Category: Shares

Categories
Shares

Scentre Group – Shares Still Look Undervalued

However, the group faces challenges from consumers closing their wallets in 2020 due to the coronavirus, and from e-commerce taking a greater share of spending over time. The business has been allocating more space to food, entertainment and services in response to online competition undermining the rent it receives from discretionary retailers. We expect tenants will resist agreeing to traditional annual increases above CPI without corresponding revenue growth. As such, we forecast lower income growth in the long run, weighing on property values.

Key Investment Consideration

Under pressure specialty tenants pay higher rent per square metre than anchor tenants, and therefore drive Scentre Group’s profitability.

Scentre Group has high leverage, and has so far resisted raising equity in 2020, unlike other retail REITs. It can persevere, but we think it needs an improved operating environment in calendar 2021 to avoid an equity raise. OThe quality of Scentre’s assets will ensure they remain pre-eminent shopping destinations in Australia, but we expect e commerce will undermine its pricing power.

Our base case is Scentre either avoids an equity raise, or takes advantage of a rally in sentiment towards REITs to issue equity at less dilutive prices. But we include a dilutive equity raise in our bear case. A realistic possibility is something in between, perhaps a smaller rights issue at a less dilutive price, when markets are optimistic about recovery.

It’s possible our very high uncertainty rating could reduce if operational performance improves once distancing requirements fade, and Scentre reduces debt. With income underpinned by contractual leases under nearly all circumstances, Scentre’s revenue is much more predictable than many other companies. However, the pandemic is one of those rare circumstances, and until that subsides uncertainty remains.

Australian shopping centres are in better shape than their counterparts in the United States, due to lower retail space per person, and a larger share of anchor tenants such as supermarkets.

Population growth in Australia was among the fastest in the developed world until coronavirus. If immigration recovers it would provide infill demand at Scentre’s assets.

Despite retail spending switching online, retailers still need a physical presence to maintain their brand. Premium retailers have little choice but to locate shops in the malls of Scentre and a handful of other groups, given the quality of locations and centres.

While Scentre has one of the highest-quality shopping centre portfolios in Australia, rents are higher than for convenience focused centres, and high end consumer goods are most at risk from online competition.

In response to online competition, Scentre Group has remixed its tenant profile towards food, entertainment and services. However, these categories are more sensitive to social distancing preferences, and typically require higher tenant incentives and maintenance capital expenditure.

Retail space per person is higher in Australia than it is in Europe, and the amount of floorspace devoted to under pressure department stores is high. High end malls in the U.S. may benefit from the closure of marginal malls, but outright closures of rival malls is likely to be less frequent in Australia.

 (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.

Categories
Shares Small Cap

Federated Hermes MDT Small Cap Growth

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

He is responsible for the model and research and draws on seven managers/analysts. Frederick Konopka also became a manager in 2008 and handles portfolio construction and trading for the team. MDT looks to group companies into different baskets producing various streams of alpha potential using valuation, growth, momentum, and quality indicators.

By using classification and regression tree analysis, the team can test thousands of potential combinations of factors based on 30-plus years of U.S. stock data to find the best mixtures of alpha using a three-month investment horizon. Still, such a short investment horizon can be difficult to implement. It leads to annual portfolio turnover that can be lofty and varies greatly. Over the past five years, turnover ranged from 188% to 227%, well above the 59%-66% range for the typical small-growth. The portfolio’s holdings have varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless they’re spread out across more holdings.

Since Mahr became lead manager in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 lagged the small growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. The fund has performed better since the team’s 2013 process switch to multiple decision trees, but the fund’s high volatility has kept its risk-adjusted results in line with the index.

Quantitative approach with short focus

MDT groups companies into different baskets of alpha potential. The team forecasts three month returns using valuation factors based on structural earnings, tangible book value, and forward earnings estimates; growth factors like analyst conviction and long-term earnings growth; quality factors measuring free cash flow, leverage, and reliance on external capital; and momentum factors like relative stock price trend. The team uses classification and regression tree analysis to test thousands of potential combinations based on 30-plus years of U.S. stock data.

Prior to 2013, the team used one large decision tree to forecast alpha, but that approach was subject to overfitting issues. Switching to regression analysis using multiple decision trees resulted in combinations of subsets of the factors with the best alpha potential. This leads to the fund holding stocks with different avenues to produce alpha, potentially leading to more opportunities to outperform. The MDT team continues to refine its model, usually updating the model twice a year. These revisions are typically on the margin, though. In 2020, for example, they adjusted their structural earnings indicator by using an industry relative basis.

Diversified, but high turnover

The strategy’s short-term approach has led to higher turnover than most smallgrowth peers. Its annual portfolio turnover range of 118%-227% the past five years is much higher than the median range of 59%-66%. The fund might struggle to maintain its fast-trading ways if assets hit the team’s $8 billion-$10 billion estimate of its small-cap capacity, which includes this strategy, Federated MDT Small Cap Core QISCX, and Federated MDT Small Cap Value. So far, the team is not near that limit, with around $2 billion across its small-cap charges. However, the portfolio’s number of holdings has varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless their potential alpha is spread out across more holdings. This could become more pronounced as the asset base grows

Performance – Volatile

The fund’s absolute and risk-adjusted returns lag the Russell 2000 Growth Index during lead manager Dan Mahr’s tenure. Since Mahr took over in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 trailed the small-growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. It has done so with more volatility than the benchmark, resulting in subpar riskadjusted performance measures, like the Sharpe ratio. Most of the fund’s underperformance has come during market turbulence. Mahr’s Aug. 31, 2008,start date means he took over amid the credit crisis, and the fund barely edged the benchmark through that period’s March 9, 2009, bottom. The fund lagged the bogy’s ensuing trough-to-peak (April 23, 2010) performance by 26.6 percentage points, annualized.

(Source: Morning star)

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.

Categories
Global stocks Shares

Xiaomi Produces Record Smartphone Sales and Gross Margins; FVE Raised to HKD 20.70

The smartphone gross margin of 12.9% was up 480 basis points on the previous corresponding period. Up until third-quarter 2020 Xiaomi’s smartphone gross margins averaged 7.5% and never rose above 9% in any quarter. Fourth quarter last year these margins increased to 10.5% and then jumped to 12.9% in the first quarter. The smartphone performance drove consolidated operating profit (less investment gains) up 161% with an 8% consolidated operating margin, much better than its previous best quarterly operating margin of 6.1% in second-quarter 2019. Huawei’s retreat seems to have lifted margins across the industry with Samsung’s smartphone business and Apple’s consolidated business also reporting their best operating profit margins since 2016. We lift our fair value estimate to HKD 20.70 from HKD 16.30 previously due mainly to increased gross margin forecasts in the smartphone business as well as increased smartphone revenue growth forecasts in 2021, with the lift in the value of Xiaomi’s investment portfolio over the quarter and a slightly stronger CNY also helping. Our no-moat rating is retained as we believe Xiaomi is predominantly an electronics hardware supplier with limited switching costs with its internet services business not yet well enough developed to assign a moat to. On our estimates Xiaomi currently trades on a 2021 price/earnings ratio of 31 times. Despite Xiaomi’s growing Internet of Things and lifestyle services business revenue giving it some differentiation from other consumer electronics peers, we believe this multiple is still above what could be reasonably justified.

Xiaomi’s smartphone segment had another strong quarter with Xiaomi’s total number of smartphones sold globally rising by 69% and smartphone revenue increasing by 70% from the previous year. Smartphone gross profit was up 170% with gross profit margin increasing to 12.9% from 8.1% in first-quarter 2020. Until the third quarter of 2020, the average smartphone gross margin for the previous 15 quarters had been 7.5% with a range of 3.3% to 9%. The margin then jumped to 10.5% in fourth-quarter 2020 and 12.9% in first-quarter 2021. Given Xiaomi generates around two thirds of its revenue from smartphone, its valuation is very sensitive to the smartphone gross margin assumption. If we double the smartphone gross margin assumption from 7.5% to (say) 15%, holding all other assumptions equal, Xiaomi’s valuation nearly doubles. Xiaomi pointed toward the shift in product mix toward higher end smartphones and reduced marketing and promotion spend given tightness in the semiconductor supply chain as the key drivers for the margin increase.

We estimate that reduced competitive intensity from Huawei has probably also helped smartphone industry margins and there may also be some premium attached to 5G phones. In the first-quarter 2021, key competitor, Samsung, reported its highest quarterly smartphone operating margin since the second quarter of 2016. The first quarter also saw Apple reporting its highest quarterly company operating margin since first quarter of 2016.

Xiaomi admitted that gross margin expansion had not been its main focus nor does it expect it to be in the near future as it is quite rightly focused on increasing market share, particularly in the mid-high end phone segment. It expects future growth to come from increased penetration into the offline segment in China as it is currently expanding its store footprint with a target of around 10,000 stores by the end of 2021. We forecast Xiaomi to grow its smartphone revenue by 44% in 2021 and at an average of 18% per year thereafter out to 2025 and assume its smartphone gross profit margin increases from 11.0% in 2021 to 11.4% in 2025 having lifted these assumptions by around 200 basis points following this result.

Revenue from the Internet of Things and lifestyle products segment increased by 41% year over year in the first quarter after growing by 8.6% in 2020. We note that the prior period was negatively impacted by COVID-19. Gross margin increased to 14.5%, which was also a quarterly record. Management had previously indicated that it had proactively reduced the number of stocks keeping units in this division to focus more on those products that interworked with the smartphone ecosystem. The company indicated that global shipments of its smart TVs were down 4% to 2.6 million for the first quarter. Larger television competitor, TCL, reported global TV sales volumes up 33% for the first quarter with TV sales in China up 8.3% and non-China sales up 43%. We forecast that Xiaomi can grow its Internet of Things and lifestyle products revenue by an average of 15.1% per year out to 2025 with gross margins averaging 12.0%.

Revenue from internet services was below expectations, increasing by 11.4% year over year in the first quarter after growing at 20% in 2020. Monthly active users, or MAUs, of its Mi User Interface increased to 425 million at the end of March from 396 million at the end of December 2020 and were up 29% year on year. However, average revenue per user was down 13% to CNY 5.3 per month. Advertising revenue was strong growing by 20% to CNY 3.6 billion and making up 58% of total internet services revenue. This is mainly driven by smartphone sales with the improved mix of higher end smartphones helping Xiaomi to grow the preinstalled app revenue. The high percentage of advertising revenue and improved margins from the fintech business drove internet services gross margin to 68.4% for the quarter. We believe the dominance of advertising in this revenue stream speaks to the difficulties Xiaomi has faced in building non-hardware-related internet revenue streams. We forecast internet services revenue growth of 20% per year to 2025 noting that growth in first-quarter 2021, internet services revenue was slower because of the very high gaming revenue in first-quarter 2020 due to the pandemic.

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

Best Buy Co Inc

Revenue was $11.6 billion, up from $8.6 billion in 2021’s first quarter and ahead of our $10.4 billion forecast. Comparable sales were up 37.2%, bolstered by the domestic appliance segment (comps up 67%), which the firm attributed to economic stimulus and sustained spending on the home. Best Buy’s 6.6% operating margin was ahead of the 2.7% result in fiscal 2021 and our 3% projection and reflected an improvement over 2020’s first-quarter result of 3.7%. Fiscal 2022 first-quarter EPS came in at $2.32, well above our $0.90 estimate. For comparison, first-quarter 2020 EPS was $0.98.

While these results were impressive, we are skeptical about their sustainability as economic stimulus payments are set to end and other disposable income options are increasing. Management’s second-quarter guidance indicates a deceleration of comps (17%) and a flat gross margin compared with 2021 (22.9%). For the full year, we expect comps around 5% (in line with updated guidance of 3%-6%), flat year-over-year gross margins, and a slight increase in selling, general, and administrative expense. We don’t plan a material change to our $101 fair value estimate and view the shares as overvalued, given the headwinds Best Buy faces.

One notable takeaway in Best Buy’s favor was the efficacy of its e-commerce and omni channel strategy despite the reopening of physical stores. Sixty percent of online orders were fulfilled from a Best Buy store via shipping, delivery, or pickup in store. Additionally, online orders made up 33% of domestic sales, compared with 15% in 2020. The firm is planning to capitalize on this with its new Best Buy Beta loyalty program, which offers perks including same-day delivery and special member pricing. For Best Buy to remain competitive after COVID-19, an evolving e-commerce plan is imperative.

Profile

Best Buy is one of the largest consumer electronics retailers in the U.S., with product and service sales representing more than 9% of the $450 billion-plus in personal consumer electronics and appliances expenditures in 2019 (based on estimates from the U.S. Bureau of Economic Analysis). The company is focused on accelerating online sales growth, improving its multichannel customer experience, developing new in-store and in-home service offerings, optimizing its U.S., Canada, and Mexico retail store square footage, lowering cost of goods sold expenses through supply-chain efficiencies, and reducing selling, general, and administrative costs.

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.

Categories
Shares Technology Stocks

Change Healthcare Inc

UnitedHealth still plans to purchase Change for $25.75 per share, which is our fair value estimate. However, in March, U.S. antitrust regulators announced an extension of that merger’s review period, and if the deal doesn’t close because of regulatory concerns, we would reduce the value of Change to our stand-alone fair value estimate of $16.50.

In the quarter, Change beat consensus on both the top and bottom lines. Revenue grew 1% to $855 million, above FactSet consensus of $846 million. With cost controls likely due to rightsizing before the pending acquisition, Change turned that slight revenue beat into a bigger profit beat. The company turned in adjusted EBITDA of $272 million (above consensus of $254 million) and adjusted EPS of $0.42 (above consensus of $0.36).

On the pending merger with UnitedHealth, both the acquirer and the target look committed to the deal, but regulators have thrown a wrench into the process. Based on recent commentary from UnitedHealth, there appears to be no major financing concerns or red flags from the perspective of the potential acquirer, and Change shareholders voted to approve the merger in April, as well. However, the Department of Justice announced an extended antitrust review on the combination in March after receiving a letter from the American Hospital Association about the combination, citing concerns about sensitive healthcare data shifting hands from Change (a neutral third party) to UnitedHealth’s Optum segment (a subsidiary of the largest U.S. health insurer and a large caregiver, too). The AHA suggested that the shift could give UnitedHealth an unfair advantage in its legacy businesses by seeing competitive claims processed in Change’s clearinghouse business. Concerns like that add uncertainty about whether the deal will close.

Profile

Change Healthcare is a spin-off of various healthcare processing and consulting services acquired by McKesson over numerous years. Recently, these processing assets were contributed to a joint venture and in June 2019 public shares were issued with McKesson retaining the majority interest. As of the end of the March 2020 quarter, McKesson distributed all its interest in the public processor. Core services consist of insurance (healthcare) claim clearinghouse for healthcare payers in addition to administrative and consulting services to assist healthcare providers improve reimbursement coding, billing, and collections.

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.

Categories
Global stocks Shares

Dollar Tree Inc

Electronic digital interface at a stock exchange or bourse showing the fluctuating prices of stocks and shares on the markets charting their performance

Our planned change is primarily a result of a higher ongoing tax rate assumption (26% statutory rate from 2022 onward, from 21% prior), as a time value of money-related adjustment mostly offsets the impact of a softer near-term outlook amid heightened freight costs. Our long-term targets still call for mid-single-digit annual top line growth and high-single-digit adjusted operating margins. We do not see a buying opportunity at the shares’ current trading price, despite a mid-single-digit percentage pullback after the announcement.

Quarterly comparable sales rose 4.7% at the Dollar Tree banner (with about a 100-basis-point impact from adverse weather in February) and fell 2.8% at Family Dollar (after a 15.5% increase in the same period of fiscal 2020 as consumers stocked up in the early days of the pandemic). We had expected a 5.5% increase and a 4% decline, respectively. Management set full-year guidance of $5.80- $6.05 in adjusted diluted EPS, including a $0.70-$0.80 freight cost headwind on a per share basis. Our prior $6.28 mark (excluding forecast share buybacks) will likely fall toward the new range, considering Dollar Tree’s heightened dependence on spot freight markets in light of capacity constraints.

Management still expects Dollar Tree Plus (a format that includes a section with certain discretionary items that cost more than the traditional $1 Dollar Tree limit) and its combo stores (which combine elements from the Family Dollar and Dollar Tree assortments in rural areas) to drive growth long term. We view the concepts favorably and think they should allow the company to leverage the strengths of each banner and its purchasing power. Still, we do not anticipate the benefits will include the development of an economic moat, considering the intense competitive environment

Profile

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1 price (CAD 1.25 in Canada). Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

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.

Categories
Shares

Metcash Is Falling Behind

Convenience and locally tailored product ranges remain a point of differentiation for smaller independent retailers, but consumers are increasingly willing to sacrifice convenience for value.Scale has proved to be an important attribute, enabling the larger retailers to pass on better pricing through purchasing power and the ability to spread the cost of distribution across a wider revenue base. The volumes that Woolworths and Coles flow through their supply chains are considerably larger than those for Metcash.

  • The expansion of discount supermarket Aldi is likely to continue pressuring on profit margins in the Australian supermarket sector.
  • The larger supermarket groups are using their scale advantage to offer lower prices and take market share from independent retailers.
  • The expansion of its hardware business through the acquisition of the Home Timber & Hardware Group further diversified earnings, but the food and grocery business still accounts for the majority of earnings.
  • Metcash’s supermarket sales grew by 14% in the first quarter, still ahead of supermarket giant Coles. However, the temporary advantage of the many stores within Metcash’s network of independent IGAs is likely waning. While restrictions were severe, customers were more inclined to shop at their local grocer to avoid longer travel distances and crowds.
  • Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From th small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.
  • The predominant supplier of packaged groceries to independent retailers provides a monopolistic market position to sustain above-average returns on capital.
  • Strategic and cost-cutting initiatives undertaken by Metcash are gaining traction. Also, independent supermarket operators across all states are stepping up investments in new stores, additional floor spare, and refurbishments.
  • Metcash’s acquisitive expansion of its hardware business has diversified the company’s earnings and cash flows away from the robust competition and lower margins experienced in the food and grocery business.
  • Intense competition between Coles, Woolworths, and Aldi is leading to price deflation to capture sales volume. A loss of volume from the independent channel could make it increasingly difficult for Metcash to match grocery pricing from its larger rivals.
  • Metcash’s customers (independent retailers) are effectively competing through differentiation of convenience, product range and service. These points of difference are likely to become marginalised in periods of economic constraint.

 (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.

Categories
Shares

Netwealth Group -Still Racing Higher and Looking Increasingly Overvalued

However, with low switching costs, we expect strong FUMA growth to be offset by industry fee compression, as platform providers largely compete on price. We expect Netwealth to generate a revenue CAGR of 12% over the next decade, and the relatively fixed-cost nature of the business and associated operating leverage should drive margin expansion and a 13% EBIT CAGR over the decade.

Key Considerations

Netwealth is the largest independent investment administration platform in Australia but still only comprises around 3% of the market.

The wealth management sector is experiencing fee compression as a result of technological innovation, and we expect this trend to continue.

Administration platform fees could potentially compress to close to zero, as they have done in the U.S., where platform managers monetise their intellectual property via transactional revenue.

Netwealth provides investment administration software as a service, or SaaS, in Australia via its proprietary software platform, which includes investment portfolio administration, investment management tools, and investment and managed account services. The company charges for its software based on the value of funds under management on its platform, comprising over 95% of group revenue, in addition to providing Netwealth-branded investment products, which are managed by third-party investment managers.

In contrast to the independent platforms, the large vertically integrated wealth managers have narrow economic moat ratings. With the wealth business contributing less than 10% of earnings for most of these companies, their economic moats don’t necessarily reflect their platform businesses or even their wealth management businesses, as these companies are very large and diversified financial services organisations. However, IOOF, which only owns a vertically integrated wealth management business, has a narrow economic moat based on switching costs and intangible assets.

Netwealth may be affected by the requirement that financial advisors act in their clients’ “best interests” if financial advisors feel obliged to move their clients onto the cheapest administration platform. This could create significant downward fee pressure for platforms.

Netwealth operates in a commoditised industry and is much smaller than many of its competitors. We expect the larger administration platforms to continue improving the functionality of their platforms and compete more

aggressively on price.

 (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.

Categories
Dividend Stocks Shares

NIB Holdings Ltd – Grow Earnings Over Time

Approximately 53% of the population is covered by private health insurance because of taxation benefits, shorter wait times, a choice of doctor and hospital, and cover of ancillary health services. NIB demutualised and listed on the Australian Securities Exchange in 2007. It is Australia’s fourth-largest health fund. Attractive long-term industry dynamics are supported by a growing population, government taxation incentives and penalties, and regulated pricing.

  • By spending on customer acquisition NIB can continue to take share, but annual growth in policyholders is expected to be low given affordability issues.
  • NIB can continue to generate attractive returns, using scale benefits and modest switching costs in a highly regulated industry. NIB could also participate in industry consolidation if smaller players become unprofitable.
  • We forecast mid-single digit earnings and dividend growth, with NIB’s 60% to 70% dividend payout ratio lower than peers being a reflection of the firm’s strategy to make small acquisitions to strengthen the private health business and diversify revenue.
  • NIB made two acquisitions to grow its travel insurance offering in recent years, with the rationale to diversify revenue outside of private health insurance, add exposure and scale in an industry expected to experience long-term growth, and leverage its claims management capability and existing distribution channels. We believe NIB will find success in cross-selling, but the business remains dependent on travel activity and being commoditised, is vulnerable to pricing pressure. While leveraging the NIB brand in Australia may come with some success, we do not believe insurers can build a competitive advantage on intangible assets.
  • Industry growth is tied to a steadily increasing population, ageing demographics and the unavoidable rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs.
  • Premium growth is generally tied to the increasing cost of healthcare. The government regulator approves/rejects price increases as part of an annual review. Very few have been rejected which helps reduce uncertainty around insurance margins.
  • The symbiotic relationship of private hospital operators, and buyer power over general practitioners, is a key strength of NIB’s business model. Private hospitals are reliant on the private insurance system, as the majority of private hospital income is paid by the insurers.

 (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.

Categories
Dividend Stocks Shares

United Malt Group Ltd – Result as a Public Company Offers Optimism

Nonetheless, the company is the fourth-largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast-growing craft producers. Although management expects United to face higher near-term costs related to its recent public listing, we think this will be offset by longer-term savings. But despite some attractive aspects of the business, we don’t think United has carved an economic moat. It is a commodity processor, with a high degree of fixed costs and limited ability to substantially differentiate its product.

Key Considerations

  • Although we anticipate craft beer consumption–a key driver for malt demand–will rise as a proportion of overall beer in United’s primary markets, the rate of growth is likely to slow, owing to the already high amount of craft brewers globally and flat overall beer volume trends.
  • Long-term client contracts, and the ability to pass through costs in periods of high barley prices help underpin a stable earnings stream and a manageable dividend policy.
  • We expect slowing end-market demand and limited barriers to supply additions driving returns on invested capital about equal to the company’s weighted average cost of capital.
  • Underlying earnings are stable, supported by longterm client contracts and its ability to pass through costs during periods of high barley prices.
  • United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
  • Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.
  • The commodity products that United Malt provide are readily available from competitors, and the company has little pricing power over the products it buys and sells, making for slim margins.
  • Barley acreage has declined in favour of other adjunct grains like corn or soybean in recent years, which could lead to periods of short supply and higher short-term costs.
  • The loss of key brewing customers, especially if they become self-sufficient for malt, could materially threaten its earnings stream.

 (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.