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Global stocks Shares

Positive effect on Amcor stock as the company’s net income and free cash flow increase

  • Flattering exposure to the growth of both emerging and developed markets.
  • A well-defined strategy for increasing shareholder value.
  • Acquisitions that are bolt-ons provide an opportunity to supplement organic growth.
  • A strong balance sheet.
  • Leveraged against a falling AUD/USD
  • Advantages from the recently finished Bemis acquisition will begin to flow.
  • Capital management initiatives include a $500 million share buyback currently underway.

Key Risks

The following are the key challenges to the investment thesis:

  • Management fails to realise the proposed synergies in the Bemis transaction.
  • Increasing competition causing margin erosion and potential balance-sheet stress (e.g. reduced earnings leading to potential debt covenant breaches).
  • Cost constraints on inputs that the company is unable to pass on to customers (even though the Company does pass through input costs).
  • Global economic growth has slowed.
  • Value-destroying acquisition.
  • The risk of emerging markets.
  • Unfavorable movements in the AUD/USD.

Highlights of key FY21 results

  • EBIT increased by 8% to $1,621 million, with margins enhancing by +60 basis points to 12.6 percent. 
  • GAAP net income of $939 million, a +53 percent increase, translates to GAAP EPS of 60.2 cents, a +58 percent increase (or adjusted EPS of 74.4 cents, a +16 percent increase on a CC basis, above guidance range).
  • Adjusted FCF of $1.1bn, flat -9.9 percent over pcp (albeit at the upper end of guidance range), effected by rising capex on organic growth projects, lower working capital benefit, and adverse tax payment timing compared to pcp.
  • Return on average funds employed of 15.4 percent, an increase of +140 basis points over the pcp. 
  • The Board declared a final dividend of 11.75 cents per share, bringing the full-year dividend to 47 cents per share, and repurchased $350 million (2% ) of outstanding shares.

Company Description 

Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe and Asia.

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

Cleanaway’s Asset Acquisition of Suez in F.Y.22

Close-up LED charts and summary info for making stock trading graph

 It is clear about Cleanaway’s growth into materials recovery which features more favorable economics than waste collection. Under its “Footprint 2025” capital allocation strategy, the group will continue to focus investment in materials recovery and waste-to-energy, or WTE. 

Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in Greenfield materials recovery, waste treatment, and WTE projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industry’s midstream.

Further diversifying Cleanaway away from waste collection is the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.

Financial Strength

Cleanaway has made further progress on its proposed AUD 501 million acquisition of key Australian post-collection assets from Suez, securing new debt facilities which will allow the deal to be fully debt funded. Therefore, balance sheet flexibility post deal completion exists should further acquisition opportunities arise. Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021-24 period, Cleanaway’s sources of cash—those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or Greenfield–under Cleanaway’s Footprint 2025 strategy. 

Bull Says

  • Cleanaway is benefiting from industry consolidation.
  • Municipal waste contracts provide relatively stable cash flows through the economic cycle.
  • Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.

Company Profile

Cleanaway Waste Management (ASX: CWY) is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment and valorization, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I, waste stream segments and in nonhazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection markets.

 (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

Orora Limited (ASX: ORA)

  • Exposure to the growth of both developed and emerging economies.
  • Headwinds in the near term should be factored into the price.
  • Following a recent strategic assessment, the strategy has been revised.
  • Bolt-on acquisitions (and the synergies that come with them) can help complement organic growth.
  • Leveraged against the AUD/USD and is now declining.
  • Corporate activities that could occur.
  • Management of capital (current on-market share buyback plus potential for additional initiatives).

Key Risks

  • Margin loss due to competitive forces.
  • Cost pressures in the supply chain that the company is unable to pass on to customers.
  • Economic conditions in the United States, emerging markets, and Australia are deteriorating.
  • Risk associated with emerging markets.
  • Adverse Movements in AUD/USD exchange rates 
  • OCC prices are decreasing.

FY21 group result highlights

Group revenue was slightly down (-0.8 percent) to $3.5 billion (up +7.8% in constant currency), operating earnings (EBIT) were up +11.6 percent to $249.1 million (up +17.3 percent in CC), underlying NPAT was up +23.7 percent to $156.7 million, EPS was up +29 percent to 16.9 cents (also driven by the on-market share buyback), and the full year dividend of 14cps up +16.7% on pcp. 2) Balance sheet. The impact of the on-market share buyback boosted leverage from 0.9x to 1.5x. Leverage, on the other hand, is still far below management’s goal range of 2 – 2.5x.

Company Description 

Orora Limited (ORA) provides packaging products and services. Orora is a global packaging manufacturer, distributor and visual communication solutions company The Company offers fibres, and glass and beverage can be packaged materials in Australia and Asia and packaging distribution services in North America and 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.

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Shares Small Cap

HT&E Limited (ASX: HT1)

  • Additional cost savings, notably a large reduction in corporate overhead expenditures.
  • The ATO and HT1 are anticipated to reach an agreement in the near future.
  • Changes in media ownership rules could lead to more corporate activity. Upside to the valuation of Soprano (25% interest) 
  • Initiatives for capital management that are still in progress.
  • A solid financial statement.

Key Risks

  • Decline in advertising dollars (radio and outdoor), particularly if Australia’s retail industry is under stress.
  • The structure of radio is being disrupted.
  • Increased tender competition from large players.
  • With worldwide expansion, there is a danger of poor execution.
  • The tax liabilities of the Australian Taxation Office materialize at a higher level than expected by the market.
  • Hong Kong could detract from the group’s performance (Corona virus or protests escalate).
  • Lockdowns relating to Covid-19 are being reintroduced around the country.

1H CY21 group results 

HT1 had a great first half of the year, owing to a solid market recovery. Core revenue increased by 18.2 percent to $109.9 million, underlying EBITDA increased by 55.9% to $30.4 million, underlying EBIT increased by 139.5 percent to $23.7 million, and NPAT increased by 352.8 percent to $16.3 million. On a like-for-like basis, group sales increased by 21%, owing to higher consumer confidence and advertising spend in Australia and Hong Kong. Higher cost of sales (ongoing investment in digital audio capability) and the resumption of marketing and certain discretionary spending that were deferred to the pandemic in the pcp drove up operating costs (up +9% vs pcp, or up +12% on a similar basis). The Board reinstated the dividend and announced a fully franked interim dividend of 3.5cps vs. zero in the PCP due to strengthening market circumstances.

Company Description  

HT&E Limited (HT1) is a media and entertainment company with operations in Australia, New Zealand and Hong Kong. The Company operates the following key segments: (1) Australian Radio Network (ARN) – metropolitan radio networks including KIIS Network, The Edge96.One and Mix106.3 Canberra; (2) Hong KongOutdoor (Cody) – Billboard, transit and other outdoor advertising in Hong Kong, with over 300 outdoor advertising panels and in-bus multimedia advertising across 1,200 buses; and (3) Digital Investments – digital assets including iHeartRadio, Emotive and Conversant Media.   

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

Cochlear’s FVE Up 9% Driven by a Stronger U.S. Dollar and Lower Expenses

Cochlear implants became the standard of care many years ago for children in developed markets with profound hearing loss or deafness. Large price differentials in the lower range of products result in 80% of revenue being earned in developed markets and 20% in tender-oriented emerging markets. Currently, penetration is still estimated to be under 5%, and Cochlear is at a pivot point as it invests to be adopted more widely by seniors with profound hearing loss. Prevalence of profound hearing loss increases over 65 years and has a steep increase from over 80 years of age. However, hearing aids, not cochlear implants, are the standard of care. Cochlear is investing significantly to grow awareness as well as funding research to support pay or reimbursement.

Financial Strength

The company has typically enjoyed low capital intensity and high cash conversion, affording it to pay out 70% of earnings as a dividend. However, with the confluence of operational weakness due to deferred elective surgeries as a result of the coronavirus, a peak in the capital cycle, and a patent infringement penalty becoming payable, the company faced a liquidity crunch. Consequently, it completed an AUD 850 million equity raise in fiscal 2020, adding an additional 10% to shares on issue and we forecast the company to carry no net debt for the foreseeable future. The company is not acquisitive and organic growth is driven by R&D spending of roughly 12% of revenue per year.

Wide-moat Cochlear’s fiscal 2021 underlying NPAT rebounded 54% to AUD 237 million following the resumption of elective surgeries. As vaccination rates increase, the firm anticipates a continued recovery and provided fiscal 2022 NPAT guidance of AUD 265 million-285 million. The guidance is based on a USD/AUD exchange rate of 0.74 and doesn’t factor in material disruption from COVID-19. Our fair value increases by 9% to AUD 175, driven by our forecast 0.72 USD/AUD exchange rate from 0.77 prior. We also decreased our long-term assumptions for the tax rate and R&D investment as a percentage of sales to 25% and 12%, respectively, from 27% and 13% prior. 

Fiscal 2021 implant sales grew 19% constant-currency on 15% growth in unit sales. Despite a much stronger USD, our revised fiscal 2022 revenue forecast of AUD 1,627 million implies just 9% growth on fiscal 2021. Shares still screen as overvalued with our forecast five-year revenue growth of 9% unchanged. Cochlear declared a final dividend of AUD 1.40 per share with full-year dividends representing a 71% dividend payout on underlying NPAT but unfranked as a result of fiscal 2020 losses.

Bulls Say’s 

  • Continued strong top-line growth is likely to be more challenging and dependent on growing penetration in emerging markets and adults in developed markets.
  • The more reliable annuitylike revenue stream from sound processor upgrades is forecast to contribute an increasingly larger proportion of group earnings as it is driven by a growing installed base.
  • The company enjoys low capital intensity and high gross margins and cash conversion, enabling Cochlear to afford a 70% dividend payout ratio in a typical year.

Company Profile 

Cochlear is the leading cochlear implant device manufacturer with around 60% global market share. Developed markets contribute 80% of group revenue where cochlear implants are the standard of care for children with severe to profound hearing loss. The company also actively targets the growing cohort of seniors in developed markets. Tender-oriented emerging markets contribute the remaining 20% of group revenue. Main products include cochlear implants, bone-anchored hearing aids, or BAHA, and associated sound processors. In fiscal 2020, 49% of revenue came from the Americas, 35% from EMEA, and 16% from the Asia-Pacific segment.

(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 Small Cap

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)

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

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)

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

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.

Categories
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.

Categories
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.