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Global stocks Shares

Citigroup awaiting recovery in Credit Card balances as internal investment spending continues

international corporate banking, and card operations. It’s truly global presence differentiates the bank from all of its U.S.-based peers. With significant revenue coming from Latin America and Asia, the bank is poised to ride the growth of these economies through the coming decade. Because of its wide geographical footprint, Citigroup should remain a bank of choice for global corporations, due to its ability to provide a variety of services across borders. Developing economies should offer an attractive combination of high margins and rapid credit growth over time, especially in comparison with the low rates and declining leverage that is expected to persist in the United States and other Western economies.

On the downside, it’s still difficult to see how some of Citigroup’s lines of businesses fit together. There isn’t any material value creation seen by having multiple retail franchises in different countries, which is the case for Citi, with material operations in the U.S., Latin America, and Asia. Unsurprisingly, the bank’s global consumer franchise has underperformed peers. Citigroup also arguably remains the most complex of the Big Four and still has operational issues to solve, which the Revlon payment fiasco and resultant regulatory scrutiny highlighted once again. Overall, the bank continues to be on a path to improved returns and efficiencies.

Financial Strength:

The fair value estimate has been increased by the analysts from $78 to $83 as it incorporates a 100% chance of a statutory tax rate of 26% and also the rate hikes starting in late 2022.

Citigroup is in sound financial health. Its common equity Tier 1 ratio stood at 11.7% as of September 2021. As of the end of 2020, the bank reports that $545 billion of its roughly $2 trillion balance sheet takes the form of high-quality liquid assets, giving it a liquidity coverage ratio of 118%, in excess of the minimum of 100%. The bank’s supplementary leverage ratio was 5.9% (excluding relief), in excess of the minimum of 5%. Citigroup’s liabilities are prudently diversified, with just over half of its assets funded by deposits and the remainder of liabilities made up of long-term debt, repurchase agreements, commercial paper, and trading liabilities. Just over $19 billion in preferred stock was outstanding as of December 2020.

Bulls Say:

  • Citigroup is leveraged to the rise of Asia, Latin America, and other emerging markets, while its competitors may struggle with lacklustre loan demand in the U.S. and Western Europe. 
  • A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher. 
  • Citigroup still has room for self-help, particularly around better optimizing current operations, and room to release excess capital, both levers to improve returns.

Company Profile:

Citigroup is a global financial services company doing business in more than 100 countries and jurisdictions. Citigroup’s operations are organized into two primary segments: the global consumer banking segment, which provides basic branch banking around the world, and the institutional clients group, which provides large customers around the globe with investment banking, cash management, and other products and services.

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks Shares

M&T Bank reported solid third quarter earnings; Aims to create value via acquisition with People’s United

efficient operations, and savvy acquisitions. The bank’s main stronghold is its commercial real estate operations in the northeast. M&T has a history of good underwriting and deep, on the ground relationships. M&T has also recently announced it will acquire People’s United Bank, further expanding its geographical reach in the northeast and its product offerings. We like the pricing of the deal and expected cost savings, and hope the acquisition will lead to some added organic growth in the future as well. 

M&T derives about two thirds of its income from net interest income, and with the bank’s cheaper deposit base, it is more sensitive to movements in interest rates. The remaining one third of revenue comes from non banking businesses like wealth management or deposit service fees. Much of the company’s loan book is composed of commercial loans.

The bank has an especially strong position within its commercial real estate operations in the northeastern United States. M&T has one of the largest CRE exposures under our coverage, and this has come under more scrutiny as the pandemic has developed. While certain CRE assets have come under unique pressure, M&T’s underwriting remains solid, and we expect losses to be very manageable.

M&T Bank reported solid third quarter earning; the acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank

M&T Bank reported solid third-quarter earnings. The bank beat the FactSet consensus estimate of $1.64 per share with reported EPS of $1.90. This equates to a return on tangible common equity of 17.5%. M&T Bank benefitted from a provisioning benefit once again as chargeoffs remain exceptionally low and the bank released some additional reserves.

Nonperforming assets remained stable. Expenses, however, came in a bit hotter than expected, up roughly 9% year over year during the quarter. Management attributed most of this to higher incentive based compensation, which is understandable. On the positive side, fees have done quite well.  Net interest income, meanwhile, was essentially in line with our expectations.

The acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank.

Key attraction of the transaction 

  • Unique strategic position and enhanced platform for growth: The merger will create the leading community-focused commercial bank with the scale and share to compete effectively.
  • Shared commitment to local communities: Both companies have been long recognized for their community commitments and longstanding support of civic organizations.
  •  Compelling financial impacts: M&T expects the transaction to be immediately accretive to its tangible book value per share. It is further expected that the transaction will be 10-12% accretive to M&T’s earnings per share in 2023, reflecting estimated annual cost synergies of approximately $330 million. 

Financial Strength 

We think M&T is in good financial health. The bank withstood the crisis better than peers and has maintained a credit cost advantage over the current economic cycle. Deposits fund roughly three fourths of total assets. We believe the bank is adequately capitalized, with a common equity Tier 1 ratio over 10% as of September 2021.

Bull Says

  • M&T’s acquisition of People’s United was at a good price and should drive additional future growth. 
  • A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher. 
  • M&T has loyal customers, and good management, and investors shouldn’t have to worry much about being burned by bad underwriting.

Company Profile 

M&T Bank is one of the largest regional banks in the United States, with branches in New York, Pennsylvania, West Virginia, Virginia, Maryland, Delaware, and New Jersey. The bank was founded to serve manufacturing and trading businesses around the Erie Canal.

 (Source: Morningstar)

General Advice Warning

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

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Global stocks Shares

Sensient Is Well Positioned to Meet Growing Demand for Natural Ingredients

Sensient has been focused on optimizing its portfolio, divesting less profitable, commodity-like business lines primarily in the flavors and extracts segment.Longer term, we expect consumer preferences will continue to shift toward natural flavors and colors and away from synthetic ingredients. However, with a growing natural ingredient portfolio, we think the company is well positioned for the transition. 

Although Sensient serves both large and small customers, it primarily targets middle-market customers rather than large consumer packaged goods customers. The company’s most valuable business relationships involve the manufacture of customized formulations from proprietary technologies that allow Sensient to be a sole supplier. 

Sensient reports three segments. The color segment is the largest .This business produces natural and synthetic color systems for a variety of end markets, including food, beverage, cosmetics, and pharmaceutical applications. The flavors and extracts segment (a little more than 40% of profits) sells both natural and synthetic taste and texture ingredients. 

Financial Strength 

Sensient is in very good financial condition. At the end of the third quarter of 2021, net debt/adjusted EBITDA was around 2 times. Sensient has historically remained safely below the leverage ratio and above the coverage ratio.We forecast the company will continue to generate healthy free cash flow, which it has consistently done over the last decade. Sensient should have no problem servicing existing debt. The company has only a small pension liability and no other major liabilities that will require material cash outflows in the coming years. Sensient has historically maintained a low cash balance, preferring to return excess cash to shareholders via dividends (management targets a 30%-40% payout ratio) or share repurchases.

Bull Says

  • Sensient’s restructuring program will lead to materially higher margins and ROICs as low-margin facilities are closed. 
  • The demand shift to natural colors from synthetic colors should drive higher volume for Sensient, boosting profits. 
  • Management’s 20% long-term operating margin goal is achievable as specialty colors and flavors will generate an increasing proportion of total sales, driving a mix shift-based margin expansion.

Company Profile

Sensient Technologies manufactures and markets natural and synthetic colors, flavors, and flavor extracts. The company has a widespread network of facilities around the globe, and its customers operate across a variety of end markets. Sensient’s offerings are predominantly applied to consumer-facing products, including food and beverage, cosmetics and pharmaceuticals.

 (Source: Morningstar)

General Advice Warning

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

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Shares Technology Stocks

Netflix’s Growth Will Increasingly Come From Outside the U. S

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.

We believe that many consumers use, and will continue to use, SVODs like Netflix as a complementary service, especially as SVOD prices increase and pay television bundle prices decrease. Larger firms like Disney and WarnerMedia have launched their own SVOD platforms to compete against Netflix. We think this usage pattern and increased competition will constrain Netflix’s ability to raise prices without inducing greater churn. 

We expect that Netflix will expand further into local-language programming to offset the weakness of its skinny offering in many countries. This will likely generate a competitive response from the firm’s global and local rivals, which will augment their own first-party content budgets. In turn, we think Netflix’s international expansion will continue to hamper margin expansion.

Netflix’s Growth Will Increasingly Come From Outside the U. S.

Netflix reported decent third-quarter results as subscriber growth beat the low guidance issued a quarter ago but this is below the previous two years. The lower subscriber growth reflects not only saturation in its largest markets but strong competition in the regions with the most potential growth remaining, including Latin America and India. 

While we now project that EMEA will have more members than the U.S. by the first quarter of 2022, its revenue and implied margin contribution will remain much lower as its ARPU only hit $11.65 in the quarter. We continue to project price increases for the region but still expect a large gap between it and the U.S. to persist over the next five years.

Asia-Pacific, Netflix’s supposed long-term growth engine, increased revenue year over year by an impressive 31% in the quarter but ARPU remained under $10 and actually declined sequentially. We expect ARPU to decline going forward as the firm rolls out low-price plans in more countries across the region. 

Financial Strength 

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The company’s weak free cash flow due to this spending is a concern, as we don’t see the need to spend decreasing in the near future. As of June 2021, Netflix has $14.9 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($500 million due 2021, $700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($2.7 billion recognized on the balance sheet and over $15 billion not yet reflected on the balance sheet).

Bull Says 

  • Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years. 
  • Netflix has built a substantial content library that will benefit the firm over the long term.
  • International expansion offers attractive markets for adding subscribers.

Company Profile

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, Internet-connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

 (Source: Morningstar)

General Advice Warning

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

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Shares Technology Stocks

Xero Investors Should Check Its ARPU and CAC in Its Interim Financial Result

SME accounting software users have historically shown little inclination to switch providers, and Xero enjoys annual customer retention rates of over 80%.

The transition from desktop- to cloud-based products offers a rare opportunity for relatively new providers to win market share via the transition of customers to cloud-hosted SaaS products that offer material productivity improvements. We expect switching costs to recapture their earlier resilience once customers transition to cloud products and accounting software becomes more integrated with third-party software.

Xero Investors Should Check Its ARPU and CAC in Its Interim Financial Result

Xero has announced little of note since its fiscal 2021 financial result in May 2021. However, the company will announce its interim fiscal 2022 financial result next month, which is likely to reignite investor attention. However, Xero shares are materially overvalued and the current market price of AUD 145 per share is significantly above our AUD 50 fair value estimate. 

Although Xero reported a NZD 20 million profit after tax in fiscal 2021, this was partly due to the company’s decision to cut back on spending in the first half.In the long term, we expect Xero’s EBIT margin to expand significantly, from 7% in fiscal 2021 to 30% by fiscal 2027.

We expect investors to largely overlook Xero’s profitability at its interim result and instead focus on other metrics like subscriber growth, revenue growth, customer acquisition costs, or CAC, and annual revenue per user, or ARPU. Particularly focused on ARPU because it forms a key component of our investment thesis, and expected that strong price-based competition to limit Xero’s ability to raise prices. This will be interesting because a strong subscriber growth figure may be supported by weak ARPU growth or possibly strong CAC growth, indicating Xero is competing harder for customers.

Financial Strength

 Xero is in reasonable financial health but needs to maintain high revenue growth rates to increase profits and justify its market capitalisation. We expect EBIT margins to expand to around 30% by fiscal 2025, in line with peer companies. As the company matures, we expect the capital-light business model to enable strong cash generation. Strong customer retention rates of over 80% should mean earnings volatility will be relatively low in the long term.

Bulls Say 

  • Xero is experiencing strong revenue and customer growth driven by the transition of desktop accounting software to the cloud, a trend we expect to continue for at least the next decade.
  • Xero operates in the software sector, which is typically an industry with low capital intensity and strong cash generation. We expect Xero to generate strong returns on invested capital and free cash flow in the long term. 
  • Xero has already achieved dominant positions in the New Zealand and Australian cloud accounting markets and is a leading competitor in the U.K. and U. S. markets.

Company Profile

Xero is a provider of cloud-based accounting software, primarily aimed at the small and medium enterprise, or SME, and accounting practice markets. The company has grown quickly from its base in New Zealand and surpassed local incumbent providers MYOB and Reckon to become the largest SME accounting SaaS provider in the region. Xero is also growing internationally, with a focus on the United Kingdom and the United States. The company has a history of losses and equity capital raisings, as it has prioritised customer growth.

 (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

Nexstar Media Group looks to capitalize on its acquisition

158 are affiliated with the four national broadcasters: CBS (50), Fox (43), NBC (35), and ABC (30). The firm has networks in 15 of the top 20 television markets and reaches 63% of U.S. TV households. 

Though it’s slightly declining in importance, advertising remains an important source of revenue for Nexstar. Just under 44% of total 2019 revenue came from non-political advertising, down from 46% in 2017. Over 70% of non-political advertising revenue is generated at the local level by selling ad time to area businesses, including restaurants, auto dealerships, and retailers, which have suffered during the pandemic. In markets where Nexstar has a duopoly (two local stations), the costs of the salesforce and news programming can be split and the access to two stations provides local (and national) advertisers more choices in terms of targeting certain demographic groups. Because of its size and geographic reach, Nexstar also sells advertising nationally to auto manufacturers, telecom firms, fast-food restaurants, and retailers via their ad agencies. The larger scale of the firm, along with increased political ad spending, has increased the importance of elections.

Financial Strength:

The fair value of Nexstar has been maintained by the analysts at USD 150.00. This fair value estimate implies 2021 adjusted price/earnings of 9 times, an enterprise value/adjusted EBITDA multiple of 8, and a free cash flow yield of 16%. 

Although Nexstar is more highly leveraged than it has been traditionally, it is in decent financial shape. Overall debt increased as a result of the Tribune Media acquisition. The firm had $7.2 billion in net debt as of March 2019, up sharply from $3.9 billion at the end of 2018. Nexstar took a number of steps over the first quarter of 2020 to adapt its business for the potential impact of COVID-19. It spent $457 million in the first quarter to reduce its debt load, lowering its first-lien net leverage to 3.04 times at the end of the quarter from 3.52 times at the end of 2019. The new level is well below the covenant level of 4.25 times. The firm had no bond maturities due until 2024, though some of its $5.4 billion first-lien loans will come due over the next three years.

Bulls Say:

  • Nexstar can drive local ad revenue growth via its duopoly markets
  • The increased reach provided by the Tribune merger will help attract more national advertisers and grow political ad spending 
  • Nexstar has the heft and reach to strike more advantageous retransmission agreements with pay television distributors

Company Profile:

Nexstar is the largest television station owner/operator in the United States, with 197 stations in 115 markets. Of its 197 full-power stations, 158 are affiliated with the four national broadcasters: CBS (50), Fox (43), NBC (35), and ABC (30). The 2019 merger with Tribune made Nexstar the top broadcast affiliate for both Fox and CBS as well as the number-two partner for NBC and number three for ABC. The firm now has networks in 15 of the top 20 television markets and reaches 69 million television households. Nexstar also owns WGN, a nationwide pay-television network, and a 31% stake in Food Network and Cooking 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.

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Shares Technology Stocks

Netwealth’s FUA Continues to Grow Quickly But FUA Fees to remain Under Pressure

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The company charges for its software based on the value of funds under management on its platform, comprising over 95% of group revenue, in addition to providing Netwealth-branded investment products, which are managed by third-party investment managers. Netwealth does not own investment management or financial advisory businesses. 

The company has also benefited from regulatory changes such as the Future of Financial Advice, or FOFA, reforms, which require financial advisors to act in their clients’ best interests. These reforms have encouraged financial advisors to break away from vertically integrated, and potentially conflicted, wealth management businesses to operate as independent financial advisors, or IFAs, and use independent investment administration platforms, such as Netwealth, in the process.
Netwealth has also benefited from the banning of trail commission fees previously paid by investment administration platforms and investment advisors for recommending their products. This has encouraged financial advisors to seek new fee sources, including managed accounts, which were mainly available on the independent platforms. 

The vertically integrated incumbent platform providers continue to develop their platforms, which poses a long-term competitive threat to Netwealth.

Netwealth Remains Overvalued Despite FUA Growth Upgrade

Netwealth’s share price jumped 16% following its third-quarter update, which included an increase to fiscal 2022 funds under administration, or FUA, net inflow guidance to AUD 12.5 billion from AUD 10 billion. However,the market overreacted to the announcement, is overly focussed on FUA and revenue growth, and is ignoring likely long-term outlook on profits and cash flows. 

We have maintained Netwealth’s earnings forecasts and fair value estimate at AUD 6.50 per share, which is well below the current market price of AUD 16.56 per share.

Financial Strength 

Netwealth is in good financial health because of its service-based and capital-light business model, which has little need for debt or equity capital. The company expenses, rather than capitalises, research and development costs, which results in strong cash conversion and means most operating cash flow is available for dividend payments. The profitable business model ensures dividends are fully franked, which we consider to be sustainable. We consider management’s target dividend payout ratio of 60%-80% of Netwealth’s statutory net profit after tax to be sustainable.

Bulls Say

  • Netwealth has only a small proportion of the investment administration market, at around 4%, but has won market share quickly, and significant growth potential remains. 
  • Netwealth has a low fixed-cost base which means operating leverage is high and further strong revenue growth should be amplified at the EPS level. 
  • The investment administration platform industry has been growing at a low-double-digit CAGR in recent years, and we expect a high-single-digit CAGR over the next decade, providing a strong underlying tailwind for Netwealth.

Company Profile

Netwealth provides cloud-based investment administration software as a service, or SaaS, in Australia via its proprietary platform. Netwealth’s platform provides portfolio administration, investment management tools, and investment and managed account services to financial intermediaries and directly to clients. The company charges SaaS fees based on funds under management on its platform. Netwealth also offers Netwealth-branded investment products on its platform which are managed by third-party investment managers.

 (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

Solid economic growth via its active and passive platform lifts BlackRock’s AUM

The biggest differentiators for the firm are its scale, ability to offer both passive and active products, greater focus on institutional investors, strong brands, and reasonable fees. The iShares ETF platform as well as technology that provides risk management and product/portfolio construction tools directly to end users, which makes them stickier in the long run, should allow BlackRock to generate higher and more stable levels of organic growth than its publicly traded peers the next five years.

Although the secular and cyclical headwinds to make AUM growth difficult for the U.S.-based asset managers over the next five to 10 years, still BlackRock will generate 3%-5% average annual organic AUM growth, driven by its commitment to passive investing, ESG strategies, and geographic expansion, with slightly higher levels of revenue growth on average and stable adjusted operating margins during 2021-25.

Solid Organic Growth From Both its Active and Passive Platforms Continue to Lift BlackRock’s AUM

With $9.464 trillion in total assets under management, or AUM, at the end of September 2021, BlackRock is the largest asset manager in the world. Unlike many of its competitors, the firm is currently generating solid organic growth with its operations, with its iShares platform, which is the leading domestic and global provider of ETFs, riding a secular trend toward passively managed products that began more than two decades ago. This has helped the company maintain above average levels of annual organic growth despite the increased size and scale of its operations.

Financial Strength 

BlackRock has been prudent with its use of debt, with debt/total capital averaging just over 15% annually the past 10 calendar years. The company entered 2021 with $7.3 billion in long-term debt, The company also has a $4.4 billion revolving credit facility (which expires in March 2026) but had no outstanding balances at the end of June 2021.BlackRock has historically returned the bulk of its free cash flow to shareholders via share repurchases and dividends.The firm did spend $693 million on two acquisitions in 2018, $1.3 billion on eFront in 2020, and $1.1 billion for Aperio Group in early 2021, so bolt-on deals look to be part of the mix in the near term. As for share repurchases, BlackRock expects to spend $300 million per quarter on share repurchases but will increase its allocation to buybacks if shares trade at a significant discount to intrinsic value. The company spent close to $1.8 billion on share repurchases during 2020.BlackRock increased its quarterly dividend 14% to $4.13 per share early in 2021. We expect the dividend to increase at a mid- to high-single-digit rate the next five years, leaving the payout ratio (based on our forward earnings estimates) at around 45% on average annually.

Bulls Say 

  • BlackRock is the largest asset manager in the world, with $9.464 trillion in AUM at the end of September 2021 and clients in more than 100 countries. 
  • Product diversity and a heavier concentration in the institutional channel have traditionally provided BlackRock with a much more stable set of assets than its peers. 
  • BlackRock’s well-diversified product mix makes it fairly agnostic to shifts among asset classes and investment strategies, limiting the impact that market swings or withdrawals from individual asset classes or investment styles can have on its AUM.

Company Profile

BlackRock is the largest asset manager in the world, with $9.464 trillion in AUM at the end of September 2021. Product mix is fairly diverse, with 53% of the firm’s managed assets in equity strategies, 29% in fixed income, 8% in multi-asset class, 7% in money market funds, and 3% in alternatives. Passive strategies account for around two thirds of long-term AUM, with the company’s iShares ETF platform maintaining a leading market share domestically and on a global basis. Product distribution is weighted more toward institutional clients, which by our calculations account for around 80% of AUM. BlackRock is also geographically diverse, with clients in more than 100 countries and more than one third of managed assets coming from investors domiciled outside the U.S. and Canada.

 (Source: Morningstar)

General Advice Warning

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

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Global stocks Shares

Boral Limited shares screen as undervalued at current market price

Hot on the heels of the USD 2.15 billion (AUD 2.9 billion) sale of its North American building products division, Boral has offloaded its Australian timber business for AUD 65 million and anticipates further proceeds of USD 125 million (AUD 170 million) for the Meridian Brick divestment.

The surviving Australia segment, which accounted for approximately 60% of group earnings prior to sell-downs, consists of construction materials and cement, and the building products business units. The construction materials and cement business unit comprise quarries, asphalt, transport, landfill, property, cement and concrete placing activities. This business unit represents around 90% of Australia earnings and has the greater competitive strengths, though not sufficient to drive a moat overall. Building products, meanwhile, includes West Coast bricks, roofing, masonry and timber products and represents the remaining 10% of segment EBIT. These businesses are the less moaty.

Financial Strength:

The fair value of Boral Ltd has been maintained by the analysts at AUD 7.40. 

Since Seven Group (which holds 59.2% stakes in Boral) closed its AUD 7.40 takeover offer in July 2021, Boral shares drifted off to a low of AUD 5.80 in September, before staging a modest recovery to the current circa AUD 6.20. The fair value estimate of the analysts equates to a 2026 EV/EBITDA multiple of 6.7, a P/E of 14.5, and dividend yield of 4.8%.

Boral’s balance sheet is now flush with cash and a return of capital a near certainty in fiscal 2022. Prior to asset sale receipts, the company ended fiscal 2021 with AUD 900 million in net debt, excluding operating leases. But with cash from asset sales it expects to be in a position to return up to AUD 3 billion or AUD 2.70 per share of surplus capital by way of an equal capital reduction, subject to shareholder approval at the AGM on Oct. 28, 2021 and subject to an appropriate class ruling from the Australian Tax Office.

Company Profile:

Boral is Australia’s largest construction materials and building supplier, with an expanding footprint in U.S. fly ash and building products markets, and exposure to Asian construction materials markets via a joint venture with USG Corp. Previously operating as a conglomerate, Boral now exists as a pure-play, construction materials and building products group following the demerger of the group’s energy business, Origin Energy, in 2000. In Australia, the company is an integrated construction materials player, while operating fly ash and building products businesses in the U.S. The company’s joint venture, USG Boral, is a gypsum-based building product manufacturer and distributor in Australia, Asia and the Middle East. Boral formed the JV with USG Corp in 2014.

(Source: Morningstar)

General Advice Warning

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

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Global stocks Shares

Adbri Strategize its focus on operational efficiency via vertical integration

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Successive acquisitions have seen the company become Australia’s fourth largest concrete and aggregates player. However, Adbri currently lacks full vertical integration in key Victorian and Queensland construction materials markets. This has left the group with an inability to fully benefit from demand from major infrastructure projects in these markets, and left Adbri’s earnings susceptible to falling demand from residential construction through the current Australian housing construction downturn, which began in late 2018. 

Acquisitions within these markets are therefore viewed positively, and with an improved ability to supply infrastructure projects in all major metro markets, the resilience of Adbri’s earnings in the next cycle will be strengthened.

There are concerns regarding the recent loss of the Alcoa lime supply contract highlights Adbri’s intention to allocate growth capital to its lime business. Competition from lime imports has proved too strong with Alcoa-the largest lime buyer in the Western Australia, or WA, market–to source lime offshore from 2021. A reassessment of the lime growth strategy is required, in our view.

Financial Strength 

The balance sheet remains in decent shape. It is anticipated that pressure on Adbri’s balance sheet will build near-term, owing to the AUD 200 million of capital expenditure over the 2021–2022 period associated with the previously announced Kwinana upgrade project. We expect leverage(defined as net debt including lease liabilities/EBITDA)to peak at 2.4 times in 2022, remaining below Adbri’s leverage covenant of 3.0 times. We anticipate balance sheet metrics will improve from 2023 onward as the cyclical recovery in new home construction and Adbri’s earnings gathers pace. An AUD 5.5 cent interim dividend was announced. We continue to forecast full-year 2021 dividends of AUD 0.12 per share reflecting an approximate 75% payout of net income. Adbri’s has ample liquidity to support operations through the medium term. 

Bulls Say 

  • Infrastructure spending will offset declining residential construction activity and provide top-line growth. 
  • A conservative balance sheet provides capacity for continued downstream acquisitions promising better returns. 
  • The eventual turning of the housing cycle will support price increases in coming years.

Company Profile

Formed by the merger of S.A. Portland Cement and Adelaide Cement in 1971, Adbri is an integrated cement, lime, concrete and aggregates, and concrete products business. Adbri currently sells about 3 million metric tons of cement and 1 million metric tons of lime per year, making it Australia’s largest lime and second-largest cement supplier. Key geographic regions include Western Australia and South Australia with a focus on residential construction, infrastructure, and industrial markets including mining.

 (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.