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Merck MRK High-Margin Drugs and Vaccines

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Management expects Organon, after it’s spun off in the second quarter, “to pay a meaningful dividend that will be entirely incremental to that of Merck.” It also intends to keep Merck’s payout ratio in the 47%–50% range. Based on consensus earnings for 2021 and 2022, Merck should be able to maintain solid dividend growth while remaining within that range.

“Merck’s combination of a wide lineup of high-margin drugs and vaccines along with a pipeline of new drugs should ensure strong returns on invested capital over the long term. Merck is well positioned to gain further entrenchment in immuno-oncology with Keytruda, which holds a strong first-mover advantage in the large first-line non-small-cell lung cancer market with excellent data. Also, we expect Keytruda to gain ap-provals in early-treatment settings, which should open up underappreciated sales potential.

“Merck’s vaccines look ready to drive further gains, led by human papillomavirus vaccine Gardasil, which continues to generate excellent clinical data. While the firm’s late-stage pipeline lacks several new blockbusters, we expect early-stage assets focused on cancer to move through trials rapidly.

Even though Merck faces some patent losses over the next five years, including diabetes drug Januvia, we expect new drug launches and gains from currently marketed products to more than offset generic competition.

Merck & Co., Inc., d.b.a. Merck Sharp & Dohme outside the United States and Canada, is an American multinational pharmaceutical company headquartered in Kenilworth, New Jersey. It is named after the Merck family, which set up Merck Group in Germany in 1668. Merck & Co. was established as an American affiliate in 1891. 

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Dividend Stocks Shares

ViacomCBS Poised to Capitalize with Paramount+; International Streaming Expansion Key to Growth

The flagship service offers not only a strong on-demand library from the firm’s deep library but also access to CBS and its wealth of sports rights including the NFL and March Madness which helped to drive streaming growth over the first four months of 2021. With the recent renewal of the Sunday afternoon NFL rights, ViacomCBS now controls two of its most important sports rights into the next decade.

Like its larger peers, Netflix and Disney+, we expect that Paramount+ and Pluto will both benefit from international expansion. While the rebranded flagship service launched in 23 international markets in March including 18 in Latin America, the service has yet to launch in most of Europe, the largest non-U.S. market for Netflix, or India, the biggest international market for Disney+. Given the opportunity internationally and the relatively low guidance of 65-75 million subscribers by 2024, we think it’s likely that management raises the guidance in the next two years similar to the increase that Disney management made in December 2020.

In order to support the streaming growth, we project that ViacomCBS will continue to invest in content creation for the linear networks, theatrical slate, and the streaming platforms. Additionally, we expect that the firm will likely exceed its minimal target of $5 billion in streaming content spending as it ramps local language content to better compete with Disney+ and Netflix around the world. This spending will not help to drive subscription revenue but also ad revenue for both the lower-priced ad-supported tier and Pluto.

ViacomCBS Inc’s Company Profile

ViacomCBS is the recombination of CBS and Viacom that has created a media conglomerate operating around the world. CBS’ television assets include the CBS television network, 28 local TV stations, and 50% of CW, a joint venture between CBS and Time Warner. The company also owns Showtime and Simon & Schuster. Viacom owns several leading cable network properties, including Nickelodeon, MTV, BET, Comedy Central, VH1, CMT, and Paramount. Viacom has also built several online properties on the strength of these brands. Viacom’s Paramount Pictures produces original motion pictures and owns a library of 2,500 films, including the Mission: Impossible and Transformers series.

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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Shares

Macquarie Group Ltd- Difficult to Flip Assets

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Growth in funds management is delivering lower-risk income, and as the largest manager of infrastructure assets globally, we believe Macquarie is well placed to take advantage of a long pipeline of infrastructure projects across transport and renewable energy expected over the medium-term. While Macquarie is in a sound capital position, impairments in asset financing and lending businesses, as well as on its own equity investments are a potential risk in weaker economic conditions. Timing of asset realisation and market conditions can create lumpiness in earnings, we forecast midcycle returns well above Macquarie’s cost of capital.

Key Investment Consideration

  • The strong earnings outlook is reliant on riding the continued investment in infrastructure and energy assets globally.
  • The global business model, management experience, and strong balance sheet provide flexibility for organic growth and acquisitions, but market fluctuations do cause volatility and can result in loss of capital.
  • Macquarie has avoided large regulatory penalties. While we believe the firm should be given credit for its focus on risk management, the risk of hefty penalties due to error or failure to adequately manage potential risks in the future can be ruled out entirely.
  • Macquarie’s position as the largest infrastructure asset manager globally leaves the firm well placed to benefit from underlying demand for assets and investors searching for sustainable income streams.
  • The expansion into funds management has produced more sustainable, less capital intensive, annuity-style income, which will prevent a GFC-like shock to earnings and return on equity.
  • A focus on niche segments of investment banking allows Macquarie to continue to increase earnings globally.
  • Without the support of falling cash rates it is unlikely Macquarie can continue to achieve double-digit returns in infrastructure, resulting in lower performance fee income.
  • Macquarie invests directly in unlisted assets and businesses, and despite being diversified, a large bankruptcy or asset write-down would still have an impact on group profits.
  • A large investment portfolio makes it more difficult for investors to track and identify issues early.

 (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

Magellan Financial Group – rand to Attract More Funds

While we don’t believe it will be immune from the structural trends of investors moving to passive investments, continuing fierce competition in the active manager industry and major institutions in-housing some of their asset management, we believe it’s better placed than most active managers to address these headwinds. We also think it’s well position to take advantage from Australia’s growing pool of self-managed superannuation funds that still have a relatively low allocation to global equities. However, continued strong Performance will remain key.

Key Considerations

  • Magellan Financial Group has a high-profile brand. Increasing superannuation balances supported by Australia’s ageing demographic and compulsory superannuation should expand demand for global exposure, and we believe Magellan is well placed to serve growing retail investor demand.
  • Its established presence in the much larger U.S. and U. K. markets gives Magellan further growth opportunities.
  • A strong balance sheet, operating leverage, low capital demands, and strong free cash flow generation supports a high dividend payout ratio and offers investors the best of both growth and income return.
  • A strong long-term track record in international equities allows Magellan to charge investors a premium management fee and has established the firm as a leader in Australia’s wealth-management industry. Continued strong investment performance of flagship funds should support funds flow.
  • Magellan is well managed and benefits from strong long-term growth prospects resulting from increasing numbers of investors seeking to diversify exposure to international equities with a long-term, high-quality stock focus.
  • Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. give it a stronger growth profile than most domestic peers.
  • The majority of Magellan’s earnings come from a few large funds, meaning it has a high reliance on key investment personnel and the performance of its main funds. Should these personnel leave, or should its main funds underperform for a sustained period, fund outflow could increase to material levels.
  • There is increasing competition from other active international equity managers and new international equity funds from incumbents.
  • The firm faces fee pressure from the increasing popularity of lower-cost alternatives, such as index type products and ETFs.

 (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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Shares Small Cap

The Pinnacle at Backing and Growing the Right Horses

This allows Pinnacle to benefit from earnings upside as its affiliate boutiques grow in scale and realise operating leverage. A well-known brand and extensive diversification (across managers, asset classes and client cohorts) strengthen Pinnacle’s ability to attract and hold on to FUM across market cycles. Regardless, capital intensity is higher than pure-play asset managers. Dilution from capital raisings, increasing leverage and deploying capital at low rates of return are risks.

Key Investment Considerations

  • Pinnacle’s reputation as a quality growth partner for high performing boutique managers helps attract high calibre asset managers and investors seeking varied investment solutions. Diversity in asset classes, boutiques, and client cohorts provide stability in FUM growth across market cycles.
  • We anticipate ongoing growth in demand for Pinnacle’s solutions due to the increasingly competitive and regulated funds management landscape.
  • Earnings prospects are strong. Notably, there are upsides from the scaling of fixed costs as affiliate boutiques grow in scale, new money from increased distribution and new boutique additions.

Company Profile

Pinnacle Investment Management Group is an Australian-based multi-affiliate investment management firm. The principal activities of the firm are equity, seed capital and working capital, and providing distribution services, business support, and responsible entity services to a network of boutique asset managers, termed as “affiliates.” Apart from deriving revenue from its services, Pinnacle also earns a share of profits from its affiliates via holding equity interests in them. The business is growing rapidly with number of boutiques and FUM more than doubling to 16 and circa AUD 71 billion in December 2020, respectively, from seven and AUD 23 billion in December 2016.

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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

Veeva Raises Annual Guidance after First-Quarter Revenue Beat

Commercial Cloud results also benefited from adoption of CRM add-ons, which we see as the fundamental driver of long-term growth for the suite. Vault had a very strong quarter as well, bolstered by its Development Cloud that is composed of an end-to-end stack of modules that integrates different components of the drug development process (clinical, quality, regulatory, safety). The company added a record number of new customers to its Vault Quality suite of offerings. Vault Regulatory and Vault Safety also performed well, adding new customers and expanding adoption of modules among existing customers.

Professional services revenue grew an impressive 38% year over year and despite only composing one fifth of total revenue, contributed to more than half of Veeva’s revenue beat, as demand for Vault R&D services and business consulting was higher than anticipated during the quarter. Management expects service revenue to normalize in the second quarter, as it attributes higher utilization of services to the timing of client project starts. Ultimately, services revenue is more volatile than subscription revenue due to its nature (ad hoc versus SaaS), and we are maintaining our long-term revenue growth estimates for the segment.

Veeva anticipates momentum to carry through the rest of the year and has raised total revenue guidance to a range of $1,815 million-$1,825 million (an increase of $60 million over last quarter’s estimates). Taking this raise into account along with a slight improvement in our short-term operating margin estimates, we are raising our fair value estimate to $305 from $300.

Company Profile

Veeva is a leading supplier of software solutions for the life sciences industry. The company’s best-of-breed offering addresses operating and regulatory requirements for customers ranging from small, emerging biotechnology companies to departments of global pharmaceutical manufacturers. The company leverages its domain expertise and cloud-based platform to improve the efficiency and compliance of the underserved life sciences industry, displacing large, highly customized and dated enterprise resource planning, or ERP, systems that have limited flexibility. As the vertical leader, Veeva innovates, increases wallet share at existing customers, and expands into other industries with similar regulations, protocols, and procedures, such as consumer goods, chemicals, and cosmetics.

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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

AusNet Services Ltd

Revenue is highly secure and predictable between regulatory resets, being close to 90% regulated. Less-favourable regulatory conditions pose headwinds to earnings and distributions.

  • The tougher regulatory environment is a headwind. Earnings are expected to remain subdued in coming years following less generous regulatory resets, though a cost efficiency program should help.
  • The soft economy and high energy utility bills are pressuring the regulator to cut network returns to protect households as much as possible. The environment is likely to remain tough for the foreseeable future.
  • Financial position and distribution policy are relatively conservative, positioning the company well to withstand the tough environment.

AusNet Services owns three regulated energy networks in Victoria: the state’s main high-voltage electricity transmission network; an electricity distribution network; and a gas distribution network. It also owns minor unregulated assets and a third-party asset management business. We like the secure cash flow, solid balance sheet, and full ownership of underlying assets. However, medium-term earnings face major headwinds as the regulator cuts returns to protect households and businesses from high and growing energy bills. AusNet is considered to have no moat, as sustainable excess returns are unlikely, given regular resets and the tough regulatory environment.

Around 85% of AusNet’s revenue is regulated, offering predictable and secure cash flow between regulatory resets. These assets are subject to review by the Australian Energy Regulator, usually every five years. The regulator sets tariffs to provide a fair return for investors after covering forecast costs. AusNet received favourable regulatory decisions for its electricity transmission and distribution assets in past years, including the Advanced Metering Infrastructure program. However, more recent regulatory decisions were relatively unfavorable. We expect future resets will be even tougher, given the soft economy and high energy bills, a key risk for all regulated utilities. Household gas and electricity bills have doubled in the past 10 years because of higher fuel prices, expensive network modernization and government policies to promote green energy.

Long-term government bond yields are a key determinant of regulatory returns, affecting both the cost of debt and the cost of equity allowances. As bond yields have fallen sharply in recent years, regulatory returns have fallen in sympathy. Additionally, rules were changed to give the regulator more power in reducing allowances for other costs. Staggered resets smooth the impact, but all assets will likely generate lower returns in coming years. The electricity distribution network resets in early 2021, the electricity transmission network resets in early 2022, and the gas distribution network resets in early 2023.

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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GWA Group Ltd – Earnings Likely to Recover

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But competition is heating up with new entrants such as Spain’s Roca eyeing the fast growing Asia Pacific region including Australia and have achieved access to local distribution channels. We expect GWA’s margins to come under pressure as the brand portfolios of recent Australian market entrants garner greater

brand awareness.

Key Investment Considerations

  • GWA’s brand strength and leading market share in bathroom and kitchen fittings create enduring competitive advantages. However, competition is heating up.
  • The COVID-19 outbreak represents a significant shock to the Australian economy. We anticipate a sizable contraction in 2020 Australian housing starts. But the dip in construction is expected to be relatively short-lived, with a recovery commencing in early 2021.
  • The outsourcing of vitreous china and plastic manufacturing activities to suppliers in Asia has significantly reduced operating leverage. Operating margins are expected to remain stable through the cycle.
  • Caroma’s strong brand awareness should preserve GWA’s market share and economic profits. OThe Methven acquisition may provide access to growth opportunities in the U.K. and continental Europe.
  • GWA’s outsourced manufacturing model increases the variability of the firm’s cost base, steadying margins through the cycle.
  • Global industry leader Roca has big ambitions for the Asia-Pacific region. While off a low base, Roca is enjoying strong growth in Australia.
  • The top-of-cycle acquisition of Methven introduces execution risk. Value will be destroyed if deal synergies are not fully realised.
  • Falling Australian house prices could affect the typically more resilient renovation and replacement market segment near term.
  • Following the sale of its door and access systems business, GWA Group now operates through a single business division: water solutions. We think this division has competitive advantages that warrant a narrow economic moat rating for the group. Brand strength is high, with Caroma in particular resonating in both retail and wholesale channels in Australia.
  • Established distribution channels, including strong relationships with market-leading plumbing retailers, also help to maintain market position and prices. GWA has strong market positions in most products and is particularly dominant in toilet suites. A long history, since 1941 in Caroma’s case, has allowed it to build its presence.

 (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

Harvey Norman Holdings Ltd– Overestimating Upside

Yet, these factors are unlikely to alter the long-term outlook for most retailers. Rather, we expect consumer spending growth will prove relatively weak, while shifts between categories and sales channels could test retailers in the medium term.

The S&P/ASX 200 Consumer Discretionary index has rebounded by some 75% since the recent lows on March 23, 2020, after it collapsed by 45% in just over a month amidst the global equity rout. The discretionary retailing sector was initially much more severely hit than the overall market. In the past, discretionary spending has proven to be procyclical and it was singled out as highly exposed to the impending recession and widespread shutdowns, with these risks further exaggerated by supply chain concerns.

However, unlike the overall domestic equities market, the S&P/ASX 200 Consumer Discretionary index has nearly fully recovered and is just 3% shy of its February 2020 highs. In contrast, the broader Australian market is still down 13% versus its all-time February highs. While our discretionary retailing coverage screened as materially undervalued in March 2020, when we identified Myer, Super Retail and Premier as 5-star investment opportunities, the pendulum has now swung too far the other way.

However, this growth was unevenly distributed because of various restrictions on mobility and gatherings introduced either by federal and state governments or self-imposed by health-conscious consumers. The travel and restaurant industries, as well as fashion retailers, have been amongst the most impacted as consumers redirected their spending to other categories. Clear winners have been liquor, hardware and consumer electronics and home appliances retailers

 (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

InvoCare Ltd– Earnings

The number of deaths is highly predictable, creating a reliable revenue source. Historically, growth has been driven by price increases, growth in the number of deaths, small organic market share gains, and a boost from acquisitions of small private businesses at relatively low prices. Nonetheless, year-on-year variations in the death rate can cause some short-term earnings volatility. InvoCare typically trades on a high forward price/earnings ratio; however, we believe a premium valuation is justified, given the stable, growing revenue and returns consistently above its cost of capital.

Key Investment Considerations

  • InvoCare usually trades at a high price/earnings ratio, reflecting defensive earnings, strong cash flow generation, and a high dividend payout ratio.
  • Fluctuations in the number of deaths per year and changing product mix dynamics can result in volatility of underlying earnings.
  • The increased reinvestment in the business should support margin improvement while ensuring the business is well placed to capitalise on rising death rates.
  • InvoCare is the largest provider of funeral, cemetery, and crematorium services in Australia, New Zealand, and Singapore. It has a number of well-known, highly respected brands and significant market shares that underpin our
  • wide economic moat rating. InvoCare has a history of resilient and rising revenue and earnings, free cash flow and dividend-per-share growth. The company consistently generates returns above its cost of capital.
  • Steady growth in the number of deaths underpins our positive long-term view on InvoCare’s earnings outlook. Growth in the number of deaths has averaged about 1% in Australia and in New Zealand over the past 60 years. The latest estimates from the Australian Bureau of Statistics and Statistics New Zealand project the annual growth in the number of deaths to increase progressively and peak at around 2.8% in Australia and 2.3% in New Zealand by 2034, before slowing back to around 1% by 2055.
  • InvoCare consistently generates return on invested capital above its weighted average cost of capital, reflective of its market position, reputation, and strong brand equity.
  • Steadily growing industry volumes are relatively immune to economic factors and will accelerate as the population increases.
  • InvoCare faces no significant national competitors in Australia. This relative market strength and InvoCare’s participation in the slow consolidation of the industry should deliver high-quality earnings.
  • Beyond brand management, reputation risk in particular is high, given the importance of personal recommendations to winning new business.
  • Advances in medicine and changes to assumptions for life expectancy, coupled with changes in assumptions regarding birth and death rates, could negatively affect expected cash flows.
  • An extended economic downturn could see more price-sensitive customers spend less on funerals.

 (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.