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Global stocks Shares

Ralph Lauren has closed more than 75 stores, reduced exposure to U.S. department store and off-price channels

Business Strategy & Outlook

Ralph Lauren’s restructuring over the past few years puts it on solid footing as it navigates macroeconomic challenges. In response to poor inventory control and heavy discounting in years past, Ralph Lauren has closed more than 75 stores, reduced exposure to U.S. department store and off-price channels, and cut product lead times. These and other changes have resulted in strong gross margin increases. Although sales have declined in North America from peak levels, the restructuring, including new merchandise and better pricing for core products, has positioned Ralph Lauren for low-single-digit sales growth and mid-60s gross margins. Further, advertising support as a percentage of sales in the mid-single digits in the long term and anticipate its direct-to-consumer sales will rise to 73% of sales in fiscal 2032 from 63% in fiscal 2022, thereby reducing the brand’s dependence on U.S. physical retail and providing better control over pricing and positioning.

An increasing direct-to-consumer business as essential as customer visitation is declining in many retail stores and malls. Much of Ralph Lauren’s growth came from international markets. The brand is more of a premium brand in Europe and Asia than in North America, allowing for reduced discounting and higher average unit retail. In Europe, store openings in underserved markets to support its existing e-commerce and attract new customers. In Asia, where Ralph Lauren trails some competitors, 7% compound average annual sales growth over the next decade as stores open and e-commerce expands in mainland China. Sales in Europe and Asia-Pacific will rise to 58% of total sales in fiscal 2032 from 49% in fiscal 2022. As evidence of the potential for Ralph Lauren, a comparable American brand, narrow-moat PVH’s Tommy Hilfiger, produced 75% of its sales outside North America in fiscal 2021.

Financial Strengths

Ralph Lauren has a strong balance sheet. The company recently sold Club Monaco (undisclosed terms) and licensed Chaps. It also paid off $500 million in debt that came due in 2022. After these moves, it closed September 2022 with long-term debt of $1.1 billion but $1.4 billion in cash and investments (net cash of about $4 per share). Ralph Lauren will generate significant cash flow for stock buybacks and dividends despite disruption from the pandemic. After suspending it during the pandemic, the firm resumed its dividend in fiscal 2022 and plans to pay $3 per share in dividends in fiscal 2023.Its long-term dividend payout ratio at about 44%. As for buybacks, Ralph Lauren repurchased shares on a consistent basis prior to the pandemic and has recently resumed them. It will generate an average of about $680 million per year in free cash flow to equity over the next five fiscal years and use practically all of it for share repurchases and dividends. Ralph Lauren’s yearly capital expenditures dropped below 3% of sales as its conserved cash during the pandemic. Now, though, larger investments in digital capabilities, store remodels, and store openings. Ralph Lauren’s annual average capital expenditures at 4.5% of sales over the next five years.

Bulls Say

  • Business trends have improved for Ralph Lauren in Europe and Asia, which is advantageous as both regions have higher average unit retail and better growth prospects than the United States. 
  • Ralph Lauren’s gross margins are higher than those of some competitors and have been improving, as much of its merchandise achieves premium pricing. 
  • Ralph Lauren’s growth came from controlled retail and e-commerce, allowing for better command over pricing and marketing. The firm has reduced its share of revenue from wholesale channels by about 20 percentage points over the past 12 years.

Company Description

Founded by designer Ralph Lauren in 1967, Ralph Lauren Corp. designs, markets, and distributes lifestyle products in North America, Europe, and Asia. Its products include apparel, footwear, eyewear, jewelry, leather goods, home products, and fragrances. The company’s brands include Ralph Lauren Collection, Polo Ralph Lauren, Lauren Ralph Lauren, and Double RL. Distribution channels for Ralph Lauren include wholesale (including department stores and specialty stores), retail (including company-owned retail stores and ecommerce), and licensing.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

VUK reported a very strong FY21 result, with +546%

Investment Thesis

  • Trades on undemanding valuations (i.e. depressed price to book and price to earnings) and below valuation (which also includes a Brexit / Covid discount).
  • Potentially further provisioning required as a result of Covid-19.
  • Improving shareholder returns (including potential for buybacks).
  • Delivering on medium term targets.
  • Solid franchise and branch network.
  • Synergies from Virgin Money acquisition to support earnings growth.
  • Expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears).
  • Funding position remains sound, however excess funding for potential capital management is unlikely now.
  • Increasing penetration in the SME and retail banking space in the UK.

Key Risks

  • The UK economy recovers quicker than expected post-Covid-19.
  •  VUK resumes dividend payments earlier than expected.
  • More intense competition for deposit and loan growth.
  • Increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits.
  • Medium term guidance targets, especially cost reduction targets, fall short.
  • Regulatory changes especially around any capital requirements and hence lower ROEs achieved.
  • Brexit uncertainty (potentially leading the UK economy into recession).
  • Clarity provided over Virgin Money disappoints.

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

  • Underlying operating income +2% to £1572m, with net interest income increasing +5% to £1412m as lower deposit costs, structural hedge benefit and growth in higher yielding assets more than offset mortgage spread pressures, partially offset by -16% decline in non-interest income to £160m, reflecting weaker market conditions.
  • Underlying operating expenses reduced -2% to £902m with the underlying cost-to-income ratio reducing -200bps to 57% as efficiencies from cost savings programmes were partly offset by higher variable remuneration. 
  • Impairment release of £131m (vs £501m charge in pcp) amid robust asset quality & improving outlook, however, maintained coverage levels of 70 bps (down -33bps), well above pre-pandemic levels. 
  • Underlying PBT improved +546% to £801m driven by a recovery in income, lower costs and

improved impairment performance leading to underlying RoTE improving +17.2% to 17.8%.

VUK returned to statutory profit before tax of £417m from £168m loss, equating to statutory RoTE of 10.2%.

  • Capital strengthened with CET1 increasing +150 bps to 14.9% (14.4% excluding software benefit) equating to buffer of £1.4bn over MDA threshold of 8.7%, and strong liquidity & funding position maintained with LCR of 151% (up +11%) and 108% (up +100 bps) loan-to-deposit ratio. 
  • Capital returns resumed with the Board declaring a 1p dividend (updated capital framework and dividend policy post-SST at 1H22).

Company Description

Virgin Money UK Plc is a holding company that owns Clydesdale Bank and Yorkshire Bank in the United Kingdom. It was formed by National Australia Bank (NAB) in February 2016, in advance of the divestment of its UK segment via IPO. VUK is a full-service challenger bank of scale servicing both retail and SME in the UK market. VUK services ~160k small business customers with a turnover of less than £2m, and ~23k medium businesses with a turnover of >£2m.

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

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

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

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

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

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

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

Categories
Global stocks Shares

Washington H. Soul Pattinson and Company Ltd (SOL) reported strong 1H22 results reflecting a strong uplift in profit

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

Investment Thesis

  • Trades on fair-value in terms of the valuation. 
  • The portfolio is well positioned and diversified, providing access to a range of asset classes across sectors, including equities, private equity, private credit and property. 
  • Solid investment philosophy/approach as investment strategies have delivered above market returns for over 5-yr, 10-yr, 15-yr and 20-yr timeframe. 
  • Strong management/investment team led by Rob Millner, with solid credentials and a strong track record of execution and active stewardship of capital. 
  • Strong track record of paying a consistent and increasing dividend for over 20 years.

Key Risks

  • Deterioration in performance in investments. 
  • Global and Australian economic conditions deteriorate. 
  • The investment Manager/analysts miss-calculate their bottom-up valuation of investments.
  • Reliance on the investment team and their expertise to outperform investment benchmarks. Hence key man risks and departure of key investment personnel, especially Rob Millner.

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

  • Strong uplift in profit after tax of $343.7m, up +281% relative to the pcp of $90.2m. 
  • Net Cash Flow from Investments of $182.6m, was up +114% (or on a like for like basis, excluding the acquisition of Milton, was up 81%).
  • Pre-tax Net Asset Value per share up +3.4% for the period (outperformance of 8.6% against market). After tax Net Asset Value per share up +17.7% over first half (outperformance of 22.9% against market).
  • SOL completed its merger with Milton Corporation. 
  • The Board declared a fully franked interim Segment; EBITDA declined -21% amid higher employee costs reflecting expansion of the workforce and Covid-19 related cancelled/deferred cycles.
  • Completed merger with Milton Corporation.
  • Goodwill of $954m was created because of an increase in SOL share price between the date the transaction was announced to the market and the date control passed to SOL (5 October 2021).
  • 1H22 statutory profit was impacted by a one-off, noncash impairment of all the goodwill associated with the transaction.

Company Description

Washington H. Soul Pattinson and Company Ltd (ASX: SOL) holds a diversified portfolio of uncorrelated investments across listed equities, private equity, property and loans. It has a flexible mandate to generate returns by making long-term investment decisions and adjust the portfolio by changing the mix of investment classes over time. The Company is the second oldest publicly listed company on the ASX and has been successfully managed by the same family from the outset: Lewy Pattinson, Fred Pattinson, Jim Millner and current Chairman, Rob Millner.

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

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

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

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

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

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

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

Categories
Global stocks Shares

A2M delivered a solid FY22 result which was ahead of consensus expectations

Investment Thesis

  • Management appears to be working through the inventory issues which have impacted the Company in the recent past.
  • Potential to win market share in Australia and China.
  • Growing consumer demand for health and well-being globally.
  • Demand growth in China for premium infant formula products.
  • Expansion into new priority markets, aided by the capabilities of Fonterra.
  • US expansion provides new markets + opportunities.
  • Key patents provide a 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 is 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.

Key Highlights

  • FY22 results highlights. Relative to the pcp: 
  • Group net revenue was up +19.8% YoY to $1,443.7m, driven by solid growth in IMF (up +11.9% YoY) and the inclusion of MVM. Excluding MVM, group revenue was up +11.2% YoY. The Company also made good progress on rebalancing inventory in the 2H22 vs 1H22. China & Other Asia revenue was up +24.5% YoY on the back of strong execution in China, strong China label IMF consumer demand, pricing benefits and positive movement in forex. 
  • Gross profit was up +30.2% to $663.5m, with % GM up +370 bps to 46.0% versus pcp given the cycling of stock write-downs in pcp, higher pricing, lower trade spends and favourable forex. Partially by higher raw materials and logistics costs. 
  • Strong top line growth and gross margin improvement drove FY22 EBITDA higher by +59% to $196.2m. EBITDA margin expanded by +330bps, driven by margin expansion in both ANZ (up +590bps) and China & Other Asia (up +700 bps). Marketing costs of $230.0m were up +36.3% YoY to support A2M’s China strategy execution. 
  • NPAT (including non-controlling interest) was up +42.3% YoY to $114.7m and EPS of 16.5cps was up +51.8%. 
  • Balance sheet is solid with a net cash position of $816.5m.
  • On-market share buyback. On the back of improving market conditions and strong operating performance, the Board announced a capital return of $150m via an on-market share buyback. It is expected to start at the end of September and be carried out over next 12-months.

Company Description

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: Banyantree)

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

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

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

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

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

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

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

Categories
Global stocks Shares

Williams-Sonoma has set its sights on expanding its total addressable market outside of furniture

Business Strategy & Outlook

Williams-Sonoma has carved out a solid position in the $750 billion global home category and the $80 billion U.S. business-to-business industry. It has historically launched most of its brands organically in underserved segments and its brand intangible asset has been the supporting factor in its top- and bottom-line growth. Its ability to drive repeat business relies on customer loyalty and smart marketing and merchandising and the firm has access to some of the best analytics in retail. This should help Williams-Sonoma outperform its competitors and grow its market share, aided by new category expansions. In recent years, Williams-Sonoma has set its sights on expanding its total addressable market outside of furniture and home furnishings, via B2B and marketplace efforts, categories with robust end markets that remain fragmented. These white-space business lines, along with faster growth from both franchise and the e-commerce channels (which accounted for 66% of 2021 sales) should help 

Williams-Sonoma reached $10 billion in sales in 2026. Furthermore, the aforementioned categories have the ability to deliver better operating margins than the historical brick-and-mortar business (which is on track to decrease its store base by 25% between 2020 and 2025), allowing mix to offer a natural lift to profitability. Such efforts, along with lower costs from an improved supply chain (when COVID-19 constraints subside), better distribution network (from direct sourcing and furniture delivery operations), as well as higher productivity of its store fleet (as underperforming locations close and older leases are renegotiated) should allow for operating margins that are consistently at a midteens rate. Despite a solid competitive edge, the company isn’t insulated from the proliferation of e-commerce peers such as no-moat Wayfair pushing harder into the home furnishing space, bounding upside potential. Even with robust competition in the category, narrow-moat Williams-Sonoma could deliver an average adjusted return on invested capital, including goodwill, averaging 30% over the forecast, well ahead of the 9% weighted average cost of capital estimate.

Financial Strengths

Williams-Sonoma is in fine financial health, with plenty of cash on hand, ending its third quarter with $113 million on its balance sheet. Given the strong free cash flow it has been able to generate, the firm will not have to tap the equity or credit markets for liquidity anytime soon, and there is currently no long-term debt outstanding, liberating excess cash flow for a return to shareholders. Over the past five fiscal years, the company has produced cumulative free cash flow of $3.4 billion. Williams Sonoma’s cash requirements are primarily for inventory, property, plant, and equipment, advertising and marketing, technology, share repurchases, and dividends, which will mostly be funded by cash generated from operations. Free cash flow to equity has averaged about 10% of revenue during the past five years, which is decent for a company that can produce somewhat volatile results that are closely tied to the performance of the housing market. The company resumed share repurchases in the fourth quarter of 2020, and the board authorized a $1.5 billion share buyback program in March 2022, which should facilitate continued buybacks ahead (in fiscal 2021 the company repurchased $899 million in shares, well ahead of any other year in the past decade). Williams-Sonoma has repurchased $841 million in shares in the first three quarters of fiscal 2022. Additionally, it pays a dividend of $0.78 per quarter, representing a payout that was raised 10% in March 2022, illustrating the board’s confidence in the strength of the underlying business. Over the next decade, the firm is to average around 8% EPS growth (increasing modestly faster than sales), bolstered by continued top-line growth, a favorable sales mix shift, and stringent cost controls. Williams Sonoma is positioned to earn an average of around $1 billion in free cash flow (cash from operations minus capital expenditures) over the next five years.

Bulls Say

  • Less discretionary categories such as cookware and small appliances offer some resilience amid macroeconomic cyclicality. Registries in categories such as wedding and baby offer a steady source of customers.
  • The firm opened company-owned stores abroad in Australia in 2013 and has since expanded to the U.K.International opportunities (owned and franchised) could provide location and sales growth and elevated brand awareness.
  • Around two thirds (or more) of sales has stemmed from the e-commerce channel in recent years, which helps minimize store expenses and maximize operating margins.

Company Description

With a wide retail and direct-to-consumer presence, Williams-Sonoma is a leader in the $300 billion domestic home category, focused on expanding its exposure in the B2B, marketplace, and franchise areas. Namesake Williams-Sonoma (175 stores) offers high-end cooking essentials, while Pottery Barn (189) provides casual home accessories. Brand extensions include Pottery Barn Kids (52) and PBteen. West Elm (121) is an emerging concept for young professionals, and Rejuvenation (9) offers lighting and house parts. Williams-Sonoma also has a business-to-business team that supports projects that range from residential to large-scale commercial.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

Gilden has approximately 80% market share in printwear basics and acquisitions have made it a stronger player in fashion basics

Business Strategy & Outlook

Gildan Activewear lacks a moat, which has put it in a difficult position as it navigates disruption from the coronavirus pandemic and inflation. While Gildan began a private-label men’s underwear contract with wide-moat Walmart in 2019, this product has largely replaced Gildan-branded underwear and only partially offsets losses in other areas. Narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other critical retailers. Mass retailers reportedly account for more than 60% of total underwear sales in the United States. Gildan has purchased a few notable brands, including Gold Toe (socks) and American Apparel (inexpensive fashion/printwear), having invested about $500 million in acquisitions since 2014. The company, though, no longer reports branded apparel as a separate business segment and recorded an impairment to goodwill related to its hosiery in 2020. It acknowledges market share losses to private-label brands, especially in socks, and its total yearly hosiery and underwear sales declined 21% between 2017 and 2021. 

There is a possibility that Gildan may end some of its hosiery programs to concentrate on its private-label business. Gildan’s success in printwear to its investments in the category and its cost-efficient production model. The firm has approximately 80% market share in printwear basics and acquisitions have made it a stronger player in fashion basics. Gildan’s printwear benefits from its strong supply chain as most of its clothing is manufactured in company-owned factories in low-wage, developing countries. Moreover, Gildan, unlike rivals, owns yarn-spinning factories in the U.S. that may improve its efficiency. In 2021, it bolstered its U.S. production with the acquisition of Frontier Yarns for about $170 million. Gildan’s investments have lowered its production costs, a permanent cost advantage hasn’t been created as its processes can be replicated by competitors and cost savings may be lost to lower prices.

Financial Strengths

In a move, Gildan cut spending to conserve cash during the COVID-19 crisis in 2020. Specifically, the firm lowered selling, general, and administrative expenses by 20%, suspended its dividends and share repurchases, and reduced its capital expenditures. However, as its results and finances improved in 2021, it stepped up cash usage, with capital expenditures of $127 million (4.4% of sales), about $250 million in share repurchases, and $90 million in dividend payments. Capital expenditures will rise to 6%-7% of sales over the next three years due to building projects and efficiency investments. Over the next decade, annual average repurchases of about $330 million and an annual average dividend payout ratio of 23%. Gildan’s total liquidity is solid. As of the end of September 2022, the firm had $920 million in debt, but also $69 million in cash and $680 million available on its revolving credit facility. Gildan will generate about $227 million in free cash flow to equity in 2022, more than enough to cover its obligations. Gildan renegotiated its debt covenants in June 2020 to avoid a possible violation. The firm closed 2019 with net debt/adjusted EBITDA of about 1.4 times, but this increased to 3.0 times at the end of 2020 because of the increased debt and a 70% drop in adjusted EBITDA for the year. However, its net debt/adjusted EBITDA fell to 0.6 times at the end of 2021 on debt reduction and higher EBITDA.

Bulls Say

  • Gildan has dominant market share in printwear basics and has invested in a low-cost production and distribution process to maintain its position. This business is recovering from the severe impact of the pandemic.
  • In 2019, Gildan won a contract with Walmart to supply men’s underwear for its in-house brand called George. While a blow to its branded business, the deal increased Gildan’s shelf space in the category.
  • Gildan’s Back to Basics efficiency strategy should allow it to hold operating margins around 18%, an improvement from prepandemic levels of about 15%.

Company Description

Gildan is a vertically-integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery. Its primary market is the sale of blank T-shirts and other apparel to wholesalers, major clothing brands, and printers (printwear). Gildan also sells branded clothing through retail and direct-to-consumer channels. Brands include Gildan, American Apparel, Comfort Colors, and Gold Toe. Gildan produces most of its clothing at factories in Latin America. The Montreal-based company generates most of its sales in the U.S. and was incorporated in 1984.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

GrainCorp has historically handled up to 60% of the east-coast grain crop and 30% of the country’s total grain exports

Business Strategy & Outlook

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. However, the firm hasn’t carved an economic moat, and forecast returns on invested capital to trail the firm’s cost of capital over the long term. GrainCorp’s core Australian grain storage and logistics business is heavily reliant on favorable weather patterns. Accordingly, it has had some strong years during bumper grain harvests, but with a high fixed-cost base, even after substantial asset reduction, earnings can quickly evaporate in poor seasons. While the company’s upcountry storage network would be difficult to replicate from scratch, on-farm storage is a competitive threat, particularly in drought years when a larger share of the crop moves direct from farm to customer, bypassing GrainCorp’s storage network. Port competition has also increased in recent years, and regulation remains high. In a bumper harvest year, GrainCorp has historically handled up to 60% of the east-coast grain crop and 30% of the country’s total grain exports, but in a poor year, these market shares can trend closer to 30% and below 5%, respectively. GrainCorp’s market share of the eastern grain crop stabilized at levels near 40% over time, and export share above 20%, representing an average crop year.

Beyond storage and logistics, the grain marketing segment competes domestically and internationally against other major commodities trading houses such as Cargill and Glencore. This is a competitive market, and GrainCorp isn’t having any advantage relative to these large global players. The firm will likely remain at the mercy of Australian grain competitiveness relative to global pricing. Similarly, GrainCorp’s oil crushing and refining business remains competitive. Profitability is expected in this segment to improve due to cost-savings measures and ongoing growth, the segment doesn’t enjoys durable competitive advantages.

Financial Strengths

GrainCorp’s capital structure is reasonable. It comprises debt and equity, with noncore debt associated with the funding of grain marketing inventory. As a result of swings in crop prices, GrainCorp’s cash flow and working capital requirements can be volatile, so the company will need to draw down on debt on demand. As at Sept. 30, 2022, core debt (net debt less commodity inventory) was cash-positive and total net debt was AUD 540 million. There’s a risk that earnings pressure in drought-affected years could test debt covenants with its bank lenders. The primary metrics are its net debt/capital gearing ratio and EBITDA/interest ratio. Gearing ratios can be volatile, given the swings in inventory levels. The net debt gearing ratio (net debt/net debt plus equity) sat at over 27% as at Sept. 30, 2022 due to high inventory levels. Accordingly, core debt gearing (core debt/core debt plus equity) was negligible. Management doesn’t disclose the minimum EBITDA/interest ratio. In fiscal 2020, this ratio was about 4 times on an adjusted basis, but improved to 13 times and 20 times in fiscal 2021 and 2022, respectively.

Bulls Say

  • With strategic processing, storage, and transportation assets, GrainCorp’s size gives the company scale advantages over regional competitors.
  • Global thematic, such as increased food demand, particularly in Asia, should benefit agribusinesses such as GrainCorp.
  • Despite divesting the malt business, GrainCorp has entered into a new grains derivative contract which assists with smoothing out earnings through the cycle.

Company Description

GrainCorp is an agribusiness with an integrated business model operating across three divisions. The company operates the largest grain storage and logistics network in eastern Australia. GrainCorp

provides grain marketing services to all major grain-producing regions in Australia, as well as to

Canadian and U.K. growers. The company has also diversified into edible oil refining and supply, and bulk liquid storage.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

Nufarm’s primary competitive strengths are marketing scale, dominant position in the Australian market, formulation expertise, and marketing skills

Business Strategy & Outlook

Nufarm is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into all major world markets. The company is leveraged to growing demand for crops for biofuels, and food from rapidly industrializing markets such as China and India. Growth should come from astute brand and offshore business investments and from a customer service-focused strategy. However, the global crop-protection markets are competitive and earnings are cyclical, given a reliance on seasonal conditions. Sumitomo Chemical’s investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia. Continued growth in food demand in industrializing nations should underwrite long-term earnings growth. Nufarm’s primary competitive strengths are marketing scale, dominant position in the Australian market, formulation expertise, and skills in marketing post-patent crop-protection products. Global expansion in recent years reduced dependency on the domestic market. The company’s dominance in Australia has become less certain, with glyphosate pricing coming under considerable pressure. Due to the competitive nature of its markets, lack of pricing power and exposure to cyclical agricultural demand, Nufarm doesn’t possess an economic moat. Returns on invested capital have historically failed to meet the cost of capital.

In addition to its crop-protection business, Nufarm has a seed technologies business. With this, it aims to broaden its portfolio of products, all of which are targeted to improve agricultural yields. Nufarm has a growing presence in North America and Europe. Sound sales momentum has been evident in North America and Europe. Several Chinese companies have previously expressed interest in acquiring Nufarm, but withdrew either because of too high a price demanded by the board, or because of reduced availability of debt. In 2010, Japanese company Sumitomo Chemical bought 20% of Nufarm, subsequently increasing its stake to 23% before diluting to 16% and then selling out completely in 2022.

Financial Strengths

Nufarm’s balance sheet is in great shape. In early April 2020, the company received AUD 1.2 billion net sale proceeds from major shareholder Sumitomo, for the sale of its South American crop protection and seed treatment operations in Brazil, Argentina, Colombia, and Chile. This significantly bolstered the finances at a very fortuitous time, coming mid coronavirus. Prior to this in January 2020, group net debt had stood at a whopping AUD 1.6 billion. Nufarm’s under-leveraged balance sheet remains a strength. At Sept. 30, 2022, net debt stood at a modest AUD 204 million excluding leases, leverage of just 9% and annualized net debt/EBITDA of 0.5 is very comfortable. Leverage is well below management’s net debt/EBITDA target range of 1.5 to 2.0. Nufarm is to be unleveraged within a year all else being equal. It would be wise for the company to remain modestly leveraged at most, given vagaries of the weather, earnings seasonality, and new product ramp-up requirements.

Bulls Say

  • Nufarm benefits from potential strength in soft commodities markets.
  • Nufarm has well-established distribution platforms in most major global agricultural markets.
  • Product and geographic diversification helps reduce earnings volatility.

Company Description

Nufarm Limited is a global crop-protection company that develops, manufactures, and sells a range of crop-protection products, including herbicides, insecticides, and fungicides. Nufarm sells its products in most of the world’s major agricultural regions, and operates primarily in the off-patent segment of the crop-protection market. Nufarm operates along two business lines: crop protection and seed technologies.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

With the bank’s acquisition of MB Financial, Fifth Third’s share has improved substantially in the Chicago area

Business Strategy & Outlook

Fifth Third’s reputation as a solidly profitable bank took a hit during the financial crisis. The bank regularly reported returns on equity that exceeded 17% before 2007, largely because of a strong line of fee-income businesses. In 2007, primarily because of weakness in some of the bank’s most significant markets–Ohio, Michigan, and Florida–loan losses began to pile up. Although management could not avoid the impact of operating in hard-hit economies, a generally increasing appetite for risk compounded the bank’s problems. Over the course of 2008-09, loan-loss provisions ate up more than 100% of net interest income. Since the crisis, much has changed, and management has made improvements to the underwriting process and generally improved the bank’s risk management. Fifth Third has emerged from the crisis as one of the Midwest’s more stable banking franchises, with strong deposit share across several large cities in Ohio and Michigan. With the bank’s acquisition of MB Financial, Fifth Third’s share has improved substantially in the Chicago area. 

The bank is also entering a new stage of better cost controls, which when combined with coming rate hikes, should set up the bank for solid operating leverage for years to come and a consistent sub-60% efficiency ratio. These are all necessary moves as the bank figures out how to buoy returns in a post-Worldpay existence. Better card analytics, increased capital markets and M&A offerings, and bolt-on acquisitions should continue to help drive growth in revenues. Fifth Third has experimented with partnerships with financial technology firms, such as GreenSky, the bank has bolstered its investment banking franchise with bolt-on acquisitions, and the bank’s latest acquisition of Dividend Finance should produce steady loan growth for years. The bank has performed from a credit perspective this time around, much better than during the financial crisis. Overall, Fifth Third is a dependable Midwest operator with improved risk management, decent market share in key geographies, and particular strength among its core middle-market clients.

Financial Strengths

Since the financial crisis, Fifth Third had steadily built its capital base to what is considered a healthy level. The bank reported a common equity Tier 1 ratio of 9.1% as of September 2022, in line with management’s target of roughly 9%. Fifth Third is adequately capitalized to withstand future losses while also funding growth.

Bulls Say

  • A strong economy and higher rates are all positives for the banking sector and should propel revenue and profitability even higher for Fifth Third. 
  • Fifth Third’s latest acquisition of Dividend Finance should drive outsized and profitable loan growth for years to come. 
  • Fifth Third may still have additional cost savings waiting in the background, potentially allowing the bank to outperform peers in an otherwise inflationary expense environment.

Company Description

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati. The company has over $200 billion in assets and operates numerous full-service banking centers and ATMs throughout Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia, and North Carolina.

(Source: Morningstar)

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

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

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

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

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

Categories
Global stocks Shares

Tabcorp (TAH) delivered a solid 1H22 result which came in ahead of expectations

Investment Thesis

  • The demerger of its Lotteries & Keno business (to be named The Lottery Corporation) from its Wagering & Media business (to be named Tabcorp) could unlock shareholder value as standalone business.
  • Subdued outlook for wagering business and cost pressures likely to keep a lid on margin expansion in the near term.
  • Positive regulatory changes could drive out smaller uneconomical corporate bookmakers.
  • Potential capital management initiatives.

Key Risks

  • Competitive pressures within the core Wagering business.
  • Loss of market share.
  • Lack of product development.
  • Cost blowouts with failed investment in Sun Bets business in the UK.
  • Adverse outcome from any regulatory change.
  • The demerger fails to get all necessary approvals.

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

  • Revenue of $2,934m was up +2.2%, variable contribution was mostly flat (-0.9%) at $942m and underlying EBITDA of $529m was down -5.5% vs pcp, mainly reflecting the impact of Covid-19 with a strong performing Lotteries and Keno businesses being offset by Wagering & Media and Gaming Services (impacted by venue restrictions and trading). Management delivered a further $16m in savings in 1H22 from 3S optimization program, bringing total savings to date from the program to approximately $46m.
  • The Company declared an interim dividend of 6.5 cents per share, which is down -13.3% on pcp and represents a payout ratio of 77% of net profit before significant items (and at the top end of 70 – 80% range). 
  • Underlying NPAT of $187m was down -9.7% on pcp.
  • Lotteries & Keno. Revenues of $1,784m were up +10.9%, with EBITDA of $358m up +15.1% (margin up +80 bps on pcp). Segment earnings were driven by strong growth in Lotteries revenue (Jackpot games up; active registered customers up +5% and very strong digital growth of +26%) and Lotteries VC margin (digital growth drove margin expansion; 3S savings initiatives). This was partly offset by Keno revenue being impacted by retail shutdowns, which also had an adverse impact on reported margins.
  • TAH is on track to implement the demerger of its Lotteries & Keno business (to be named The Lottery Corporation) from its Wagering & Media business (to be named Tabcorp) no later than June 2022, subject to all necessary approvals. The Company expects to incur one-off costs of up to $275m and ongoing incremental costs of $40-45m p.a. further, The Lotteries and Keno business will target gearing levels of around 3.5x to 4.0x and the wagering & gaming business will target gearing of 1.0x to 1.5x.

Company Description

Tabcorp Holdings Ltd (TAH) is an integrated gambling and entertainment company listed in Australia, with operations overseas. The business operates three key segments – Wagering & Media, Keno and Gaming Services. These services are delivered to customers through TAH’s retail, digital and Sky media platforms.

(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.

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