Category: Shares

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Global stocks Shares

G8 Education Ltd Long term Outlook remains positive with growing population; Announced share buyback

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Investment Thesis

  • Trading below our valuation. 
  • Long-term outlook for childcare demand remains positive with growing population (organic and net immigration). 
  • Greater focus on organic growth as well as acquired growth. 
  • National footprint allows the Company to scale better than competitors and mum and dad operators.
  • Potential takeover target by a global operator. 
  • Leverage to improving occupancy levels – (rough estimates) a 1.0% improvement in occupancy equates to $10-11m revenue and approx. $3m EBIT benefit.

Key Risk

  • Execution risk with achieving its operating leverage and occupancy targets.
  • Increased competition leading to pricing pressure. 
  • Increased supply in places leading to reduced occupancy rates. 
  • Value destructive acquisition(s). 
  • Adverse regulatory changes or funding cuts to childcare.
  • Recession in Australia.
  • Dividend cut   

CY21 Results Highlights Given the disruption to CY20 results, comparing the CY21 results to pre-Covid CY19 results. 

  • Group core revenue of $828m was down -6.9% (or down ~$62m) vs CY19 due to lower occupancy (down 2.1% vs CY19) impacting revenue by ~$50m and a $48m impact from the centers divested since CY19. Partly offsetting these were higher average net fees of $16m and $20m of temporary government support relating to Covid-19. 
  •  Core centre NPBT of $137.8m was down -7.7% on CY19, however core centre NPBT margin of 16.6% was mostly flat on CY19 (16.8%) driven by cost management (effective booking and attendance levels; roster optimization) and removal of negative or low margin centers through lease surrender or divestment. 
  •  Group’s cash conversion of 107% was higher vs CY19 101% despite lower overall operating cash flows (driven by lower EBITDA), in part driven by the benefits of lower interest payments (refinance and lower net debt levels). 
  •  GEM finished the year with a strong balance sheet, with a net debt position of $26m and leverage (net debt / EBITDA) of 0.2x. 
  • The Board declared a fully franked dividend of 3cps, representing a payout ratio of 56% and within the target payout ratio range of 50-70% of NPAT. The Company also announced an on-market buyback “to be determined by appropriately balancing between shareholder returns and leverage levels, the uncertain earnings recovery outlook driven by Covid-19, the funding of strategic priorities including the improvement program and the property investment program and other funding needs included for wage remediation and network optimization.”

Company Profile

G8 Education Limited (GEM) owns and operates care and education services in Australia and Singapore through a range of brands. The Company initially listed on the ASX in December 2007 under the name of Early Learning Services, but later merged with Payce Child Care to become G8 Education.

(Source: Banyantree)

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

Categories
Shares Small Cap

Nitro Software expects attractive growth runway

Investment Thesis

  • Sizeable market opportunity of US$28bn TAM (company estimates which is based on ground up model taking into account customer contract values).
  • Established a solid foundation to build from – the Company has penetrated 68% of the Fortune 500 companies and whilst initial involvement with these companies may be small however it provides opportunity to scale up with these customers (approx. 10% of the Fortunes 500 customers have 100 or more licensed users).  
  • Structural tailwinds – ongoing migration to online with businesses looking to digitize manual, paper driven processes.
  • Looking to become a platform.
  • Attractive recurring revenue base via subscriptions. 
  • Investment in R&D to continue developing the Company’s competitive position and enhance value proposition with customers.   

Key Risks 

  • Rising competitive pressures, especially the larger players like Adobe Inc and DocuSign
  • Growth disappoints the market, given the company trades on high valuation multiples – growth in subscriptions, new customers and penetration of existing clients. 
  • Product innovation stalls and fails to resonate with customers. 
  • Emergence of new competitors and technology.

Bulls Say’s

  • Revenue excluding Connective of US$50.7m, was up +26%, and at the top end of the upgraded guidance range. Revenue including Connective was US$50.9m. Annual Recurring Revenue (‘ARR’) excluding Connective was US$40.1m, up +41% and in line with guidance (reaffirmed in October 2021 of US$39m – US$42m). ARR including Connective was US$46.2m, up +62%.
  • Operating EBITDA loss excluding Connective was US$7.4m, and including Connective was US$7.6m, in line with the upgraded guidance range of US$7.5m – US$8.0m provided by the Company in January 2022, and significantly lower than the guidance range of US$11m – US$13m provided at the beginning of FY2021.
  • NTO exceeded 1m active subscription PDF licences, reaching 1.1m at FY21-end.
  • NTO executed 2.2m Nitro Sign eSignature requests excluding Connective eSignatures, up +102%, and more than 22m eSignature requests including Connective.
  • NTO completed a A$140.0m capital raise and hence NTO retains a strong balance sheet with no debt and cash and cash equivalents of US$48.2m including Connective.

Company Profile 

Nitro Software Ltd (NTO), founded in 2005 & listed in 2019, is a global document productivity software company. NTO offers integrated PDF productivity, eSignature and business intelligence (BI) tools through a horizontal SaaS and desktop-based software suite. The Company helps customers move to 100% digital document workflows, eliminating paper and accelerating business processes. NTO serves customers around the world and counts 68% of the Fortune 500 companies among its customers. In total, NTO has over 12,000 business customers (who are defined as having at least 10 licensed users) and across 155 countries.  

(Source: BanyanTree)

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

QBE FY21 statutory NPAT improve to $750m, as premiums shot up by an average of 9.7% during the year

Sydney, Australia - March 14, 2013: The Australia Stock Exchange big board viewed from the sidewalk in front of the exchange building in Sydney. The ASX board displays real-time stock information for companies listed on the exchange.

Investment Thesis 

  • New CEO announced could bring a fresh perspective and potential rebasing of earnings. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. 
  • Solid global reinsurance program should insulate earnings from catastrophe claims.
  • Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio).
  • Committed to the share buyback program.
  • Undertook a simplification process and sold non-core operations.

Key Risks

  • New CEO announced could bring a fresh perspective and potential rebasing of earnings. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. 
  • Solid global reinsurance program should insulate earnings from catastrophe claims.
  • Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio).
  • Committed to the share buyback program.
  • Undertook a simplification process and sold non-core operations.

1H22 Results Highlights                

Relative to the pcp:   

  • Statutory NPAT improved to $750m from a loss of $1,517m in pcp, reflecting a material turnaround in underwriting profitability. Adjusted net cash profit after tax improved to $805m from a loss of $863m in pcp and equated to ROE of 10.3%. 
  •  GWP grew +22% to $18,457m reflecting the strong premium rate environment (average group-wide rate increases averaged +9.7%) as well as improved customer retention and new business growth across all regions with growth in Crop exceptionally strong at 51% due to the significant increase in corn and soybean prices coupled with targeted organic growth. Excluding Crop, GWP increased +18%, or +10% in excess of premium rate increases, up +600bps over pcp, including growth in excess of rate of +15%, +7% and +11% in North America, International and Australia Pacific, respectively. 
  • Combined operating ratio improved -10.5% over pcp to 93.7% as pcp was significantly impacted by Covid-19 claims and adverse prior accident year claims development. North America Crop business reported a combined operating ratio of 92.7%, declining -550bps over pcp. 
  •  Statutory expense ratio declined -140bps over pcp to 13.6% amid operational efficiencies, remaining on track to reach 13% by 2023. 
  • Catastrophe claims were $905M (6.6% of net earned premium vs 5.8% in pcp), up +31.5% over pcp and 90bps above the Group’s increased allowance. 
  • Investment income declined -46% over pcp to $122m amid negative mark-to-market impact of higher risk-free rates on fixed income portfolio. 
  •  Capital position strengthened with indicative pro-forma APRA PCA multiple increasing +0.03x to 1.75x, at the higher end of 1.6–1.8x target range and pro-forma gearing (debt/capital) declining -170bps to 24.1%, within the 15–30% target range. 
  •  Probability of adequacy (PoA) of net outstanding claims reduced -80bps to 91.7% but remained towards the top end of our 87.5–92.5% target range. 

Company Profile

QBE Insurance Group Ltd (QBE) is a global general insurer that underwrites commercial and personal policies across North America, Australia and New Zealand, Europe and emerging markets. QBE’s Equator Re segment is its captive reinsurer, providing reinsurance protection to the entire Group’s operating divisions.

 (Source: Banyantree)

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

Cost Absorption Normalizes as Top Line Growth Moderates at No-Moat Wayfair

Business Strategy and Outlook

Wayfair continues to take share in the fragmented home goods market. The firm’s differentiation comes by way of product breadth and its logistics network, which permits faster delivery of both small and large parcels than most of its peers. Targeting a wide consumer base with a customer aged 20-64 years old (200 million domestic households) with income of $25,000-$250,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no-moat rating.

Wayfair’s inventory-light model benefits inventory turns, a strategy has freed up capital to spend on customer acquisition and retention, leading to 27 million active users as of December 2021 who spend around $500 per year (versus 1.3 million users who spent $300 in 2012). This implies its product mix and marketing are resonating with end users. The pandemic pulled forward the capture of positive free cash flow to 2020, and scale should allow Wayfair to generate positive free cash flow to equity over our forecast, even with constraints from infrastructure spend in Europe and IT investment.

Given Wayfair’s lifecycle position, with significant growth potential but also corresponding expenses to achieve market share gains, we expect ROICs to be volatile. We think Wayfair can hit some of its long-term goals, but the duration of execution to achievement is trickier. While it should exceed its prior 25%-27% gross margin target longer term (we forecast reaching 29% due to higher private label mix), we don’t see operating expenses in management’s targeted range 15%-19% of sales until beyond 2031. We plan to watch post pandemic customer acquisition cost trends to determine whether Wayfair could develop a network effect.

Financial Strength 

Wayfair carries modest levels of debt, keeping its financial profile stable as it grows into a more mature business. It carried about $3 billion in long-term debt at competitive rates on its balance sheet as of Dec. 30, 2021, after executing a $535 million convertible raise in April 2020 and another $1.5 billion convertible raise in August 2020. The firm also has access to liquidity through its $600 million credit facility, which matures in 2026. There is cash and marketable securities ($2.4 billion at the end of December) to help cover expenses like operating lease obligations.Over the past two fiscal years, the company has turned free cash flow positive (CFO minus capital expenditures plus site and software development costs). Free cash flow has averaged about 1% of revenue during the past five years, a metric that should average a mid-single-digit rate over the next decade benefiting from increasing scale. Capital expenditures have averaged 2% of sales over the last five years, which we consider a reasonable run rate as the brand invests back into the business to further support top line growth and improving profitability. Morningstar analysts don’t expect the board to initiate a dividend in the near term, given the volatile cash flow pattern that Wayfair has generated in recent years and the need for the firm to continue to invest heavily in technology and customer acquisition. However, in August 2021 it authorized a $1 billion share buyback program, which we would expect to at least partially be deployed in 2022 after shares declined nearly 16% during calendar 2021.

Bull Says

  • Different brands in the Wayfair portfolio cater across income and age demographics, offering some resiliency in cases of macroeconomic cyclicality and economic uncertainty. 
  • Over the last five years, the company has expanded into untapped markets such as Canada, the United Kingdom, and Germany. Additionally, international opportunities could provide location and revenue growth and improved brand awareness. 
  • B2B represents around 10% of sales and targets a $200 billion total addressable market in the U.S. and Europe. This opportunity could grow materially faster than we anticipate.

Company Profile

Wayfair engages in e-commerce in the United States and Europe. At the end of 2021, the firm offered more than 33 million products from 23,000-plus suppliers for the home sector under the brands Wayfair, Joss & Main, AllModern, DwellStudio, Birch Lane, and Perigold. This includes a selection of furniture, decor, decorative accent, housewares, seasonal decor, and other home goods. Wayfair was founded in 2002 and is focused on helping people find the perfect product at the right price.

(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

Telstra Ltd delivered strong earnings growth with declining NBN headwinds; Resulting in increased shareholder returns

Investment Thesis

  • Solid FY22 earnings guidance with management flagging a turning point as it expects mid to high single digit growth in FY22.
  • Solid dividend yield in a low interest rate environment. 
  • On market buyback of $1.35bn (post sale of part of Towers business), expected to be completed by end of FY22, should support its share price.
  • Additional cost measures announced to support earnings.
  • InfraCo provides optionality in the long-term. 
  • Despite intense competition, subscriber growth numbers remain solid. 
  • Company looking to monetize $2.0bn of assets. 
  • In the long-term, the introduction of 5G provides potential growth, however we continue to monitor the ROIC from the capex spend. 
  • TLS still commands a strong market position and has the ability to invest in growth technologies and areas (e.g., Telstra Ventures) which could provide room for growth.
  • Industry consolidation leading to improved pricing behavior by competitors. 
  • The Company continues to deliver strong underlying earnings growth which combined with declining NBN headwinds could see the Company increase shareholder returns via increased dividends which combined with the remaining 60% of the current buybacks should support the share price

Key Risk

  • Further cuts to dividends.
  • Further deterioration in the core mobile and fixed business.  
  • Management fails to deliver on cost-out targets and asset monetisation. 
  • Any increase in churn, particularly in its Mobile segment – worse than expected decrease in average revenue per users (or any price war with competitors).
  • Any network disruptions/outages.
  • More competition in its Mobile segment. Merger of TPG Telecom and Vodafone Australia creates a better positioned (financially and resource wise) competitor
  • Quicker than expected deterioration in margins for its Fixed segment.
  • Risk of cost blowout in upgrading network and infrastructure to 5G.

Key highlights 1H22                        1H22 Results Highlights. 

  • On a reported basis, total income declined -9.4% over pcp to $10.9bn, amid declines of ~$450m in one off nbn receipts and ~$200m in nbn commercial works. 
  • Operating expenses on an underlying basis declined -8.5% over pcp, with underlying fixed costs declining -8.9% over pcp enabled by ongoing drive to digitise and simplify processes, move to an agile workforce and continued migration of fixed customers to the nbn network as well as focus on rationalising 3rd party vendors and services. 
  • Underlying EBITDA increased +5.1% over pcp to $3.5bn driven by strong growth in Mobile. 
  • Net finance costs declined -22.5% over pcp to $238m, primarily due to a reduction in interest on borrowings and financing items relating to contracts with customers. 
  • Underlying EPS was up +55% over pcp to 6.2 cents per share, representing a strong start against T25 ambition for underlying EPS target of high teens CAGR from FY21-25. 
  •  Net cash provided by operating activities declined -5.7% over pcp to $3,246m mainly due to a $1,193m decline in receipts from customers, partly offset by a $955m reduction in payments to suppliers and employees. FCF (after lease payments) declined -9.1% over pcp to $1,675m

Company Profile

Telstra Corporation (TLS) provides telecommunications and information products and services. The company’s key services are the provision of telephone lines, national local and long distance, and international telephone calls, mobile telecommunications, data, internet and on-line. Its key segments are Mobile, Fixed, Data & IP, Foxtel, Network applications and services and Media

(Source: Banyantree)

General Advice Warning

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

Categories
Shares Small Cap

MVF reported solid 1H22 results; Growing above industry growth resulting in market share of 20.8% in key domestic markets

Investment Thesis

  • High barriers to entry with unique expertise and assets. 40-year heritage of leadership in science and innovation in ARS and women’s imaging, coupled with the depth of experience from the doctors and clinical team which will continue to underpin MVF’s future growth and maintain treatment success rates.
  • Aging Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favourable demographic tailwinds.
  • Improving balance sheet with flexibility to execute expansion strategies. Earnings increasingly become diversified as the Malaysian business gains momentum. 
  • Potential earnings diversification and growth via international expansion and increased presence in diagnostics.
  • Demonstrated capacity to perform well in terms of cost out and earnings growth despite tough conditions (i.e., lower cycle volumes).
  • Transparent and detailed disclosures.

Key Risk

  • Low growth environment impacting earnings.
  • Regulatory risk as changes in government funding may increase patient’s out-of-pocket expenses and thereby volume demand. 
  • Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue 
  • The Australian market does not rebound following this period of downturn. Population of males and females with fertility problems decline.
  • Loss of key specialists.
  • Loss of market share especially to low-cost providers, with one already appearing in Victoria.
  • Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment.
  • Execution of international forays into Malaysia goes poorly.

1H22 results summary:  Relative to the pcp:

  • Revenue increased +11.2% to $101m, largely driven by domestic stimulated cycles growth of +6.6% and average ARS revenue per stimulated cycle growth of +4.4%, partially offset by decline in ultrasound scan volumes. 
  • Adjusted EBITDA of $26.8m, increased +8.5% with volume leverage gained from increased domestic IVF activity partly offset by short-term margin declines in Ultrasound and Kuala Lumpur, pandemic related costs and $1m increase in medical malpractice and D&O liability insurance reflecting appropriate insurance policies in the current settings. 
  • Adjusted NPAT of $13.4m increased +11.7% and came in +3.1% ahead of management’s guidance. Reported NPAT declined -17.6% to $12.2m, primarily due to receipt of Job Keeper subsidies in pcp. 
  • FCF (excluding job keeper subsidy receipts in pcp) increased +51.6% to $9.7m, driven by 83% cash conversion of EBITDA to pre-tax operating cash flows and a decline of -42% in capex to $3.6m. 

Growing above industry growth and gaining market share

IVF industry fundamentals remain attractive including advanced maternal age and stable and continued government funding, which saw positive industry momentum continue in the half with industry volume growth at +3.6% and MVF recording above-industry growth of +6.6% resulting in market share gains of +70bps to an overall market share of 20.8% in key domestic markets. 

Company Profile

Monash IVF Group Ltd (MVF) offers assisted reproductive technology services, ultrasound services, gynecological services, in-vitro fertilization services, consultancy services and general clinical services to patients in Australia and Malaysia. MVF comprises 40 clinics and ultrasound practices and employs ~100 doctors and has a network of 650 associated health professionals. 

(Source: Banyantree)

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

The a2 Milk Co. Ltd progressing well in 1H22

Investment Thesis

  • Inventory issue remains a downside risk but can also provide upside surprise should management work through the excess inventory in its distribution channels. It appears the inventory is at target levels for some of the key channels. 
  • Wining market share in Australia and China. 
  • Growing consumer demand for health and well-being globally. 
  • Demand growth in China for premium infant formula product.
  • Expansion into new priority markets, aided by the capabilities of Fonterra.
  • US expansion provides new markets + opportunities. 
  • Key patents provide barrier to entry.
  • Takeover target – the Company was the subject of a takeover bid in 2015.

Key Risks

  • Management fails to meet its revised FY21 guidance. 
  • Chinese demand underperforming market expectations.
  • Disruption to A2 milk supply.
  • Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
  • Expiration of A2M’s intellectual property rights may weaken or be infringed by competitors.
  • Withdrawal of A2M product from international markets due to market share loss or lack of market penetration. 

1H22 Results Highlights

  • Revenue was marginally lower, down -2.5% to $661m but in line with guidance, and up +24.8% on 2H21, due to (i) China label IMF sales were constrained in 1Q22 to rebalance distributor inventory levels with sales falling -11.4% for 1H22 vs pcp; (ii) English and other label IMF sales fell -9.8% in 1H22 vs pcp with lower market share; (iii) ANZ liquid milk sales were up with higher market share, while U.S. liquid milk sales were down.
  • EBITDA fell -45.3% to $97.6m due to lower revenue and gross margin as well as a +37.3% increase in marketing investment vs pcp. EBITDA margin of 14.8% in 1H22 (17.3% ex-MVM) was weaker versus 26.4% in 1H21. Gross margin percentage fell to 46.2% (with underlying gross margin of 50.7% excluding MVM), due to inclusion of MVM, adverse product mix and cost headwinds (especially raw milk and freight costs), partially offset by price increases.
  • NPAT including non-controlling interest was down -53.3% to $56.1m.
  • Balance sheet remains strong with closing net cash of $667.2m due to high operational cash conversion during 1H22. Inventory at the end of the period was $127.9m, higher than at the end of FY21, due to the inclusion of MVM.
  • A2M noted the Mataura Valley Milk (‘MVM’) acquisition and strategic partnership with China Animal Husbandry Group (‘CAHG’) was completed in July 2021 and fully consolidated into the results.

Company Profile 

The a2 Milk Company Limited (A2M) sells a2 brand milk and related products. The company owns intellectual property that enables the identification of cattle for the production of A1 protein free milk products. It also sources and supplies a2 brand milk in Australia, the UK and the US, exports a2 brand milk to China, and distributes and markets a2 brand milk and a2 Platinum brand infant nutrition products in Australia, New Zealand, and China

(Source: BanayanTree)

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

Tech-Led Reimagination Starting to Bear Fruit, but eBay’s Near-Term Road Looks Turbulent

Business Strategy and Outlook:

With divestitures of Stubhub, eBay Classifieds, and Gmart largely in the rearview mirror, eBay’s business looks remarkably similar to its genesis: a customer-to-customer e-commerce platform connecting hundreds of millions of buyers and sellers worldwide, with an emphasis on non-new, seasoned goods. The core eBay Marketplace business should have plenty of room to run, considering management’s estimated $500 billion total addressable market for non-new, seasoned goods, and could benefit from swelling interest in resale markets and a strong pull-forward in e-commerce demand in 2020 and 2021.

eBay’s Marketplace generated the sixth-highest gross merchandise volume, or GMV, among global players in 2021, and renewed attention by management in core verticals like collectibles, used and refurbished goods, liquidation inventory, premium shoes, and luxury jewelry–often products without a benchmark average sales price, or ASP, index (limiting price comparison pressure and leaning into the marketplace’s edge in price discovery)-appears clever. The eBay’s, 147 million active buyer base, and recent platform improvements (including managed payments, promoted listings, and inventory management services) should prove sufficient to solidify advantages in many targeted verticals.

Financial Strength:

eBay’s financial health is sound. The company has access to a $1.5 billion commercial paper facility and a $2 billion line of credit represent attractive backstops, particularly when considering that the firm maintained only $4.2 billion in net debt at the end of 2021, with a further $5.8 billion available in short-term investments. eBay’s highly free-cash-flow generative business model, comfortable coverage of interest payments (7.8 times over the same period), and investment-grade credit rating suggest that the firm should have no trouble meeting its fixed obligations.

Management again raised its buyback facility again in the fourth quarter of 2021, to $6 billion from $2 billion prior. With $1.6 billion in cash and equivalents on the balance sheet at the end of 2021, eBay maintains a bulletproof balance sheet, with substantial flexibility to meet fixed interest and principal payments, invest in attractive internal investment opportunities, and return a generous amount of capital to shareholders through share repurchases and dividends.

Bulls Say:

  • The firm’s managed payments rollout executed seamlessly, and offers optionality for auxiliary financial services down the line.
  • Recent successes in higher-touch luxury resale and collectibles categories offer a blueprint for sustained growth in the C2C marketplace.
  • The addition of auction-based items and offsite advertising could catalyze better sell-through rates and monetization in the promoted listings business.

Company Profile:

eBay operates one of the largest e-commerce marketplaces in the world, with $87 billion in 2021 gross merchandise volume, or GMV, rendering the firm the sixth-largest global e-commerce company. eBay generates revenue from listing fees, advertising, revenue-sharing arrangements with service providers, and managed payments, with its platform connecting more than 147 million buyers and roughly 20 million sellers across almost 190 global markets. eBay generates just north of 50% of its GMV in international markets, with a large presence in the U.K., Germany, and Australia.

(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
Shares Small Cap

Qube Working Towards Cost Effective Supply Chain

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook

Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains. 

It is alleged Qube to generate robust earnings growth over the long term on acquisitions, developments and organic growth. The domestic port logistics industry has traditionally been very fragmented, highly competitive, and inefficient. Currently, there are more than 250 operators providing port logistics services in one segment of the market. These are typically small operators with limited geographic scope offering limited point-to-point services. Qube’s strategy is to provide a broad range of services nationwide, touching multiple segments of the import/export supply chain. Analysts are supportive of this strategy and believe there is significant scope for further industry rationalisation. 

Consolidating the fragmented logistics chain should significantly improve Qube’s competitive position. Qube has already established a dominant market share in some specific port logistics offerings, particularly with regards to rail haulage services to and from Port Botany. Successfully developing its strategic land holdings into inland intermodal terminals should add materially to Qube’s future earnings and support cost advantages to less efficient peers. Qube aims to develop inland rail terminals as an alternative to moving container volumes from port via road. When fully developed, Moorebank will be Australia’s largest inland intermodal terminal. The bulk and general segments are highly fragmented and competitive but Qube is one of the largest players, with operations at 28 city and regional ports. The automotive stevedoring business operates in a duopoly market structure, holding long-term off-ship transportation, processing and storage contracts with major foreign vehicle manufacturers.

Financial Strength

Following the sale of Moorebank warehouses, Qube is in strong financial health. Gearing (net debt/net debt plus equity) was 10% in December 2021, well below Qube’s 30%-40% long-term target range. It has less than AUD 400 million in debt after receiving the upfront component of Moorebank sale proceeds, providing ample headroom to fund developments and bolt-on acquisitions. A special dividend or share buyback is likely in 2022. It is projected net debt/EBITDA to fall from 3.8 at June 2021 to below 2 times in 2022 and for the medium term. Qube’s businesses have delivered steadily increasing operating cash flow in recent years, though operations remain cyclical. Recent growth initiatives should generate strong future cash flow, though a large-scale acquisition or development project may require new equity funding. Qube has significant capital expenditure requirements including Moorebank development. Qube is committed to paying 50%-60% of earnings per share before amortisation as dividends.

Bulls Say’s

  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration. 
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving strong returns for Qube. 
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders

Company Profile 

Qube has three main divisions: operating; property; and Patrick. Operating undertakes road/rail transportation of containers to and from port, operation of container parks, customs/quarantine services, warehousing, intermodal terminals, international freight forwarding, domestic stevedoring, and bulk transport. Patrick is the container terminals business acquired from Asciano, and the property division includes tactical land holdings in Sydney. 

(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
Shares Small Cap

Temple & Webster Group strong focus on reinvesting earnings back into business

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

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(Source: BanayanTree)

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.