million in cash. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at $4.3 billion on its industrial balance sheet. The comfort in CNH Industrial’s ability to tap into available lines of credit to meet any short-term needs. The company has access to $3.9 billion in credit facilities. CNH Industrial maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects. They think CNH Industrial can generate solid free cash flow throughout the economic cycle. The company can generate over $1 billion in free cash flow in mid cycle year, supporting its ability to return free cash flow to shareholders, mostly through dividends. Additionally, the management is determined to rationalize its product portfolio and manufacturing operations. The company is working to reduce a significant portion of its products in the construction business, refocusing their efforts on higher volume models. This will allow CNH Industrial to run leaner in its manufacturing operations. If successful, this will put CNH Industrial on much better footing from a cost perspective, further supporting its ability to return cash to shareholders.

Bulls Say

  • Higher crop prices increase farmers’ profitability, allowing them to purchase new agriculture equipment, which substantially boosts CNH Industrial’s revenue growth. 
  • CNH Industrial will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand have eased, encouraging farmers to refresh their machine fleet. 
  • CNH improves the construction business by optimizing the product portfolio and dealer network. Additionally, increased infrastructure spending in the U.S. and emerging markets leads to more construction equipment purchases.

Company Description

CNH Industrial is a global manufacturer of heavy machinery, with a range of products including agricultural and construction equipment. One of its most recognizable brands, Case IH, has served farmers for generations. Its products are available through a robust dealer network, which includes over 3,600 dealer and distribution locations globally. CNH Industrial’s finance arm provides retail financing for equipment to its customers, in addition to wholesale financing for dealers; which increases the likelihood of product sales.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Penske Automotive Group receives over 90% of its light-vehicle dealer revenue from import and luxury brands

Business Strategy & Outlook

Penske Automotive Group receives over 90% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm’s operating margin tends to be on the lower end of the publicly traded dealers. Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business–a 100% gross margin business–as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske’s SG&A ratio is competitive. 

Penske has heavy-truck distribution in Australia and New Zealand, 39 truck dealers in the U.S. and Canada, and 21 CarShop used-vehicle stores in the U.S. and U.K. with 40 targeted by 2023. Total company pretax income is targeted at $1 billion by then, up 41% from 2020 but less than 2021’s $1.6 billion. The National Automobile Dealers Association reports that as of 2021, the number of U.S. new-car dealerships was 16,676, down from 25,025 in 1987. This highly fragmented industry is always consolidating because smaller players cannot compete with the scale of the public franchise dealers. Parts and service was only 10% of 2021 retail automotive revenue but made up 34% of gross profit. This significant contribution to profitability is less volatile than new- and used-vehicle sales and will continue to mitigate the cyclical risk of the auto industry. Large dealers are enjoying a growing competitive advantage for repair work because the increasingly advanced technology of cars presents an obstacle for smaller repair shops that are less able to afford the equipment and training needed to provide competent service. Consumers incur search costs (most notably time) to get many service estimates, which makes it more likely that they will keep going to the dealer.

Financial Strengths

EBIT covered interest expense was 13.7 times in 2021, up from about 3 times during the Great Recession. At year-end 2021, Penske has one large debt maturity over the next few years, which is $550 million of 3.5% notes due in September 2025. The company issued $500 million of 3.75% 2029 senior subordinated notes in second-quarter 2021 to fully redeem the $500 million 5.50% 2026 notes. Total credit line availability at June 30 was about $1 billion and a mortgage line has an additional $142.8 million available. Debt/EBITDA at June 2022 was under 1 times from 4.7 at year-end 2008 due to debt reductions and turbocharged earnings. Management has reduced debt by nearly $1 billion since the end of 2019. Penske’s non-floor-plan debt financing mostly comes from bank lines in the U.S. and U.K. The U.S. facility is $800 million of revolving loans for working capital, acquisitions, capital expenditures, and other purposes. The facility matures Sept. 30, 2024, and had no balance outstanding at the end of June. The U.K. facility has two parts: a GBP 150 million revolver expiring in December 2023 and a GBP 52 million overdraft line of credit. It also has a GBP 100 million accordion clause to request more capacity if required. As of June 30 there were no borrowings on the U.K. facility. At June 30, availability was $800 million on the U.S. facility, GBP 162 million on the U.K. facility, and AUD 40 million on an Australian line. The company has about AUD 30 million outstanding on loan agreements in Australia. The Penske Corporation or other Roger Penske-controlled entities could provide additional liquidity if needed but one can see the firm in good financial health with what one can see as ample room to take on debt for a large acquisition if needed.

Bulls Say

  • Auto dealerships are stable, profitable businesses with a diversified stream of earnings coming from parts, service, and used cars. 
  • Parts and service revenue should continue to be lucrative over time because most manufacturers require warranty work to be done at the dealership, and large dealers can more easily afford the technology and training needed to service increasingly more complex vehicles. 
  • Penske is well suited to acquire dealerships because many small dealers do not want to keep paying expensive facility upgrades mandated by the automakers.

Company Description

Penske Automotive Group operates in about 20 U.S. states and overseas. It has 152 U.S. light-vehicle stores including in Puerto Rico as well as 180 franchised dealerships overseas, primarily in the United Kingdom. The company is the second-largest U.S.-based dealership in terms of light-vehicle revenue and sells more than 35 brands, with over 90% of retail automotive revenue coming from luxury and import names. Other services, in addition to new and used vehicles, are parts and repair and finance and insurance. The firm’s Premier Truck Group owns 39 truck dealerships selling mostly Freightliner and Western Star brands, and Penske owns 21 CarShop used-vehicle stores in the U.S. and U.K. The company is based in Michigan and was called United Auto Group before changing its name in 2007.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.