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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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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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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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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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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)

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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

Nine’s Estimates Updated for News Supply Deals with Digital Giants

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We see competitive intensity continuing, preventing any sustained improvement in Nine Network’s margins. The same is true for digital division, which operates in the equally competitive digital advertising space. However, Nine Entertainment has a strong balance sheet and is a high cash-generating business. This provides management with significant flexibility, allowing it to invest in marquee television content, diversify into digital businesses, and engage in capital management initiatives. The group has been executing admirably to date and culminated in the merger with Fairfax (consummation in December 2018), using mostly Nine shares as consideration.

Key Investment Considerations

  • Despite boasting a portfolio of entertainment-based divisions, Nine Entertainment’s key asset is Nine Network, a free-to-air television business that operates in a structurally challenged industry.
  • The group has a strong balance sheet, giving management the luxury to invest in content and emerging delivery platforms to fortify the current revenue base.
  • Benefits of the merger with Fairfax hinges on synergies management extracts from the combined entity. We forecast cost savings of AUD 62 million, but this may be conservative, given the potential upside from collaboration and savings on news-gathering resource rationalisation.

Company Profile

Nine Entertainment operates Nine Network, a free-to-air television network spread across five capital cities, as well as in regional Northern New South Wales and Darwin. It also owns Australia’s third-largest portfolio of online digital properties, one that reaches more than 60% of the country’s active online audience. The merger with Fairfax combines Nine’s top-ranked TV

network and the second-largest newspaper group, topped with a collection of quality digital assets in Nine Digital, subscription video on demand operator Stan, and Fairfax’s 59%-owned Domain. It ensures the merged entity remains relevant in the eyes of audiences and advertisers.

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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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Sales Surge at O’Reilly Automotive Inc

The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than

900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 30% 2020 mark).

With a strong operational record and national presence, O’Reilly features a highly productive infrastructure, with strong margins despite investments in service and high levels of part availability. While other chains have attempted to adopt a similar dual-market approach, we believe O’Reilly’s expertise and customer relationships give it an advantage that will take time for peers to match. This should keep O’Reilly’s relative positioning strong among the national retailers as the industry consolidates, with large-scale participants like O’Reilly increasingly favored due to their ability to provide hard-to-find parts to commercial (and, to a lesser extent, DIY) customers more quickly, reliably, and efficiently. We estimate the firm should achieve meaningful share growth in both segments, to 12% in DIY and 8% in commercial from 10% and 6% before the pandemic, respectively, over the next decade.

While O’Reilly’s operating margins grew from 13.6% in 2010 to 18.9% in 2019 (pandemic-fueled cost leverage led to a 20.8% 2020 mark), we see room for expansion as it leverages fixed costs and as house label products gain increasing acceptance and adoption. The strength of its brand, coupled with its cost advantage, should enable the firm to foster new and deepening relationships with its customers by providing a better standard of service, protecting O’Reilly’s results from competitive threats from smaller and like-sized peers. Although the pandemic’s sales surge should ease in mid-2021 as vaccination rates rise and comparisons become challenging, O’Reilly’s long-term strength remains rooted in its competitive advantages.

Company Profile

O’Reilly is one of the largest sellers of aftermarket automotive parts, tools, and accessories, serving professional and DIY customers (41% and 59% of 2020 sales, respectively). The company sells branded as well as own-label products, with the latter category comprising nearly half of sales. O’Reilly had 5,616 stores as of the end of 2020, spread across 47 U.S. states and including 22 stores in Mexico. The firm serves professional and DIY customers through its store network, and also boasts approximately 765 sales personnel targeting commercial buyers.

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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

Vocus Group Ltd – Spin Off Business

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The February 2016 merger between these companies transformed the enlarged Vocus into a full-service, vertically integrated player with the necessary ammunition to materially lift its share in all segments of the Australian and New Zealand telecommunications markets. However, the group has been beset by integration and execution risks, leading to a string of board and management changes. Under new management, the turnaround is now progressing solidly.

Key Considerations

  • Vocus’ extensive fibre network infrastructure has the potential to materially lift the company’s share of the corporate and small business telecommunications markets.
  • Vocus’ Australian retail unit faces margin pressure in the National Broadband Network, or NBN, era.
  • Vocus is well and truly past the “fix and repair” stage, and is on the “shed and grow” phase of its journey, with network services clearly identified as its core unit longer-term.
  • Vocus owns and operates an extensive fibre network that drives attractive economics in its fibre and Ethernet business and provides a durable competitive advantage.
  • The marriage of Vocus’ infrastructure and M2’s strong salesforce has the potential to materially lift the company’s share of both the corporate and the small business markets.
  • Vocus’ presence in the New Zealand telecommunications market is underappreciated by investors and is a fertile source of growth.
  • The merger with M2 has exposed Vocus to the margindilutive NBN regime.
  • While steps are being taken to improve in these areas, it is abundantly clear Vocus has bitten off more than it can chew with its recent spate of mergers and acquisitions, with reporting and technology systems woefully inadequate for what is a major player in the telecom big leagues.

 (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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Wesfarmers Ltd – Exceptional Growth

Wesfarmers is one of Australia’s largest private-sector employers, with more than 100,000 employees. Wesfarmers has a wide moat, which is sourced from cost advantages derived from its significant retail scale. After the demerger of Coles in 2018, returns on equity are no longer affected by goodwill associated with the 2008 acquisition of Coles and returns on invested capital comfortably exceed the group’s weighted cost of capital.

Key Investment Consideration

  • Leading Australian hardware retailer Bunnings generates about half of the group’s operating income and we expect the chain to continue building its market share. Bunnings is exposed to the health of the Australian housing market and the cyclical weakness in home prices is likely to negatively affect sales and profitability.
  • Wesfarmers offers investors an opportunity to diversify across different categories in the discretionary retail sector, beyond hardware, with additional diversification provided by its smaller industrials division.
  • Wesfarmers is Australia’s best-known conglomerate. Activities span discount department stores, office supplies, home improvement, energy manufacture and distribution, industrial and safety supplies, chemicals, and fertilisers. Business interests can be divided into two broad groups: retail and industrial.
  • The company’s hardware store footprint across the Australian economy and its leading market positions within several segments, combined with strong underlying return on invested capital (before goodwill), lead to our wide moat rating.
  • Wesfarmers is one of Australia’s largest retailers, and despite the Coles demerger, still earns around 80% of sales from the retail channel across discount department stores, hardware/home improvement, and office supplies.
  • The Bunnings is the undisputed leader in Australian home improvement retailing. Based on its market position, Bunnings could start giving up some volume growth and improve profitability by increasing prices. OThe diversification of Wesfarmers’ revenue streams across multiple retail categories and industrial businesses lowers earnings volatility and better predictability of dividends for income investors.
  • Wesfarmers’ strong balance sheet lowers funding costs, but also provides the financial firepower to opportunistically pursue acquisitions.
  • Wesfarmers’ retailing businesses are pro-cyclical and the near-term outlook for the Australian economy and consumer spending is mixed at best.
  • Mergers and acquisitions are risky and can be value destructive to shareholders. Wesfarmers’ most recent acquisition, Homebase in the U.K. and Kidman Resources were ill-timed and cost investors dearly.
  • The department store segment is grappling with intense competition from online, international apparel retailers and most importantly Amazon Australia, but are also confronted with the secular decline of thedepartment store format.

 (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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Westpac Banking Corp– Earnings To Retrace

Margins are currently being compressed as cash rates fall to historically low levels and demand for credit growth remains weak. Starved of revenue growth opportunities, the bank will focus on cost-cutting initiatives. A significant penalty for breaching anti-money-laundering laws has been agreed hurts 2020 earnings, as will higher loan impairment expenses over the next few years. During tough economic conditions, capital strength is paramount, with the dividend payout ratio expected to remain between 50% and 70%.

Key Investment Considerations

  • Market concerns about housing and weaker economic conditions are exaggerated. After a period of exponential growth Australian house prices cooled in 2017 and 2018, but a collapse remains unlikely without a sustained spike in unemployment.
  • Cost-saving initiatives are needed to further improve operational efficiency and increase returns.
  • Common equity Tier 1 capital exceeds regulatory requirements but changes to capital requirements in New Zealand, regulatory penalties, rising credit stress, and additional customer remediation costs have the potential to reduce this comfortable position.
  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2022.
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth.
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.
  • The withdrawal of personal financial advice by Westpac salaried financial advisors reduces compliance and regulatory risk.
  • Slow core earnings growth has resurfaced because of low loan growth, margin compression, subdued wealth and markets income, lower banking fee income.
  • A sound capital position will be tested by inflation in risk weighted assets.
  • Increasing pressure on stressed global credit markets could increase wholesale funding costs.
  • Bad debts remain under control, but large provisions are being taken in anticipation that COVID-19 will have a large negative impact on many businesses and households.

 (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.