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Shares Small Cap

nib holdings Ltd (NHF) reported revenue grew +8.3% to $1.4bn and is forecasted to become profitable in FY23

Young woman trading stock market by touching.

Investment Thesis:

  •  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), and exposure to upstart investments, we estimate that NHF offers close to double-digit underlying growth in the medium term.
  • Solid management team.
  • Cost-out strategy which improves the company’s expense ratio. 
  • 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.
  • Growth runways through the JV with Tasly Holdings Group, and also international expansion, through product offerings like NISS

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 decline unexpectedly despite the encouraging incentives and the 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 unfavorable contractual terms;
  • Lower than expected investment returns

Key highlights:

nib holdings Ltd (NHF) reported 1H22 – relative to the pcp, group underlying revenue grew +8.3% to $1.4bn; Group underlying operating profit (UOP) increased +28.5% to $109.6m; NPAT of $81.2m was up +24.7%. NHF’s Arhi (Australian Residents Health Insurance) recorded an uplift in net arhi policyholder growth of +2.8% to 653,000 new policyholders; whilst NHF’s New Zealand segment reported strong performance, with revenue growth of +13.8%, partially offset by poor but expected performance in international inbound and travel businesses, which reported a loss of $7.4m, and -$7.9m, respectively, as the Government continues to enforce measure to contain Covid. On the conference call with NHF, management did expect in the near-term, the iihi and travel segment to gradually return to normal as countries reopen international borders. Both segments are forecasted to become profitable in FY23. 

  • 1H22 Results Highlights. Relative to the pcp: (1) Group underlying revenue $1.4bn, up +8.3%, driven by strong premium revenue growth of +8.2% upon uplift in policyholders, and Covid related disruption to elective surgery and allied healthcare, partially offset by NHF’s international students and travel insurance businesses. (2) Group claims expense $1.1bn, up +6.4% with ongoing uncertainty around deferred treatment and future claims. (3) Group underlying operating profit $109.6m, up +28.5%. (4) NPAT of $81.2m, up +24.7%. (5) The Board declared an interim dividend of 11.0cps, fully franked (versus 10.0cps in 1H21). (5) Management does “expect and account for an inevitable ‘catch-up’ in deferred treatment now estimated at $59.2m”.
  • Performance by Segments. Relative to the pcp: (1) Australian Residents Health Insurance (arhi). Premium revenue of $1,151.0 was up +7.8% driven by policyholder growth, up +2.8% to over 653k. Claims expense of $917.1m, was up +4.9%, as Covid impacts offset increase in deferred claims liability, and effect of catch up in pcp. UOP of $123.6m, was up +39.8%. Normalised net margin continues to be in the 6-7% range. (2) New Zealand. Premium revenue of $144.4m, was up +13.8% due to policyholder growth of +4.1%, price adjustments to reflect inflation and favorable FX. Claims expense increase +17.2% to $92.9m due to policyholder increase and +12.3% claims inflation. UOP of $9.2m was down -12.4%. Net margin declined to 6.3% reflecting investment in the core system. NHF noted “the outlook for our Kiwi business is positive with favorable market conditions and the acquisition of Kiwi Insurance Limited which should be completed in 2H22. We expect 3-5% growth in policyholders for FY22”. (3) International inbound health insurance (iihi). Premium revenue was up +2.7% to $59.9m on strong performance in workers business especially through the Pacific and Australia Labor Mobility (PALM) scheme, offset by NHF’s student business with restrictions on international students. Claims incurred of $47.9m was up +20.4%. Underlying operating loss of $7.4m, was weaker than the $0.3m profit in the pcp. (4) nib Travel. Operating income of $8.2m was materially stronger than the $4.4m in the pcp. Underlying operating loss of -$7.9m was -1.3% lower than the pcp. NHF’s management noted that nib Travel’s loss was as expected, with the business still heavily impacted by border closures and travel restrictions.
  • Outlook. While NHF did not provide specific quantitative earnings guidance, management did note: “Strong arhi performance and New Zealand and international workers profitability are offsetting current loss making in international students and travel. Expect that support to continue while necessary”. (1) Australian Residents Health Insurance (arhi). Net policyholder growth ~3%; Claims escalation associated with “catch up” in deferred treatment fully provisioned; Return to net margin target 6-7% over time. (2) New Zealand. FY22 net policyholder growth 3-5%; Kiwi Insurance acquisition expected to complete in 2H22. (3) International inbound health insurance (iihi). Gradual return of travel domestically and internationally in CY22; Return to profitability in FY23. (4) nib Travel. Heightened demand for skilled migration to continue; Gradual return of international students as travel restrictions ease; Return to profitability in FY23.

Company Description: 

nib Holdings Limited (NHF) is the Australian private health insurer. NHF operates in four divisions which are private health insurance, life insurance, travel insurance and related health care activities. 

(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 is not liable for any unintentional errors in the document.

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

Categories
Global stocks Shares

Inflated Raw Material Costs In Conjunction With Significant Market Competition To Impede Growth For Catalent Inc.

Business Strategy and Outlook

Catalent is a leading contract development and manufacturing organization, or CDMO. The company has an extensive network of partnerships with pharmaceutical and biotechnology firms that leverage its expertise and scale to optimize drug production and avoid the risks of in-house drug manufacturing. The challenges and compliance risks associated with changing a drug’s manufacturing process create a sticky relationship for Catalent’s customers. Drug companies tend to stick with trusted suppliers with good track records of regulatory compliance, which makes them unlikely to switch to a different CDMO. Catalent provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Outsourcing penetration is anticipated to continue incrementally increasing, driven by the complexities of biologics manufacturing. 

Biologics are large, complex molecules such as antibodies, recombinant proteins, vaccines, and cell and gene therapies. Catalent’s biologics segment accounted for 48% of its fiscal year 2021 revenue. The biologics manufacturing process requires around-the-clock maintenance, with an emphasis on maintaining the integrity of the cell and its DNA as well as keeping the cells free of contaminants. The same cell line reproduces to continue making the product until the end of the drug’s life. Therefore, for clients to switch manufacturers would require establishing a new cell line that would result in variations, or transferring the technology, which makes it vulnerable to changes as well. Biopharma customers are likely to continue outsourcing to CDMOs in order to benefit from access to flexible capacity and manufacturing improvements. According to Industry Standard Research, only one third of pharmaceutical manufacturing is currently conducted in-house while two thirds are outsourced.

Financial Strength

Catalent is in fair financial health, and the business is expected to continue providing a steady stream of cash. The company has historically utilized debt, particularly for acquisitions. Catalent ended 2021 with $3.2 billion in total debt after completing several acquisitions over the last few years of biologics-focused businesses, cell and gene therapy companies, and a gummies manufacturer. Catalent is focused on expanding its biologics capabilities to meet increased demand for complex biologics manufacturing and diversify its offerings to customers. The company is expected to be able to meet its financial obligations thanks to continued strong growth. At the end of 2021, Catalent had nearly $900 million in cash and equivalents, which is considered a healthy amount to support additional growth.

Bulls Say’s

  • Contract development and manufacturing organizations like Catalent have sticky businesses with long-term contracts and high switching costs for its customers. 
  • As drug portfolios are increasingly made up of complex drugs like biologics and emerging therapies, Catalent’s biopharma customers will be more reliant on outsourced manufacturing. 
  • With its global scale, Catalent is less dependent on any one customer or drug, which allows it to better absorb unexpected late-stage trial failures or drops in demand.

Company Profile 

Catalent is a contract development and manufacturing organization, or CDMO. It operates under four segments: biologics, softgel and oral technologies, oral and specialty delivery, and clinical supply services. Catalent derives its revenues primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Catalent has over 50 facilities across four continents.

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Shares Small Cap

It is going to be challenging for Spirit to expand content on existing aircraft platforms organically

Business Strategy and Outlook

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, and structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue. It is likely Spirit will need significant additional inorganic growth to achieve its goals. 

Spirit AeroSystems was spun out of Boeing in 2005 and the company remains the sole-source supplier for the majority of the airframe content on the 737 and 787 programs. Spirit is particularly exposed to Boeing’s 737 program, which generally accounts for roughly half of the company’s revenue. Boeing retained all of the intellectual property when it spun out the company. It is alleged that the lack of intellectual property and these long-term supply agreements prevent Spirit from fully monetizing its sole-source supplier position. 

Spirit became an Airbus supplier in 2006 with the acquisition of BAE Aerostructures and has inorganically expanded content on Airbus products in recent years. It’s held in positivity: Spirit’s revenue diversification because it reduces the firm’s product concentration risk. It is probable that the firm will hold off from inorganic growth, as Spirit has taken substantial debt to fund unprofitable operations during the COVID-19 pandemic and will have few capital allocation options other than deleveraging during an aerospace recovery. It is believed that it will be challenging for Spirit to expand content on existing aircraft platforms organically.

Financial Strength

Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company had $1.5 billion of cash on the balance sheet and about $3.8 billion of debt at the end of 2021, and access to another $950 million of debt if it so needs. It is held roughly slightly below breakeven cash flow in 2022, and that the firm will be able to meet its goal of removing $1 billion of debt off its balance sheet in the three-year period leading to 2023. It is projected that Spirit will focus on deleveraging post-pandemic. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Based on projections, it is regarded that the firm will be able to cover the debt maturities in cash, but it is likely the 2025 obligations will be the most difficult for the firm to cover. It is alleged that managing the debt maturity schedule will be the paramount issue Spirit faces in an aerospace recovery, and that shareholder remuneration will likely be a secondary focus for the firm.

Bulls Say’s

  • Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier. 
  • Spirit has restructured to become more efficient when aircraft manufacturing recovers. 
  • Spirit is diversifying its customer base, which is likely to make it less susceptible to customer specific risk.

Company Profile 

Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s revenue. 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Shares Small Cap

The growth that the Western Union Co is seeing in digital transfers does not appear to be leading to strong overall growth

Business Strategy and Outlook

Western Union’s primary macroeconomic exposure is to employment markets in the developed world, as the search for better economic opportunities is the fundamental driver for money transfers. While conditions have improved over time in the United States and Europe, a region that is about equally important for Western Union as the U.S., growth remains modest, with new entrants adding to the issues for legacy operators like Western Union. At this point, it is unlikely for a catalyst to improve the situation. Pandemic-related headwinds appear to be lingering, and the decision to exit Russia will add pressure. It is still anticipated that Western Union has a wide moat based on its sizable scale advantage, but with a stagnant top line, the value of the moat over the next few years could be questioned. 

Another major issue for Western Union is the industry shift toward electronic methods of money transfer. The company has been actively building out its presence in electronic channels in recent years to adapt to the change in the industry. Western Union saw a sharp spike in digital transfers at the beginning of the pandemic, and growth has remained strong. Western Union achieved a 32% year-over-year increase in transaction growth in 2021 as this area of the company’s business jumped to about a quarter of revenue. It is alleged the firm’s aggressive approach is the best strategy as Western Union positions itself to maintain its scale advantage despite the shift. In analysts’ opinion, scale and market share across all channels will be the dominant factor in long-term competitive position, and Western Union appears to be maintaining its overall position. However, the growth that the company is seeing in digital transfers does not appear to be leading to strong overall growth, and this situation is unlikely to change.

Financial Strength

Western Union’s capital structure is fairly conservative, as management sees a strong credit profile as an advantage in attracting agents. The company carried $3.0 billion in debt at the end of 2021, resulting in debt/EBITDA of 2.3 times; this is a reasonable level, in experts’ reasoning, given the stability of the business. Western Union also typically holds a substantial amount of cash. Net debt at the end of 2021 was approximately $1.8 billion, and it is held, that the company might hold a net debt position of about $2 billion over time. Given recent changes to tax laws, it’s possible Western Union might not hold as much cash as it has historically, as it will no longer incur a tax penalty upon repatriation. This could help free management’s hand, as the company historically has returned the bulk of its free cash flow to shareholders through stock repurchases and dividends.

Bulls Say’s

  • The demographic factor that has historically driven industry growth–namely, the differential between population growth in developing and developed countries–remains in place for the foreseeable future. 
  • Western Union didn’t see a major drop-off during the last recession or the pandemic, highlighting the stability of the business. 
  • While the motives for immigrants to relocate to wealthier countries are well understood, developed countries also have incentive to open their borders, as negligible native population growth makes immigration a necessity for long-term GDP growth.

Company Profile 

Western Union provides domestic and international money transfers through its global network of about 500,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network. 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Global stocks Shares

Lower Copaxone Sales, US Generic Competition, Unfavorable Exchange Rates Weigh on Teva’s Results

Business Strategy & Outlook: 

Israel-based Teva Pharmaceutical is one of the largest global generic drug manufacturers, with a significant presence in the United States and in Western Europe. Generic drug manufacturers with large exposure to the U.S. have fared very poorly compared with the overall market over the past few years due to factors that resulted in a highly deflationary generic drug price environment. To combat further margin deterioration, the largest, most capable manufacturers have invested more heavily in development and marketing of complex generics and biosimilars, which face much less competition and price erosion than small-molecule generics. 

Founded in 1901, Teva was a small wholesale drug business in Jerusalem that converted into a local drug manufacturer during World War II with the rise in demand. The company consolidated the market in 1960 to create the largest drugmaker; it later expanded into Europe and the U.S. and then into generics in 1984 with the passage of the Hatch-Waxman Act. In the following 30 years, Teva completed roughly 30 acquisitions to further its position as the largest global generic manufacturer with roughly 90 manufacturing and research and development facilities worldwide. Despite efforts to curb margin deterioration by eliminating unprofitable drugs in the portfolio, Teva’s top and bottom lines have been negatively affected by a 70% decline in sales for its largest specialty drug, Copaxone, following generic entry and competition from new therapies. At its peak in 2013, Copaxone generated $4.3 billion in sales and contributed one fifth of total company revenue. While the company’s specialty drug pipeline is deep and consists of several novel biologic products and biosimilars, the growth is expected to be anemic over the next few years with slow generic revenue growth and a further decline in Copaxone sales. The company forecasts $750 million in Copaxone revenue in 2022.

Financial Strengths:

As of year-end 2021, Teva holds net debt of $20.9 billion, with $1.4 billion due in 2022, $2.1 billion due in 2023, and $2.0 billion due in 2024. The company’s $2 billion in cash and free cash flow generated from operations gives us some assurance that Teva should meet its obligations in the near term. Legal risk from ongoing litigation related to opioids, price-fixing, and Copaxone is also a risk to liquidity over the next several years. The base assumption calls for $2 billion in a cash settlement paid over a period of 15 years.

Bulls Say:

  • As a leading global generic manufacturer, Teva enjoys economies of scale over its smaller peers.
  • Teva’s specialty portfolio represents one fifth of sales and diversifies the company from generic drug deflation risk.
  • Teva’s biosimilar for Humira is anticipated to launch in the U.S. in 2023, which should bolster specialty segment sales.

Company Description: 

Based in Israel, Teva is one of the world’s largest generic drug manufacturers, with over 3,500 products marketed in over 60 countries. While a majority of its revenue is attributed to prescription generic drugs, Teva develops and markets its own branded specialty and biopharmaceutical products, primarily in the U.S. and in Europe. The company’s branded portfolio generates one fifth of total revenue and consists of patented therapies targeting central nervous system conditions (Austedo, Ajovy, Copaxone), oncology (Bendeka/Treanda), and respiratory conditions (ProAir, Qvar). While global competition has facilitated the commodification of small-molecule generic drugs, Teva’s portfolio rationalization has resulted in less overall price erosion versus peers.

(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

Vehicle Repair Demand Continues to Strengthen, Benefiting LKQ’s Q1 Results

Business Strategy & Outlook

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. The company has built scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, boosting productivity. The company’s strong distribution network will support its ability to keep order fulfilment rates high in both aftermarket and salvage products.

The company’s strategy focuses on being a one-stop shop for repair professionals, ranging from salvage products to aftermarket and remanufactured parts. LKQ’s parts are a strong alternative to original equipment manufacturers’ parts, exhibiting high quality in comparison. While insurance companies aren’t usually direct customers, they do have sway over which parts are used in vehicle repairs. LKQ’s alternative parts allows insurance companies to reduce their cost base while also reducing the cycle time for repairs. Historically, the company has used acquisitions to build up its capabilities and footprint, but that has changed over the past few years. LKQ has shifted its focus to integrating its businesses and improving its cost structure, and it will aim to make smaller tuck-in acquisitions as opposed to larger deals.

 LKQ is well positioned to compete as electric vehicle adoption increases. The shift to EVs will present new revenue opportunities for the company. In both hybrid and full-electric vehicles, new parts will be needed to keep vehicles on the road. For example, to see increased demand for battery-related parts and a need for remanufactured or refurbished batteries.

LKQ has exposure to end markets with attractive tailwinds. The demand for repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed by the COVID-19 pandemic). The high average age of vehicles will also support demand for repair work.

Financial Strengths

LKQ maintains a sound balance sheet. Its debt balance stood at $2.8 billion in 2021, down from $3.7 billion in 2019. LKQ’s management team has been focused on strengthening the balance sheet over the past few years. The company’s net leverage position (net debt/EBITDA) has steadily improved, declining from nearly 3 times to under 2 times in 2021. This resulted in LKQ reaching investment-grade status.

In terms of liquidity, the company will be on solid footing over the long term. In 2021, LKQ had a cash balance of nearly $300 million, but this will likely increase over the forecast, given the company’s shift in its acquisition strategy. In the past, LKQ was more willing to acquire companies to expand its capabilities and footprint. Going forward, the company will focus on small tuck-ins, freeing up more cash to reinvest in its business, repurchase shares and grow its dividend. A stronger cash position will help LKQ quickly react to a changing operating environment as well as meet any near-term debt obligations (no major maturities until 2024). The comfort in LKQ’s ability to access $1.2 billion in credit facilities. LKQ’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favours organic growth and also returns cash to shareholders.

 LKQ can generate solid free cash flow throughout the economic cycle. The company to generate over $1 billion in free cash flow in midcycle year, supporting its ability to return free cash flow to shareholders through share repurchases and dividends. Additionally, free cash flow growth over the next decade will be supported by improving EBITDA margins in LKQ’s Europe business, which to be in the low-double-digit range over the next five years.

Bulls Say

  • Growth in miles driven increases the wear and tear on vehicles, requiring more maintenance and repair work to keep them on the road, benefiting LKQ.
  • LKQ’s collision business could see rising demand from increasing auto claims as more drivers return to the road following the COVID-19 pandemic.
  • Increasing adoption of hybrid vehicles presents new revenue opportunities for LKQ, such as new battery related parts, in addition to its ICE-related parts.

Company Description

LKQ is a leading global distributor of non-OEM automotive parts. Initially formed in 1998 as a consolidator of auto salvage operations in the United States, it has since greatly expanded its scope to include distribution of new mechanical and collision parts, specialty auto equipment, and remanufactured and recycled parts in both Europe and North America. It still maintains its auto salvage business and owns over 70 LKQ pick-your-part junkyards. Separate from the self-service business, LKQ purchases over 300,000 salvage automobiles annually that are used to extract parts for resale. Globally, LKQ maintains approximately 1,700 facilities.

(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

CS: History of Poor Risk Management Drives Discounted Valuation

Business Strategy & Outlook: 

Credit Suisse’s true underlying profitability has been masked for the better part of a decade by multiple restructuring charges and the cost of running down a legacy book of unprofitable assets. The new management team at the helm of Credit Suisse hoped that it addressed all issues during 2020, but new problematic exposures continue to crop up. This suggests a deeper risk management malaise at Credit Suisse. Credit Suisse has some very good, profitable, and generally asset-light business with good long-term secular growth prospects–especially in wealth management/private banking and the Swiss universal bank. The discount that the market has imposed on the rating of Credit Suisse relative to UBS and its other peers should, however, remain in place until Credit Suisse can convince investors that it has addressed its risk management deficiencies. 

Credit Suisse will have to report several quarters of results free from the large non-recurring items that have historically marred its results. There is a strong long-term secular trend that sees the wealth of high-net-worth individuals and families growing ahead of global nominal GDP. The ultra-high net worth and family office segment, where Credit Suisse has focused most of its attention, is a particularly attractive segment. The threat of digital disintermediation is reduced and the need for bespoke solutions and strong relationship between banker and client remains. The current negative interest rate environment obscures the benefits of Credit Suisse’s very strong deposit franchise that provides it with ample surplus liquidity. Currently, this is damaging to Credit Suisse’s net interest income–it needs to invest its excess liquidity in short-term risk-free assets that currently pays no or negative interest. Credit Suisse has, however, starting passing on these costs to selected clients.

Financial Strengths:

Credit Suisse has a common equity Tier 1 ratio of 14.4% currently, ahead of its own internal capital target of a 14% common equity Tier 1 ratio. This is comfortably ahead of its regulatory minimum capital requirement of 10%. However, Credit Suisse’s leveraged ratio of 4.2% is more of a constraint, with a regulatory minimum requirement of 3.5% and an internal target of 4.5%. Credit Suisse intends to pay out 25% of its earnings as a dividend and it has not announced new share buybacks.

Both Credit Suisse’s liquidity coverage ratio and its net stable funding ratio are comfortably above 100%, which indicates sound liquidity. These ratios, while helpful, do not fully capture the quality of a bank’s funding. One should also consider the structure of a bank’s funding–where the relatively lower importance of wholesale deposits in Credit Suisse’s funding mix is a clear positive. However, private banking/wealth management clients will typically be more sophisticated than the average retail banking client and therefore more likely to withdraw funds in times of stress. The private banking deposits are as sticky as general retail deposits, although they remains stickier than wholesale funding.

Bulls Say:

  • Credit Suisse looks set to emulate UBS and transform its business model into a wealth manager with a complementary investment bank, which would increase profitability and reduce earnings volatility.
  • Credit Suisse has run down a massive book of EUR 126 billion to EUR 45 billion over the past four years, incurring pretax losses of EUR 16 billion in the process. This has obscured the performance and profitability of the core business.
  • Credit Suisse generates the bulk of its earnings in stable and low-risk private banking/wealth management and Swiss commercial banking.

Company Description:

Credit Suisse runs a global wealth management business, a global investment bank and is one of the two dominant Swiss retail and commercial banks. Geographically its business is tilted toward Europe and the Asia-Pacific.

(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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Shares Small Cap

Upon U.S. federal legalization, Tilray to own 21% of the U.S. multistate operator

Business Strategy and Outlook

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD products in the U.S. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and renaming itself Tilray in 2021. Canada legalized recreational cannabis in October 2018. Since then, recreational sales have come to represent an increasingly larger portion of sales for producers. The Canadian market is overly crowded with producers, so Tilray faces stiff competition to develop consumer brands that can lead to meaningful pricing power. Buoyed by attractive deal terms, Tilray’s acquisition of HEXO’s senior secured convertible notes could potentially help drive necessary market consolidation.

Legacy Aphria had an extensive international distribution business, which generated the majority of its net revenue, a far larger portion than many of its Canadian cannabis peers. Legacy Tilray had also entered the global medical market. With both companies’ international capabilities intact, Tilray looks well positioned. The global market looks lucrative given higher realized prices and growing acceptance of the medical benefits of cannabis. Exporters must pass strict regulations to enter markets, which protects early entrants. It is foreseen, roughly 15% average annual growth through 2030 for the global medicinal market excluding Canada and the U.S.

In 2020, legacy Aphria acquired SweetWater, a U.S. craft brewery. Legacy Tilray previously acquired Manitoba Harvest to distribute CBD products in the U.S. It finally secured a toehold into U.S. THC when it acquired some of MedMen’s outstanding convertible notes. Upon U.S. federal legalization, Tilray would own 21% of the U.S. multistate operator. Furthermore, Tilray paid a great price while also getting downside protection as a debtholder. It is held, the U.S. offers the fastest growth of any market globally. However, the regulatory environment is murky with individual states legalizing cannabis while it remains illegal federally. It is alleged federal law will eventually be changed to allow states to choose the legality of cannabis within their borders

Financial Strength

At the end of its third fiscal quarter 2022, Tilray had about $710 million in total debt, excluding lease liabilities. This compares to market capitalization of about $4 billion.In addition, Tilray had about $279 million in cash, which will allow it to fund future operations and investments. Management has been deliberate with its SG&A spending given the slow rollouts and regulatory challenges the Canadian market has faced. Legacy Aphria was the first major Canadian producer to reach positive EBITDA, with legacy Tilray reaching positive EBITDA in the quarter immediately preceding its acquisition. However, the combined company continues to generate negative free cash flow to the firm, which pressures its financial health.The proposed deal to purchase $211 million in HEXO senior secured convertible notes is unlikely to add any pressure to Tilray’s financial health.With most of its development costs completed, it is anticipated Tilray will have moderate capital needs in the coming years. As such, it is held, debt/adjusted EBITDA to decline. It is alleged Tilray is unlikely to require significant raises of outside capital. In September 2021, the company received shareholder approval for increasing its authorized shares in order to rely on equity for future acquisitions. This bodes well for keeping its financial health strong.

Bulls Say’s

  • Legacy Aphria’s acquisition of Legacy Tilray created a giant with leading Canadian market share, expanded international capabilities, and U.S. CBD and beer operations.
  • Tilray’s management focuses on strategic SG&A spending and running a lean business model, benefiting its financial health in the early growth stage industry.
  • Tilray management’s careful approach to expansion has allowed it to reach profitability faster than any of its Canadian peers.

Company Profile

Tilray is a Canadian producer that cultivates and sells medical and recreational cannabis. In 2021, legacy Aphria acquired legacy Tilray in a reverse merger and renamed itself Tilray. The bulk of its sales are in Canada and in the international medical cannabis export market. U.S. exposure consists of CBD products through Manitoba Harvest and beer through SweetWater.

(Source: MorningStar)

General Advice Warning

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

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Global stocks Shares

Carnival’s Return to Profitability in Sight Despite Omicron and Geopolitical Speed Bumps

Business Strategy & Outlook:

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships at 2021 fiscal year-end. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, global travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers have slowly resumed cruising since the summer of 2021 (after a year-plus no-sail halt), the cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. 

On the yield side, the Carnival is expected to see some pricing pressure as future cruise credits continue to be redeemed through 2022, a headwind partially mitigated by the return of capacity via full deployment of the fleet. And on the cost side, higher spend to maintain tighter cleanliness and health protocols should keep expenses inflated. Aggravating profits will be staggered reintroduction of the fleet through the first half of 2022, crimping near-term profitability and ceding previously obtained scale benefits. As of March 22, 2022, 75% of capacity was already deployed and the entire fleet should be sailing by the important summer season. These persistent concerns, in turn, should lead to average returns on invested capital including goodwill, that are set to languish below our 10.4% weighted average cost of capital estimate until 2026, which supports our no-moat rating. While Carnival has carved out a broad offering across demographics, the product still has to compete with other land-based vacations and discretionary spending for share of wallet. It could be harder to capture the same percentage of spending over the near term given the perceived risk of cruising, heightened by persistent media attention.

Financial Strengths:

Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with around $7 billion in cash and investments at the end of February 2022. This should cover the company’s cash burn rate through the end of the redeployment ramp-up, which had run around $500 million or more in recent months due to higher ship startup costs. The company has raised significant levels of debt since the onset of the pandemic with $35 billion in total debt, up from around $12 billion at the end of 2019. The company has less than $3 billion in short term and $2 billion in long-term debt coming due over the next year (as of Feb. 28, 2022).

The company is focused on reducing debt service as soon as reasonably possible in order to reduce future interest expense. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term.  Carnival has just over one year’s worth of liquidity to operate successfully in a no-revenue environment. There is no anticipation on an imminent credit crunch in the near term, even with no associated revenue (which the company has successfully resumed capturing), as long as capital markets continue to function properly. Additionally, in order to free up cash to support operating expenses, Carnival eliminated its dividend in 2020 ($1.4 billion in 2019). Another $3 billion in current customer deposits were on the balance sheet, offering working capital that can be utilized to run the business and indicating demand for cruising still exists. And capital markets remain open to financing, with the company announcing a $500 million at-the-market equity raise at the end of January 2022, indicating access to cash is still plentiful.

Bulls Say:

  • As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate as capacity limitations are repealed.
  • A more efficient fleet composition (after pruning 19 ships at the onset of the pandemic) may benefit the cost structure to a greater degree than initially expected, as sailings fully resume.
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Description:

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with all of its capacity set to be redeployed by summer 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(Source: Morningstar)

General Advice Warning

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

Categories
Global stocks Shares

Narrow-Moat Nordstrom Poised for a Turnaround as Its Strategic Plans Take Hold

Business Strategy & Outlook:

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While the company was unprofitable in 2020 because of the COVID-19 crisis, its profitability returned in 2021, and its brand intangible asset is intact. Despite a rocky couple of years, the Nordstrom’s full-price and Rack off-price stores have competitive advantages over other apparel retailers.

Nordstrom is responding well to changes in its market. The company has about 100 full-price stores, with nearly all of them in desirable Class A malls (sales per square foot above $500) or major urban centers. This is viewed as an advantage, as some lower-tier malls are unlikely to survive. Moreover, Nordstrom has a presence in discount retail with Rack (about 250 stores) and significant e-commerce (42% of its sales in 2021). Still, the firm’s full-price business is vulnerable to weakening physical retail, and Rack competes with firms like no-moat Poshmark and narrow-moats TJX and Ross.

Nordstrom unveiled a new strategic plan, Closer to You, in early 2021 that emphasizes e-commerce, growth in key cities (through Local and other initiatives), and a broader off-price offering. Among

the merchandising changes, Nordstrom intends to increase its private-label sales (to 20% of sales from 10% now) and greatly expand the number of items offered through partnerships (to 30% from 5% now). The firm set medium-term targets of annual revenue of $16 billion-$18 billion, operating margins above 6%, annual operating cash flow of more than $1 billion, and returns on invested capital in the low teens. Nordstrom will consistently generate more than $1 billion in operating cash flow, achieve ROICs in the teens, and reach $16 billion in annual revenue in 2024. However, they will trend higher, the operating margins will be slightly below 6% in the long run due to intense competition, but this could change if some of the new initiatives are more successful than expected.

Financial Strengths:

The Nordstrom is in good financial shape and will overcome the virus-related downturn in its business. The firm closed 2021 with more than $300 million in cash and $800 million available on its revolving credit facility. Although it also had $2.9 billion in long-term debt, most of this debt does not mature until after 2025. Nordstrom had net debt/EBITDA of a reasonable 2.5 times at the end of 2021. Nordstrom generated $200 million in free cash flow to equity in 2021, but this amount to rise through reductions in operating expenses, working capital management, and moderate capital expenditures. As per forecast an annual average of about $840 million in free cash flow to equity over the next decade. As Nordstrom’s results have improved, it has resumed cash returns to shareholders. In 2021, about $250 million in share repurchases and dividends totaling $0.76/share (23% payout ratio). Also, to conserve cash, Nordstrom has suspended its dividends and share repurchases (used more than $400 million combined in cash in 2019), but to anticipate both will resume in 2022. Over the next decade, the buybacks of about $340 million per year and an average dividend payout ratio of about 23%. Nordstrom’s capital expenditures were quite elevated prior to 2020. Its store count has increased from 292 at the end of 2014 to about 360 today as more than 60 Rack stores have opened

since 2014 and the company has expanded into Canada and New York City. Nordstrom has estimated its total investment in Canada and New York at $1.1 billion for 2014-19. The estimated Nordstrom’s yearly capital expenditures will average about $650 million over the next decade, well below 2019’s $935 million. 

Bulls Say:

  • ONordstrom’s online sales exceeded $6 billion in 2021, making it one of the largest e-commerce firms in the U.S.
  • ONordstrom suspended dividends and share repurchases   when the pandemic hit but has resumed cash returns to shareholders. The projected annual combined dividends and share purchase above $400 million over the next five years.
  • ONordstrom serves an affluent customer base in its full line stores, which separates it from the many midlevel retailers in malls. Most of its stores are in productive malls that are not expected to close.

Company Description:

Nordstrom is a fashion retailer that operates approximately 100 department stores in the U.S. and Canada and approximately 250 off-price Nordstrom Rack stores. The company also operates both full- and off-price e-commerce sites. Nordstrom’s largest merchandise categories are women’s apparel (28% of 2021 sales), shoes (25% of 2021 sales), men’s apparel (14% of 2021 sales) and women’s accessories (14% of 2021 sales). Nordstrom, which traces its history to a shoe store opened in Seattle in 1901, continues to be partially owned and managed by members of the Nordstrom family.

(Source: Morningstar)

General Advice Warning

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