Category: Shares

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Shares Small Cap

Super Retail’s attractive loyalty program with 8 million member

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

Investment Thesis

  • Trading below our valuation and on attractive trading multiples and dividend yield. 
  • Strong tailwinds/fundamentals in SUL’s four core segment. For instance, sales for vehicle aftermarket continue to remain strong (with increase in secondhand vehicle sales (Supercheap); travelers seeking social distancing and hencemoving away from public transport (Supercheap); with Covid lockdown measures in forced, more people are spending their holidays domestically (BCF; macpac), utilising their vehicles (Supercheap); growing awareness of fit and healthy lifestyles (rebel). 
  • Solid capital position. 
  • Strong brands in BCF, macppac, rebel and Supercheap with solid industry positions in largely oligopolies and solid store network. 
  • Transitioning to an omni-channel business. Whilst previously the business has been modeled on like-to-like store numbers, management now thinks of business metrics based on club members and has been able to grow the active club membership much faster than store numbers (store numbers in last 5 years have grown +2% CAGR vs active club members at +10% CAGR), providing it with an opportunity to expand customer base and therefore revenue base without significant capex for investment in stores (most of the customers are omni channel). 
  • Management continues to push towards expanding its online sales (Covid-19 added to this tailwind), with online sales penetration of ~13-15% of total sales currently and expected to reach 20-25% over the next 5 years. 
  • Attractive loyalty members program, with over 8 million members.

Key Risks

  • Rising competitive pressures.des 
  • Any issues with supply chain,especially as a result of the impact of Covid-19 on logistics which affects earnings. 
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures). 
  • Disappointing earnings update or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower.

FY21 Results Highlights

  • Total Group sales of $3.45bn, up +22% (Group like-for-like sales growth of +23%).Online sales of $415.6m, up +43% and nowaccounts for ~12% of total sales. On the impact of Covid -19 lockdowns, management noted its “omni-retail capability enabled it to pivot to online channels to meet consumer demand through both Click & Collect and home delivery”.
  • Segment EBIT of $476.8m was up +80%. 
  • Segment normalised PBT of $435.8m, up +108%.
  • Normalised NPAT up +107% to $306.8m. Basic EPS up +139% to 133.4cps.
  • The Board declared a fully franked final dividend of 55.0cps, bringing the full year dividend to 88.0cps, significantly higher than 19.5cps in FY20. Dividend equates to 65%, which is in line with SUL’s 65% payout ratio policy.
  • Management guided capex in FY22 of $125m to fund expanded store development and investment in omni and digital capability.

Company Profile 

Super Retail Group (SUL) is one of Australasia’s Top 10 retailers. SUL comprises four core segments. (1) BCF: Australia’s largest outdoor retailer focused on selling Boating, Camping and Fishing products. (2) macpac: retailer of apparel and equipment with their own designs focused on outdoor adventurers. (3) rebel: retailer of branded sporting and leisure goods and equipment for casual and serious fitness enthusiast. (4) Supercheap Auto: specialty retail business which specialises in automotive parts and accessories. 

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

OOh!media is strongly-positioned but shares are overvalued relative to our intrinsic assessment

In the nine years to 2019, advertising dollars flowing to the Australian outdoor medium increased at a CAGR of 9%.

Our view is based on three structurally related tailwinds:

 First, unlike other traditional media, the outdoor audience is increasing. 

Second, a key Achilles heel for the outdoor advertising industry was the lack of reliable audience measurement. However, with the 2010 launch of measurement of Outdoor Visibility and Exposure, or MOVE, the medium now has greater legitimacy and offers a more robust way for marketers to assess the return on money allocated to outdoor advertising. 

Third, in contrast to its debilitating impact on other traditional media, digital technology is a growth facilitator for the outdoor industry. We estimate converting a static site to a digital site can lift advertising revenue three- to four-fold, potentially doubling the margin and vastly lifting the return on capital. 

We view these drivers as long-dated, and will continue to be exploited by oOh!media. Management is investing in further technological, data, and analytics capability. While adding to near-term costs, these investments are designed to more effectively convince marketers of the benefits of outdoor advertising, in terms of greater sophistication in audience targeting, resulting in longer-term sustainability.

Our fair value estimate for oOh!media is AUD 1.40 per share, which implies fiscal 2021 enterprise/EBITDA of 11.9 times but Shares in oOh!media are trading 30% above our AUD 1.40 fair value estimate. We are not ignorant of the stock’s appeal to investors lusting after high-beta, COVID-19 recovery trades ahead of imminent reopening of the New South Wales and Victorian economies.

Bulls Say 

  • Outdoor advertising is a growth medium benefiting from structural tailwinds such as increasing audience, more reliable measurement, and conversion of inventory to digital.
  • Australian outdoor’s 5% share of the total advertising pie still lags Canada (8%), the U.K. (7%), and the global average of 6%-plus. 
  • OOOh!media may have failed in its attempt to merge with APN Outdoor in 2017, but it completed the acquisition of Adshel in September 2018 and there is an opportunity to extract sizable synergies from the combination.

Financial Strength

 At the end of June 2021, net debt/EBITDA was 1.1 times, pre AASB 16. We forecast this to fall to 0.7 by the end of 2021, within the renegotiated 3.25-3.50 covenant limit for 2021. The current dividend payout policy is reasonably conservative at between 40% and 60% of net profits after tax but before amortisation acquired intangibles, allowing further investment in inventory digitisation. However, due to the uncertain impact of the coronavirus outbreak, there were no dividends in 2020 and we forecast resumption of just AUD 0.04 in 2022.

Company Profile

OOh!media operates a network of outdoor advertising sites with a sizable share of the Australian market of around 30%, and has a presence in New Zealand. It boasts a diverse portfolio of locations to service the needs of outdoor advertisers, and is particularly strong in the roadside billboard and retail (such as shopping malls) segments. OOh!media offers these services by entering into lease arrangements with owners of outdoor sites–effectively an intermediary allowing site owners to monetise their visible space in high-traffic areas. In late September 2018, the group completed the acquisition of Adshel from HT&E for AUD 570 million, a deal that cements its competitive position in the face of industry consolidation.

 (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

Digital Realty Continues Deepening its Global Footprint and Transitioning Away From Wholesale Only

power, and connection needs. Along with Equinix, we think this makes Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the pack.

Before its acquisition of Telx in 2015, Digital Realty garnered almost 95% of its total revenue from wholesale data centers and had virtually no interconnection revenue. At the end of 2020, a year in which Digital Realty also acquired Interxion, a firm with almost exclusively co-location and interconnection revenue, we estimate that annualized rent from the largest customers–those taking greater than 1 megawatt of power–made up only about half of total annualized revenue, and interconnection revenue was about 9% of the total.

In Digital Realty’s data centers, tenants can directly connect to their cloud providers or other partners, resulting in reduced latency and superior security. Even when in different Digital Realty locations, customers can bypass the public Internet to connect with other Digital Realty data centers via direct fiber connections within cities or through a software-defined network between cities. 

Steady Performance in Q3 for Digital Realty as It Continues Pursuing New Opportunities 

Digital Realty’s third-quarter results were consistent with recent performance, with a solid level of new bookings and re-leasing spreads that remain sluggish. 

The firm’s 11% year-over-year revenue growth was significantly boosted by higher utilities revenue, which simply reflects higher energy costs that Digital passes on to its customers.Rental revenue, which excludes pass-through revenue, was up 6%. Renewal spreads remain under pressure as the firm continues working off below-market contracts with its larger deployments, but this quarter’s negative 6% cash re-leasing spread was misleading, as it was the result of a 30- megawatt renewal combined with a very large new lease.

New bookings totaled $113 million in annualized revenue, with space and power bookings just over $100 million for the third straight quarter, and interconnection bookings in the $12 million-$13 million range for the fifth straight quarter-every quarter since Digital acquired Interxion. While this level of bookings is solid, it is believed that the moves the firm is making will lead them to pick up in the future. Key moves Digital made during or after the third quarter include entries into both India and Nigeria, both through joint ventures. The firm also made an investment in AtlasEdge data centers in Europe to propel its edge ambitions.

Bulls Say 

  • Digital Realty’s shift toward connection and colocation exposes it to the most attractive parts of the data center business and the growth tailwinds of cloud providers and data connectivity. 
  • Digital Realty’s global offering and high exposure to cloud providers gives it an advantage over competitors that operate in more narrow geographies or can only offer retail colocation space.
  • Internet of Things, artificial intelligence, and other innovations that increase the public’s demand for data and connectivity require more hardware and connections in data centers.

Company Profile

Digital Realty owns and operates nearly 300 data centers worldwide. It has more than 35 million rentable square feet across five continents. Digital’s offerings range from retail colocation, where an enterprise may rent a single cabinet and rely on Digital to provide all the accommodations, to “cold shells,” where hyperscale cloud service providers can simply rent much, or all, of a barren, power-connected building. In recent years, Digital Realty has de-emphasized cold shells and now primarily provides higher-level service to tenants, which outsource their related IT needs to Digital. Digital Realty has also moved more into the co-location business, increasingly serving enterprises and facilitating network connections. Digital Realty operates as a real estate investment trust.

 (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

Megaport retained strong balance sheet position, with a cash balance of $136.3m at year-end

Graphic of investment stock market data analysis business

Investment Thesis

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapidly growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1)  adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud  products/providers, which works well with MP1’s business model.
  • MP1 has a scale advantage over competitors. MP1 is over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take a number of years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Strong R&D program ensuring MP1 remains ahead of competitors. 
  • Strong cash balance of $136.3m at year end and a reducing cash burn profile puts the Company in a strong position.
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.

Key Risks

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers) 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Company Profile 

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform.

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

ANN delivered solid FY21 performance with strong financial position

Investment Thesis

  • ANN is a reputable company with international production capability.
  • The 5-yr forward earnings estimates are on the conservative side and capture the moderating growth likely to be seen from the elevated levels experienced in FY21.
  • ANN’s share price trades at a >10% discount in comparison to DCF valuation
  • FX translation should be positive for the Company. 
  •  Raw material cost pressures can be shared with customers and suppliers.
  • ANN has a healthy financial sheet, allowing it to repay cash to shareholders or borrow money to fund acquisitions.

Key Risk

  • Recall of a product.
  • Trade wars escalate, leading to higher tariffs.
  • Increase in competitive pressures.
  • Adverse movements in AUD/USD.
  • The expansion of emerging and developed markets both disappoints.
  • Any worse or better prices for raw materials.

Key highlights of FY21

  •  Sales of $2,027m, up by 25.6% (+22.5% in CC) with Healthcare organic growth of 34.8% and Industrial organic growth of 7.1%. 
  •  EBIT of $338m, up by 56.0% (+51.4% in CC) with margin improving 330bps to 16.7%, driven by higher production volumes, pricing/mix benefit and SG&A operating leverage, partly offset by elevated labour and freight costs combined with increase in inventory provision.
  •  Profit Attributable to ANN shareholders of $246.7m, up by 57.5% (+48.5% in CC) and EPS of 192.2cps (EPS would have been 193.9cps, without Cloud Computing accounting policy change), up by 59.9% (+50.8% I CC). 
  •  Operating Cash Flow of $49.2m (down by 74.3% over pcp) representing cash conversion of 60.9%, negatively impacted due to greater investment in working capital to support top line growth along with pricing impact as well as higher capex to increase capacity in a number of higher demanded products.
  • ROCE saw significant improvement (up +590bps to 19.8% pre-tax and up +550bps to 16.8% post tax), predominantly due to strong EBIT growth.
  • Final dividend of US43.6cps (up +54.3% over pcp), taking full year dividend to US76.8cps, up +53.6% over pcp and representing payout of 40%.
  • Strong financial position with ample liquidity of $464m (cash and committed undrawn bank facilities), conservative gearing profile (net debt/EBITDA of 0.7x vs 0.6x in pcp), well managed debt profile with net debt position below target leverage and no significant upcoming maturities in the next 12-months and investment grade rating of Baa2 by Moody’s.

FY 22 Outlook

Assuming net interest expense in the range of $20-21m, effective tax rate in the range of 22-23% and increased software investments where a portion will now be expensed rather than capitalised and amortised pursuant to the new cloud computing accounting policy resulting in 5-6cps adverse EPS impact, management anticipates EPS to be in the range of 175-195cps. Management further noted on the analyst conference call, “we expect continued demand for Mechanical, Surgical, Life Sciences and internally manufactured Single Use gloves, however, lower demand is expected in areas which benefited most during the onset of COVID-19 .

Company Profile

Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its  Sexual Wellness Global Business Unit group.

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

SUN reported strong FY21 result with plans to deliver a growing business through strategic initiatives

Investment Thesis

  • Management believes it will be difficult to achieve a ROE target of 10% in FY21 due to factors affecting both the underlying ITR and cost to income targets, as well as the historically low interest rate environment, but it hopes to maintain an ordinary dividend payout ratio of 60-80 percent of cash earnings.
  • SUN has a 2-year forward PE-multiple of 15.0x and a fully franked yield of 5.3 percent, which is excellent.
  • A $250 million share repurchase programme should help the company’s stock price.
  • SUN’s Bank has been granted advanced accreditation by APRA, resulting in capital relief.
  •  Banking and general insurance margins outperformed expectations (GI).
  •  The Royal Commission’s recommendations have resulted in positive changes in the sector.
  •  Maintaining net interest margins while maintaining good credit quality in its Bank and Wealth sector.
  •  Management has the ability to continuously maintain an underlying insurance trading ratio of 12 percent and a sustainable ROE of at least 10% in the future.

Key Risk

  • Competition in insurance lines is greater than predicted, affecting pricing, unit growth, and risk management.
  • Continuing high-intensity natural disasters, like the NSW bushfires, which will deplete reinsurance and have an impact on SUN’s profitability.
  • Key milestones for FY21, such as the rollout of the Company’s technology and digital platforms, have not been met.
  • Investment returns are lower than projected.
  • Net interest margins are lower or provisions are larger than projected.
  • An increase in the number of claims.

Key highlights of FY21

  • SUN reported strong FY21 results reflecting cash earnings of $1,064m, up by 42.1% and Group NPAT, up by 13.1% to $1,033m.
  • By segments: Relative to the pcp: (1) Insurance (Australia): PAT of $547m, was up by 42.4%.(2) Banking & Wealth: PAT of $419m was up +69% on net interest margins of 2.07%, up 13bps. (3)NZ: PAT of $200m declined by 18.4% driven lower by General Insurance PAT of NZ$177m, declining 19.2% (mainly due to higher natural hazard costs and lower investment income).
  • SUN reported better top-line growth, with Gross Written Premium (GWP) growth of 5.5 percent in Australia and 9.2 percent in New Zealand, respectively (best insurance top-line performance in almost a decade).
  • Suncorp Bank  home lending grew by 0.8 percent in the second half of 2021, and has grown home loans for six months in a row as of July 31, 2021.
  • The Board declared a fully franked final ordinary dividend of 40cps which brings FY21 total fully franked ordinary dividends to 66cps (on a 79.3% payout ratio, and up from 36cps in FY20, on 60.7% payout ratio), a fully franked 8 cent special dividend, and an on-market share buyback of up to $250m (which should support its share price).

Guidance commentary: (1) FY23 Plan: “The plan intends to deliver a growing business with a sustainable return on equity above the cost of equity throughout the cycle.” The Group is investing in 12 major projects to achieve this, with the program’s advantages beginning to be realised in 2H22. (2) Natural hazard and reinsurance: SUN has increased its natural hazard allowance for FY22 to $980 million. (3) Releases of prior-year reserves: SUN continues to allow for prior-year reserve releases if inflation continues low, releases should be at least 1.5 percent of Group NEP. (4) Operating expenses: The Group’s operating expense base is estimated to be $2.8 billion, including project spending and restructuring charges in fiscal year 22. (6) Capital: SUN remains committed to a 60-80% dividend distribution ratio”.

Company Profile

Suncorp Group Ltd (SUN) provides general insurance, banking, life insurance, and superannuation products and related services to the retail, corporate, and commercial sectors in Australia and New Zealand. The company operates through Personal Insurance, Commercial Insurance, General Insurance New Zealand, and Banking segments.

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

Bapcor delivered record results driven by increased revenue and earnings across all business segments

Investment Thesis:

  • Trading below analysts’ valuation 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in second hand vehicle sales; travellers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilising their vehicles)
  • Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth). 
  • Strong earnings growth profile
  • Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers
  • Significant distribution network across Australia to leverage from
  • Ongoing bolt on acquisitions and associated synergies
  • Growing BAP’s own brand strategy, which should be positive for margins
  • BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products
  • Weak macro story of leveraged Australian consumer and lower growth environment persisting
  • Thailand represents a meaningful opportunity 

Key Risks:

  • Rising competitive pressures 
  • Value destructive acquisition
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures)
  • Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower
  • Integration (and therefore synergies) of recent acquisitions underperform market expectations 
  • Execution risk around Thailand

Key highlights:

  • BAP delivered a record result with FY21 revenue up +20.4% over the pcp, driven by increased revenue and earnings across all business segments
  • Pro forma EBITDA and NPAT, were up +28.8%, and +46.5% respectively, over the pcp.
  • The revenue and EBITDA generated by segments are:
  1. Trade: Delivered record revenue of $649m, up by 15.5% and EBITDA of $115m, which is up by 19%
  2. New Zealand: Revenue of $170m, was up 8.8% and EBITDA of $33m, was up 21.2%
  3. Specialist Wholesale (‘SWG’): Revenue of $660m, and EBITDA of $90m was up +26.8% and +42.2% respectively
  4. Retail: Revenue of $369m increased +26.1% and EBITDA of $65m increased +20.1%
  5. Asia: On BAP’s 25% investment in Tye Soon and Thailand, management highlighted revenue up by 26% and profit after tax of $2.2m

Company Description: 

Bapcor Ltd (BAP) is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS.

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

Facebook’s Network Effect Moat Source Remains Intact

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along with the valuable data that they generate, makes Facebook attractive to advertisers in the short and long term. The combination of these valuable assets and expected continuing growth in online advertising bodes well for Facebook, as the firm generates strong top-line growth and remains cash flow positive and profitable. Facebook has increased users and user engagement by providing additional features and apps to keep them engaged within the Facebook ecosystem. With more Facebook user interaction among friends and family members, sharing of videos and pictures, and the continuing expansion of the social graph, we believe the firm compiles more data, which Facebook and its advertising clients then use to launch online advertising campaigns targeting specific users. While utilization of the data is under scrutiny in different markets, we think Facebook’s large audience size will still attract the ad dollars. Growth in Facebook’s average ad revenue per user indicates advertisers’ willingness to pay more for Facebook-placed ads, as they expect high return on investment from the targeted ads.

We believe Facebook will continue to benefit from an increased allocation of marketing and advertising dollars toward online advertising, more specifically social network and video ads where Facebook is especially well positioned. The firm’s Facebook app, along with Instagram, Messenger, and WhatsApp, is among the world’s most widely used apps on both Android and iPhone smartphones. Facebook is taking steps to further monetize its various apps, such as providing interactive video ads. It is also applying artificial intelligence and virtual and augmented reality technologies to various products, which may increase Facebook user engagement even further, helping to further generate attractive revenue growth from advertisers in the future.

We assign Facebook a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Given its ability to profitably monetize its network via advertising, we think Facebook will more likely than not generate excess returns on capital over the next 20 years.

Financial Strength

 In an industry where continuing investments are required to remain competitive and maintain market leadership, we believe Facebook is well positioned in terms of access to capital. The firm has a very strong balance sheet with $62 billion in cash, cash equivalents, and marketable securities and no debt.The firm generated $39 billion cash from operations in 2020, 7% higher than the prior year. We expect faster growth in cash flow during the next five years owing to operating leverage after 2022. Facebook’s strong operational and financial health is demonstrated by the 28% average free cash flow to equity/revenue during the past three years. We project average annual FCFE/sales to be in the 35%-40% range through 2025, as a result of strong top-line growth and slight operating margin expansion beginning in 2022. We do not expect Facebook to issue a dividend as it remains in a rapid-growth phase. The firm may use some portion of its cash, as it remains active on the merger and acquisition front.

Bull Says

  • With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for social network online advertising. 
  • Facebook’s ad revenue per user is growing, demonstrating the value that advertisers see in working with the firm. 
  • The application of AI technology to Facebook’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue.

Company Profile

Facebook is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos, and videos. On the video side, the firm is in the process of building a library of premium content and monetizing it via ads or subscription revenue. Facebook refers to this as Facebook Watch. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Advertising revenue represents more than 90% of the firm’s total revenue, with 50% coming from the U.S. and Canada and 25% from Europe. With gross margins above 80%, Facebook operates at a 30%-plus margin.

 (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

Baby Bunting FY21 results show group revenue surged by 15.6%

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Investment Thesis

  • Mandatory product safety standards for baby goods in Australia limit supply sources and provide barriers to entry to international competitors.
  • BBN has the largest presence in Australia amongst specialty baby goods retailers.
  • Low risk that online sales threaten high service business model of brick-and- mortar stores to showcase goods and in-store advice.
  • Solid growth story via new store openings (targeting 100+ stores network).
  • Strong market shares (currently sits at 30% in a highly fragmented market).

Key Risks

  • Retail environment and general economic conditions in addressable markets may deteriorate.
  • Competition may intensify especially from online retailers such as Amazon, specialty retailers, department stores, and discounted department stores.
  • Customer buying habits/trends may change. Rapid changes in customer buying habits and preferences may make it difficult for the Company to keep up with and respond to customer demands.
  • Higher operating and occupancy costs. Any increase in operating costs especially labour costs will affect the Company’s profitability.
  • Poor inventory control and product sourcing may be disrupted.
  • Management performance risks such as poor execution of store rollout especially into ex-metro areas.

FY21 Results Highlights 

  • Sales of $468.4m were up +15.6%, with same-store comparable sales up +11.3%. Online sales grew by +54.2% and now make up 19.4% of total sales (vs 14.5% in pcp).
  • Gross profit of $173.7m was up +18.3% on pcp, with GP margin up +83bps to 37.1%. Cost of doing business (CODB) as a percentage of sales improved 14bps to 27.8%, aided by store expense leverage and warehouse volume leverage (cost fractionalization).
  • Operating earnings (EBITDA) were up +29.2% to $43.5m (with EBITDA margin up +100bps to 9.3%) and NPAT was up +34.8% to $26.0m.
  • Operating cash flow was weaker versus previous corresponding period (pcp), driven by higher working capital – driven by an increase in inventories and also cycling particularly low levels in the pcp.
  • The Company declared a final dividend of 8.3cps, taking the full year dividend to 14.1cps (up +34.1% on pcp). The Board continues to target a payout ratio in the range of 70-100% pro forma NPAT.
  • Private label sales were up +31.1% vs pcp and now make up 41.4% of group sales (vs 36.5% in FY20). The Company remains on target to achieve 50% of sales from private sales.

Company Profile 

Baby Bunting Group Limited (BBN) is Australia’s largest nursery retailer and one-stop-baby shop with 42 stores across Australia. The company is aspecialist retailer catering to parents with children from newborn to 3 years of age. Products include Prams, Car Seats, Carriers, Furniture, Nursery, Safety, Babywear, Manchester, Changing, Toys, Feedingand others.

(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

Netflix faces increase in competition in the U.S and around the world

Netflix has morphed into a pioneer in subscription video on demand and the largest online video provider in the U.S. and likely the world. Our economic moat rating of narrow is based on intangibles resulting from the use of Big Data stemming from the firm’s massive worldwide subscriber base. Already the largest provider in the U.S., Netflix expanded rapidly into markets abroad as the service now has more subscribers outside of the U.S. than inside. 

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.” Media firms will continue to reap the benefits of both an additional window for existing content and another platform for new content. Larger firms like Disney+ and WarnerMedia have launched their own SVOD platforms to compete against Netflix. 

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 net cash burn was over $2 billion in 2017, over $3 billion in 2018, and $3.5 billion in 2019. 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).

Bulls Say’s 

  • 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)

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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.