Category: Shares

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Global stocks Shares

Novartis results beat consensus delivering revenue of US$12.95bn

Investment Thesis:

  • Relatively high barriers to entry, with a significant amount of funds deployed in R&D every year. 
  • Recent and upcoming divestments will streamline the business and provide increased focus to deliver shareholder returns. 
  • Recent product launches indicate solid sales momentum, with near-term product pipeline potentially providing further upside. 
  • Selective bolt-on acquisitions to supplement organic growth. 
  • Operating efficiency focuses to further support earnings growth. 
  • As the new management team improves Company culture, investors are less likely to ascribe a discount to the stock based on legacy issues.

Key Risks:

  • Recently launched products fail to deliver sales growth as expected by the market. 
  • New product pipeline fails to yield “blockbuster” products or delays in bringing key products to market. 
  • R&D programs do not yield new long-term ideas. 
  • Increased competition (pricing pressure & innovative products) from new entrants or existing players. 
  • Value destructive M&A. 
  • Regulatory / litigation risks.

Key highlights:

  • NOVN’s product development pipeline continues to progress well without any major disruptions.
  • Novartis (NOVN) 2Q21 results beat consensus on both top and bottom line, delivering revenue of US$12.95bn (vs estimates of US$12.49bn) and EPS of US$1.28 (vs estimate of US$1.08) as disruption from the pandemic waned, with management announcing the growth drivers and launches continue to show excellent momentum with +35% growth and now contributing to more than 50% of top line.
  • The Oncology business continued to recover delivering +7% growth with sales reaching US$3.9bn during the quarter, with management expecting to see accelerated growth if trends move toward pre-Covid-19 levels in 2H21.
  • Financial position remained strong with the Company not experiencing liquidity or cash flow disruptions during 2Q21 due to the Covid-19, ending the quarter with total liquidity of US$5.4bn.
  • FY21 net sales to grow low to mid-single digit, with Innovative Medicines to grow mid-single digit and Sandoz to decline low to mid-single digit, and core operating income to grow midsingle digit (ahead of sales), with Innovative Medicines growing mid to high-single digit, ahead of sales, and Sandoz declining low to mid-teens.
  • The Company retained strong capital structure (credit rating of A1/AA- by Moody’s/S&P), not experiencing any liquidity or cash flow (2Q FCF up +17% over pcp) disruptions during 2Q21 due to the COVID-19 pandemic.

Company Description: 

Novartis AG (NOVN) is an innovative healthcare company headquartered in Basel, Switzerland, with approximately 125,000 employees. In 2017, the Group reported net sales of US$49.1bn, while R&D throughout the Group amounted to approximately US$9.0bn. The Company sells its products in approximately 155 countries. The group has two segments which it reports on: (1) Innovative Medicines (Oncology / Pharmaceutical), and (2) Sandoz generics division.

(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.

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Shares Small Cap

Bega Cheese economic moat required to sustainably generate economic profits

Business Strategy and Outlook

Bega has transformed from a dairy processor with a focus on business to business operations to a branded consumer food company with a more diversified earnings base and less exposure to volatile milk prices. While dairy will remain a key category for Bega Cheese, the focus will be on high value products such as cream cheese and infant formula. In January 2021, Bega finalised the acquisition of Lion Dairy and Drinks from Kirin Group for AUD 534 million. As part of the acquisition, Bega acquired leading brands in milk-based beverages and yoghurt, white milk, and plant-based beverages, in addition to 13 manufacturing sites and Australia’s largest national cold chain distribution network. 

Revenue from the branded segment, which includes spreads, grocery products and Lion’s Dairy and Drinks portfolio, to expand at a CAGR of 18% to fiscal 2026, underpinned by new product innovation and bolt-on acquisitions. Bega Cheese has made limited investment in its brands, particularly in Australia where Fonterra is the licensee of the Bega brand, however since acquiring the spreads and grocery business in 2018, marketing spend as proportion of revenue has increased to 3% from 1% and it is anticipated to remain the higher level.

Financial Strength

Our fair value estimate is AUD 5.20 per share. Bega’s balance sheet is sound. Leverage, measured as net debt/EBITDA improved to 2.3 at June 30, 2021, from 2.4 at the prior period and comfortably below covenants. This is a pleasing position post the major acquisition of Lion Dairy and Drinks in fiscal 2021 which was funded through AUD 267 million of new and extended debt facilities and a AUD 401 million equity raising. It is expected that further deleveraging in coming years as acquisition synergies are achieved, earnings improve and noncore assets are divested, with net debt/EBITDA falling below 2.0 by 2023. Bega has the capacity to pursue smaller acquisitions while maintaining a dividend payout ratio of 50% normalised EPS. The group’s fiscal 2022 EBITDA guidance of AUD 195 million to AUD 215 million has necessitated an 11% downgrade to our fiscal 2022 EBITDA forecast to AUD 215 million.

Bulls Say’s 

  • Bega is shifting investment to the spreads and grocery business, which we view as less commoditised and higher margin than dairy, with strong niche positions in Vegemite and peanut butter 
  • External factors outside of Bega’s control, such as the weather, can adversely impact supply and demand dynamics. This can impact commodity prices, inputs costs and the firm’s supply chain and lead to volatile earnings 
  • Changing consumer trends toward dairy-free and vegan diets could lead to declines in per-capita dairy and cheese consumption, weighing on the majority of Bega’s earnings

Company Profile 

Bega Cheese is an Australian based dairy processor and food manufacturer of well-known brands including Bega Cheese and Vegemite. Bega Cheese operates two segments: the branded segment which produces consumer packaged goods primarily sold through the supermarket and foodservice channels and the bulk segment which produces commodity dairy ingredients primarily sold through the business-to-business channel.

(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

Deere’s Prospects for Fiscal 2022 Look Bright to Us, Given Strong End Market Demand

Business Strategy and Outlook

Deere’s strong brand is underpinned by its high-quality, extremely durable, and efficient products. Customers in developed markets also value Deere’s ability to reduce the total cost of ownership. The company’s strategy focuses on delivering a comprehensive solution for farmers. Deere’s innovative products target each phase of the farming process, which includes field preparation, planting and seeding, applying chemicals, and harvesting. The company also embeds technology in its products, from guidance systems to seed placement and spacing and customized spraying applications. Deere is committed to expanding customer offerings and providing value-added services. Additionally, we believe the management team will look to reduce the company’s cost structure as some markets have matured, providing an opportunity to rethink its footprint and create a leaner organization.

Financial Strength 

Deere maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of fiscal 2021, coming in at 0.4. Total outstanding debt, including both short- and long-term debt, was $10.4 billion. Deere’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. The company’s cash position as of fiscal year-end 2021 stood at $7.2 billion on its industrial balance sheet. We also find comfort in Deere’s ability to tap into available lines of credit to meet any short-term needs. Deere has access to $5.7 billion in credit facilities.

Additionally, management is determined to rationalize its footprint by reducing the number of facilities in mature markets. If successful, this will put Deere on much better footing from a cost perspective, further supporting its ability to return cash to shareholders. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $38 billion in fiscal 2021, along with $38 billion in finance receivables and $829 million in cash. In our view, Deere enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Higher crop prices encourage farmers to grow more crops and will lead to more farming equipment purchases, substantially boosting Deere’s revenue growth. 
  • Deere will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand has eased, encouraging farmers to refresh their machine fleet. 
  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, benefiting Deere.

Company Profile 

Deere is the world’s leading manufacturer of agricultural equipment, producing some of the most recognizable machines in the heavy machinery industry. The company is divided into four reportable segments: production and precision agriculture, small agriculture and turf, construction and forestry, and John Deere Capital. Its products are available through a robust dealer network, which includes over 1,900 dealer locations in North America and approximately 3,700 locations globally. John Deere Capital provides retail financing for machinery to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Deere product sales.

(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

Bank of Queensland brings forward cost savings to offset margin pressure

Business Strategy and Outlook

Bank of Queensland is one of Australia’s top-10 largest banks, but is considerably smaller than the four major Australian banks. Preceding the global financial crisis, the bank grew aggressively via acquisitions and the rollout of its distinctive owner-manager branch franchise model. However, expanding the branch network and diversifying away from traditional residential lending came at a cost, with additional equity required to fund growth, significantly increased bad debts, and multiple banking systems, which resulted in deteriorating cost/income and returns on equity. 

The aim is to ensure the bank is more competitive, particularly in the home loan market, but this investment giving the bank any competitive edge. At best, it can narrow the gap to peers, but with the big investment budgets of the majors, those innovations are likely to be hard to keep up with. Bank of Queensland has branches owned by branch managers and corporate branches. The model has the potential for the bank to outperform its peers on customer service, with owner branch managers building relationships with local customers, and niche business lending specialists with an understanding of borrower needs and industry.

Financial Strength

The capital structure and balance sheet provide comfort that the bank can manage a large increase in loan losses associated with COVID-19, but it remains the greatest threat to the bank’s capital position. Common equity Tier 1 capital was 9.8% as at August 2021, well above APRA’s 8.5% minimum capital benchmark for standardised banks. It is expected that the bank will pay out around 60% to 65% of earnings given the credit growth outlook, elevated investment in the banking platform, and integration of ME Bank. Our fair value estimate for no-moat rated Bank of Queensland is unchanged at AUD 8.50.

With the elevated savings rate in 2020, the bank has been able to increase its share of funding from customer deposits to 70% as at Aug. 31, 2021, up from pre-COVID-19 levels of 64% as at Aug. 31, 2019. In March 2020 the RBA announced the Term Funding Facility, or TFF, which provided three-year funding at 0.25%. From Nov. 4, 2020, new drawdowns would pay 0.1%. The initial funding available via the TFF was set at 3% of the bank’s outstanding loan balance, with an additional 2% of balances announced in November.

Bulls Say’s

  • The appointment of new senior executives and a clean out of the troubled commercial loan portfolio has ensured a more risk-conscious culture. 
  • Substantial capital raisings bolstered the balance sheet, ensuring that the bank satisfies capital rules and can still fund investments in technology and expand loan balances. 
  • Productivity improvements not only lead to improved operating margins, but a more streamlined loan approval process lifts mortgage growth rates. 
  • Management extract greater cost and revenue synergies from the acquisition of ME Bank.

Company Profile 

Bank of Queensland, or BOQ, is an Australia-based bank offering home loans, personal finance, and commercial loans. BOQ operates both owner-managed and corporate branches, and is the owner of Virgin Money Australia. Its BOQ business includes the BOQ branded commercial lending activity, BOQ Finance and BOQ Specialist businesses. The division provides tailored business banking solutions including commercial lending, equipment finance and leasing, cashflow finance, foreign exchange, interest rate hedging, transaction banking, and deposit solutions for commercial customers

(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 Technology Stocks

ResMed witnesses strong revenue growth of 10%

Investment Thesis:

  • Global leader in a significantly under-penetrated sleep apnea market
  • High barriers to entry in establishing global distribution channels
  • Strong R&D program ensuring RMD remains ahead of competitors
  • Momentum in new masks releases
  • Bolt-on acquisitions to supplement organic growth 
  • Leveraged to a falling Australian dollar

Key Risks:

  • Disruptive technology leading to better patient compliance 
  • Product recall leading to reputational damage 
  • Competitive threats leading to market share loss
  • Disappointing growth (company and industry specific)
  • Adverse currency movements (AUD, EUR, USD)
  • RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation

Key highlights:

  • The net result was strong revenue growth of 10% for our ResMed business in the June quarter
  • In 4Q21, Revenue in the U.S., Canada, and Latin America (excluding Software as a Service), grew +18%, over the pcp, on demand for sleep devices and masks, including recovery of core sleep patient flow that was previously impacted by Covid-19 and increased demand following a recent product recall by one of RMD’s competitors, partially offset by lower Covid-19 related demand for RMD’s ventilators
  • Revenue in Europe, Asia, and other markets grew by 2% on a constant currency (CC) basis, on strong sales across RMD’s mask product portfolio, partially offset by weaker device sales due to the incremental Covid-19 respiratory care revenue in the pcp
  • Excluding the impact of the incremental respiratory care revenue associated with Covid19, revenue increased by 35% on a constant currency basis
  • Software as a Service revenue was +5% higher than the pcp, on continued growth in resupply service offerings and stabilising patient flow in out-of-hospital care settings

Company Description: 

ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio).

(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

Strong customer retention and new business growth drives QBE earnings higher

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:

  • Prolonged period of pricing pressures. 
  • Adverse CAT claims. 
  • Ongoing prolonged period low interest rates and volatility in credit spreads which affects QBE’s predominately defensive portfolio. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. However, at the same time, as it underwrites across the globe, the business it is more difficult to forecast and analyse claims and pricing environment as well as reinsurance.
  • Undesirable investment returns below management guidance. 
  • Prolonged poor performances in Asia

Key highlights:

  • QBE delivered 1H21 net income of $441m (vs loss of $712m y/y) as QBE continued to post solid premium rate increases (average group-wide rate increases averaged +9.7%) across all segments, as well as strong customer retention and new business growth.
  • However, management warned rate momentum is showing signs of moderating in some geographies and products, particularly in International Markets.
  • QBE’s operational efficiency program saw expense ratio improve -60bps over pcp to 13.7%. Balance sheet remained strong with gearing improving to 31.1%.
  • The Board declared an interim dividend of 11cps (up +175% over pcp) and guided to typically higher catastrophe incidence and Crop result variability in 2H21.
  • QBE saw expense ratio improve -60bps over pcp to 13.7%, with management announcing its next phase of efficiency program (focused on IT modernisation and digitisation) remains on track to deliver an expense ratio of 13% by 2023, anticipating a restructuring charge of $150m to be expensed over three years (of which $29m was recognised in 1H21).
  • Gross written premium increased +20% to $10,203m reflecting the strong premium rate environment

Company Description: 

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
Shares Technology Stocks

Xero Ltd. delivered strong results with improving key metrics

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

Investment Thesis:

  • Competent leadership team with a proven track record of delivering strong growth (Strong top-line momentum driven by strong support of accountants and bookkeepers with annualised monthly recurring revenue increasing at CAGR 32% and strong subscriber growth with positive LTV (Lifetime Value) trends (over FY15-19, ANZ LTV grew at CAGR 48% and International LTV grew at CAGR 65%)). 
  • Solid product offering that is secure, scalable and efficient technology which is competing against competitors with technology that has legacy issues. We note that XRO’s small business platform is an ecosystem of more than 700 connected apps backed by a community of more than 50,000 users of XRO’s API developer tools. Going forward the Company could potentially increase its revenue by monetising its platform in other ways like charging third party app developers. 
  • Potential for meaningful acquisitions to fill gaps in product capability. In our view, the Company is well positioned to make acquisitions going forward (given its balance sheet and funding status). 
  • The Company continues to focus on cloud accounting, and we see significant upside potential in the sector given the fact that the current levels of small business cloud accounting adoption globally is estimated to be less than 20% of the total market or opportunity across English-speaking countries in which the Company operates.

Key Risks:

  • Decrease of migration to cloud software. 
  • Currency headwinds due to weakening of NZ$ relative to AUD, USD and Pound. 
  • Deteriorating sentiment if the economy and IT spending weakens. 
  • Excessive competition from other established players like Intuit leading to loss of market share. 
  • Inability to extract higher operational efficiencies as the Company scales up. 
  • Issues in gaining market share especially in markets with established incumbents.

Key highlights:

  • Improving trends in key metrics – (1) subscriber growth; (2) higher ARPUs (average revenue per user); and (3) lower churn.
  • A key catalyst for XRO’s share price going forward will be execution and growth in North America. 
  • Despite relatively mature markets in New Zealand and Australia, XRO’s subscriber growth in 1H22 in both markets (NZ +16% and Aus +22%) was a standout from our perspective.
  • The Company finished 1H22 with net cash position of NZ$125m and has total available liquidity of NZ$1.2bn.
  • Operating revenue was up +23% (or up +26% in constant currency) to NZ$505.7m, with total subscribers up +23% to 3.0m and ARPU (average revenue per user) up +5% to NZ$31.32
  • The financial position for different markets of Xero are as follows:
  • Australia: Segment revenue was up +22% to NZ$225m, with net additions up +24% and subscribers up +22% to 1.24m. 
  • New Zealand: Segment revenue was up +13% to NZ$72m, with net additions up +55% and subscribers up +16% to 480,000. 
  • United Kingdom: Segment revenue was up +33% to NZ$133m, with net additions up +160% and subscribers up +23% to 785,000. 
  • North America: Segment revenue was up +5% to NZ$30m, with net additions up +130% and subscribers up +23% to 308,000. 
  • Rest of World: Segment revenue was up +72% to NZ$46m. with net additions up +136% and subscribers up +48% to 201,000.

Company Description: 

Xero Ltd (XRO) is a software as a service (SaaS) company, engaged in the provision of a platform for online accounting and business services to small businesses and their advisors. The Company operates through two operating segments: Australia and New Zealand (ANZ), and International (UK + North America + Rest of the World).

(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
Dividend Stocks Shares

Cochlear reported solid FY21 results, with earnings up by 54%

Investment Thesis:

  • Attractive market dynamics – growing population requiring hearing aids, improving health in EM providing more access to devices such as hearing aids and relatively underpenetrated market
  • There remains a significant, unmet and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long‐term sustainable growth of COH
  • Market leading positions globally
  • Direct-to-consumer marketing expected to fast track market growth 
  • Best in class R&D program (significant dollar amount) leading to continual development of new products and upgrades to existing suite of products 
  • New product launches driving continued demand in all segments 
  • Attractive exposure to growth in China, India and more recently Japan 
  • Solid balance sheet position
  • Potential benefit from Australian tax incentive 
  • Subject to successful passage of legislation, the patent box tax regime for medical technology and biotechnology should encourage development of innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17%, with the concession applying from income years starting on or after 1 July 2022 

Key Risks:

  • Product recall
  • Sustained coronavirus outbreak which delays recommencement of hospital operations in China
  • R&D program fails to deliver innovative products 
  • Increase in competitive pressures 
  • Change in government reimbursement policy 
  • Adverse movements in AUD/USD
  • Emerging market does not recoup – significant downside to earnings

Key highlights:

  • COH reported strong FY21 results, with earnings (underlying NPAT) up +54% to $237m and within guidance of $225-$245m, despite Covid-19 impacted surgery activity recovering to varied levels across both developed and emerging markets
  • For FY22, it is expected to deliver net profit of $265‐285m, a 12‐20% increase on underlying net profit for FY21, based on a 74 cent AUD/USD
  • Sales revenue is expected to benefit from market growth, with a continuing recovery in surgery rates across many countries more affected by Covid
  • The management will continue their investment in market growth activities
  • Capex is expected to be ~$70‐90m for FY22 and includes around $20m related to a major process transformation and IT systems upgrade, a program that is expected to be a $100‐120m investment over the next four to five years
  • Effective tax rate is expected to decline to ~25% as a result of the introduction of changes to the R&D tax concession by the Australian government, with legislated changes to take effect from 1 July 2021
  • The Board is committed to maintaining the dividend policy which targets a 70% payout of underlying net profit
  • Record sales revenue of $1,493m, was up +10%, or +19% in constant currency (CC), driven by market share gains, market growth and rescheduled surgeries post Covid lockdowns
  • Implant units climbed +15% to 36,456 (developed markets up ~20%; emerging markets up ~10%), compared to FY19, implant units increased +7%
  • The Board declared final dividend of $1.40 which brings full year dividends to $2.55 per share, up +59% and equates payout ratio of 71% of underlying net profit, in line with COH’s 70% target payout
  • COH’s balance sheet position remains strong with net cash of $564.6m at year-end, improving from $457m in FY20

Company Description: 

Cochlear Ltd (COH) researches, develops and markets cochlear implant systems for hearing impaired people. COH’s hearing implant systems include Nucleus and Baha and are sold globally. COH has direct operations in 20 countries and 2,800 employees.

(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

Nufarm’s Fiscal 2022 Cash Conversion and working capital moves favourable

Business Strategy and 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 industrialising 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 16% investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia.

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%. The resultant collaboration should boost the performance of both companies, given little product portfolio overlap.

Financial Strength

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. Fiscal 2021 net operating cash flow rebounded strongly from negative AUD 398 million in the pcp to positive AUD 370 million. This reflects a focus on working capital management. It sees net debt down 40% to a modest AUD 173 million, leverage (ND/(ND+E)) of just 8% and net debt/EBITDA very comfortable at 0.5. Net working capital significantly improved post sale of the Latin American business and remains a focus with improved debtor collections, reduced inventory and foreign exchange translation.

Our AUD 7.00 fair value for no-moat crop protection company Nufarm. Underlying fiscal 2021 NPAT improved to positive AUD 61 million against an underlying loss of AUD 67 million in the pcp. NPAT in the fiscal second half was negligible at just AUD 0.7 million. On a full fiscal year basis, APAC revenue enjoyed a sharp turnaround, up 52% to AUD 858 million and segment EBITDA margin nearly doubled to 12.7%. Nufarm shares plunged 8.5% on the day of profit release, a strange response given an all-important strong cash flow performance. The fall may have been in reaction to a decline in salmon demand impacting sales of Omega-3 canola. But there is a long way to run on Omega-3, still in its infancy, and we are unconcerned.

Bulls Say’s

  • 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 Profile 

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)

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

Huon reported results as expected; however earnings dented due to impacts of Covid

Investment Thesis:

  • HUO takeover price is $3.85. The Board have announced it believes accepting the offer is in the best interest of shareholders, absent any superior offer or independent expert advice.
  • Founding/major shareholders, Frances and Peter Bender, who hold ~53% of total shares, intend on voting in favour.
  • Growing consumer preference for natural and organic products, both in Australia and abroad, may see significant increase in salmon sales and therefore higher share prices. 
  • Number two player in the domestic market. 
  • With rational behaviour around pricing, the concentrated industry could benefit. 
  • Supportive salmon prices given disruption to global salmon supply. 
  • High barriers to entry (desired temperatures and regulatory licenses difficult to obtain). 
  • Given the complex nature of salmon farming HUO is unlikely to have its dominant position as an Australian salmon farmer ever seriously threatened.

Key Risks:

  • Takeover fails to proceed. 
  • Impact to production due to adverse weather conditions and diseases. 
  • Chemical coloring in salmon may lead to further negative publicity and undermine demand for salmon.
  • Cost pressures or cost blowout could deteriorate margins significantly given the large cost base relative to earnings (EBITDA). 
  • Irrational competitive behaviour (domestic and international markets). 
  • Negative media on the sustainability of the Tasmanian salmon industry.

Key highlights:

  • On an operating basis, EBITDA of $16.7m was in line with management guidance but declined -65% on pcp due to a -10% fall in the average price, made worst by an increase in production which caused a shift in the channel mix to spot export sales at materially increased freight costs.
  • NPAT decline of -$128.1m was a significant deterioration from $4.9m in the pcp.
  • Cash flow from operations was -$3.0m reflecting higher working capital requirements as freight costs doubled on pcp to $66m.
  • The two main contributors were the -12% fall in the average international salmon price in FY2021 compared to the previous year and the significant increase in freight charges due to limited access to international flights.
  • The impact of these were amplified by the commencement of Huon’s ramp up in production as part of its five-year strategy to expand capacity to meet future growth in domestic demand
  • The shut-down of international commercial flights was a major impediment to gaining access to the markets Huon needed to sell 44% of its FY2021 harvest.
  • HUON also announced on 6 August 2021, a takeover offer at $3.85 per share which is a +38% premium to the Huon share price of $2.79 on the prior trading day’s close.

Company Description: 

Huon Aquaculture (HUO) is a vertically integrated salmon producer in Australia. Its operations span all aspects of the supply chain, from hatcheries and marine farming to harvesting and processing, as well as sales and marketing. HUO’s marine farms are located in the cool, pristine waters of Tasmania, with the Company’s logistics infrastructure delivering salmon efficiently to the major fish markets around Australia. 

(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.