Category: Dividend Stocks

Companies return profits to shareholders through two main channels, capital gains and income. A high dividend yield indicates that a company is returning a large amount of cash to shareholders relative to the value of the company. This allows investors to maximize their income received relative to their investment amount. The gross dividend is calculated from the net dividend amount paid to shareholders plus the value of any attached franking credits associated with those dividends. A fully franked dividend will have franking credits equal to 30% of the gross dividend value, which can, therefore, represent a significant source of additional value.

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Dividend Stocks

Metcash Ltd: Earnings And Positioning Has Significantly Improved Over Recent Years

Investment Thesis:

  • Trades below the blended valuation. 
  • MFuture benefits to help margins and customer value which in turn will drive sales growth. 
  • Food inflation in core categories (Food, Liquor and Hardware).
  • Acquisition synergies have already been achieved and in line with expectations.
  • Competitive pressures remain however the market to remain more rational at this stage, despite meaningful players such as Coles, Bunnings (Wesfarmers), Woolworths, Aldi, Costco, and potentially in Amazon.
  • Hardware is becoming a much larger part of the overall business, and this may warrant a higher valuation multiple. 
  • MTS has the second largest liquor business in Australia, which exhibits defensive earnings quality. 

Key Risks:

  • Further margin pressure in the core business segments with deflation being unhelpful to topline revenue.
  • Any deterioration in balance sheet metrics due to earnings/cash flow pressure/decline.
  • Adverse movements in AUD/USD (international sourcing).

Key Highlights:

  • FY22 group results. Group revenue was up +6.4% YoY to $17.4bn, operating earnings (EBIT) up +17.7% to $472.3m, underlying NPAT up +18.6% to $299.6m and underlying EPS up +23.5% to 30.5cps, driven by earnings growth and the off-market share buy-back of $200m. On the back of strong operating performance, dividends also increased +22.9% YoY to 21.5cps, fully franked. Management continues to target a pay-out ratio of 70% underlying NPAT. Balance sheet is in a healthy position with gearing ratio of 14.8% and underlying EBITDA coverage ratio of 4.8x. 
  • Easing house prices not impacting Hardware yet. MTS’ group earnings now have 39% coming from the attractive Hardware sector (up from 33% in FY21). Management noted that they haven’t seen any impact of easing house prices in Australia appear in the demand so far. According to industry data (HIA), there remains a solid pipeline of renovation in new home builds.
  • Return of the value-driven consumer. Economic conditions are likely to remain subdued and could deteriorate further. the value-driven consumer will become more driven to shop around and cross shop for products to lower family cost pressures. Management believes their ongoing focus on competitive offering on a wider range of products, programs such as price-match and the newer programs around low prices every day (LPED) should assist MTS maintain competitiveness.
  • Group sales up +8.6% across all segments.
  • Food sales up +5.0%, with Supermarkets up +4.5%, driven by demand and higher wholesale inflation.
  • Hardware sales are up +19.8%, with demand remaining strong and persisting global supply chain challenges.
  • Liquor sales are up +8.6%, with recovery in on-premise sales and higher wholesale inflation.

Company Description:

Metcash Ltd (MTS) is an ASX listed consumer staple company which operates three internal divisions (“business pillars”) covering food, liquor and hardware: Metcash Food & Grocery (MF&G): MF&G is comprised of Supermarket and Convenience divisions supplying to independent stores across Australia including ~1,434 IGA branded stores and ~250 Friendly Grocer / Eziway stores. Australian Liquor Marketers (ALM): Australian Liquor Marketers (ALM), has two divisions, ALM and Independent Brands Australia (IBA). ALM serves as a broad range liquor wholesaler supplying over 12,000 hotels, liquor stores, restaurants and other licensed premises throughout Australia. IBA’s 4 national independent retail brands are Collaborations, IGA Liquor (formerly IGA Plus Liquor), Bottle-O and Bottle-O Neighborhood. Independent Hardware Group (IHG): Independent Hardware Group (IHG), is the combined entity of Mitre 10 and Home Timber & Hardware Group networks. Mitre 10 is an independent, national retail network of over ~370 bannered Mitre 10 and True Value Hardware stores. Home Timber & Hardware has a network of ~380 bannered stores including the Home Timber & Hardware, Thrifty-Link Hardware, Harding, Hardware and Hudson Building Supplies brands.

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

JHX – Segment Revenue Up +22% To A$777.7m, Driven by Volume Growth of +17% and Price/Mix Up +10%

Investment Thesis:

  • Trading on attractive multiples and below the blended valuation. 
  • Largest producer of non-asbestos fibre cement
  • Opportunity to hit and exceed management’s financial targets for the European business. 
  • Fibre cement taking market share from vinyl and other siding products.
  • Strong R&D program to stay ahead of competition and product innovation. 
  • Leveraged to a falling AUD/USD.
  • New CEO may bring a fresh perspective on existing strategy. 
  • Productivity gains.
  • Investment plans over the next 4 years should deliver solid earnings growth. 

Key Risks:

  • Competitive pressures leading to margin decline.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in housing starts (U.S., Australia), significant decline in house prices or deep recession.
  • Unable to achieve its growth and market share target, which likely see a de-rating of the stock. 
  • Adverse movements in asbestos claims.
  • Disappointing primary demand growth (PDG) relative to market expectations. 
  • Manufacturing / operational issues impacting earnings. 

Key Highlights:

  • Net sales increased +24% over pcp to US$3,614.7m, driven by volume growth of +14% and price/mix growth of +10% (increasing penetration of high value product mix).
  • Group adjusted operating earnings (EBIT) were up +30% to US$815.6m, delivering an adjusted EBIT margin of 22.6%. Earnings were driven by top line growth (product mix shift to high value product) and ongoing operational improvement (e.g., LEAN which allowed the Company to absorb higher input costs and increase investment in marketing to drive top line growth).
  • North America Fibre Cement. Segment revenue was up +25% to US$2,551.3m, driven by exterior volume growth of +17% and price/mix up +10%. Adjusted EBIT of US$741.2m was up +27% on pcp, with margin improving +30bps at 29.1% due to higher average net sales price and lower restructuring expenses.
  • Asia Pacific Fibre Cement (Aus. / NZ / Philippines). Segment revenue was up +22% to A$777.7m, driven by volume growth of +17% and Price/Mix growth of +5%. All regions saw strong growth over the period, although Price/Mix growth was much higher in Australia / New Zealand (up +10%). Adjusted EBIT was up +23% to A$217.4m, with margin unchanged at 28%.
  • Europe Building Products. Segment revenue was up +19% to US$488.5m, driven by fibre cement and fibre gypsum net sales growth of +38% and +16%, respectively. Adjusted EBIT of US$62.9m was up +47% on pcp with EBIT margin up +250bps to 12.9% driven by higher gross profit, lower SG&A expenses (as % of sales) and lower restructuring costs. 
  • Balance sheet. Leverage as of 31 Mar-22 was at 0.8x versus target of maintaining leverage ratio of less than 2x.
  • Management has committed to investing between US$1.6 – 1.8 bn over the next 4 years in capacity expansion (brownfield and greenfield in all regions).      
  • The Company noted that the search for the new CEO remains ongoing and that they have held meetings with “some excellent candidates”. As previously guided, the Company believes a new CEO will be in place by later this year. This is likely to be an overhang on the Company, however a new CEO might significantly alter the strategy already on foot at JHX.

Company Description:

James Hardie Industries Plc (JHX) manufactures building products for new home construction and remodeling. JHX’s products include fibre cement siding, backer board, and pipe. The company operates in the US, Australia, Europe and New Zealand.

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

FVEs for Anglo American, BHP, and Glencore Modestly Reduced as Queensland Hikes Coal Royalty Rates

Business Strategy and Outlook 

BHP Group is the world’s largest publicly traded mining conglomerate and positioned at the centre of the China boom. The company correctly values a strong balance sheet to provide some stability through the inevitable cycles and derives some modest benefit from commodity and geographic diversification, relative to its mining peers. BHP produces a range of commodities and is a major producer of iron ore, copper, and metallurgical coal. Exposure to conventional oil and gas ended with the spinoff and subsequent merger with Woodside in 2022. The onshore U.S. shale assets were divested in 2018. Much of the company’s operations are in Australia, particularly the low cost iron ore business. Many of BHP’s assets are located close to key Asian markets, particularly iron ore and metallurgical coal, which provides a modest freight cost advantage relative to peers. 

Commodity demand is tied to global economic growth, China in particular. China is BHP’s largest customer, accounting for more than 65% of total sales in fiscal 2021. With demand for most products likely to soften with the end of the China boom, and BHP’s fiscal 2021-22 earnings back near the fiscal 2011-12 peak, the outlook is for earnings to materially decline, with iron ore the likely key driver. The good times saw significant capital expenditure, notably on iron ore and onshore U.S. shale gas and oil. Overinvestment in the boom diluted returns to the point where long-term excess returns are unlikely. Structurally lower earnings with the demise of the China boom peaks means mid cycle returns on adjusted invested capital, after adding back the impairments and write-downs, are expected to be close to the cost of capital. Ignoring the cumulative impairments and write-downs, returns are forecasted to modestly excess the cost of capital by mid cycle.

Financial Strength

BHP is in a strong financial position. With ongoing debt repayment, modest near-term capital requirements and the fortuitous bounce in commodity prices since 2016, BHP’s financial position is strong. For the five years ended fiscal 2026, net debt/EBITDA is anticipated to remain below 0.5 and EBIT/net interest to average more than 30. Net debt at end-June 2021 was about USD 4 billion, below BHP’s net debt target range of USD 12 billion to USD 17 billion. Given the limited capital expenditure requirements, with only modest commitments to new expenditure in the lower demand growth environment, BHP’s balance sheet is expected to remain strong with excess cash flow to be returned to shareholders. Share buybacks and special dividends are possible, depending on the level of commodity prices, given the relatively modest outlook for capital expenditure. The likelihood of special dividends and buybacks would decline if BHP chose to pursue acquisitions.

Bulls Say’s

  • BHP is a beneficiary of continued global economic growth and demand for the commodities it produces. 
  • The company’s cash flow base is diversified and is less susceptible to the vagaries of the market than single-commodity producers. 
  • BHP’s iron ore assets are industry-leading. The company remains well placed to continue low-cost production and increase output with minimal expenditure and an efficiency focus.

Company Profile 

BHP is a leading global diversified miner supplying iron ore, copper, oil, gas, and metallurgical. The merger of BHP Limited (now BHP Ltd.) and Billiton PLC (now BHP PLC) created the present-day BHP. Shareholders in each company have equivalent economic and voting rights in BHP as a whole and in 2022 voted to reunify the dual listed structure. Major assets include Pilbara iron ore, Queensland coking coal, Escondida copper and conventional petroleum assets, principally in Australia and the Gulf of Mexico. Onshore U.S. oil and gas assets were sold in 2018 and the remaining Petroleum assets are likely to be spun off and merged with Woodside.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Itaú Should Benefit from Rising Interest Rates, but Uncertainty in Brazil’s Economy Still a Concern

Business Strategy & Outlook:   

The challenge for Itaú Unibanco will be to navigate an increasingly volatile Brazilian economy and uncertain political environment, which has been hit by the dual shocks of the pandemic and rapidly rising inflation, which exceeded 12% in April 2022. In response, the Brazilian central bank has rapidly increased interest rates, taking the SELIC rate from 2% at the start of 2021 to 13.25% by June 2022. The bank benefits from rising interest rates, as Brazil’s central bank attempts to fight inflation, but there is risk that economic fallout from rapidly increasing rates could lead to lower loan growth and higher credit losses for the bank. As pandemic conditions have eased, Itaú has refocused on individual lending, driving the bank’s impressive loan growth during 2021, with credit cards and mortgages leading the way. With a slew of government guarantee programs for small and midsize enterprises and fiscal stimulus spending, the bank’s credit costs during the pandemic have been surprisingly low. However, these same programs have contributed to Brazil’s growing inflation and budgetary issues. While the company does not expect credit costs to normalize over time, low charge-offs and a surge in deposits have allowed Itaú to expand its loan book significantly from its pre-pandemic size. 

Itaú Unibanco appears to be positioning itself as a regional money center in Latin America, with operations across Chile, Uruguay, Paraguay, Colombia, Panama, and Argentina. Though there are difficulties in such an approach, the bank has been able to diversify its asset growth and simultaneously reduce its exposure to the notoriously volatile Brazilian real. With nearly 30% of loans outstanding held abroad, the bank is in a unique position to benefit from Latin American emerging-market growth. However, in the near to medium term Itaú’s results will be impacted by Brazil’s struggles as the country heads into the 2022 election cycle. Itaú faces a more hostile approach from regulators in recent years, with the central bank’s efforts to increase competition through the launch of the successful Pix payment system and support for the open banking movement.

Financial Strengths:  

Itaú Unibanco has a common equity Tier 1 ratio of 11.1% as of March 2022. The bank’s Tier 1 ratio is 12.5%, as it holds 1.4% of additional Tier 1 capital in hybrid debt and equity securities. While management has said at times that the bank has been overcapitalized, that Itaú has done well to avoid increasing leverage at a time when Brazil’s economic prospects were challenged. The strong capitalization entering the recent crisis permitted the bank to expand its aggregate loan book by more than 15% during 2021 after growing nearly 22% in 2020. Net charge-offs for the bank have been low, a result of government guarantees and fiscal stimulus, which is  expected to normalize as the impact of the central bank’s interest rate hikes is felt in the Brazilian economy. That said, Itaú is in a decent position to withstand higher credit costs as its balance sheet is in good shape.

Bulls Say: 

  • Rising interest rates in Brazil create an opportunity for Itaú to expand its net interest margin. 
  • Itaú has been able to significantly expand its foreign lending operations, diversifying the bank and reducing its exposure to the volatile Brazilian market. 
  • Credit losses in Brazil remain well below historical norms, allowing Itaú to generate good returns on its lending operations.

Company Description:  

Itaú Unibanco is the largest privately held bank in Brazil, the result of the 2008 merger between Banco Itaú and Unibanco. In addition to Brazil, the bank has significant operations in Chile, Colombia, Argentina, Uruguay, and Paraguay. Its commercial and consumer loans account for 36% of the bank’s total loans each, while foreign loans now account for 28% of the bank’s portfolio. Itaú also operates the fifth-largest insurer in Brazil and is the second-largest asset manager in the country, giving it broad reach over the Brazilian financial system. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Honda’s brand and reputation for quality drive demand for its vehicles

Business Strategy & Outlook

Honda’s products and strong financial position should keep it on solid ground, but the competition is fierce and the U.S. market’s move to light trucks, where Honda’s lineup is not as complete as competitors, may be permanent. Ongoing risks include foreign-exchange volatility, a highly competitive U.S. market, and rising steel prices. Honda’s brand and reputation for quality drive demand for its vehicles, but its longtime niche in fuel-efficient cars historically positioned the company well to take advantage of consumers seeking more fuel-efficient vehicles. Over 2003-09, the U.S. car/light-truck mix moved to 55%/45% from 46%/54%, but as gas prices fell and light-truck fuel economy improved, cars have lost share to just 22% in 2021. In 2021, cars made up 37% of Honda’s U.S. sales mix, compared with 31% for Toyota, 7% for General Motors, and 4% for Ford. Honda’s car focus gives it an advantage whenever the critical U.S. market has high gas prices, but with cheap oil, the Honda leaves share on the table in segments such as full-size pickups and large SUVs, as it does not have product in these segments. One had liked to see Honda attain a more complete vehicle lineup. The company instead seems to be focusing on efficiency by targeting a two thirds reduction of vehicle trim and option choices across its five global models, such as Civic and Accord, by 2025 versus 2018 levels. As of April 2022, it has achieved an over 50% reduction.

Despite a strong car and crossover lineup, formidable threats remain, such as rising commodity prices and inflation making input costs expensive while hurting consumers’ purchasing power. Honda can mitigate this problem by using more common-size vehicle platforms to reduce costs, but even that is no guarantee. A weak dollar relative to the yen can also hurt profits. Honda does a good job producing where it sells to mitigate exchange risk. In 2020, Honda announced it will buy EV batteries from GM’s Ultium battery line, and in April 2021 new CEO Mibe said Honda targets a 100% global zero emission (electric and hydrogen fuel cell) vehicle lineup by 2040. Honda is planning to move beyond hybrids.

Financial Strengths

Honda’s financial position is excellent, as the company has a small debt load. The Honda’s cash and available credit lines at March 31, 2022, to be about JPY 7.5 trillion. This flexibility is important because it gives the company plenty of room to acquire more capital in the debt markets if needed. Excluding the captive finance company, Honda held about JPY 3.3 trillion in cash at the end of fiscal 2022. They calculate a net cash position at year-end fiscal 2022, excluding the captive finance arm, of nearly JPY 2.5 trillion. As of year-end fiscal 2022, the consolidated company has JPY 3.8 trillion of unused credit lines. Its debt/EBITDA ratio excluding the financing arm is generally well below 1 but was 1.3 in fiscal 2012 due to the Japan earthquake and Thai flooding. One can not see Honda having any problems meeting debt maturities, and they expect the company even before financial services results to be free cash flow positive over most of the forecast period.

Bulls Say

  • Honda’s popular vehicles usually allow it to use fewer incentives than the Detroit Three, boosting the firm’s profits and improving the resale value of its vehicles. 
  • Honda enjoys a reputation for quality, especially in America’s large coastal markets, but management is concerned about quality problems in recent years and Honda has slipped in U.S. J.D. Power quality rankings. 
  • In 2021, Honda produced about 95% of its vehicles sold in the U.S. in North America. This means Honda is better positioned than Toyota (71%) to withstand the yen when it is very strong against the dollar.

Company Description

Incorporated in 1948, Honda Motor was originally a motorcycle manufacturer. Today, the firm makes automobiles, motorcycles, and power products such as boat engines, generators, and lawnmowers. Honda sold 21.1 million cars and motorcycles in fiscal 2022 (4.1 million of which were autos), and consolidated sales were JPY 14.6 trillion. Automobiles constitute 63% of revenue and motorcycles 15%, with the rest split between power products and financial services. Honda also makes robots and private jets.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Polaris is one of the longest-operating brands in powersports.

Business Strategy & Outlook

Polaris is one of the longest-operating brands in powersports. Its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris’ brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm’s ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Polaris had sacrificed some financial flexibility after its transformational acquisitions of TAP (2016) and Boat Holdings (2018), but debt-service metrics have been rapidly worked down via EBITDA expansion and cost-saving scale benefits (with debt/adjusted EBITDA set to average around 1.0 times over the forecast). This unlocks Polaris ability to continue to serially acquire strategic businesses (with opportunities likely in the marine and parts and accessories segments), which could help stimulate incremental demand. For now, a 8% top-line lift in 2022 (after accounting for the expected sale of TAP), as Polaris attempts to fill advance orders and backfill dealer inventory, a rate one can think will return to a low-single-digit rate in 2024 (if scarce dealer inventory levels are remedied). International (low-double-digit percentage of sales) expansion over the long term also remains promising and could drive demand upside, particularly as Polaris increases its global operating footprint with a wider physical presence abroad. As evidenced by solid ROICs (at 26%, including goodwill, in 2021), Polaris still has top notch brand goodwill in its segments, supporting consumer interest and indicating the firm’s brand intangible asset is intact. However, with constraints in the supply chain, 2022 could see some volatility in market share gains, depending on the availability of certain products at retail (the snow segment suffered this plight in the most recent quarter). The modest market share gains to ensue ahead, signaling the firm’s competitive edge is intact.

Financial Strengths

Exiting the recession, rising profits led to increases in company equity, which helped reduce debt/capital from 49% in December 2009 to 31% in December 2015. With the addition of leverage from the acquisition of TAP (which is set to be sold in 2022), and the financing of Boat Holdings in 2018, Polaris ended 2018 with debt/adjusted EBITDA above 2 times and debt/capital of 69%. However, they expect robust demand and successful execution through COVID-19 to restore the metrics to 47% and to 1.1 times, respectively, at the end of 2022, a very manageable level that the company should be able to maintain. Additionally, Polaris is poised to produce strong cumulative free cash flow to equity over the next five years’ worth around $3.4 billion; thus, there should be no concern repaying debt as it comes due. The current revolver ($1 billion) and corresponding term loan ($900 million) are set to mature in 2026. And in December 2021, Polaris secured an incremental 364-day term loan for $500 million, which can be refinanced if needed. There is no meaningful debt coming due until 2026, confirming the opinion that Polaris has plenty of financial flexibility. The company maintains flexibility in its capital structure through stock repurchases and dividends. Polaris has restored share repurchases in 2021 as demand has proved consistent through COVID-19, and it will continue to fund (and grow) its annual dividend, which is currently set at $0.64 per share quarterly (2.5% yield).

Bulls Say

  • Polaris has historically had a strong reputation for innovation, and new product lines and acquisitions have supported solid performance in both strong and difficult environments. 
  • Profit margins could tick up faster than with faster than enterprise average volume growth from the sizable off-road and low operating expense marine business segments. 
  • Management remains focused on operating as a best-in-class manufacturer. With continuous improvement at existing facilities, the pursuit of excellence should support stable operating margin performance.

Company Description

Polaris designs and manufactures off-road vehicles, including all-terrain vehicles and side-by-side vehicles for recreational and utility purposes, snowmobiles, and on-road vehicles, including motorcycles, along with the related replacement parts, garments, and accessories. The firm entered the boat market after acquiring Boat Holdings in 2018, offering exposure to new segments of the outdoor lifestyle market. Polaris products retailed through more than 2,500 dealers in North America and through 1,500 international dealers as well as more than 30 subsidiaries and 90 distributors in more than 120 countries outside North America at the end of 2021.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Halma Plc – The Board increased the final Dividend by +7%, equating to +7% y/y increase in total Dividend

Investment Thesis:

  • High quality company with a history of earnings and dividend growth.
  • Management is looking to double EPS every five years. HLMA’s group earnings growth model is driven by organic and acquired growth. 
  • HLMA earnings are defensive as HLMA is exposed to attractive end markets which are niche and regulated in some shape or form – such as safety, medical and infrastructure.
  • HLMA consists of a strong diversified portfolio of companies (currently 45 companies). 
  • Strong management team with strong corporate culture. 
  • “Private Equity firm with a purpose” – the Company is not limited by a timeframe to exit positions. 
  • HLMA operates a decentralized operating structure with operating companies and management teams left to run their businesses. 
  • Scores well on ESG metrics – targeting a science-based emission target (1.5 degree-aligned 2030 target for Scope 1 & 2 emissions), a net zero target (scope 1 & 2 by 2040) and transitioning towards a circular economy.

Key Risks:

  • Execution risk – specifically around acquired growth or the inability to source enough deals as the group grows larger.
  • Deterioration in global growth or consumption.
  • New CEO represents opportunity and risk (strategic misstep).

Key Highlights:

  • The Board increased the final dividend by +7% to 11.53p, which combined with interim dividend of 7.35p per share, resulted in a total dividend of 18.88p, up 7% y/y. This was the 43rd consecutive year of dividend per share growth of +5% or more. Net debt (on an IFRS 16 basis which includes lease commitments) increased +7% y/y to £274.8m and represents gearing (net debt to EBITDA) of 0.74x times, within operating range of <2x. HLMA has ample liquidity – refinancing GBP 550m syndicated revolving credit facility (matures in May 2027), completion of a new Private Placement issuance of GBP 330m, with a seven-year average life and additional funding capacity of GBP 260m on maturing of January 2023 tranche of existing Private Placement.
  • Organic revenue growth (in CC) in single digit percentage. 
  • Return on Sales similar to 2H22 of 20.5%.
  • Capex to increase +26% y/y to ~GBP 34m, reflecting a more normal level of spend relative to the increased size of the group, with investment largely focused on the expansion and automation of manufacturing facilities to support future growth, with investment of GBP 20m in Group-wide technology (vs GBP 11m in pcp) primarily focused on delivering enhanced security, improved data and analytics capabilities, and support for companies in upgrading their operating technology and creating new digital models. 
  • Central costs to increase +29% y/y to GBP 40m. 
  • Net financing cost (assuming no further acquisitions are made) to increase +67% y/y to GBP 14m, reflecting a higher weighted average interest rate in the year.
  • Strong FX tailwinds (assuming currency rates for FY23 of USD 1.260/ Euro 1.190 relative to GBP) of GBP 59m on revenue and GBP 13m on profit, with the majority of impact in 1H23. 

Company Description:

Halma Plc (HLMA), listed on the London Stock Exchange, looks to acquire, and grow businesses in niche markets with a global reach. The Company focuses on markets such as medical, safety and environment. Management believes the earnings profile of these markets have a high degree of defensibility and long-term growth drivers. The Company is not like a Private Equity firm which looks to acquire businesses, reduce costs (to improve earnings profile) and then sell within a 5-year timeframe. HLMA looks to buy and hold companies over the long-term. They manage the mix of businesses in a group portfolio to drive sustainable growth and returns over the long term. HLMA looks to acquire businesses to accelerate penetration of more markets, merge businesses where it markets sense, and exit markets if they become less attractive from a long-term growth and returns perspective.  

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Fresenius is taking aim at those ESRD therapies with significant investments too

Business Strategy and Outlook 

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, it is expected the company will benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, the top-line growth for Fresenius is to be towards the top of that range after a very weak 2021 and even higher earnings growth compounded annually during the next five years, as the firm wrings out more efficiencies and repurchases shares. The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius’ experience operating over 4,100 dialysis clinics around the globe (about 1,000 more than the next-largest player, DaVita) gives it insights into caregiver and patient needs to inform service offerings and product innovation.

Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius’ technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only 9% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius’ top product customers. With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It recently purchased NxStage Medical for home haemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.

Financial Strength

Fresenius maintains a manageable balance sheet, despite its high lease-related obligations and capital-allocation strategy that includes acquisitions and significant returns to stakeholders. The company receives investment-grade ratings from the three major U.S. rating agencies, which should help it access the debt markets for any necessary refinancing. As of September 2021, Fresenius owed EUR 9 billion in debt and had lease obligations around EUR 5 billion. On a net debt/EBITDA basis, leverage stood at roughly 3 times, which appears manageable and in line with the firm’s previous long-term goal of 2.5-3.0 times, which excluded lease obligations. After generating over EUR 3 billion of free cash flow in 2020 including government aid, free cash flow looks likely to decline to about EUR 1.5 billion before rising to about EUR 2.0 billion by 2026. The firm will not face any significant refinancing risks during the next five years even as it continues to push cash out to stakeholders and pursue acquisitions. While acquisitions remain difficult to predict, the company pays a dividend to shareholders (EUR 0.4 billion in 2020) and makes distributions to noncontrolling interests (EUR 0.4 billion in 2020). It also repurchased EUR 0.4 billion in shares in 2020, and more repurchases are expected going forward. With those expected outflows to stakeholders and significant debt maturities coming due in the foreseeable future, Fresenius may be an active debt issuer going forward.

Bulls Say’s

  • Diversified by geography and business mix, Fresenius should be able to benefit from ongoing growth in treating ESRD patients worldwide once the pandemic recedes. 
  • Increasing at-home treatment rates could raise demand for the company’s at-home systems and boost how long patients can continue to work and stay on commercial insurance plans, which can positively affect the company’s profitability. 
  • Through its venture capital arm, Fresenius is investing in new ways to treat ESRD patients, aside from more traditional dialysis tools, which should help keep it at the forefront of this market.

Company Profile 

Fresenius Medical Care is the largest dialysis company in the world, treating about 345,000 patients from over 4,100 clinics across the globe as of September 2021. In addition to providing dialysis services, the firm is a leading supplier of dialysis products, including machines, dialyzers, and concentrates. Fresenius accounts for about 35% of the global dialysis products market and benefits from being the world’s only fully integrated dialysis business. Services account for roughly 80% of firmwide revenue, including care coordination and ancillary operations, while products account for the other roughly 20%. Products typically enjoy a higher margin, making them a strong contributor to the bottom line.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

High brand equity enabling scale and barriers to entry provide Winnebago with a narrow economic moat.

Business Strategy & Outlook

Winnebago, which reinvented itself under CEO Mike Happe with the November 2016 acquisition of high-end towable maker Grand Design, sees itself as a leading outdoor lifestyle firm. It now has a marine segment with Chris-Craft and Barletta. Towable is an area the company had long wanted to grow in but had remained very small since acquiring Sunnybrook in 2011. Winnebago’s North American towable share is 12%, up from under 2% before Grand Design, so a long growth runway if it can keep chipping into Thor’s and Forest River’s roughly 80% combined share. In fiscal 2021, towable were about 55% of total revenue compared with just 9% in fiscal 2016. High brand equity enabling scale and barriers to entry provide Winnebago with a narrow economic moat.

Leadership sees opportunities to improve Winnebago’s operations with an intense focus on strategic planning to be faster to market with new products in new segments such as off-roading and lower price points (but not the cheapest in a segment). Models are no longer cloned, which should help dealer profitability, and product will be positioned around a good, better, best framework. A unit is now not manufactured until it has an order, which should mean little to no discounting. Acquisitions in the $700 billion-plus outdoor activity market also play a role, but only for high-end firms such as Grand Design, Chris-Craft, Newmar, and Barletta. Industry data shows that 11.2 million U.S. households owned a RV in 2020, up from 6.9 million in 2001. 60% of first-time campers are under age 40 and have a household income of $100,000 or more versus 29% for all campers. 82% of new campers since the pandemic have children and Hispanic and Black consumers were 25% of all campers in 2020, up from 8% in 2012, so Winnebago has plenty of runway with a wide consumer base if it executes right. The Winnebago’s brand equity gives it a good shot at capitalizing on these trends. The pandemic-induced outdoor lifestyle boom has also given the company a $3.6 billion RV backlog at third quarter fiscal 2022, up from about $400 million at the end of fiscal 2019.

Financial Strengths

The balance sheet lacks the massive legacy costs that burden some other manufacturers because Winnebago’s workforce is not unionized. Winnebago’s untapped $192.5 million credit line, good through Oct. 22, 2024, coupled with about $238 million of cash should get the firm through nearly any challenge. A 9% increase in the dividend in summer 2020, despite the pandemic at the time, is a good sign of financial health, as is a 50% increase announced in August 2021. Winnebago’s balance sheet had been free of long-term debt since the mid-1990s. As having no debt limits the downside to equity investors, but new leadership was exploring whether to add debt and did so in fiscal 2017 with $353 million to fund part of the consideration to buy Grand Design. Debt as of May 28 totaled $600 million, before a $49.1 million convertible note discount and $9.4 million of debt issuance costs, and consists of $300 million of 1.5% 2025 unsecured senior convertible notes issued to buy Newmar (along with the company issuing 2 million shares of stock to the seller at $46.29) and $300 million of 2028 6.25% senior secured bonds. The convertible notes are not callable, can be converted any time starting Oct. 1, 2024, and have a conversion price of $63.73 per share. The target range for net debt/adjusted EBITDA is 0.9-1.5 times, but management is willing to leverage up to 3.0 times to make an acquisition. Net debt/adjusted EBITDA was 0.6 times at the end of third quarter fiscal 2022. Winnebago has no significant pension obligations and stopped paying retiree healthcare in 2017. The Winnebago to be comfortably free cash flow positive in the long term. One would prefer that it repurchase its shares only when they’re cheap and buybacks be done at a minimum to offset dilution from stock option issuance. Acquisitions and other growth investments are a priority over buybacks.

Bulls Say

  • The Grand Design acquisition materially raised Winnebago’s operating margin, and Newmar could do the same. 
  • The company’s strong balance sheet provides financial strength and flexibility to withstand cyclical downturns. 
  • Because RV consumers are relatively affluent, rising gas prices would probably not hinder a consumer’s ability to purchase a motor home. A 2016 study by travel consulting firm PKF Consulting found that for a family of four, gas prices would have to exceed $12 a gallon to make RV travel more expensive than other forms of travel.

Company Description

Winnebago Industries manufactures Class A, B, and C motor homes along with towable, customized specialty vehicles, boats, and parts. Headquartered in Eden Prairie, Minnesota, Winnebago has been producing recreational vehicles since 1958. Revenue was about $3.6 billion in fiscal 2021. Winnebago expanded into towable in 2011 with the acquisition of Sunnybrook and acquired Grand Design in November 2016. Towable made up 85% of the firm’s RV unit volume, up from 31% in fiscal 2016. The company’s total RV unit volume was 71,015 in fiscal 2021. Winnebago expanded into boating in 2018 with the purchase of Chris-Craft, bought premium motor home maker Newmar in November 2019, and bought Barletta pontoon boats in August 2021.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

NIB is incentivised to help bring down industry claims to improve affordability and support participation rates

Business Strategy and Outlook 

NIB Holdings is Australia’s fourth-largest provider of private health insurance. In addition to private health insurance for Australian and New Zealand residents, the firm also provides health insurance for overseas students and temporary overseas workers in Australia, and distributes travel insurance internationally. NIB has consistently grown its share of the market over the last five years. The insurer is expected to continue spending a larger share of expenses on marketing than peers, which lifts profit and adds scale. This further strengthens the group’s future prospects and competitive position. Smaller players with lower margins do not have the financial headroom to engage in marketing (advertising, commissions to brokers, bonus offers) at the same level as NIB, nor can they support white-label offerings. NIB offers white label solutions for Suncorp Group and Qantas. As one of the larger players, NIB is also incentivised to help bring down industry claims to improve affordability and support participation rates. While there are no factors in any material benefit in earnings, NIB seeks to use membership data and industry expertise to prevent illness and personalise treatment.

Despite larger players generating respectable returns on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation or at least a pullback in marketing expenses and policyholder acquisition costs. In this scenario, NIB could acquire smaller, less-profitable insurers to grow share, lower costs, and strengthen the competitive position relative to suppliers, or simply retain share while pulling back on marketing and acquisition spend to support margins. NIB made two acquisitions to grow its travel insurance offering, 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.

Financial Strength

NIB Holdings is in sound financial health. Cash flow generation from operations is typically strong, and the firm might pay dividends in the upper half of its current 60% to 70% target dividend payout range. As at Dec. 31, 2021, NIB had AUD 234 million in debt and a gearing ratio of 25% (debt/capital), within its long-term target gearing ratio of 30%. Since acquiring World Nomads Group in 2015, NIB has held a similar level of gearing to its target ratio. Given low claims volatility in health insurance, this level of debt is manageable and forecast gearing to remain steady at current levels. Investment assets of AUD 1.1 billion were allocated 39% cash, 40% to fixed income, 17% to equities, and 4% to property and other assets as at Dec. 31, 2021.

 Bulls Say’s

  • Industry growth is tied to a steadily increasing population, ageing demographics and rise in healthcare spending. 
  • The symbiotic relationship of private hospital operators, and buyer power over general practitioners, is a key strength of NIB’s business model. 
  • NIB is a large insurer of international visitors and Australia could become even more popular after handling COVID-19 better than most countries.

Company Profile 

NIB Holdings is Australia’s fourth-largest health fund. It is a national provider of private health insurance, life insurance, travel insurance, and related healthcare services, with a growing presence in New Zealand. Approximately 54% 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.

(Source: MorningStar)

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