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ETFs ETFs

Vanguard Information Technology ETF: Fund Remains Fully Invested

Investment Approach

  • Seeks to track the performance of the MSCI US Investable Market Information Technology 25/50 Index. 
  • Multi Capitalization equity in the information technology sector. 
  • The fund employs a passively managed, full-replication strategy when possible. 
  • If regulatory constraints prevent full replication, the fund uses a sampling strategy to approximate the index’s key characteristics. 
  • The fund remains fully invested. 
  • Low expenses minimize net tracking error.

Fund Management

Vanguard Information Technology ETF seeks to track the investment performance of the  MSCI US Investable Market Information Technology 25/50 Index, an index of stocks of large, medium-size, and small U.S. companies in the information technology sector, as classified under the Global Industry Classification Standard (GICS). This GICS sector is made up of companies in the following three general areas: internet services and infrastructure companies, including data centers and cloud networking and storage infrastructure; companies that provide information technology consulting and services, data processing, and outsourced services; technology hardware and equipment, including manufacturers and distributors of communications equipment, computers and peripherals, electronic equipment, and related instruments; and semiconductors and semiconductor equipment manufacturers. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund may also sample its target index by holding stocks that, in the aggregate, are intended to approximate the index in terms of key characteristics, such as price/earnings ratio, earnings growth, and dividend yield. Typically, the fund will use a sampling strategy only if regulatory constraints or other considerations prevent it from replicating the index. Vanguard’s Equity Index Group uses proprietary software to implement trading decisions that accommodate cash flows and maintain close correlation with index characteristics. Vanguard’s refined indexing process, combined with low management fees and efficient trading, has provided tight tracking net of expenses. 

Portfolio

Performance 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

About Fund:

Vanguard Information Technology ETF is an exchange-traded fund incorporated in the USA. The ETF tracks the performance of the MSCI US Investable Market Information Technology Index holding technology stocks of all cap sizes. Its investments are focused in the U.S. and on computer, software, and internet companies.

(Source: vanguard, Bloomberg)

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

Sonic will have scale relative to a small dealer and can get better terms from vendors for supplies

price of btc is going to breakout

Business Strategy & Outlook

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy. In October 2013, Sonic announced its intention to compete with CarMax in used vehicles with EchoPark used-vehicle stores. 

The U.S. used-vehicle market is highly fragmented at about 40 million units a year, with late-model used vehicles as old as six years often making up at least 15 million units, so there is certainly room for both firms to pursue their strategies. Openings started in late 2014 in the Denver area and as of March 2022, the EchoPark segment has 47 stores with plans to add 25 a year between 2021 and 2025. It will take time for EchoPark to reach the scale to compete with CarMax’s over 220 stores. The stores will not have a big-box retail format and are not capital-intensive due to most eventually being delivery and buy centers that only cost $1 million-$2 million each. These centers will be served by larger hub stores in a region that each cost between $7 million and $25 million. EchoPark will not do home delivery. Sonic does not plan a captive finance arm like CarMax enjoys. In July 2020, management announced a $14 billion 2025 revenue target for EchoPark, up from $2.3 billion in 2021, with 140 nationwide points. This is not impossible because EchoPark intentionally undercuts competitors on price, then recovers a small loss on the vehicle by arranging loans with third-party lenders and selling extended warranties, targeting over $2,000 gross profit per unit. In 2021, Sonic said it is reviewing alternatives for EchoPark. Sonic will have scale relative to a small dealer and can get better terms from vendors for supplies, computer systems, and health insurance compared with a small dealer. It also captures lucrative service workover repair shops through its warranty business.

Financial Strengths

Sonic’s largest debt maturity at year-end 2021 through 2026 is $118.2 million in 2024, mostly from about $90 million of mortgage line borrowing coming due in November. The credit facility matures in April 2025 and is undrawn at the end of 2021 with $281.4 million available for borrowing. Total liquidity at the end of 2021 is $702.8 million including $299.4 million of cash. Management has told us that the used floorplan line is like a revolver. Net Debt/adjusted EBITDA was about 1.80 times at year-end 2021. Leverage in 2019 declined from about the 3.7 times level thanks to the early redemption of the firm’s $289.3 million 5% notes due in May 2023. Sonic also has $346.2 million of mortgage notes with 62% of the balance at fixed rates ranging between 2.05% to 7% and maturities at various dates through 2033. The company owns about half its real estate, but has not disclosed how much unencumbered real estate it has. In October 2021, Sonic issued $1.15 billion of 2029 ($650 million at 4.625%) and 2031 notes ($500 million at 4.875%) to help fund the $950 million purchase of RFJ Auto Partners in December 2021, but no one is concerned about balance sheet health. The firm’s debt profile is not going to be a challenge for management to maintain.

Bulls Say

  • Auto dealerships are well-diversified businesses that have lucrative parts and servicing operations, which help them be profitable in almost any environment. 
  • EchoPark could prove to be a very lucrative business this decade if it can scale up. 
  • Sonic has the potential to generate significant economies of scale as vehicle demand rebounds and if EchoPark grows.

Company Description

Sonic Automotive is one of the largest auto dealership groups in the United States. The company has 110 franchised stores in 17 states, primarily in metropolitan areas in California, Texas, and the Southeast, plus 47 EchoPark and Northwest Motorsport brand used-vehicle stores. In addition to new and used-vehicle sales, the company derives revenue from parts and collision repair, finance, insurance, and wholesale auctions. Luxury and import dealerships make up about 88% of new-vehicle revenue, while Honda, BMW, Mercedes, and Toyota constitute about 60% of new-vehicle revenue. BMW is the largest brand at over 26%. 2021’s revenue was $12.4 billion, with EchoPark’s portion totaling $2.3 billion. Sonic bought RFJ Auto in December 2021, which added $3.2 billion in 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
Shares Small Cap

Sprout’s Turnaround is Unlikely to Result in Much Profitability Improvement Due to Competition

Business Strategy & Outlook:   

Sprouts has capitalized on a natural, health-oriented positioning aligned with culinary trends, but the company believes it faces a competitive onslaught as conventional grocers, mass merchandisers, hard discounters, and online sellers target the same themes. Without the cost leverage of the largest grocers, Sprouts will face continued intense price pressure. Amazon’s 2017 purchase of Whole Foods remains a threat, as the digital juggernaut’s procurement strength and distribution efficiency can fuel price cuts that upend Sprouts’ value proposition (a produce-oriented store featuring fresh, affordable items). Sprouts has room for store growth, but the company believes the ensuing cost leverage will need to be used to keep pace with price cuts in an industry favoring larger firms that can spread fixed costs and omnichannel investments over the broadest possible sales base. 

Sprouts relies on Instacart for its delivery and click-and-collect efforts. While the partnership is prudent given Sprouts’ size, it imposes costs that larger firms can mitigate by fulfilling digital orders internally. Delivery can extend Sprouts’ appeal to customers that do not regularly drive past a store, but the channel is margin-dilutive even for firms that are able to scale costs over a much larger sales base. Although the COVID-19 outbreak has lifted near-term demand as shoppers spend more time at home, increased digital transactions could linger, shifting sales into a less lucrative channel long term. New leadership began revitalization work in earnest in early 2020, attempting to stabilize declining operating margins (6.8% in 2014 versus 3.9% in 2019) and optimize an inefficient expansion strategy. While it is expected that the management will hit its long-term low-single-digit comparable sales growth goal, its low-double-digit adjusted EPS expansion target will be harder to achieve, even after considering share buybacks (forecast is in the mid- to high single digits). Nonetheless, the efforts should provide ammunition to fight unending price battles against intensifying competition as large retailers encroach on Sprouts’ natural and health-oriented turf.

Financial Strengths:  

Sprouts’ financial health strikes us as sound. Net debt was around 1.4 times adjusted EBITDA at the end of fiscal 2019, before the pandemic-related sales spike nearly erased Sprouts’ net debt by the end of fiscal 2020 (with a similar outcome at the end of fiscal 2021) Sprouts will continue to open stores, although management slowed growth in fiscal 2020 as it optimized new unit size and layout. Company foresees mid- to high-single-digit percentage unit count expansion annually over the next decade, with Sprouts exceeding 700 stores (from 374 at the end of fiscal 2021). Store opening costs are modest (roughly $3.6 million net cash investment for the average new unit; the number should dip to around $3.2 million as new management favors smaller, simpler locations), and Sprouts to fund its growth internally. Company expects capital expenditures to average 3% of sales long term. Despite the growth, free cash flow to the firm should average 2%-3% of sales long term (similar to fiscal 2019’s 3.2%; 2020-21’s 5% average mark was inflated on account of the pandemic) amid intense competition. Sprouts enjoys flexibility as it can adjust store growth plans to suit market conditions; while it spent $81 million in fiscal 2021 on capital expenditures (net of landlord reimbursements), it is suspected that about half was for new stores, leaving roughly $40 million for sales initiatives, remodels, infrastructure, and maintenance (which is sufficient as its stores are fairly new). It is anticipated that management will direct excess cash to share repurchases. The model assumes 45% of operating cash flow is dedicated to buybacks long term. Sprouts could also consider bolt-on acquisitions to accelerate its store growth; the forecast does not incorporate such transactions due to their uncertain timing and nature.

Bulls Say: 

  • Sprouts’ health and value-oriented concept is on trend, consistent with customers’ desire to eat foods that are less processed and contain more naturally derived ingredients. 
  • As a fairly new chain, Sprouts’ relatively small stores feature layouts that are consistent with newer consumer demand trends, such as centrally located fresh produce and robust prepared food and grab-and-go offerings. 
  • Sprouts has ample room for growth as it boosts its penetration in existing markets and extends its footprint elsewhere in the United States.

Company Description:  

Sprouts Farmers Market is an American specialty grocer offering an assortment highlighting fresh and naturally derived products. Its offerings are especially focused on produce, which constituted around 21% of sales in fiscal 2021. Founded in 2002, the chain is most heavily concentrated in California, which accounted for over one third of its 374 stores as of the end of fiscal 2021. All of the company’s operations are in the United States, with its stores largely located in the southern half of the country. The firm sells roughly 20,000 products (of which around 70% are attribute driven, such as organic, plant-based, or catering to the keto or paleo diet), with private-label products accounting for about 16% of sales in fiscal 2021. Perishable items accounted for 58% of fiscal 2021 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
Funds Funds

Magellan Global Fund Open Class: Investment process focuses on high quality, liquid companies

Investment Objective

The investment objectives of the Fund are to achieve attractive risk-adjusted returns over the medium to long-term, while reducing the risk of permanent capital loss.  

Investment Process

The investment objective of the strategy is two-fold: 

  1. Achieve attractive risk adjusted returns over the medium to long-term (translates to 9% p.a. net of fees long-term target)
  2. Minimise the risk of permanent capital loss (downside protection)

The Magellan Global Fund aims to invest in ‘outstanding companies’ at attractive prices, while also managing investment risk through a comprehensive understanding of the macroeconomic and broader environment. ‘Outstanding’ in this context refers to companies that are able to “sustainably exploit competitive advantages in order to continually earn returns on capital that are materially in excess of their cost of capital.” As such, the Fund is not deterred by companies that may be perceived as trading expensively (e.g. at high multiples), so long as their underlying businesses are outstanding, and share prices are assessed to be trading at a discount to intrinsic value.

The investment team assesses each stock via five quality criteria (economic moat, re-investment potential, business risks, agency risks, and ESG factors).  This analysis reduces the universe to around 300 stocks which then undergo detailed bottom-up analysis.  The team discusses the results to determine stocks that will be recommended to the investment committee. Investments will need to have a margin of safety (discount to intrinsic value) to enter the portfolio.

The stringent quality criteria result in a concentration in global franchises, information technology, global infrastructure and niche financial services companies. Analysts build discounted cash flow models to determine the intrinsic value of each company. A “conviction scoring matrix” is also used to ensure that each company is consistently evaluated both relative to peers and on a standalone basis.

Portfolio

Investment Team 

In February 2022, CIO and Lead Portfolio Manager Hamish Douglass took, effective immediately, a medical leave of absence for personal reasons and mental health issues. It is important to note, the Company does expect Mr Douglass to return in due course when he is healthy to return. 

In June 2022, the Manager announced that Mr. Douglass will cease to be a permanent member of Magellan’s staff on 15 June 2022 and will commence the consultancy role on 1 October 2022. Mr. Douglass will be available to the investment team, as required by them, to share his insights including his views on macroeconomic and geo-political matters.

In the interim, Chris Mackay (Magellan’s co-founder) will step in and oversee the portfolio management of Magellan’s global equity retail funds and global equity institutional mandates. Chris is a highly experienced Portfolio Manager with a solid track record in global equities. Further, Nikki Thomas has re-joined Magellan as a Co-portfolio manager of Magellan’s global equity strategies. Nikki was due to commence in March however due to this announcement, she agreed to start 7th February. Nikki is a highly regarded Portfolio Manager with over 20 years of experience in the management of global equity portfolios. Nikki was instrumental in the development of the Magellan investment team’s processes in 2006, and she has a deep knowledge of Magellan’s investment universe. Her experience and relationships with investment advisers and consultants will add further depth to the investment team. Chris Mackay will be working with Deputy CIO Dom Giuliano, Nikki Thomas, Arvid Streimann and Chris Wheldon in respect of the co-management of the global equity and high conviction retail funds and institutional mandates.

Fund Performance and Positioning 

About Fund:

The Magellan Global Fund (Unhedged) is a concentrated, currency unhedged, benchmark unaware international equities strategy that typically contains 20-40 stocks. The objectives are capital preservation and reduction of downside volatility risk, while having a minimum return objective of 9% p.a. (net of fees).

(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

Albemarle to generate healthy bromine profits due to its low-cost position in the Dead Sea

Business Strategy and Outlook 

Albemarle is the world’s largest producer of lithium, which generates roughly half of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison and Wodgina. The Chilean operation is among the world’s lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. As electric vehicle adoption increases, a high-double-digit annual growth in global lithium demand can be seen. In response, Albemarle plans to expand its lithium production from 88,000 metric tons in 2021 to over 450,000 metric tons over the next decade. This includes the company’s 60% interest in the Wodgina spodumene operation from Mineral Resources. Mineral Resources retains the other 40% interest and the two operate a joint venture, though this will likely become a 50-50 JV as the two are in discussions to expand the partnership. The joint venture will begin producing spodumene (lithium hard rock concentrate) and one 50,000-metric-ton lithium hydroxide plant in Australia. Albemarle will continue to increase its lithium capacity largely through brownfield expansions at existing operations, including the expansion of recently acquired spodumene conversion assets in China.

Albemarle is the world’s second-largest producer of bromine, a chemical used primarily in flame retardants for electronics. Bromine prices have begun to rise as increased demand for use in servers and automobile electronics is offset by a decline in demand from TVs, desktops, and laptops as well as lower demand for bromine used in oilfield completion fluids. Over the long term, Albemarle is to generate healthy bromine profits due to its low-cost position in the Dead Sea. Albemarle is also a top producer of catalysts used in oil refining and petrochemical production. These chemicals are highly tailored to specific refineries. However, the company is conducting a strategic review and may ultimately divest the business.

Financial Strength

Albemarle is in good financial health. As of March 31, 2022, the company’s net debt/adjusted EBITDA ratio was 1.9 times, within management’s target for a long-term ratio of 2-2.5 times. Albemarle should be able to meet all of its financial obligations, including dividends. Albemarle is completing the construction of two new lithium projects that were initially funded with a combination of debt and excess cash flow from its bromine and catalysts businesses. However, Albemarle raised equity in early 2021 as a way to deleverage its balance sheet and provide financial flexibility. This move made sense, given that the stock price was above the fair value estimate at the time. After 2022, Albemarle plans to expand its lithium capacity largely through the build-out of brownfield capacity and new greenfield spodumene conversion plants in China. While these expansions will likely be capital-intensive, they should be cheaper than building new greenfield lithium production assets in higher cost regions such as Australia. This should allow Albemarle to maintain the financial flexibility to expand its lithium capacity without considerably straining its balance sheet. Additionally, high lithium prices should allow the company to generate more cash flow from its existing businesses as a way to partially fund future capacity expansions. Further, Albemarle is undergoing a strategic review of the catalysts business and could divest it to pay for a considerable amount of the lithium capital expenditures over the next several years. Additionally, Albemarle could opt to raise capital through additional equity issuances if needed.

Bulls Say’s

  • Albemarle has top-tier lithium assets through its brine operations in Chile and spodumene hard-rock operations in Western Australia, which are among the lowest-cost sources of lithium production globally. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Albemarle. 
  • Albemarle has low-cost bromine production through its highly concentrated brines in the Dead Sea and Arkansas

Company Profile 

Albemarle is the world’s largest lithium producer. The robust lithium demand is predicated upon increased demand for electric vehicle batteries. Albemarle produces lithium from its salt brine deposits in Chile and the U.S. and its hard rock joint venture mines in Australia. Albemarle is also a global leader in the production of bromine, used in flame retardants. The company is also a major producer of oil refining catalysts.

(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.

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Sonic announced its intention to compete with CarMax in used vehicles with EchoPark used-vehicle stores.

Business Strategy & Outlook

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy.

In October 2013, Sonic announced its intention to compete with CarMax in used vehicles with EchoPark used-vehicle stores. The U.S. used-vehicle market is highly fragmented at about 40 million units a year, with late-model used vehicles as old as six years often making up at least 15 million units, so there is certainly room for both firms to pursue their strategies. Openings started in late 2014 in the Denver area and as of March 2022, the EchoPark segment has 47 stores with plans to add 25 a year between 2021 and 2025. It will take time for EchoPark to reach the scale to compete with CarMax’s over 220 stores. The stores will not have a big-box retail format and are not capital-intensive due to most eventually being delivery and buy centers that only cost $1 million-$2 million each. These centers will be served by larger hub stores in a region that each cost between $7 million and $25 million. EchoPark will not do home delivery. Sonic does not plan a captive finance arm like CarMax enjoys. In July 2020, management announced a $14 billion 2025 revenue target for EchoPark, up from $2.3 billion in 2021, with 140 nationwide points. This is not impossible in because EchoPark intentionally undercuts competitors on price, then recovers a small loss on the vehicle by arranging loans with third-party lenders and selling extended warranties, targeting over $2,000 gross profit per unit. In 2021, Sonic said it is reviewing alternatives for EchoPark. Sonic will have scale relative to a small dealer and can get better terms from vendors for supplies, computer systems, and health insurance compared with a small dealer. It also captures lucrative service work over repair shops through its warranty business. 

Financial Strengths

Sonic’s largest debt maturity at year-end 2021 through 2026 is $118.2 million in 2024, mostly from about $90 million of mortgage line borrowing coming due in November. The credit facility matures in April 2025 and is undrawn at the end of 2021 with $281.4 million available for borrowing. Total liquidity at the end of 2021 is $702.8 million including $299.4 million of cash. Management has told us that the used floorplan line is like a revolver. Net Debt/adjusted EBITDA was about 1.80 times at year-end 2021. Leverage in 2019 declined from about the 3.7 times level thanks to the early redemption of the firm’s $289.3 million 5% notes due in May 2023. Sonic also has $346.2 million of mortgage notes with 62% of the balance at fixed rates ranging between 2.05% to 7% and maturities at various dates through 2033. The company owns about half its real estate, but has not disclosed how much unencumbered real estate it has. In October 2021, Sonic issued $1.15 billion of 2029 ($650 million at 4.625%) and 2031 notes ($500 million at 4.875%) to help fund the $950 million purchase of RFJ Auto Partners in December 2021, but no one can concern about balance sheet health. The firm’s debt profile is not going to be a challenge for management to maintain.

Bulls Say

  • Auto dealerships are well-diversified businesses that have lucrative parts and servicing operations, which help them be profitable in almost any environment. 
  • EchoPark could prove to be a very lucrative business this decade if it can scale up. 
  • Sonic has the potential to generate significant economies of scale as vehicle demand rebounds and if EchoPark grows.

Company Description

Sonic Automotive is one of the largest auto dealership groups in the United States. The company has 110 franchised stores in 17 states, primarily in metropolitan areas in California, Texas, and the Southeast, plus 47 EchoPark and Northwest Motorsport brand used-vehicle stores. In addition to newand used-vehicle sales, the company derives revenue from parts and collision repair, finance, insurance, and wholesale auctions. Luxury and import dealerships make up about 88% of new-vehicle revenue, while Honda, BMW, Mercedes, and Toyota constitute about 60% of new-vehicle revenue. BMW is the largest brand at over 26%. 2021’s revenue was $12.4 billion, with EchoPark’s portion totaling $2.3 billion. Sonic bought RFJ Auto in December 2021, which added $3.2 billion in 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.

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Ross’ results are enabled by its strong merchandising and inventory management, allowing a fast-changing assortment of opportunistically sourced items

Business Strategy and Outlook 

With a fast-turning inventory of high-value branded merchandise, Ross’ store experience and value proposition should continue to resonate as the pandemic ebbs. Ross weathered a number of challenges in 2021, with a difficult environment for experience-oriented physical retail, inflation, supply chain disruptions, and volatile case counts eased by economic stimulus, continued strength in home décor categories, and the start of Americans’ post-pandemic wardrobe rebuild. The current situation is unprecedented, but off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively. Ross’ results are enabled by its strong merchandising and inventory management, allowing a fast-changing assortment of opportunistically sourced items. It aims to be a partner of choice for vendors looking to sell excess items, accepting incomplete assortments without return privileges, paying promptly, and stocking brands discreetly (allowing them to avoid creating pricing pressure in the full-price channel that can ensue if their labels are viewed as a constant discount option). This flexibility is a product of the treasure-hunt shopping experience and Ross’ distribution and merchandising agility.

Ross has long enjoyed ample availability of attractively priced products, which is expected to persist. Mutable tastes, the proliferation of alternative distribution channels, and inherent demand variability due to unpredictable external factors (exacerbated by full-price store closures during the pandemic), should leave room for off-price retailers to source products attractively, capitalizing on their vendor relationships and ability to offer favourable terms. While competition is fierce and digital rivals are building a presence in Ross’ core categories, its low-frills shopping experience and significant discounts (around 20%-70%) result in competitive prices and superior economics after considering shipping and return costs. The pandemic should increase e-commerce adoption long term, but the full-price sellers will have to bear most of the shift.

Financial Strength

With nearly $5 billion in cash at the end of fiscal 2021 against less than $2.5 billion in debt, Ross’s clean balance sheet affords considerable flexibility. It is expected that annual adjusted EBITDA will cover interest expense at least 40 times in any given year over the next decade. Combined with free cash flow to the firm averaging around 8% of sales over the long term, Ross will fund its continued expansion goals internally once conditions normalize. Ross is expected to grow toward its 3,600-unit footprint target over the next 10 years (from 1,923 at the end of fiscal 2021). While expansion should remain its capital priority, it should continue to favour leasing stores. Capital expenditures should average around 3%-4% of sales long term, near fiscal 2019’s pre-pandemic 3.5%. The firm will continue to look to return excess capital to shareholders via share buybacks and dividends. Ross’ dividend rises over time as cash generation increases, at a long-term payout ratio of around 30%, slightly higher than fiscal 2021’s 23% mark. It is expected Ross to use 60% of its annual operating cash flow to repurchase shares by the end of the explicit forecast. Alternatively, the firm could pursue acquisitions of regional chains or other concepts (including operations outside the United States) to accelerate its growth.

Bulls Say’s

  • Ross should be relatively well-insulated against digital rivals, considering its differentiated store experience and operational efficiency (which fuels its competitive prices). 
  • Its treasure-hunt shopping experience, agile supply chain and distribution network, and merchandising strength maximize Ross’ flexibility while holding inventory levels in check, minimizing risk while freeing capital. 
  • Other physical retailers’ downsizing should lead to an ample supply of attractively located, well-priced storefronts that should fuel Ross’ expansion

Company Profile 

Ross Stores is a leading American off-price apparel and home fashion retailer, operating over 1,920 stores (at the end of fiscal 2021) across the Ross Dress for Less and dd’s Discounts banners. Ross offers a variety of name-brand products and targets undercutting conventional retailers’ regular prices by 20%-70%. The company uses an opportunistic, flexible merchandising approach; together with a relatively low-frills shopping environment centred on a treasure-hunt experience, Ross maximizes inventory turnover and traffic, enabling its low-price approach. In fiscal 2021, 26% of sales came from home accents (including bed and bath), 25% from the ladies’ department, 14% from each of men’s and accessories, 12% from shoes and 9% from children. All sales were made in the United States.

(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.

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The Fast Charge EV Network: Initiating Coverage of EVgo with $7 Fair Value Estimate

20025825 - closeup image of businessman drawing 3d graphics

Business Strategy & Outlook:  

EVgo is a leading owner operator of fast charging direct current, or DC, stations in the United States. The market for public charging of electric vehicles can be divided into high-powered DC charging and lower powered Level 2, alternating current (AC), charging. Charging times to add 100 miles vary from as little as 5-15 minutes with DC charging to as much as several hours with AC charging. EVgo was a pioneer in the buildout of DC charging, which is expected to experience a growing percentage of charging demand. According to Bloomberg NEF, fast charging is expected to constitute 22% of all public EV demand by 2030 versus less than 10% in 2021.

EVgo pursues various partnerships to execute its business model. The company partners with retail, grocery stores, and related high-traffic merchants to site its charging stations in desirable locations. This strategy differs from other DC charging strategies which focus more on highway corridor locations. In addition to host customer partnerships, EVgo has partnered with automotive OEMs. One example is with General Motors, which has agreed to help fund EVgo’s buildout of DC charging stations over the next few years. Auto OEM partnerships is viewed as a key customer acquisition strategy for EVgo and would view further partnerships favorably for its competitive position. While public charging for passenger vehicles has historically been EVgo’s focus, and an increasing focus on the fleet market. Vehicle fleets are particularly relevant for DC charging given the higher utilization of the vehicle compared to a typical passenger car. While the long-term attractiveness of the fleet market, and the number of competitors is numerous in this burgeoning arena. In addition to its core focus of owning and operating DC fast chargers, EVgo expanded its digital and software capabilities with its acquisition of Plugshare in 2021. Plugshare is the leading global platform for EV drivers to locate and provide information relating to charging stations. This transaction is viewed as financially immaterial, but highly strategic given its large data capture.

Financial Strengths:  

EVgo’s financial strength received a major boost from its 2021 special purpose acquisition company merger. The merger and subsequent financing added approximately $600 million in cash to EVgo’s balance sheet. This allows for a step change in EVgo’s capital investment compared with a more restrained balance sheet under past private equity ownership. While EVgo possess a relatively strong balance sheet compared to EV charging pure plays, it pales in comparison to select competitors within auto OEMs, utilities, or oil and gas majors. EVgo’s balance sheet is unlevered, which is viewed as prudent given the early stage of its business. Over time, the envision leverage being added as the business matures given its asset-backed nature. EVgo’s asset ownership approach results in a more capital-intensive business model than competing models. The uses of cash to consist operating cash outflows as profitability is not expected in the near-term and growth capital expenditures associated with expanding its fast-charging network. Government subsidies play a crucial role in financing of EV charging stations – helping to offset upfront capital requirements. EVgo notes subsidies can range from 5-50% of typical capital requirements.

Bulls Say: 

  • EVgo is a leading asset owner of fast-charging stations, which are expected to grow faster than slower charge stations.
  • Government subsidies can help fund a material portion of a typical EV charging station’s capital expenditures.
  • EVgo offers exposure to growing adoption of electric vehicles.

Company Description: 

EVgo owns and operates a public direct current fast charging network in the U.S. EVgo’s network of charging stations provides electric vehicle charging infrastructure to consumers and businesses. Its network is capable of charging all EV models and charging standards currently available in the U.S. EVgo partners with national and regional chains of grocery stores, automotive original equipment manufacturers (OEMs), hotels, shopping centers, gas stations, parking lot operators, local governments and independent property owners in order to locate and deploy its EV charging infrastructure.

(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.

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Ventia has built trust to deliver highly sensitive and complex projects across its sectors

Business Strategy & Outlook

Ventia is a leading infrastructure maintenance services provider in Australia and New Zealand. Through developing strategic relationships and a focus on safety, Ventia has built trust to deliver highly sensitive and complex projects across its sectors. Revenue has a visible stability with 70%-80% of Ventia’s next 12 months of revenue historically supported by work in hand. Work in hand as at July 2021 stood at AUD 15.5 billion. Approximately 85% of revenue comes from Australia with over 13,000 employees at around 350 sites. The 15% balance comes from New Zealand where over 2,000 workers are employed at approximately 50 sites. Ventia also relies upon an additional workforce of around 20,000 subcontractors. With access to such a large workforce, Ventia can leverage a deep pool of talent across Australia and New Zealand. And the subcontractor base allows for flexible staffing, enabling Ventia to scale the workforce up and down on short notice, and provides wide geographical coverage. This plays into Ventia’s capital-light business model with capital expenditure typically less than 1% of total revenue.

Ventia is structured across four sectors including defense & social infrastructure; infrastructure services; telecommunications; and transport. Its capabilities span the full asset lifecycle including operations and maintenance, facilities management, minor capital works, environmental services, and other solutions. In Australia, Ventia services 50% of the private motorways and tunnels, and over 70% of defence sites. In New Zealand, it provides services to over 90% of the electricity transmission network. Ventia is also the number one telecommunications infrastructure services provider in both Australia and New Zealand. Ventia has long-term relationships with a diverse range of public and private sector clients. In 2020, it did work for more than 60 public sector clients at federal, state, and local levels, and 65 private sector clients ranging from medium-size domestic organizations to large national and global corporates.

Financial Strengths

With net debt excluding lease liabilities of AUD 563 million at December 2021, Ventia is in reasonable financial health. Net debt/(net debt plus equity) is high at 59%, but this skewed by Ventia’s capital-light operating model which limits assets on balance sheet. Debt is comfortably serviced with EBIT/interest expense in fiscal 2021 of 7.0 times. The net debt/EBITDA of around 1.6 in 2021, falling to sub-1.0 levels by 2023, all else equal. Ventia boasts robust operating and free cash flows. On a pro forma basis before interest and tax, three-year average operating cash flow to 2020 was AUD 195 million and three-year average free cash flow was AUD 150 million. As per forecast solid free cash flows in the foreseeable future, growing to over AUD 200 million by 2025, which should comfortably support Ventia’s targeted dividend payout ratio of between 60% and 80% of underlying NPATA.

Bulls Say

  • The maintenance services market is expected to grow strongly, supported by the fair winds of population growth, rising outsourcing rates, and increasingly stringent environmental regulation. 
  • Ventia has long-term relationships with a diverse range of public and private sector clients and has maintained many client relationships for decades across its sectors. 
  • Ventia’s client contracts are relatively long in duration with the average contract term at inception over five years. Most contain some form of embedded price escalation.

Company Description

While Ventia is not the largest player with an estimated 7.5% share of addressable markets, it is a leading infrastructure maintenance services provider in Australia and New Zealand. Its capabilities span the full asset lifecycle including operations and maintenance, facilities management, minor capital works, environmental services, and other solutions. And its business model is favorably capital-light via flexing of a large contractor base complementing a deep pool of talented employees. Ventia has long-term relationships with a diverse range of public and private sector clients with many client relationships maintained for decades. Contracts are favorably long with an average five-year duration at inception and most containing some form of embedded price escalation.

(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.

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Global stocks Shares

ResMed’s minority stake hedges some risk from emerging competition

Business Strategy and Outlook

ResMed is taking a “smart devices” and Big Data approach to further entrench itself as one of the two leading players in the global obstructive sleep apnea, or OSA, market. With cloud-connected devices, physicians can monitor patient compliance and encourage continued use. Higher adherence supports both reimbursement rates from payers and the resupply of masks and accessories. ResMed also plays a key role in producing clinical data that demonstrates treatment can minimise related risks such as hypertension, stroke, heart attack and Alzheimer’s disease. Through its own testing devices and education, ResMed seeks more widespread diagnosis and treatment of OSA. The global OSA homecare device market, is a two-player duopoly with over 80% estimated market share split between ResMed and Philips, with ResMed the market leader in the majority of the 140 countries it competes in. The market offers a large global growth opportunity as penetration within developed markets is estimated at one fifth of the roughly 15% prevalence, and emerging markets are essentially untapped. In the U.S. It is estimated that roughly half of the 22 million people diagnosed with OSA are treated with continuous positive airway pressure, or CPAP, with another 34 million remaining undiagnosed. ResMed operates in over 140 countries with over 900 million people estimated to have sleep apnea globally, indicating the long runway for growth.

ResMed has made acquisitions of home healthcare software platforms as it seeks to leverage the trends of digital health and providing care in a lower-cost setting. Brightree, acquired in 2016, and MatrixCare, acquired in 2019, offer business management software for a range of home health providers. ResMed is currently directing significant capital to this area, and although high returns have largely been unproven, the move has been strategically sound given the structural industry tailwinds. ResMed has a minority stake in Nyxoah who are developing a neurostimulation implant to treat OSA. Although a little near-term risk from this therapy will be due to the higher cost and invasive surgery needed, ResMed’s minority stake hedges some risk from emerging competition.

Financial Strength

ResMed is in a strong financial position. Free cash flow conversion of earnings prior to acquisition spending has averaged 106% over the last five years and has allowed ResMed to quickly repay the debt funding its acquisitions. At the end of fiscal 2021, ResMed reported USD 360 million in net debt representing net debt/EBITDA of only 0.3 times. The free cash flow is to grow to USD 1,469 million by fiscal 2026 from USD 556 million in fiscal 2021, and in the absence of major acquisitions, the company should be in a net cash position over the five-year forecast period. ResMed commenced paying a dividend in fiscal 2013 and doesn’t have a fixed payout ratio policy. The 28% payout ratio is lower than the trailing three-year average of 34% of underlying net income mainly due to ResMed’s significant uplift in earnings. Dividends are to grow at a five-year 15% CAGR versus a trailing five-year CAGR of 6%, and ResMed is likely to seek optionality for further acquisitions in the software-as-a-service segment.

Bulls Say’s

  • The long-term growth opportunity for respiratory homecare devices is sizable as both developed and emerging markets are still significantly underpenetrated.
  • The focus on cloud-connected devices has led to increased adherence, supporting both reimbursement rates and the resupply of masks and accessories.
  • ResMed stands to benefit from Philips’ significant product recall and the launch of its new flagship product, AirSense 11.

Company Profile

ResMed is one of the largest respiratory care device companies globally, primarily developing and supplying flow generators, masks and accessories for the treatment of sleep apnea. Increasing diagnosis of sleep apnea combined with ageing populations and increasing prevalence of obesity is resulting in a structurally growing market. The company earns roughly two thirds of its revenue in the Americas and the balance across other regions dominated by Europe, Japan and Australia. Recent developments and acquisitions have focused on digital health as ResMed is aiming to differentiate itself through the provision of clinical data for use by the patient, medical care advisor and payer in the out-of-hospital setting.

 (Source: MorningStar)

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