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Oversupply Issues Are Behind Inghams, but Mix Shift to Drag in the Near Term

competition in poultry is intense. Poultry is largely commoditised, and Inghams possesses limited opportunity to differentiate its products, leading to our view that the firm lacks a sustainable competitive advantage required to award an economic moat. Further, Inghams’ customer base is highly concentrated, with the majority of its total sales comprising five customers, including supermarket giants Woolworths and Coles, and quick-service restaurant KFC. Population growth, relative affordability, and changes in consumer preferences have driven chicken consumption to all-time highs in Australia and New Zealand. 

Per capita chicken meat consumption in both Australia and New Zealand has steadily grown at a low-single-digit CAGR over the last decade. Chicken remains the cheapest meat by a significant margin, with the per-kilo retail price of chicken less than half that of pork, lamb, and beef. This price advantage is supported by favourable production dynamics, notably chicken’s superior food conversion ratio, or FCR. The chicken industry remains highly efficient in translating feed into live weight for production, with producers able to convert feed at a rate that is about 1.5 times more efficient than pork and 4 times more efficient than beef. The chicken FCR, measured by kilograms of feed required to produce one kilogram of meat, has fallen from over 2.5 in 1975 to less than 1.8 today.

Financial Strength 

Given relatively high lease-adjusted leverage, and slim operating margins, we rate Inghams’ balance sheet as weak–stronger than poor as we do not see risk of a dilutive capital raising. Net debt/EBITDA improved in fiscal 2020 to 1.2 at June 30, 2021, due principally to earnings recovery and tighter capital expenditure amid COVID-19 uncertainty over the year. This is down from 1.8 in fiscal 2020 and 1.3 in fiscal 2019 following the capital return and share buyback over fiscal 2019. Given heavy investment into automation and operational efficiency, capital expenditure requirements have been elevated, peaking at AUD 106 million during fiscal 2019 at 4% of revenue. 

Our fair value estimate for Inghams to AUD 3.70 from AUD 3.60 due to the time value of money boost to our financial model. Inghams’ fiscal 2021 underlying net profit of AUD 87 million matched our estimates and was at the top end of management’s guidance range. Inghams declared a fully franked final dividend of AUD 9 cents, bringing the full-year distribution to AUD 16.5 cents per share, implying a payout ratio of 71% of underlying EPS. Government-imposed shutdowns shift poultry demand from restaurants to retail, creating inefficiencies as Inghams is forced to adjust production lines. 

Poultry producers struggled to keep up with pantry-stocking and panic buying in March and April 2020, but this sales momentum was not maintained, and the poultry industry entered fiscal 2021 in oversupply. The chicken industry remains highly efficient in translating feed into live weight for production, with producers able to convert feed at a rate that is about 1.5 times more efficient than pork and 4 times more efficient than beef–leading to cost-efficient processing and a smaller environmental footprint. We expect low-single-digit growth in annual per capita chicken meat consumption to 53kg by fiscal 2026, before moderating as chicken consumption approaches saturation.

Bulls Say’s 

  • Inghams benefits from a consumer trend toward protein-rich, fresh, easy-to-prepare meals.
  • Per-capita chicken meat consumption continues to rise as chicken enjoys a relative affordability advantage compared with other meats, such as beef.
  • A shift in Inghams’ sales mix to value-added products could enhance margins.

Company Profile 

Inghams is the largest vertically integrated poultry producer in Australia and New Zealand. The firm enjoys a number-one position in Australia with approximately 40% market share and a number-two position in New Zealand with around 35% share. Inghams supplies poultry products, notably to major Australian supermarkets Woolworths and Coles, and quick-service restaurants McDonalds and KFC. Sales are heavily skewed toward poultry, which includes the production and sale of chicken and turkey products.

(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.

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Global stocks Shares

Raising Tesla’s FVE to $600 on Improved Long-Term Outlook for AV Software

the company went from a startup to a globally recognized luxury automaker with its Model S and Model X vehicles. In addition to luxury autos, the company also competes in the mid-size car and crossover SUV market with its platform that is used for Model 3 and Model Y vehicles. Tesla’s strategy is to maintain its market leader status as EVs grow from a niche auto market to reaching mass consumer adoption. Tesla also invests around 6% of its sales into R&D, focusing on improving its market-leading technology and reducing its manufacturing costs. The company will also move upstream into battery production, with a goal to reduce costs by over 50%. 

Tesla’s extended range EVs are already at range parity with ICE vehicles, which should improve further with plans for its batteries to improve energy density. Tesla also continues to increase its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow in this market. 

Financial Strength 

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of June 30, 2021. Total debt was roughly $9.4 billion, however, total debt excluding vehicle and energy product financing (non-recourse debt) was around $4 billion. Cash and cash equivalents stood at $16.2 billion as of June 30, 2021.To fund its growth plans, Tesla has used credit lines, convertible debt financing as well as equity offerings and credit lines to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. 

We are raising our fair value estimate to $600 per share from $570 for narrow-moat Tesla following AI day. Our largest key takeaway from Tesla’s AI day was the progress that the company is making on its Level 3 autonomous vehicle software known as full self driving. The biggest change to our forecast is our long-term outlook for Tesla’s Level 3 autonomous vehicle software. The software, which is currently still in beta testing mode, appears to be closer to a rollout than we had expected. 

Dojo is the supercomputer that Tesla is using to train its AV software. However, over the next several years, the company plans to begin selling AI training to other companies using extra processing space. This should generate operating profits in line with software companies. Finally, Tesla plans to develop humanoid robots that can be used to perform dangerous or repetitive tasks, by creating a repurposed version of the same camera-based autonomous software that it is developing for cars in the humanoid robots, which will be programmed to perform simple tasks.

Bulls Say’s 

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems.
  • Tesla will see higher profit margins as the company achieves its plan to reduce battery costs by 56% over the next several years.
  • Through the combination of its industry-leading technology and unique Supercharger network, Tesla offers the best function of any EV on the market, which will result in the company maintaining its market leader status as EV adoption increases.

Company Profile 

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and mid-size sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light-truck, semi-truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

(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.

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Global stocks Shares

Estee Lauder’s Currency Sales Grew to $16.2 Billion

missing $16.5 billion estimate, as an increasing number of COVID-19 cases resulted in another round of store closures across Europe, Latin America, and Asia (excluding China). Even so, fiscal 2021 sales are 6% above fiscal 2019 revenue (adjusted for acquisitions), supported by Estee’s ability to pivot to ecommerce, which increased to 28% of fiscal 2021 sales, compared with 15% in 2019.

 The travel retail channel has remained surprisingly resilient, which increased to 29% of fiscal 2021 sales, versus 23% in 2019. While international travel is largely curtailed, domestic trips have been strong, particularly in China’s Hainan province. 

Other factors that helped the firm return to prepandemic sales levels despite continued store closures are Estee’s strong brands (which underpins its wide moat rating) and the firm’s expertise in developing compelling new products, with innovations representing 30% of fiscal 2021 sales, well above the 15% targeted by many consumer products companies. Skin care is well above prepandemic levels, but makeup continues to lag, as mask mandates curb demand. But the firm has promising innovations and marketing programs lined up that it will rollout as mandates relax.

Company’s Future Outlook

Fiscal 2021’s adjusted operating margin increased 420 basis points to 18.9%, given tight expense controls. This margin upside should continue into fiscal 2022, as management’s guidance for adjusted earnings per share of $7.23-$7.38 is above our $7.06 estimate, although sales growth guidance of 13%-16% brackets 15% estimate. No change is expected in $249 fair value estimate, as modestly higher operating margins should be offset by a higher tax rate, 

Company Profile

Estee Lauder Inc (NYSE: EL) is the world leader in the global prestige beauty market, participating across skincare (52% of 2020 sales), makeup (33%), fragrance (11%), and hair care (4%) categories, with popular brands such as Estee Lauder, Clinique, MAC, La Mer, Jo Malone, Aveda, Bobbi Brown, Too Faced, and Origins. The firm operates in 150 countries, with 26% of revenue stemming from the Americas, 44% from Europe, the Middle East and Africa, and 30% from Asia-Pacific. The company sells its products through department stores, travel retail, multi brand specialty beauty stores, brand-dedicated freestanding stores, e-commerce, salons/spas, and perfumeries.

(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

Narrow-Moat Tapestry Closed Fiscal 2021 on a Good Note; Outlook Is Reasonable; Shares Attractive

Handbags and some types of apparel have been selling well as economies in the U.S. and greater China have recovered. We think Tapestry has good momentum as it enters fiscal 2022, so we expect to lift our per share fair value estimate of $43.50 by a mid-single-digit percentage. Tapestry is one of the few firms in the apparel and accessories space that we currently view as undervalued, especially after its share price slid 3% after the earnings report.

Against an easy comparison, Tapestry reported constant currency sales growth of 122% in the quarter, eclipsing our 118% estimate. More importantly, its sales rose 7% as compared with 2019, with most of the growth attributable to Coach. The Coach brand is the source of our narrow moat rating on Tapestry, and we think it is healthy enough to hold segment operating margins of 29%-30% in the long term. Meanwhile, we see signs of progress at both Kate Spade and Stuart Weitzman, although neither has significant growth from two years ago. We model sales growth rates of 5%-6% for these brands in the long run based on improved product and consumer engagement under the Acceleration Program.

Tapestry’s quarterly adjusted operating margin of 16.9% came in 40 basis points above our 16.5% forecast. As targeted by the Acceleration Program, the firm achieved the $200 million in gross expense savings in fiscal 2021 and expects to achieve $300 million in additional savings this year. These cost savings are somewhat offset by intended increases in marketing and e-commerce investment, which we view as prudent given the rising demand in China and elsewhere and ongoing e-commerce growth (55% for Coach in the fourth quarter).

Tapestry guided to fiscal 2022 EPS of $3.30-$3.35 on $6.4 billion in sales, above our forecast of $3.23 in EPS on $6.1 billion in sales. We think Tapestry’s outlook is achievable based on current momentum in the business. As its business has rebounded nicely from the pandemic, Tapestry has reinstated its dividend and plans to resume share repurchases. It intends to pay a dividend of $1 per share in fiscal 2022. It also guided to $500 million in repurchases in fiscal 2022, which would be its most since before the 2017 Kate Spade deal. We have a favourable view of this buyback plan as Tapestry trades below our fair value estimate and has a reasonable valuation (forward P/E of about 12). Meanwhile, we think Tapestry may look for another large acquisition in the future. The firm’s new CEO, Scott Roe, has considerable experience with acquisitions from his time at narrow-moat VF. Our capital allocation rating on Tapestry is Standard.

Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. The firm’s products are sold through about 1,500 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2020 sales), Europe, Asia (32% of fiscal 2020 sales), and elsewhere. Coach (71% of fiscal 2020 sales) is best known for affordable luxury leather products. Kate Spade (23% of fiscal 2020 sales) is known for colourful patterns and graphics. Women’s handbags and accessories produced 68% of Tapestry’s sales in fiscal 2020. Stuart Weitzman, Tapestry’s smallest brand, generates nearly all (98%) of its revenue from women’s footwear.

(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

Baby Bunting Group (ASX: BBN)

  • 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).
  • NZ’s $450m addressable market represents another opportunity.

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 result 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 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. Outlook guidance: Similar to last year, no earnings guidance was provided for FY22 due to Covid-19 related uncertainty. However, year-to-date trading update suggest the Company is feeling the impacts of the current lockdowns – comparable store sales are down -6.4% YTD (impacted by stay at home orders), online sales are up a healthy +32.6% however much lower than pcp and excluding the most impacted state (NSW) comparable sales are up a subdued +1.0%.

Company Description

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

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

Applied Materials Inc poised for Remarkable Growth in Fiscal 2021

 It has been observed that Applied Materials and its peers have all called for strong growth in 2021, driven by record capital expenditure levels at TSMC (Taiwan Semiconductor Manufacturing Company) and Intel as well as solid memory spending.

Third-quarter sales rose 41% year over year to $6.2 billion, led by a 53% increase in the semiconductor systems group (SSG) revenue. Within SSG, equipment sales to logic and foundry customers grew 75% year over year. This strength has been attributed to investments supporting leading-edge process technologies at the likes of TSMC as well as lagging-edge processes that support end markets such as automotive and Internet of Things. Memory equipment sales also grew 26% year over year. Foundry and logic are expected to be the biggest growth drivers for Applied’s SSG sales in 2021.

Financial Strength:

The last price for Applied Materials Inc. was USD 129.20, whereas its fair value has been estimated to be USD 131. Besides, PE ratio of Applied during 2020 was 14.2, making it undervalued with reference to its sector. This suggests that there is room for growth of the Applied Materials Inc. 

Management expects Applied’s fourth-quarter revenue to be up by 34% year over year at the midpoint, with momentum persisting into 2022. Also, the sales of Applied are expected to be $6.3 billion at the midpoint, with SSG at $4.6 billion, services at $1.3 billion, and display at $400 million.

Quarterly services revenue was nearly $1.3 billion and was up 24% year over year. In recent years, services and part sales from long-term service agreements have grown from 40% to 87% of total service revenue. 

Company Profile:

Applied Materials is one of the world’s largest suppliers of semiconductor manufacturing equipment, providing materials engineering solutions to help make nearly every chip in the world. The firm’s systems are used in nearly every major process step with the exception of lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement, and defect-inspection scanning electron microscopes.

(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

Steadfast Puts a Strong Shareprice to Work; Recommend Passing on This SPP

Insurers putting up rates to improve their own margins provides a nice tailwind for the resilient insurance broking industry. Steadfast will pay AUD 411.5 million for Coverforce, an EBITA multiple of 11 times after cost synergies. While the multiple is higher than the 9-10 times often paid for broker businesses, given Steadfast is funding the purchase with expensive shares, the deal is still attractive. Coverforce is the largest privately owned broker business in the network, overseeing AUD 530 million of GWP in fiscal 2021. Losing this group would not have been a good look for Steadfast.

The acquisition is straight from the playbook that has served Steadfast well. Owners often look to sell all or part of their broking business to release equity or as part of a succession plan. A share purchase plan to raise an additional AUD 20 million will also be offered. The SPP price will be set at the lower of the institutional placement price or 1% discount to the VWAP of Steadfast shares over the five trading days to September 13, 2021. Around 60% of Steadfast’s EBITA growth was organic, both volume and price increases. The remainder, from acquisitions and increased equity holdings in brokers within its network. The growth strategy reinforces the businesses competitive advantages and strengthens customer switching costs.

With insurers generating poor returns on capital, we expect premium rate increases to continue at around 5% per annum in fiscal 2022, but moderate to 2-3% per annum longer-term. The acquisition of Coverforce lifts Steadfast’s equity ownership in brokers within the network to 37% from 32%, leaving a long tail of investment opportunities over the long-term. Our forecasts assume annual NPAT growth of 14% per annum over the five-years to fiscal 2026.

Steadfast’s Future Outlook 

Our forecast sits above the range, with NPAT of AUD 174 million. We think management guidance is conservative given the price increases insurers are pushing to improve their own returns. We increase our fair value estimate 8% to AUD 4.00 per share as we incorporate the acquisition of Coverforce. We assume a 12% increase in shares on issue to fund the acquisition. We think the acquisition is likely to be a success. We do not recommend participating in the share purchase plan given the issue price is set at a floor of AUD 4.35 per share, a 9% premium to our fair value estimate. Steadfast is a good business, but expensive.

Back on the result, one aspect that missed our expectations was GWP on the Steadfast Client Trading Platform, or SCTP. Premiums on the platform increased 24% in fiscal 2021, but still make up less than 8% of broker GWP. Being more profitable for Steadfast, success here will provide an additional tailwind to earnings. e assume around 40% of GWP is written on the platform by fiscal 2026, down from our prior forecast of 50%, as it is taking longer than expected for insurers to integrate products onto the new platform.

Company Profile 

Steadfast Group is the largest general insurance broker network in Australia and New Zealand, with over 450 brokers and 2,000 offices in Australia, New Zealand, Singapore, and London. Steadfast operates as both a broker and a consolidator via equity interests in insurance broker businesses, generating close to AUD 10 billion of network broker gross written premium annually. Steadfast also co-owns and consolidates underwriting agencies and other complementary businesses.

(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

Berkshire’s Equities in Q2; Apple Remains Top Stock

selling some $2.1 billion worth of stock while also acquiring a little over $1 billion of equities. Based on the insurer’s recent 13- F filing, Berkshire trimmed positions in US Bancorp and Chevron, and sold off more than 10% of the investment portfolio’s stakes in Abbvie (selling 2.3 million shares or 10.2% of its holdings), General Motors (7.0 million shares or 10.4% of its holdings), Bristol-Myers Squibb (4.7 million shares or 15.3% of its holdings), and Marsh & McLennan (1.1 million shares or 20.6% of its holdings). Berkshire also disposed of meaningful amounts of Merck (8.7 million shares, or 48.8% of its holdings) and Liberty Global Cl C shares (5.5 million shares, or 74.5% of its holdings), while completely eliminating the firm’s holdings in Liberty Global Cl A, Biogen, and Axalta Coating Systems.

As for the purchases, almost all of them involved existing holdings as Berkshire added to stakes in Kroger (picking up 10.7 million shares and increasing its position by 21.0%), Aon (around 300,000 shares and increasing its position by 7.3%), and Restoration Hardware (35,500 shares for a 2.0% increase in the company’s holdings). Berkshire had originated stakes in the pharmaceuticals–AbbVie, Biogen, Bristol Myers Squibb and Merck–as well as the insurance brokers—Marsh & McLennan and Aon–in just the past year and a half, but many of these stocks have seen marked gains in just the past few quarters, allowing the insurer’s main managers of many of these smaller holdings (relative to the portfolio overall)–CEO Warren Buffett’s two lieutenants Todd Combs and Ted Weschler–to take some profit off the table. Even so, the firm ended the second quarter with $293.0 billion of reportable equity holdings.

Berkshire’s top 5 positions of Apple (41.5%), Bank of America (14.2%), American Express (8.6%),Coca-Cola (7.4%), and Kraft Heinz (4.5%), accounted for 76.2% of the insurer’s 13-F equity portfolio, and its top 10 holdings, which included Moody’s (3.1%), Verizon Communications (3.0%), US Bancorp (2.5%), DaVita (1.5%), and Charter Communications (1.3%), accounted for 87.5%. Given the changes in Berkshire’s 13-F portfolio during the second quarter, the financial services sector now accounts for 28.7% of the portfolio (up from 28.5% at the end of March 2021), with technology stocks at 43.2% (up from 41.8%), and consumer defensive names decreasing to 12.8% (from 13.3%).

Company Profile 

Berkshire Hathaway is a holding company with a wide array of subsidiaries engaged in diverse activities. The firm’s core business segment is insurance, run primarily through Geico, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group. Berkshire has used the excess cash thrown off from these and its other operations over the years to acquire Burlington Northern Santa Fe (railroad), Berkshire Hathaway Energy (utilities and energy distributors), and the firms that make up its manufacturing, service, and retailing operations (which include five of Berkshire’s largest noninsurance pretax earnings generators: Precision Castparts, Lubrizol, Clayton Homes, Marmon and IMC/ISCAR). The conglomerate is unique in that it is run on a completely decentralized basis. 

(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

Post Plans Reduce its Stake in BellRing Brands as It Emerges from the Pandemic

As the cereal category has come under pressure, the firm diversified its revenue base by entering categories that were driving the legacy business’ deterioration, such as eggs and protein-based nutritional products. While these actions have stabilized the top line, it is believed a competitive edge remains elusive.

The cereal business (42% of fiscal 2020 revenue) has been declining (outside of the pandemic) as consumers have shifted away from processed, high-sugar, high-carbohydrate fare. Post’s cereal business is very profitable, with EBITDA margins around mid-20% and low-30% for the U.S. and European businesses, respectively. The refrigerated segments (41%, with 24% food service and 17% retail) consist primarily of egg and potato products. As a result, this business is relatively low margin (10%-12%) and does not offer the firm a competitive advantage, in our view. While 2020 was challenging for food service, the segment should recover in 2021 with the dissemination of vaccines.

Post holds a majority stake in BellRing Brands (17%), which makes protein shakes, bars, and powders. The business has realized low-double-digit growth and attractive operating margins (17%-18%). Post recently announced plans to reduce its stake in BellRing from 71% to no more than 20% in the first half of calendar 2022, which will undoubtedly result in slower sales growth for Post. 

Financial Strength

Post has a unique capital allocation strategy, preferring to carry a heavier debt load than most packaged food peers. Post’s legacy domestic cereal business generates significant free cash flow (about 12% of revenue, above the 10% peer average), although after acquiring the refrigerated foods, BellRing, and private brands businesses, this metric fell to just over a 6% average between 2013 and 2018. Post has no intention to initiate a dividend. It is increasing FVE for Post to $114 per share from $110 to account for better than expected third-quarter sales, partially offset by a higher U.S. tax rate beginning in 2022. The company’s valuation implies a 2022 price/adjusted earnings of 21 times.

Bull Says

  • Post’s Premier Protein brand is well positioned in the protein shake category, an attractive, high-growth market with outsize margins.
  • The refrigerated foods segment, nearly half of Post’s business, is benefiting from consumers’ evolving preference for fresh, unprocessed high-protein eggs, and fresh and convenient side dish options.
  • Although growth in the cereal business has been stagnant, it reports attractive profits and cash flows and has a lucrative opportunity with Premier Protein co-branded cereal

Company Profile

Post Holdings Inc (NYSE: POST) is a packaged food company that primarily operates in North America and Europe. For fiscal 2020, 42% of the company’s revenue came from cereal, with brands such as Honeycomb, Grape-Nuts, Shredded Wheat, Pebbles, Honey Bunches of Oats, Malt-O-Meal, Weetabix, and Alpen. Refrigerated food made up 41% of 2020 revenue and services the retail (17% of company sales) and food-service channels (24%), providing value-added egg and potato products, prepared side dishes, cheese, and sausage under brands Bob Evans and Simply Potatoes. The stake in BellRing Brands makes up the remaining 17% of revenue, with protein-based shakes, powders, and bars that sell under the Premier Protein, Power Bar, and Dymatize brands, but Post is reducing this holding to a minority position in calendar 2022.

 (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

Mirvac Group Ltd (ASX: MGR) Updates

20025825 - closeup image of businessman drawing 3d graphics
  • High quality portfolio composition with stronger weighting towards Melbourne and Sydney urban areas minimizing risk from submarket weakness from Brisbane. 
  • MGR has secured 90% of expected Residential EBIT for FY22.
  • Strong pipeline of residential projects to come, delivering earnings growth by FY22. 
  • Solid balance sheet. Gearing at 22.8% (at lower end of target range of 20%-30%).
  • Continuing recovery in weak retail sales especially for supermarkets.
  • Strong management team.

Key Risks

  • Deterioration in property fundamentals for Office, Industrial and Retail portfolio, such as delays with developments or lower than expected rental growth causing downward asset revaluations.
  • Tenant defaults as the economic landscape changes (increasingly competitive retail sector especially from online retailers such as Amazon). For instance, retailer bankruptcies causing rising vacancies in the retail portfolio.
  • Generally softening outlook on the broader retail market. 
  • Residential settlement risk and defaults. 
  • Higher interest rates impacting debt margins. 
  • Consumer sentiment towards impact of higher interest rates and effect on retail and residential businesses. 

FY21 Results Summary

Operating profit of $550m was down -9% over pcp and operating EBIT of $704m declined -12% over pcp, negatively impacted by lower development profit and higher unallocated overheads, partially offset by growth in NOI (especially growth in Integrated Investment Portfolio NOI following newly completed office asset developments).However, statutory profit was up +61% to $901m and EPS of 14cpss exceeded management’s earnings guidance of greater than 13.7cpss. 

AFFO declined -23% over PCP, reflecting the lower operating earnings together with increased tenant incentives and normalization of maintenance capex. Total distribution was $390m, representing a DPS of 9.9cpss, an increase of +9%, funded from operating cash flows which increased +41% over pcp to $635m, driven by final fund through receipts following capitalization of Older fleet, lower development spend and stronger cash collection from the investment portfolio. Net tangible assets (NTA) per stapled security increased +5% over PCP to $2.67.

The Company extended its development pipeline, ending the year with $28bn across mixed use, office, industrial, residential and build to rent. Balance sheet remained strong with cash and undrawn debt facilities of $867m, investment grade credit ratings of A3/A- by Moody’s/Fitch, gearing of 22.8% (lower end of target range of 20-30%). The Company saw cost of debt decline -60bps over PCP to 3.4%, with management expecting further reduction in FY22.

Company Description  

Mirvac Group Ltd (ASX: MGR) is a real estate investment and development company. The company operates in Residential and Commercial & Mixed Use space within the real Estate sector. Mirvac Group Ltd is headquartered in Sydney, Australia.

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.