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Canopy Offers Attractive Investment Exposure to the U.S

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Although we expect the medical market to shrink as consumers turn to the recreational market, we forecast more than 10% average annual growth for the entire Canadian market through 2030, driven by the conversion of black-market consumers into the legal market and new cannabis consumers.

Canopy also exports medical cannabis globally. The global market looks lucrative, given higher prices and growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Canopy. Partially offsetting the global markets’ potential for Canadian producers are threats of future production from countries with cheaper labor— the single largest cost. However, many Canadian companies have pulled back expansion plans given ongoing cash burn. We forecast around 15% average annual growth through 2030.

Besides hemp, Canadian companies typically have no U.S. operations, given legal limitations. However, Canopy has a standing deal to acquire Acreage Holdings, a U.S. multistate operator, immediately upon federal legalization. We thought Canopy paid a good price and acquired an attractive option for an accelerated entry into the U.S. Canopy also owns 27% of U.S. multistate operator Terrascend on a fully diluted basis. The U.S. market is murky, with some states legalizing recreational or medical cannabis while it remains illegal federally. We expect that federal law will be changed to recognize states’ choices on legality within their borders. Based on our state-by-state analysis, we forecast nearly 20% average annual growth for the U.S. recreational market and nearly 10% for the medical market through 2030.

Constellation Brands owns 38.6% of Canopy with additional securities that could push ownership to 55.8%. We see the investment as supportive of developing branded cannabis consumer products while also providing a funding backstop and foothold into the U.S. non-THC market.

Company Profile

Canopy Growth, headquartered in Smiths Falls, Canada, cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow. Although it primarily operates in Canada, Canopy has distribution and production licenses in more than a dozen countries to drive expansion in global medical cannabis and also holds an option to acquire Acreage Holdings upon U.S. federal cannabis legalization.

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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

Volkswagen Fair Value Estimation

In our opinion, the market has been overly punitive in assessing technology spending and costs from the diesel emission scandal and the EC collusion charges. Even though the worst of the cheating scandal is over in the U.S., we maintain a EUR 20 billion reduction to our enterprise value for potential litigation in Europe. If we remove the EUR 20 billion EV haircut, our FVE would be EUR 280.

Our fair value includes margin contraction from higher spending for industry-disruptive technologies, including mobility, autonomy, and electrification. In 2018, VW achieved a 7.2% EBIT margin (excluding China JV equity income). The historical 10-year high is 7.4% (2017). We assume average EBIT margin of 6.1% during our five-year forecast, with a midcycle assumption of 4.9%, 120 basis points below the historical 10-year median of 6.1%.

Diesel collusion allegations: We estimate that if Volkswagen’s worst-case fine of EUR 23.6 billion were to be levied, our fair value would drop to EUR 188 from EUR 238. In this scenario, under current trading conditions, Volkswagen stock would be rated 3 stars, with the market at a 10% discount

Volkswagen AG manufactures and sells automobiles primarily in Europe, North America, South America, and the Asia-Pacific. The company operates in four segments: Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering, and Financial Services. The Passenger Cars and Light Commercial Vehicles segment develops vehicles and engines, and light commercial vehicles; and produces and sells passenger cars and related parts. The Commercial Vehicles segment develops, produces, and sells trucks and buses; and offers parts and related services. The Power Engineering segment offers large-bore diesel engines, turbomachinery, special gear units, and propulsion components. The Financial Services segment provides dealer and customer financing, leasing, banking and insurance, fleet management, and mobility services. The company also offers motorcycles. It provides its products under the Volkswagen Passenger Cars, Audi, ŠKODA, SEAT, Bentley, Porsche, Volkswagen Commercial Vehicles, Scania, MAN, Lamborghini, Ducati, and Bugatti brands. Volkswagen AG was incorporated in 1937 and is based in Wolfsburg, Germany. Volkswagen AG operates as a subsidiary of Porsche Automobil Holding SE.

General Advice Warning

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

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Dividend Stocks Shares

Abbott Laboratories Reduces Outlook for Pandemic-Related Diagnostics

We’d already seen a foreshadowing of softening demand for COVID-19 diagnostic tests as reference labs LabCorp and Quest Diagnostics had indicated that SARS-CoV-2 testing volume peaked in mid-December and then steadily declined through to the end of the first quarter. Considering the penetration of COVID-19 vaccination in the United States and a falling caseload in the last couple of months, we anticipate further decreases in PCR testing through the rest of this year at the labs.

The big question is to what degree demand for COVID-19 PCR testing could shift to the point-of-care, rapid antigen tests that Abbott has supplied. The U.S. government made bulk purchases of those antigen tests last year, and the test recently became widely available over the counter. However, gains in vaccinating adults and now teens in the U.S. are taking place quickly, reducing the need for rapid antigen tests. Abbott now expects $4 billion-$4.5 billion in

COVID-19 test sales in 2021 (down from the $6.5 billion it expected earlier this year), which is closer to our $4.5 billion estimate. We continue to project the diagnostics segment to decline 7% in 2022, driven by falling demand for COVID-19 tests.

Company Profile

Abbott manufactures and markets medical devices, adult and pediatric nutritional products, diagnostic equipment and testing kits, and branded generic drugs. Products include pacemakers, implantable cardioverter defibrillators, neuromodulation devices, coronary stents, catheters, and infant formula, nutritional liquids for adults, and immunoassays and point-of-care diagnostic equipment. Abbott derives approximately 60% of sales outside the United States.

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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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Dividend Stocks Expert Insights Shares

Bank of Nova Scotia Revenue Growth

Its domestic operations are more concentrated in mortgages and auto lending, with leading market share in autos. The bank has been expanding its domestic wealth operations significantly with its acquisitions of MD Financial and Jarislowsky Fraser, making it the third-largest active manager in Canada. The bank has also been making multiple acquisitions in its Latin America footprint as it attempts to consolidate better share within the area.

The international exposure gives the bank the potential for higher growth and return opportunities compared with peers, but it also exposes the bank to more risks. While Latin America has been more stable in the past decade, there are risks that this may not continue. A return to political instability, higher credit losses, and inflation arguably all have higher likelihoods in these emerging markets than for Canada. The unique risks surrounding Latin America’s bounce back from COVID-19 are also worth considering.

After numerous acquisitions, the bank is in the middle of rationalizing its many back-end systems and improving efficiency bankwide. The bank’s original goal was to have an efficiency ratio of 50% by the end of 2021; however, we think this will be delayed, given the less positive economic backdrop caused by COVID-19. We like the bank’s digital efforts. While all banks in Canada are engaged in similar ongoing investments, Scotiabank has been spending the most on its technology and communication expenses. We think these efforts will ultimately pay off in the form of improved operating efficiency, customer engagement, and internal sales coordination. This leads us to believe that returns on tangible equity near 15% are sustainable over the longer term for the bank.

Bank of Nova Scotia is a global financial services provider. The bank has five business segments: Canadian banking, international banking, global wealth management, global banking and markets, and other. It offers a range of advice, products, and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. The bank’s international operations span numerous countries and are more concentrated in Central and South America.

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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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Shares Technology Stocks

Delphi Technologies largest product group is Fuel injector technology

× Fuel injector technology is currently Delphi’s largest product group. This represents a risk as manufacturers switch to smaller engines with fewer cylinders.

× Even so, the growth potential for Delphi’s electric and electronic powertrain products is substantial and represents margin expansion potential from software-based applications. We think Delphi revenue will grow at 1-3 percentage points above our long-term forecast for global light vehicle demand.

× We assume a 15.5% normalized sustainable midcycle EBITDA margin, 160 basis points below 17.1% historical 10-year high but 50 basis points above the 10-year median owing to more favorable product mix.

× To force our DCF model’s fair value to equal the $22 consensus price target, investors would have to believe a 10.0% midcycle EBITDA margin. To reach the market price, the midcycle EBITDA margin would have to be 8.7%, 80 basis points less than the 10-year historical low.

Delphi Technologies, a spinoff from Delphi Automotive, provides advanced vehicle propulsion solutions through combustion systems, electrification products and software and controls for global automotive, commercial vehicle and aftermarket customers.

DLPH Stock Summary

  • The capital turnover (annual revenue relative to shareholder’s equity) for DLPH is 27.74 — better than 98.99% of US stocks.
  • DLPH’s went public 2.83 years ago; making it older than merely 8.53% of listed US stocks we’re tracking.
  • Equity multiplier, or assets relative to shareholders’ equity, comes in at 14.76 for Delphi Technologies PLC; that’s greater than it is for 97.12% of US stocks.

General Advice Warning

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

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Dividend Stocks Philosophy Shares Technical Picks

AusNet Services Posts Good result

Reported EBITDA rose 6% to AUD 662 million. Adjusted EBITDA rose 7% to AUD 627 million, tracking slightly ahead of our full-year forecast mainly because of higher-than expected electricity demand. More people working from home benefited volumes and saw the firm earn AUD 21 million above its regulatory cap. This will be returned to customers via lower tariffs mainly in fiscal 2022. As AusNet is regulated, there is no lasting impact on our longer-term earnings forecasts or valuation from demand fluctuations.

Electricity distribution performed well, with revenue up 4% to AUD 502 million and adjusted EBITDA up 11% to AUD 288 million. The strong result benefited from tariff increases and stronger residential demand, but the outlook isn’t as rosy. This asset undergoes a regulatory reset in early 2021, which will likely reduce allowed returns on equity to under 5% for the next five years, from over 7% currently. We forecast average annual revenue growth of just 1% over the next five years, despite ongoing reinvestment and growth in regulated asset base. Gas distribution also benefited from tariff increases and stronger residential demand, helping revenue increase 4% to AUD 149 million and adjusted EBITDA increase 8% to AUD 117 million. The next regulatory reset for the gas network is in early 2023. Overall, we expect revenue to grow at about 3% for the next two fiscal years, before resetting about 5% lower from 2023.

EBITDA in the electricity transmission network rose 1% to AUD 181 million. We forecast revenue grows 1% per year for a couple of years, before falling a few per cent in fiscal 2023 following the next regulatory reset in 2022. The main growth opportunity for AusNet is transmission connections to new wind and solar farms and between states. Some will be unregulated, some regulated. All will be capitalintensive, but we think the firm can fund without an equity raising.

 (Source: Morningstar)

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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

Tenneco stock ride performance products and systems for light vehicle

× In our opinion, Tenneco stock valuation has been unfairly punished because of the high level of debt after the Federal-Mogul acquisition; the postponement of the separation of DRiV, which implies previously unanticipated integration challenges; as well as transient operating environment and cost issues.

× The company has demonstrated an ability to perform in an unfavorable operating environment while carrying a high debt burden. In 2008 and 2009, total debt/EBITDA exceeded 4.0 times. In 2009, the stock hit a low of $0.70. Since then, shares have traded as high as $68.71 (2016), and total debt/EBITDA reached a low of 1.6 (2014). At the end of the second quarter of 2019, the credit metric was 3.5 times.

× Our forecast assumes 1% pro forma average annual revenue growth from 2017 (the year before the Federal-Mogul acquisition) to 2023 versus a 4% 10-year historical growth rate for old Tenneco. Our Stage I EBITDA margin assumptions average 9.7%, with a normalized sustainable midcycle of 9.6%.

× During the past 10-years, Tenneco’s high, low, and median EBITDA margins have been 9.6%, 7.3%, and 9.1%. In 2017, including targeted $200 million integration cost savings and adding $50 million for public company costs for the eventual spin-off of DRiV, we estimate pro forma EBITDA margin would have been 10.4% versus Tenneco’s as-reported 9.4%.

× We estimate that for our model to generate a fair value equivalent to the sell-side consensus estimate and the current market valuation, investors would have to believe midcycle EBITDA margins of 5.5% and 5.0%, respectively.

Tenneco Inc. designs, manufactures, and sells clean air, powertrain, and ride performance products and systems for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers worldwide. The company operates through Clean Air, Powertrain, Ride Performance, and Motorparts segments. It offers clean air products and systems, including catalytic converters and diesel oxidation catalysts; diesel particulate filters(DPFs); burner systems; lean nitrogen oxide (NOx) traps; selective catalytic reduction (SCR) systems; hydrocarbon vaporizers and injectors; SCR-coated diesel particulate filters systems; urea dosing systems; four-way catalysts; alternative NOx reduction technologies; mufflers and resonators; fabricated exhaust manifolds; pipes; hydroformed assemblies; elastomeric hangers and isolators; and aftertreatment control units. The company also provides powertrain products and systems, such as pistons; piston rings; cylinder liners; valve seats and guides; bearings; spark plugs; valvetrain products; system protection products; and seals and gaskets. In addition, it offers motor parts, including steering and suspension, braking, sealing, engine, emission, and maintenance products, as well as shocks and struts; and ride performance products and systems comprising advanced suspension technologies, and ride control and braking products, as well as noise, vibration, and harshness performance materials. The company was formerly known as Tenneco Automotive Inc. and changed its name to Tenneco Inc. in 2005.

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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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Dividend Stocks Shares Technical Picks

Fortescue Metals Group- Iron Ore Price to Strong

There is an approximate one-month delay between shipping the iron ore and prices being finalised. Higher profit versus last year was driven primarily by price, which rose 21% to USD 79 per tonne. Volumes were mildly positive, with iron ore shipments up 6% to 177 million tonnes. The strong result saw Fortescue increase total dividends by 54% to AUD 1.72 per share, slightly ahead of our AUD 1.60 forecast.

We make no change to our AUD 7.70 per share fair value estimate. While the fiscal 2020 result was strong, we struggle to see how the buoyant iron ore price can be sustained. It’s hard to imagine external conditions getting materially better, and we see longer-term downside. On the demand side, we see a coming headwind as infrastructure spending to offset the COVID-19 downturn in China abates and as urbanisation and infrastructure requirements

generally reduce. The peak of urbanisation has passed, and China’s stock of housing and infrastructure is now relatively mature. We expect China’s steel consumption to slow accordingly and for a growing proportion of steel to come from recycling at the expense of iron ore demand.

We see modest supply additions from Fortescue’s Iron Bridge, Vale’s planned 20 million tonne S11D expansion, and the 7 million-8 million tonne Samarco restart. Longer term, the restart of production from Vale’s mines interrupted by the 2019 Feijao tailings dam failure is material. Production in 2020 is likely to be almost 100 million tonnes lower than we expected before the failure, or about 6% of global supply.

Admittedly, the outlook for near-term earnings is very strong. We expect only a 9% decline in earnings in fiscal 2021 from fiscal 2020’s record level. However, the iron ore price is way above its marginal cost, reflecting the dual shocks to supply–primarily from Vale since 2019 –and demand from China’s stimulus.

Year-to-date steel production in China is up a remarkable 2.8% with a sharp recovery from the February COVID-19- related downturn. In July 2020, steel output in China was up 9.1% on the same month in 2019. The uptick in iron ore imports has been even stronger with China imports up 12% to 659 million tonnes in the year ended July 2020. And for the month of July, imports were a record 102 million tonnes and up 24% on July 2019. With China the dominant source of demand for iron ore, accounting for more than 70% of seaborne consumption, strength there has more than offset any weakness everywhere else.

 (Source: Morningstar)

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General Advice Warning

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

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Dividend Stocks Shares

Coca-Cola Amatil Ltd– Uncertainties Remain

While we expect cost control, plans to launch smaller package sizes at higher prices per litre, and an increasing line up of non-carbonated drinks, we forecast volume declines in soft drinks and a negative mix shift from reduced on-the-go sales to drive a double-digit decline in EPS in 2020. Nonetheless, we’re encouraged by the firm’s continued market share gains, and expect earnings growth to rebound in 2021 and beyond. On top of this organic outlook, Amatil has received a non-binding offer to take over the company from fellow bottler CCEP at an attractive price. Uncertainty remains, but we think there is a strong change the deal progresses.

Key Investment Considerations

  • Coca-Cola Amatil is facing declining carbonated beverage consumption and heightened bottled water competition in its core Australian market, which will likely limit the firm’s near-term pricing power. Despite challenges in mainstream soft drinks, Amatil’s distribution deals with third parties, growth opportunities in emerging markets, and launches of smaller package sizes should drive positive annual revenue gains.
  • Amatil aims to pay out more than 80% of its annual earnings in dividends, and we forecast a low-single-digit growth pace. We expect dividends will remain unfranked until 2021, after which we see franking at 50%.
  • Coca-Cola Amatil’s long-standing relationship with The Coca-Cola Company (TCCC) and a solid distribution network and retailer relationships in Australia, New Zealand, Fiji, Indonesia, and Papua New Guinea, afford the beverage bottler sustainable brand intangible assets and a cost advantage versus its competitors and potential upstarts. However, health-led headwinds in developed markets will likely drive further pressure on Amatil’s carbonated beverage portfolio.
  • The Coca-Cola Company’s nearly 31% ownership in Coca-Cola Amatil solidifies the relationship between the parent company and bottler, and an upcoming shift to incidence-based pricing should further align the firms’ goals.
  • Indonesia is a major long-run growth opportunity for Amatil, given the country’s continued economic development and relatively low rate of packaged beverage consumption.
  • Amatil has opportunities to increase its asset utilisation through additional distribution partnerships, such as recent deals struck with Monster Energy, Molson Coors, and Restaurant Brands.
  • Developments such as container return schemes in NSW and other Australian states, and potential sugary beverage taxes, serve as a price increase for consumers, and likely accelerate the decline of CSD volumes in Australia.
  • Pricing has been dented by both competitors and customers; Amatil has driven costs out of its production system, but a continued inability to pass through raw material inflation to consumers presents a long-term challenge.
  • The Coca-Cola Company owns the rights to Amatil’s major brands, and could negatively alter the pricing consideration for beverage concentrate purchasing.

 (Source: Morningstar)

Disclaimer

General Advice Warning

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

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Dividend Stocks Shares Technical Picks

Domino’s Pizza Enterprises- Outlook

The stock suits investors seeking exposure to the food and beverage sector. Australia can still increase its store base by around 40% over the next decade. European growth is much more substantial, with potential to substantially increase the existing store base to around 2,850 outlets during the next decade. In its capacity as a master franchisee, Domino’s capital requirements are limited, which means that royalty payments should continue to be paid as dividends.

Key Considerations

  • Domino’s was an early adopter of digital. By migrating orders online, the company has been able to save costs, establish a customer database, and up-sell to customers.
  • Japan and Europe are underpenetrated markets. Replicating its success in Australia abroad presents a significant growth opportunity.
  • Short-term drivers can materially affect year-to-year earnings, including currency movements, raw material input costs, and changes to foreign government policies related to sales taxes and wages.
  • Domino’s is a highly visible brand based on a successful U.S. business model. Across Domino’s three regions, sales have increase at a CAGR of 14% over the past four years. We expect annual growth rates to continue in the low teens over the next five years.
  • The pizza market in Europe is highly fragmented, presenting significant opportunity for Domino’s to take market share with an attractive value proposition, increased convenience to the customer, and a differentiated product offering.
  • The company’s large network size has positive implications for discounted supplier arrangements.
  • There is a high level of competition, stemming from independent pizza stores and other quick-service restaurants.
  • The company might evaluate its target markets in new countries incorrectly, given the geographical distance and cultural variances.
  • The low-price business model may still be affected by slowing retail and discretionary spending.

 (Source: Morningstar)

Disclaimer

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.