Category: Shares

Categories
Shares Small Cap

Zip Shares Still Cheap After Walking Away from Sezzle, But Its Fundamentals Are Getting Murkier

Business Strategy & Outlook:    

Zip’s focus is on maximizing its addressable market. Its business is more diversified than single-product buy now, pay later, or BNPL, players, with varieties in financing options, transaction limits, and repayment schedules. Customers enjoy simple sign-up and checkouts, high acceptance by retailers and flexible financing solutions to help better manage their cash flows. Merchant partners may benefit from increased conversion rates, basket sizes, and transaction frequencies. Zip has a revolving credit business in Australia. ZipPay finances up to AUD 1,000, and ZipMoney AUD 1,000 and above. It also boasts a broader merchant base including retail, home, electronics, health, auto, and travel. Around 70% of revenue is derived from customers, mainly from account fees and interest. Meanwhile, Zip Business provides unsecured loans of up to AUD 500,000 to small and midsize enterprises. 

Zip adopts an installment financing model overseas, helping it scale up faster and keep up with competition in the underpenetrated global BNPL landscape. The acquisition of U.S. based Quad Pay materially boosts its growth prospects. It also operates in the U.K., Canada, Europe, Mexico, and the Middle East. Zip enhances customer stickiness via ongoing product add-ons. It has a Pay Anywhere function that lets users transact at a wide variety of avenues without being confined to merchant partners. Users also benefit from promotional offers, cash-back deals, or free credits. Newer features include crypto trading, credit reporting, and savings accounts. For merchant partners, Zip invests in co-marketing to help them acquire new customers. Zip has strong earnings prospects, but its margins will be increasingly under pressure and it will not achieve the same penetration and transaction frequency overseas as it had domestically. While it benefits from the growth of e-commerce and increasing preference for more convenient/cheaper forms of financing, anticipated heightened competition to its products. The capital-intensive domestic business cannot scale up as quickly, its fee structure potentially creates friction for customers, and its product offering in the U.S lacks clear differentiation.

Financial Strengths:  

While credit stress is creeping up, Zip remains overall in reasonable financial health. As of March 2022, the net bad debt ratio for its core ANZ business sits at 3.40% of receivables, while arrears are at 2.29%. But as a reprieve, Zip’s current financial position would be bolstered by: 1) its March equity raise; and 2) avoiding absorbing Sezzle’s net losses. Its debt/capital ratio is 56%, while the ratio of equity/receivables has improved to 52% in fiscal 2021 from 8.1% in fiscal 2017. Zip’s bad debts should stay manageable in a major credit event. Unlike some peers, Zip conducts a greater degree of background check before onboarding customers, such as collecting bank statements and pulling in information from a credit bureau. Soft credit checks are similarly performed when onboarding new customers overseas. This helps compensate for the fact that its receivables are higher-risk due to them having longer repayment periods and higher transaction value (notably for Zip Money) or it having a Pay Anywhere model. Its installment businesses have shorter turnover periods and lower transaction values, meaning it can know much earlier (relative to credit cards) if customers have trouble making payments and can therefore amend its risk controls accordingly. Most its Australian receivables are funded by its asset-based securitization program, with undrawn facilities totaling AUD 401.9 million as of March 2022. It also has USD 168.1 million and AUD 119.5 million of undrawn facilities to fund U.S and Zip Business’ receivables, respectively.

Bulls Say:  

  • Zip is well placed to continue growing its transaction volume, given its variety in financing options and retailer base, as well as its Pay Anywhere model which provides a greater avenue to spend using its products.
  • Zip benefits from an accelerated shift to e-commerce, increased adoption of cashless payments, and a growing need among merchants for effective marketing amid a challenging retail backdrop.
  • Zip faces lower regulatory risks than its BNPL rivals, as it already conducts a greater degree of background checks and ZipMoney is already regulated by the National Credit Act.

Company Description: 

Zip is a diversified finance provider, offering consumer financing via a line of credit (via ZipPay and ZipMoney) and installment-based finance (via Quad Pay, Spotii, Twisto, and PayFlex); as well as lending to small to midsize enterprises (via Zip Business). Zip’s fortunes are largely tied to the buy now, pay later, or BNPL, industry. Most of its products–ZipPay, Quad Pay (Zip U.S.), and PayFlex–do not charge interest based on outstanding balances. Around 60%-70% of Zip Pay’s/Zip Money’s revenue is derived from customers, mainly via account fees and interest. Meanwhile, its installment businesses primarily generate revenue by receiving a margin from merchants, which compensates it for accepting all nonpayment risk and for encouraging consumers to transact more frequently.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Investor Desk. 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 Investor Desk 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, Investor Desk 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.

Investor Desk and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Investor Desk 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 Investor Desk and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Investor Desk 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 Investor Desk 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. Investor Desk 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 Investor Desk and Banyan Tree.

Categories
Shares Small Cap

The Star Entertainment Group Limited, an integrated resort company, provides gaming, entertainment, and hospitality services in Australia

Investment Thesis:

  • Trading below blended valuation (DCF & EV/EBITDA multiple). 
  • Additional cost measures announced to support earnings.
  • Monopolies in the casino industry in SGR’s operating geographies and is one of the market leaders in other games such as slots.
  • Economic moat in the nightlife landscape in Sydney given regulatory environment (such as lock-out laws).
  • Diversified business base across different types of entertainment, hotels, retail stores and food & beverage establishments.
  • Strong tourism growth once borders reopen is expected to be a tailwind for SGR.
  • Lower AUD could improve international spending in domestic markets.
  • Domestic table games segment remains strong.

Key Risks:

  • Weakening VIP segment, potentially making Sydney less viable.
  • Further deterioration of consumer spending and household discretionary income 
  • Regulatory risks e.g., repeal of lockout laws could increase competition in the nightlife landscape in Sydney.
  • Establishment of a new Crown casino in Sydney will increase competition (especially amongst VIP customers) and could potentially dismantle SGR’s monopoly in Sydney.
  • Win-rate risk (if the casinos have a much lower win-rate than the mathematical expected value).
  • Potential scandals.

Key Highlights:

  • FY22 results summary. Compared to pcp: On a normalised basis, gross revenue declined -2% to $1.532bn, EBITDA declined -45% to $237m and NPAT was a loss of $32m (vs profit of $116m in pcp), impacted by Covid-19 related property shutdowns, operating restrictions, and border closures. Statutory net loss (post significant items) was $199m vs profit of $58m in pcp. Operating expenses increased +14% to $909m, reflecting Covid-19 related impacts, inflationary pressures, tight labour market and regulatory review costs (Bell Review, AUSTRAC enforcement investigation).
  •  Operating cash flow declined -61.5% to $181.3m with cash collection down -42% to 81%.  
  • Capex of $141m, within the guidance range of $125-150m and well below D&A expense of $208m. 
  • Balance sheet has ample liquidity position of $513m in cash and undrawn facilities. Net debt declined -2% YoY to $1.15bn, equating to gearing of 2.8x, with the Group fully compliant with June 2022 amended covenants and no covenant relief required for FY23 testing dates. (6) Final dividend scrapped.
  • By segments. Compared to pcp: Sydney revenue declined -6% to $781m and normalised EBITDA declined -60% to $82m, impacted by the closure of the property for 102 days and operating restrictions due to Covid-19, however, domestic revenues rebounded on opening with 4Q22 domestic revenue consistent with pre-Covid levels with slots revenue up +17% on pre-covid levels partially offset by -8% decline in domestic tables. 
  • Gold Coast domestic revenue was up +11% to $424m with non-gaming revenue up +50%, which combined with +27% increase in opex saw normalised EBITDA decline -20% to $90m. Domestic revenues rebounded in 4Q22, up +48% on pre-Covid level with slots revenue up +50%, domestic tables up +23% and non-gaming up +69%. 
  • Brisbane domestic revenue declined -6% to $326m and normalised EBITDA declined -43% to $65m, however, performance improved in April following removal of Covid-19 restrictions with domestic revenue in 4Q22 up +13% on pre-Covid levels with slots revenue up +26% while domestic tables down -4%. 
  • FY23 guidance and trading update. For FY23 capex of ~$150m (vs prior guidance of ~$175m), D&A expense of ~$200-205m, net funding costs of $60-65m and JV equity contributions of ~$115m.
  • Trading update (1 July 2022-18 August 2022) group domestic revenue increased +9% on pre-Covid levels (1 July 2019-18 August 2019) with Sydney domestic revenue in-line with pre-Covid levels, Gold Coast domestic revenue up +26% and Brisbane domestic revenue up +18%.
  • Key executive appointments. Robbie Cooke (ex-CEO Tatts Group and ex-MD Tyro Payments) appointed as MD and CEO. 
  • Scott Wharton appointed as CEO The Star Sydney and Group Head of Transformation.  

Company Description:

The Star Entertainment Group Limited, an integrated resort company, provides gaming, entertainment, and hospitality services in Australia. The Company operates through three segments: Sydney, Gold Coast, and Brisbane. It owns and operates The Star Sydney casino, which includes hotels, apartment complex, restaurants, and bars; The Star Gold Coast casino, which consists of hotels, theatre, restaurants, and bars; and Treasury casino in Brisbane that comprises hotel, restaurants, and bars. The company also manages the Gold Coast Convention and Exhibition Centre. The company was formerly known as Echo Entertainment Group Limited and changed its name to The Star Entertainment Group Limited in November 2015. 

(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

Despite Recent Litigation Headwinds on Zantac, GSK Remains Well Positioned for Earnings Growth

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy & Outlook: 

As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat. The magnitude of GSK’s reach is evidenced by a product portfolio that spans several therapeutic classes. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. It is expected GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade. On the pipeline front, GSK has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and the immune system, with genetic data to help develop the next generation of drugs. The benefits of these strategies are showing up in GSK’s early-stage drugs. It is expected this focus will improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers. From a geographic standpoint, GSK is strategically branching out from developed markets into emerging markets. Its vaccine segment positions the firm well in these price-sensitive markets. While this strategy is likely to create some challenges, like the potential legal violations that arose in early 2013 in China, it is believed the fast-growing emerging markets will help support long-term growth and diversify cash flows beyond developed markets. GSK’s decision to divest its consumer business will likely unlock value over the long run. GSK divested its consumer group (called Haleon) in July 2022. Given the strong valuations of consumer healthcare companies, it is expected this unit will yield a stronger valuation than what is implied within the GSK structure before the divestment.

Risk and Uncertainty: 

Like all drug companies, GSK faces risks of drug delays or non approvals from regulatory agencies, an increasingly aggressive generic industry, and competition in the pharmaceutical industry. Overall, given all the diversification the company has across its platforms offsetting the variable outcomes for drug development and competitive challenges to the firms’ leading products. GSK is not materially affected by environmental, social, and governance risks, although it is seen access to basic services (tied to drug pricing) as the biggest ESG risk that the firm needs to manage. GSK generates close to one half of total sales from U.S. prescription drug sales, so additional major pricing reforms could weigh on sales and margins. Additionally, it is assumed a more than 50% probability of GSK seeing future costs related to product governance ESG risks (such as off-label marketing or litigation related to side effects) and model base case annual legal costs at 2% of non-GAAP net income (at the midrange relative to peers based on GSK’s product portfolio having average exposure to future potential litigation). As part of these costs, litigation expenses have been factored in for the increasingly concerning Zantac litigation.

Bulls Say:

  • GSK’s next-generation respiratory drugs and HIV drugs look poised for strong growth over the next five years. 
  • GSK faces relatively minor near-term patent losses, setting up steady long-term growth. 
  • The firm’s well-positioned Shingrix vaccine should support strong long-term growth based on excellent efficacy and limited competition.

Company Description:

In the pharmaceutical industry, GSK ranks as one of the largest firms by total sales. The company wields its might across several therapeutic classes, including respiratory, cancer, and antiviral, as well as vaccines. GSK uses joint ventures to gain additional scale in certain markets like HIV.

(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

Chubb and peers are experiencing a positive trend in underlying underwriting profitability

Business Strategy & Outlook

In January 2016, ACE acquired Chubb in a deal valued at about $28 billion and assumed its name. The deal looked fairly valued and there were meaningful cost benefits involved, with management eventually exceeding its initial targets. However, from a long-term perspective, the fact that the combination created a moaty international insurer with exposure across most insurance lines for the first time, marking Chubb as potentially the most attractive long-term core holding in the space from a fundamental point of view. In 2020, the coronavirus affected the industry’s and Chubb’s results, and the company’s COVID-19 losses were roughly in line with peers’ as a percentage of premiums. However, the impact at Chubb and peers was manageable and well within the range of events that the industry has successfully absorbed in the past. The future looks relatively bright. 

Pricing momentum picked up in primary lines in 2019, and this positive trend only accelerated in 2020. More recently, pricing has started to level off, but the industry has enjoyed the highest increases it has seen since 2003. While higher pricing is necessary to some extent to offset a rise in social inflation and other claims trends, pricing increases appear to be more than sufficient to offset these factors. As a result, Chubb and peers are experiencing a positive trend in underlying underwriting profitability, and the potential for a truly hard pricing market, similar to the period that followed 9/11. In this scenario, narrow-moat and highly disciplined operators such as Chubb are positioned to earn very attractive returns. However, the industry remains well capitalized, which could put something of a lid on the magnitude and duration of any excess returns.

Financial Strengths

Equity/assets was 30% at the end of 2021, and while the company has a large amount of goodwill on its balance sheet, its balance sheet structure is reasonable and roughly in line with peers on a tangible basis. Like all property and casualty insurers, the company’s earnings and capital in any particular year could take a material hit due to catastrophes or securities market movements that affect its investment portfolio. However, the company’s insurance operations are well diversified, and it has a history of superior underwriting profits, a large catastrophe year to significantly degrade its capital position is not expected. The firm also retains a fairly conservative investment portfolio, which is concentrated in government debt, municipal bonds, and highly rated corporate securities.

Bulls Say

  • Chubb is one of the few companies with the global footprint that large corporate insurance customers demand. Its network has created a barrier to entry for potential competitors. 
  • Chubb is a large insurer with leading positions in the most moaty areas of the P&C insurance industry. 
  • Chubb’s international operations benefit from significant growth opportunities.

Company Description

ACE acquired Chubb in the first quarter of 2016 and assumed the Chubb name. The combination makes the new Chubb one of the largest domestic property and casualty insurers, with operations in 54 countries spanning commercial and personal P&C insurance, reinsurance, and life insurance.

(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

BLD’s 1H22 results were impacted by Covid 19 related construction shutdowns and adverse wet weather

Investment Thesis:

  • Near-term outlook remains uncertain in Australia with higher costs and supply chain constraints.
  • BLD is a much cleaner business operations following several divestments, which increased focus.
  • Boral is expected to benefit from proposed infrastructure projects.
  • Better realization of price increases, whilst volumes remain solid.
  • Focused on the Australian market.
  • Proceeds from divestments could be returned to shareholders.
  • Large cornerstone shareholder – Seven Group Holdings (owns approx. 70%) – may provide shareholder turnover stability.

Key Risks:

  • Concentrated earnings, focused on just the Australian Construction market.
  • Indirect and direct effect of coronavirus on operations.
  • Potential delays to infrastructure assets leading to a volume gap in the market.
  • Cost pressures continue to exceed price increases.
  • Unfavourable weather impacts.
  • BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives.

Key Highlights: Relative to the pcp:

  • Revenue of $1.5bn was up +1% (or up +3% on a comparable basis), driven by activity in detached house, A&A (alterations & additions) and R&B (roads, highways, subdivisions & bridges) and despite there being disruptions from lockdowns. The Company did see solid volumes in concrete (up +1%) and quarries (up +4%). Further, management noted that concrete like-for-like prices were steady and up +2% in quarries.
  • Operating earnings (EBIT) of $78m were down -23% (with EBIT margin declining to 5.8% from 6.8%), which was largely driven by the impact from Covid-19 related construction shutdowns (which adversely impacted earnings by $33m) and expenses (energy + other costs). Partially providing some buffer to EBIT was higher volume (up $22m) and $22m from the cost out program (Transformation program), which includes the $24m of cost inflation.
  • Operating cash flow from operations of $86m was down -22%, reflecting
  • lower EBITDA performance due to construction shutdowns.
  • Capital return of $2.72 per share. Given the completion of disposal of BLD’s North American
  • Building Products and Fly Ash, and Australian Building Products businesses (Timber and Roofing & Masonry) for more than $4bn, the Company will return $3bn surplus capital to
  • shareholders via a $2.65 capital reduction and 7cps unfranked dividend.
  • Capital structure. Following the divestments of its non-core assets and expected capital return to shareholders, BLD on a pro forma basis is expected to have net debt of less than $400m. Management is targeting net debt of $900m to $1.1bn (including leases) and leverage (net debt / EBITDA) of 2 – 2.5x.
  • FY22 outlook comments. Management did not provide overly specific guidance but noted the following: 2H22 revenue is expected to be above 1H22, driven by out-of-cycle national price increases effective Jan/Feb 2022. However, this is expected to offset the impact of higher energy costs, which will remain a headwind in 2H22.
  • No construction shutdowns in 2H22 ($33m impact in 1H22) are expected to be offset by typical 2H seasonality due to 6 fewer trading days.

Company Description:

Boral Ltd (BLD) is the largest integrated construction materials company in Australia, producing and selling a broad range of construction materials including quarry products cement, concrete, asphalt and recycled materials. The Company has a portfolio of assets consisting of upstream and downstream assets. BLD employs approximately 10,300 employees and contractors and has 367 construction materials sites across Australia.

(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

Medibank Private (MPL) reported mixed 1H22 results – while group operating profit up +12.3% to $286.5m driven by growth

Investment Thesis

  • On valuation grounds relative to the current share price, MPL trades fair value. 
  • MPL is a quality business with a high-quality management team. 
  • Given Australia’s growing and ageing population, there will be increased demand for health care services. This will add additional pressure on Australia’s public health care system and the Federal budget and an increased dependence on private health care insurers. NHF offers exposure to the business model of providing a funding mechanism for the high-growth health care sector. Healthcare spending is expected to grow at 5-10% per annum, so without significant tax hikes, the government cannot afford for people to shift back to the public healthcare system. 
  • Given underlying increases in average premium rates of around 5 – 6% p.a., some policyholder growth (especially at the 30-34-year-old segment), estimates that MPL offers close to low double-digit underlying growth in the medium term. 
  • Potential to improve the company’s expense ratio. 
  • Room for industry-wide benefits such as losses from risk equalization funds as nonprofitable players are consolidated.
  •  Incentives and benefits encourage PHI take-up. They include 1. Tax benefits and penalties for Australian residents (via Lifetime Health Cover, Medicare Levy Surcharge and means tested rebate); and 2. Shorter wait times, a choice of specialist doctor/hospital and coverage of ancillary health services support.

Key Risks

  • Intensifying competition between top 6 players, putting policy growth targets at risk and any increases in expected marketing spend going forward will no doubt add further strain on earnings growth.
  • Policyholders declined unexpectedly, despite the incentives and Australian Government struggling with the rapid increase in healthcare spending and health services demand. 
  • Registered health insurers cannot increase premium rates without approval from the Government/Minister for Health/PHIAC/APRA. This leaves NHF’s ROE and margins exposed to a political process and pressures if the company is deemed too profitable. 
  • Regulatory changes especially relating to any changes to tax incentives and benefits which encourage take up of PHI. 
  • Higher than expected lapse rates and claims inflation as a result of poor insurance policy design, aging population, and costs of new medical equipment, procedures and treatments. 
  • Poor negotiations with healthcare providers such as private hospital operators leading to unfavourable contractual terms. 
  • Lower than expected investment returns.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Group operating profit up +12.3% to $286.5m driven by growth in both MPL’s segments – Health Insurance and Medibank Health. 
  • NPAT was down -2.7% to $220.2m, on lower net investment income relative to the pcp. Underlying NPAT, which normalises for investment market returns, was up +4.4%. Net investment income of $30.9m, was down from $71.8m in 1H21, with income from the growth and defensive portfolios down $14.8m and $24.6m, respectively. Gross margin of 15.4% and operating margin of 8.1%, was a 20bps and 40 bps improvement over the pcp, respectively. 
  • The Board declared a fully franked interim dividend of 6.1cps, which equates to a 79.1% payout ratio of underlying NPAT which normalises for investment market returns, and within the target payout ratio range of between 75-85% of underlying NPAT. MPL expects the payout ratio to be towards the top end of the target range for the full year. 
  • Retains a strong capital position with health Insurance capital of $960.8m as at 31 December 2021, which equates to 13.0% of premium revenue after the allowance for the dividend declared with this result and is at the top end of the Board’s stated target range of 11.0-13.0%.
  • Health Insurance: Operating profit was up +10.3% to $280.9m driven by growth in premium revenue up +3.8% to $3,452.0m, and a benign claims environment. The segment saw strong resident policyholder growth of +1.5% in the 6 months to 31 December 2021, with policyholder growth of 28,100 comprising 12,100 for Medibank and 16,000 for ahm. Management expense ratio was down 30 bps to 7.2% due to lower management expenses and increasing revenue. 
  • Medibank Health: Segment profit was up +36.7% to $25.7m driven by strong revenue growth up +6.9% to $155.7m with strong demand in telehealth and health and wellbeing, partially offset by MPL’s travel insurance business (which was impacted by closed borders due to the Covid pandemic).
  • Management noted MPL’s healthcare investments including Myhealth Medical Group, East Sydney Private Hospital and JV with Calvary contributed $2.3m to this result.

Company Description

Medibank (MPL) is Australia’s largest private health insurer with ~30% market share. Medibank’s health insurance business (Health Insurance) underwrites private health insurance and the insurer generates revenue from a number of complementary services.

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

MQGs market facing businesses to pick up additional earnings

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Investment Thesis

  • Significant operations across the globe, which provides diversity in business and geographic mix.
  • Changing business mix has seen the company move to a more reliable (annuity style) earnings stream – making it a more quality (less volatile) business. 
  • Solid management team. 
  • Strong infrastructure business, which should benefit further government policies to drive economic growth. 
  • Push into green energy is a positive. 
  • Solid balance sheet, with surplus capital available for deployment (i.e. growth opportunities). 
  • Management unable to quantify FY23 earnings guidance due to the ongoing volatile market conditions. 
  • Potential capital management initiatives in the absence of investment in growth opportunities.

Key Risks

  • Weakness / volatility in financial markets. 
  • Change in regulatory landscape. 
  • Weakness in asset values (e.g. MQG’s co-investments). 
  • Increased competition for advisory work. 
  • Value / EPS destructive acquisitions. 
  • Company fails to achieve its FY20 guidance.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Net operating income increased +36% YoY to $17.3bn, primarily driven by higher Fee and commission income (up +33% YoY), Net other operating income (up +74% YoY) and Net interest and trading income (up +21% YoY), which combined with +22% YoY increase in operating expenses to $10.8bn, delivered NPAT of $4.7bn, up +56% YoY. 
  • Net credit and other impairment charges declined -3% YoY, driven by the partial release of Covid-19 overlays in BFS and CGM, partially offset by small number of underperforming equity investments in Macquarie Capital, though credit provisioning levels remained prudent with combined downside macroeconomic scenarios having a higher weighting than the upside scenario. 
  • ROE improved +440 bps YoY to 18.7%.income (up +33% YoY), Net other operating income (up +74% YoY) and Net interest and trading income (up +21% YoY), which combined with +22% YoY increase in operating expenses to $10.8bn, delivered NPAT of $4.7bn, up +56% YoY. 
  • Net credit and other impairment charges declined -3% YoY, driven by the partial release of Covid-19 overlays in BFS and CGM, partially offset by small number of underperforming equity investments in Macquarie Capital, though credit provisioning levels remained prudent with combined downside macroeconomic scenarios having a higher weighting than the upside scenario. 
  • ROE improved +440bps YoY to 18.7%.
  • MAM saw NPAT increase +4% YoY to $2.15bn, driven by income related to the disposition of MIC assets and increased base fees (up +40% YoY) amid acquisition of Waddell & Reed, partially offset by gain on sale of Macquarie European Rail in pcp and lower performance fees (down -40% YoY). AUM increased +38% to $773.1bn (31% private markets + 69% public investments), primarily due to acquisition of Waddell & Reed Financial. 
  • BFS delivered NPAT growth of +30% YoY to $1bn, as strong growth in home loan portfolio (up +33.6% YoY), funds on platform (up +17% YoY) and total BFS deposits (up +21.4% YoY) together with releases in net credit impairments were partially offset by increased technology investment and higher average headcount to support business growth and regulatory requirements. 
  • CGM saw NPAT increase +50% YoY to $3.9bn, driven by increased revenue across Commodities with strong risk management revenue driven by increased client hedging activity and trading activity as a result of elevated volatility and commodity price movements, and partial sale of the UK Meters portfolio, partially offset by the impact of fair value adjustments across the derivatives portfolio.
  • Macquarie Capital delivered NPAT of $2.4bn, up +269% YoY, reflecting +374% YoY growth in net interest and trading income resulting from growth in the private credit portfolio, +131% YoY growth in investment-related income due to material asset realisations in the green energy, technology and business services sectors, and +36% YoY growth in fee and commission income due to M&A and debt capital markets activities, partially offset by lower equity capital markets fee income and brokerage income.

Company Description

Macquarie Group (MQG) is a leading provider of financial, advisory, investment and funds management services. The company has operations around the globe, including world’s major financial centres. The company operates the following key divisions: Macquarie Asset Management; Corporate and Asset Finance; Banking and Financial Services; Commodities and Global Markets; and Macquarie Capital. MQG has over 14,000 employees in over 25 countries across Europe, Middle East & Africa, Asia, Americas and Australia).

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

BEN achieved its third consecutive half of positive jaws and sixth consecutive half of residential lending

Investment Thesis

  • Relative to major banks, BEN trades at fair value, on 12.1x one-year forward price to earnings, 0.8x price to book and dividend yield of 5.3%. 
  • Strong franchise model with funding predominately by way of deposits. 
  • Expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears). 
  • Continued strong cost discipline, improving efficiency and boosting performance. 
  • Advanced accreditation in progress (which may improve ROE). 
  • Potential pressure on net interest margins as competition intensifies, with major banks in a low interest rate environment. 
  • Leading in terms of customer satisfaction and net promoter metrics, which are increasingly key in a period where trust is paramount.

Key Risks

  • Intense competition for loan growth, combined with further discounting. 
  • Volatility in Home safe earnings. 
  • Increase in bad and doubtful debts or increase in provisioning. 
  • Funding pressure for deposits and wholesale funding.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Cost to Income ratio: Despite near term revenue challenges, firmly fixed on a continued improvement in CTI. 
  • Investment spend: FY22 is expected to be $170m –$180m (FY21 $165m) with a similar level of capitalisation to FY21. 
  • Credit expenses: (i) Arrears rates remain benign; (ii) Modest credit expense expected for 2H22.
  • Statutory net profit of $321.3m, up +31.7%. Cash earnings after tax of $260.7m, up 18.7%. Cash earnings per share of 47c, up +13.5%. Total income on a cash basis was $873.4m, up +2.9%. 
  • Net interest margin of 2.09%, down 14bps relative to 2H21
  • Operating expenses were up 1.5% and in line with management expectations. Cost to income ratio declined for the third consecutive half to 59.3% (from 59.8% in 2H21 and 60.9% in 1H21), in line with management’s goal of towards 50% in the medium term. 
  • BEN retained a solid capital position with CET1 of 9.85%, up 49 basis points. The Board approved a new CET1 target range of between 9.5% and 10%. The Board declared a fully Franked Dividend of 26.5 cents per share and Dividend Reinvestment Plan with a 1.5% discount. 
  • BEN saw total lending of $73.8bn increase 2.1% in 2H21. BEN’s residential lending was 1.1x system up +8.4%. Total funding of $81.9bn was up +5.1% on 2H21, with customer deposits up 6.6% on 2H21.

Company Description

Bendigo and Adelaide Bank Ltd (BEN) offers a variety of banking and other financial services including internet banking, housing finance, retail and business banking, commercial finance, funds management, treasury and foreign exchange services, superannuation and trustee services.

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

AMC’s 1H22 result highlighted the Company’s defensive capabilities and ability to recover higher input costs

Investment Thesis:

  • Leading global market position, with high barriers to entry (very capital intensive).
  • Attractive exposure to both developed markets and emerging markets’ growth.
  • Clearly defined strategy to create shareholder value.
  • Bolt-on acquisitions provide opportunities to supplement organic growth.
  • Solid balance sheet.
  • Leveraged to a falling AUD/USD.
  • Benefits from the recently completed Bemis acquisition to start flowing through.
  • Capital management initiatives – current share buyback of $600m.

Key Risks:

  • Management failed to realize the synergies proposed in the Bemis transaction.
  • Competitive pressures leading to margin erosion and potential balance sheet pressure (e.g. reduced earnings leading to potential debt covenant breaches).
  • Input cost pressures in which the Company is unable to pass on to customers (even though the Company does pass through input costs).
  • Deterioration in global economic growth.
  • Value destructive acquisition.
  • Emerging markets risk.
  • Adverse movements in AUD/USD.

Key Highlights:

  • AMC delivered solid 1H22 results, with revenue up +12% to $6.93bn, operating earnings (EBIT) up +5% to $769m and EPS up +9% to 35.8cps. Top line growth was assisted by approximately $650m driven by price increases highlighting AMC’s ability to pass through higher costs. Excluding pass through, organic sales were up +2% driven by higher volumes and favourable mix. AMC repurchased ~$300m shares in 1H22 and expects to repurchase a total of $600m in FY22. Group leverage (net debt / EBITDA) at the end of the period was 2.9x.
  • Flexibles segment. Segment revenue was up +10% to $5.35bn, consisting of 2% organic growth (focusing on priority segments such as Healthcare, Coffee & Pet Food) and $480m boost from higher raw material costs recovery. Adjusted EBIT of $691m was up +7%, however margin eased -60bps to 12.9% but this was impacted by higher raw materials costs. Excluding this impact margin actually improved on pcp.
  • Rigid Packaging segment. Segment revenue was up +17% to $1.58bn, however this includes +13% uplift from the pass through of higher raw material costs. Excluding pass through, segment revenue was up +4%. In North America, AMC saw solid underlying demand in the beverage business with volumes up +3% (accelerating to +6% in 2Q22). There was also solid volume growth in Isotonics (as well as Iced Tea categories) due to customer demand for 100% recycled PET bottles. Latin America saw double-digit volume growth driven by Argentina, Mexico, and Colombia. Segment adjusted EBIT of $117m was down -13%, with margin down -250bps to 7.4%. Earnings were adversely impacted in North America due to inefficiencies and higher costs from industry-wide supply chain disruptions.
  • M&A quiet whilst Bemis is bedded down and Covid hinders DD process. AMC hasn’t been active with bolt-on acquisitions in recent history, a key part of AMC’s growth strategy. Management noted that they continue to assess opportunities in their space but in recent history have been busy trying to bed down the Bemis acquisition (largest in AMC’s history). Further, management is also finding it challenging to conduct due diligence on opportunities due to Covid-19. Management also noted that asset prices were also elevated at the moment.
  • Outlook – reaffirmed previous guidance. Management expects adjusted EPS to grow by 7-11% in constant currency terms, adjusted free cash flow of $1.1 – 1.2bn, and approximately $600m allocated to share repurchase (increased from $400m previously).

Company Description:

Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe and Asia.

(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

Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria

Business Strategy & Outlook

Incitec Pivot aims to expand its business around its strong global market share in explosives. This provides an increasingly stable earnings stream relative to volatile earnings from its fertilizer business. Competitive advantages include a duopoly Australian explosives business and global explosives operations. Incitec Pivot is also a dominant player in the Australian domestic fertilizer market and enjoys a degree of domestic fertilizer pricing power from its dominant market share in eastern states, but it is too small to influence global prices. The fertilizer business does not possess an economic moat. Explosive earnings are leveraged to mining volumes as much as price and should benefit from long-term global growth in demand for minerals and metals. Additionally, mining strip ratios are expected to increase over time, with more explosives required to mine the same amount of ore. Given these dynamics, the demand for ammonium nitrate is to continue growing. However, growth is likely to be uneven and subject to cyclical changes in demand for commodities. Significant increases in capacity have led to near-term oversupply of ammonium nitrate on the east and west coasts of Australia. Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria. There will likely be an oversupply of ammonium nitrate in Western Australia to 2020 and in Eastern Australia to 2021. 

In Western Australia, Orica has commissioned a new plant in the Pilbara with Yara of Norway. Incitec Pivot sources its ammonium nitrate from Wesfarmers in the west, so margins will be overly hurt by the oversupply. Incitec Pivot’s explosives business is strategically short ammonium nitrate, or AN, production capacity by around 200,000 tonnes in a long-capacity market. A superior product offering is essential to facilitate this strategy, with demand supported by flexible third-party agreements that are footprint-logical. Expansion at Moranbah in the east would only be considered after markets come back into balance.

Financial Strengths

Group net operating cash flow increased 68% to AUD 1.09 billion in fiscal 2022. This allowed net debt to fall by 7% to AUD 949 million. Gearing is modest at 15% and net debt/EBITDA just 0.5. Low debt with a strong fiscal 2023 cash flow forecast creates optionality for additional capital management. Debt ratios are well below the company’s 1.0 to 1.5 net debt/EBITDA target range. This places Incitec in a sound position to navigate the conversion of Gibson Island to import only and to explore new opportunities like green hydrogen manufacture. That and/or capital management post fiscal 2022. There is an expressed concern over capital misallocation in the recent past, including on-market share buy-backs. It is pleasing therefore that management has expressed an investment bias to capital-light and faster cash returning projects aligned to the strategy. The equity capital raised in fiscal 2020 increased the company’s liquidity and supported a continued investment grade credit rating. Over the long run, Incitec Pivot to return approximately 50% of earnings to shareholders through dividends, which is a reasonable payout ratio.

Bulls Say

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

Company Description

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

(Source: Morningstar)

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