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

WES reported 1H22 results reflecting earnings weaker relative to the pcp, with revenue of $17,758m

Investment Thesis:

  • Ongoing momentum in discretionary spend, driven by strength in housing prices. Diversified asset base with core assets continuing to grow (Bunnings).
  • Expect improved performance from Target and Industrials businesses.
  • On-going focus on shareholder return including attractive yield.
  • Strong management team.
  • Strong balance provides flexibility to take advantage of opportunities as they arise.
  • Potential capital management initiatives.

Key Risks:

  • Margin erosion due to competitive pressures. 
  • Disappointing earnings performance in Bunnings. 
  • Deterioration in the macro picture leading to lower retail sales activity and volumes. 
  • Deterioration in balance sheet metrics. 
  • Adverse movements in AUD/USD.

Key Highlights:

  • WES’s earnings were weaker relative to the pcp, with revenue of $17,758m largely flat relative to the pcp, but EBIT of $1,905, declined -12.3%, and NPAT of $1,213, was -14.2% weaker, with strong results in WesCEF and Industrial and Safety, up +36.3% and +10.8% respectively, more than offset by poor performance in Kmart and Officeworks, down -63.4% and -18.0% respectively.
  • Free cash flows of $949m was -51.7% weaker.
  • Net capex increased to $405m, up +66.7%.
  • WES’s balance sheet position deteriorated from the pcp as a result of a $2.3bn return of capital to shareholders in December, with net financial debt/cash reversing from a net cash position of $871m to $2,615m net financial debt position at the end of the half. Debt to EBITDA (excluding significant items) is now 2.0x versus 1.3x in the pcp.
  • The Board declared an interim dividend of 80cps, fully franked, -9.1% lower than the pcp.
  • Revenue was up +1.7% to $9,209m, whilst earnings dropped -1.2% to $1,259m. On the conference call, management noted “Bunnings remains well positioned for long-term growth, the near-term trading remains uncertain. With Covid continuing to add operational complexity and increased variability in trading patterns. In the second half, the business to benefit from customers continuing to spend more time at home and a sustained pipeline of residential building activity… to expect supply chain constraints and elevated team absenteeism to continue, creating operational complexity as well as cost pressures”.
  • Kmart Group: revenue fell -9.6% to $4,917m as earnings before significant items declined -63.4% to $178m. WES noted “combined Kmart and Target earnings declined 55.8% to $222m for the half, reflecting the significant impact of government-mandated store closures, which led to the loss of almost 25% of store trading days during the half, as well as higher costs and lower stock availability as a result of domestic supply chain disruptions”. On the call with management, WES also highlighted “looking forward to navigating near-term trading environments that remain uncertain volatile across both supply and demand, and with the addition of increasing all material costs”.
  • Officeworks: Revenue was up +3.7% to $1,580m, while earnings fell -18.0% to $82m, with sales growth driven by strong demand in technology and furniture, partially offset by declining sales in higher-margin office supplies and print & copy categories, which continued to be adversely impacted by Covid-related restrictions, including government-mandated temporary store closures.
  • Chemicals, Energy and Fertilisers: Revenue increased +29.8% to $1,077m as earnings increased +36.3% to $218m driven by higher global commodity prices, particularly for LPG, ammonia and ammonia-related products.
  • Industrial and Safety: Revenue was up +5.1% to $944m as earnings increased +10.8% to $41m driven by increased operating efficiencies at Blackwoods, growth in demand from Coregas’ industrial and healthcare customers.

Company Description:

Wesfarmers Limited (WES) has diverse business operations covering convenience stores, home improvement, office supplies, and department stores. The company also has an industrials division which includes businesses in chemicals and fertilizers, industrial and safety products and coal. Wesfarmers employs over 220,000 people.

(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

NAB also retained strong balance sheet metrics and capital position, with group Common Equity Tier 1 (CET1) ratio of 11.51%

Investment Thesis

  • NAB is trading on an undemanding valuation, with 1.6x Price to Book (P/B) and dividend yield of 5.4%. 
  • All else being equal, NAB is offering an attractive dividend yield on a 2-yr (5.6%) and 3-Yr (5.8%) view. 
  • Strong oligopoly position in Australia (along with three other major banks in CBA, ANZ, WBC).
  • Strong management team and Board. 
  • Macro environment to be both a tailwind and headwind –a rising interest rates environment to be both positive and negative in that while it will enable banks to charge more for loans, it also could result in deterioration in asset quality, slower loan growth, as well as higher inflation and wage growth to be detrimental to costs expense. 
  • Well capitalized after the capital raising. 
  • Though management has been cautioned to expect cost to increase, highlight NAB’s strong franchise model with management capable of improving below a 40% cost to income ratio (however do not factor in management’s long-term target of 35%).
  •  Potential pressure on net interest margins as competition intensifies with other major banks. Though these pressures are to slightly alleviate as it moves into a higher interest rate environment.
  •  Improving return on equity with management proving their abilities in recent times to manage profitability in a low interest rate environment. 
  • Strong provisioning coverage. 
  • A well-diversified loan book.

Key Risks

  • Impacts from Covid-19 are more severe than already provisioned for.
  • Low growth environment impacting earnings. 
  • Potential cuts or reduction to dividends due to low earnings growth. 
  • Intense competition for loan and deposit growth. 
  • Normalizing / increase in bad and doubtful debts or increase in provisioning. 
  • Funding pressure for deposits and wholesale funding (increased funding costs). 
  • Any legal fees, settlements, loss or penalties associated with ASIC or US-based law suits.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Cash earnings up +8.3% to $7,104m. Statutory net profit up +8.3% to $6,891m. Net interest margin (NIM) declined 6bps to 1.65%. 
  • Group Common Equity Tier 1 (CET1) ratio of 11.51%, down 149 bps from September 2021 mainly due to the impact of the on-market share buy-back in FY22 totalling $3.9bn (94 bps), and Citi consumer business acquisition (30 bps). Leverage ratio (APRA basis) was 5.1%. Liquidity coverage ratio (LCR) quarterly average of 137%. Net Stable Funding Ratio (NSFR) of 119%. 
  • The Board declared a fully franked final dividend of 78cps, up 5cps from the pcp, and brings full year dividend to 151cps, up +18.9%.
  • Business and Private Banking. Cash earnings of $3,013m, was up an impressive +21.5%, driven by higher revenue (on stronger volume growth and higher margins), and lower credit impairment charges, partly offset by higher operating expenses for additional bankers and resources to support growth, LanternPay acquisition and investment in technology. 
  •  Personal Banking. Cash earnings of $1,591m, declined -3.6%, mainly due to the impact on margins from intense home lending competition, a lower level of credit impairment writebacks, partly offset by lower operating costs. 
  • Corporate and Institutional Banking. Cash earnings of $1,628m improved an impressive +34.9% on higher revenue from strong volume growth and higher margins, and lower credit impairment charges. 
  • New Zealand Banking. Cash earnings of $1,403m was up +14.1% on higher revenue due to growth in volumes and higher margins, partly offset by higher credit impairment charges and operating expenses.

Company Description

National Australia Bank Limited (NAB) is one of Australia’s largest banks, with majority of their financial service businesses operating in Australia and New Zealand. The bank also has a presence in Asia, UK and the US. NAB offers banking services, credit and access card facilities, leasing, housing and general finance, international and investing banking, wealth and funds management, life insurance and custodian, trusts and nominee services.

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

PPT delivered strong earnings growth for FY22 with underlying PBT 19 percent yy

Investment Thesis

  • Trades below the valuation and represents >10% upside to current share price. 
  • PPT is a diversified business with earnings derived from trustee services, financial advice and funds management. 
  • PPT has an opportunity to increase FUM via its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity, whilst PPT continues to maintain FUM in Australia equities which is near maximum capacity. This equates to flattish earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds). 
  • Retail and institutional inflow of funds is expected to be solid especially from positive compulsory superannuation trend and flow from Perpetual Private. 
  • Potential for Perpetual Private to drive growth in funds under management and funds under advice. 
  • Cost improvements in Perpetual Private and Corporate Trust.

Key Risks

  • Any significant underperformance across funds.
  • Significant key man risk around key management or investment management personnel.
  • Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation. 
  • Average base management fee (bps) per annum (excluding performance fee) continues to be stable at ~70bps but there are risks to the downside from pressures on fees. 
  • More regulation and compliance costs associated with the provision of financial advice and Perpetual Private. 
  • Exposure to industry funds which are building in-house capabilities (~15-20% of total PPT funds under management).

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • The company entered into a binding Scheme Implementation Deed to acquire 100% of shares in Pendal Group, targeted to be implemented by late CY22/early CY23 and Pendal shareholders receiving 1 PPT share for every 7.50 Pendal shares plus $1.976 cash/Pendal share (implying an offer price of $6.54/Pendal share), with acquisition expected to;
  •  Realise $60m of annual pre-tax synergies within the first two years and deliver double digit EPS accretion for PPT in the 12 months post implementation, with one-off costs to achieve synergies of $110m phased with majority incurred over 18 months and other transaction costs of $40m.
  • Create greater scale with $1.4bn in revenue and ~$456m in UPBT driven by increased economies of scale, and combined AUM of >$201bn, covering Global, US, UK, European and Australian equities, Multi Asset and Cash and Fixed Income strategies, significantly improving market position and brand recognition. 
  • Expanded team with employees across 16 locations around the globe and enhanced global distribution network. Management expects to fund the cash component of the offer totalling $757m via a new debt facility, which will also re-finance Perpetual’s existing debt facility and include undrawn headroom for liquidity management purposes and expects pro forma leverage to be ~1.7x gross debt/pro forma EBITDA (~1.3x Net Debt/pro forma EBITDA) with de-leveraging occurring in year 3 post-implementation given the strong cash flow generation of the combined businesses with a clear pathway to 1.2x Gross Debt/pro forma EBITDA (~0.8x Net Debt).
  • The Board declared a fully franked final dividend of 97cps, resulting in a total dividend for the full year of 209cps, an increase of +16% y/y, representing a payout ratio of 80%, in line with company’s payout range of 60-90% UPAT on an annualised basis. 
  • ROE improved +44bps y/y to 16.2%.

Company Description

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core segments in (1) Perpetual Investments which is one of Australia’s largest investment managers; (2) Perpetual Private which is one of Australia’s premier high net worth advice business; and (3) Perpetual Corporate Trust which provides trustee services. PPT manages ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as at 30 June 2021).

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

SGM’s FY22 results were solid and driven by higher volumes and prices

Investment Thesis

  • Improvement in scrap prices across key regions. 
  • Cloud recycling could add significant earnings over the long run. 
  • Investment in improving scrap quality should improve SGM’s competitive position. 
  • Undemanding valuation relative to its own historical average and ASX200 Industrials Index. 
  • Self-help initiatives to support earnings. 
  • Improving Return on Capital (ROC). 
  • Current on-market share buyback. 

Key Risks

  • Significant downturn in global economy. 
  • Trade war between China and the U.S. escalates. 
  • Weaker scrap prices in key regions. 
  • Lower volumes. 
  • Regulatory changes – particularly around China’s anti-pollution policies. 
  • Cost pressures impacting group margins 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Underlying revenue of $9,264.4m was up +56.6%, driven by higher volumes and selling prices (ferrous and non-ferrous). Sales volumes of 8,106m tonnes, was up +12.2%. 
  • Underlying operating earnings (EBIT) of $756.1m was up +95.6% on pcp, driven predominantly by: strong contribution from SA Recycling, contributing the bulk of the $144.8m improvement in JV contribution; non-acquired growth in volumes contributed over $100m; and $307.8m in margin growth. Earnings growth was partially offset by $170.9m increase in organic metal costs. Underlying NPAT of $578.9m was up +103.8%. 
  • The Board declared a final dividend of 50cps (50% franked), bringing the full year dividend to 91.0cps, up +116.7% YoY. 
  • Return on productive assets (capital efficiency) improved by 16% to 39.0%. (5) Capital expenditure forecast for FY23 was increased – at the March Investor Day management estimated FY23 sustaining and environmental capex would be approximately $175m, however this has been increased to $220m due to higher spending on environmental and increased costs from inflation. 
  • North America Metal (NAM) sales revenue of $2,669.9m was up 66.8% driven by higher sales prices and sales volumes (up +17.7%). Intake also improved over the period and was higher than pre-Covid levels. Trading margin of $881.4m was up +55% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Segment underlying EBIT of $293.4m was up +114.2%. 
  • Australia & New Zealand Metal (ANZ) revenue of $1,694.4m was up +54.2% driven by +55.2% increase in average selling prices. Sales volumes were largely unchanged on pcp (-0.3% YoY). Trading margin of $423.1m was up +34.9%. Costs were up +16.5% and lower than NAM due to flat volumes. Segment EBIT of $186.9m was up +80.2%. 
  • UK Metal sales volumes were up +9.0% YoY and average selling prices up +47.3%, driving sales revenue growth of +60.6% YoY to $1,594.9m. Management noted that the Trading Margin of $234.6m was up only +23.9% “due to market structure and competitive dynamics, UK was not able to hold onto as much of the sales price increase as NAM or ANZ.” Segment underlying EBIT of $69.8m was up +52.7% on pcp. 
  • Sims Lifecycle Services reported revenue of $327m (up +2.5%) and underlying EBIT of $16.3m was down -25.2% driven by the 30% reduction in prices for units resold, driven by reduced manufacturing activity in China due to Covid lockdowns. 
  • SA Recycling reported sales volumes growth of +33.3%, sales revenue up +74.8% to $4,993.1m, trading margin of $1,520.1m up +69% and underlying EBIT (50% share) of $298.5m 

Company Description

Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.

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

W.R. Berkley and peers are experiencing a positive trend in underlying underwriting profitability

Business Strategy & Outlook

W.R. Berkley’s niche focus and strict underwriting discipline result in a business model that has historically earned outstanding returns during hard market pricing periods, but only slightly better than adequate returns during soft periods. In 2020, the pandemic negatively affected both the industry’s and W.R. Berkley’s results. However, losses in 2020 were very manageable and well within the range of historical events that the industry has successfully absorbed in the past. W.R. Berkley recognized losses roughly in line with peers. However, the picture for the future has brightened significantly. The pricing environment had not been particularly favorable for commercial lines in previous years, and W.R. Berkley had stayed cautious as a result. However, in 2019, pricing momentum picked up in primary lines, and this positive trend only accelerated in 2020. While higher pricing is necessary to some extent to offset some negative claims trends, pricing increases appear to be more than offsetting these factors. 

As a result, W.R. Berkley and peers are experiencing a positive trend in underlying underwriting profitability, and the company has been getting more aggressive. There is a potential for a truly hard pricing market, similar to what the industry saw in 2003. In this scenario, narrow-moat and highly disciplined operators such as W.R. Berkley would be positioned to earn very attractive returns. Starting in 2003, the company generated returns above 20% for five years. However, given that the industry remains well-capitalized, the magnitude and duration of excess returns will be lower than during that period. Still, as a result of these factors, W.R. Berkley will generate strong returns in the near term. More importantly, management’s approach will favor shareholders in the long run. 

Financial Strengths

W.R. Berkley’s equity/assets ratio of 21% at the end of 2021 is a bit below industry averages, but it is acceptable, given the nature of the company’s lines and the relative lack of catastrophe exposure. The current level is in line with the company’s historical average. W.R. Berkley’s investment portfolio is fairly typical for the industry, with most of the money invested in municipal bonds, corporate bonds and asset-backed securities. But W.R. Berkley shortened the duration of its portfolio in anticipation of a rise in interest rates and shifted its allocation toward investments that generate returns primarily through capital appreciation. The potential long-term upside to this tactic, this has increased near-term pressure on investment income and raises investment risk. Still, its investment portfolio is reasonably safe and this move is unlikely to have a material effect on valuation or the company’s financial health.

Bulls Say

  • The company’s reinsurance operations are a drag on overall results. 
  • The investment in international opportunities creates a point of uncertainty, and results to date have been merely adequate. 
  • During soft pricing periods, Berkley will struggle to earn meaningful excess returns, as it is unwilling to reduce staff.

Company Description

W.R. Berkley is an insurance holding company with a host of subsidiaries that primarily write commercial casualty insurance. The firm specializes in niche products that include various excess and surplus lines, workers’ compensation insurance, self-insurance consulting, reinsurance, and regional commercial lines for small and midsize businesses.

(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

Mizuho expanded its overseas business quite rapidly in the first half of the past decade

Business Strategy & Outlook

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and to remain so. A long-running deflationary environment in the country led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 56% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms’ business models. Mizuho expanded its overseas business quite rapidly in the first half of the past decade, with overseas loans rising from 12.6% of total loans in March 2011 to 29.4% by March 2016. Mizuho has since moderated the overseas growth in order to better manage risks and conserve capital, and overseas loans comprised 33.8% of total loans as of March 2022. Compared with its Japanese megabank rivals, which have taken control of local banks in the U.S. or Southeast Asia, Mizuho’s only such investment overseas is a 15% stake in Vietnam’s Vietcombank and a 7.5% stake in Vietnamese digital-payment firm M-Service. Almost all of its overseas operations are done through the main Mizuho entities (Mizuho Bank, Mizuho Trust, and Mizuho Securities). Mizuho also lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management alone for future returns. The need for massive expense reductions is thus even more important for Mizuho’s future profitability than it is for its two megabank rivals. However, the lack of existing businesses could ironically help Mizuho adapt more flexibly than its rivals if digitalization increasingly disrupts businesses such as credit card payments.

Financial Strengths

As of September 2022, Mizuho Financial Group’s common equity Tier 1 capital ratio was 11.4%, slightly below the average for global systemically important banks. Mizuho’s density of risk-weighted assets to total assets is also lower than that of many other G-SIBs, particularly those headquartered in the U.S., and its ratio of Tier 1 capital to total leverage exposure of 4.22% is well below the G-SIB average of around 6.0%. This presents a constraint on Mizuho’s ability to increase profits by expanding balance sheet size. Instead, the group has no choice but to improve efficiency with the current size of assets, or preferably with a smaller balance sheet. Mizuho’s liquidity coverage ratio of 126% compares with the G-SIB average of 134%. The LCR does not fully distinguish between currencies, and while Japanese banks’ yen liquidity is very strong, they depend on access to U.S. dollar funding for their large amount of U.S. dollar assets. Foreign-currency deposits of USD 227 billion covered 77% of Mizuho’s nonyen loans of USD 296 billion as of September 2022. For the remainder, Mizuho has issued large bonds in U.S. dollars and euros through the holding company, as well as bonds in CNY and AUD through Mizuho Bank.

Bulls Say

  • Mizuho has outlined aggressive cost-cutting plans that could surprise market expectations to the upside.
  • After years of system troubles and long delays in integrating its predecessor banks, Mizuho has left expectations at such a low level that there is room for upside surprise as long as the group just performs reasonably well.
  • Mizuho’s lack of a strong consumer finance or credit card business could ironically help it adapt more flexibly to disruptive innovation in this area.

Company Description

Mizuho Financial Group is roughly tied with megabank peer Sumitomo Mitsui Financial Group for the status as Japan’s second largest bank after Mitsubishi UFJ Financial Group. As of March 2021, Mizuho’s market share of domestic loans was 6.9%, compared with 7.0% for SMFG and 8.3% for MUFG. In Japan, Mizuho has more of a corporate focus than SMFG, which has a larger retail business. Its overseas weighting is slightly smaller than that of MUFG. Unlike its two Japanese megabank peers that own foreign banks outright or hold non controlling stakes in local banks overseas, Mizuho expanded in recent years beyond its traditional Japanese borrowers, mainly through its core banking and securities units, focusing on the financing needs of global multinational corporations.

(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

Home Depot should continue to capture sales growth, bolstered by an aging housing stock

Business Strategy & Outlook

Home Depot is the world’s largest home improvement retailer, on track to deliver $157 billion in revenue in 2022. It continues to benefit from healthy long-term housing dynamics and improvements in its merchandising and distribution network. The firm earns a wide economic moat rating due to its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying the modest margin expansion forecast. Its flexible distribution network will help elevate the firm’s brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above pre pandemic levels longer term, despite inflationary pressures. Home Depot should continue to capture sales growth, bolstered by an aging housing stock, a shortage in home inventory, and rising home prices, even when lapping robust COVID-19 demand. Other internal catalysts for topline growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (through the acquisition of HD Supply). 

Expansion of newer categories (like textiles from the Company Store acquisition) as well as existing ones (such as appliances) could also drive demand. Perpetual improvements in the omnichannel experience should support the firm’s competitive position, even as existing-home sales and turnover become more volatile. The commitment to better merchandising and an efficient supply chain has led the firm to achieve operating margins and adjusted returns on invested capital, including goodwill, of 15.2% and 34.9%, respectively, in 2021 (both quantitative peaks). Additionally, Home Depot’s focus on cross-selling products in both its DIY and its maintenance, repair, and operations channel should support stable pricing and volatility in the sales base, helping achieve further operating margin lift, with the metric remaining above 15% on average over the next decade.

Financial Strengths

Since the beginning of the pandemic, Home Depot has had no concerns tapping the credit markets. The company raised $5 billion in long-term debt in March 2020 to ensure it could weather COVID-19 without disruption, and raised another roughly $3 billion in the fourth quarter of 2020 to help facilitate the acquisition of HD Supply. In 2021, Home Depot issued another $3 billion in debt. This led the firm to end fiscal 2021 with a total debt load of around $40 billion and a debt/capital ratio of 1.04. There aren’t any concerns about near-term cash constraints as forward debt maturities are staggered, with just $1.2 billion of short and long-term debt maturing in the next 12 months (from Oct. 30, 2022). Moreover, EBIT is forecast to cover interest expense 15 times at the end of 2022. Strong free cash flow to equity that has averaged about 10% of sales over the past five years supports higher leverage, and the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s $25 billion in net property, plant, and equipment provides an asset base to secure more debt if necessary. Given Home Depot’s ability to generate tremendous free cash flow to equity, the management has no problem facilitating dividend payments and remaining near its long-term dividend payout ratio target of 55%. Given the outsize performance despite COVID-19, share repurchases will continue, with the new $15 billion share repurchase program authorized in August 2022.

Bulls Say

  • Home Depot’s focus on distribution and merchandising should increase productivity and grow domestic share in a stable housing market, helping stimulate sales and protect margins. 
  • The company has returned $67 billion to its shareholders through dividends and share buybacks over the past five years, above 20% of its market cap. Home Depot would be returning another $90 billion to shareholders over the next five years. 
  • The addressable MRO market is around $100 billion, and Interline and HD Supply make up a low-double-digit share, leaving meaningful upside up for grabs.

Company Description

Home Depot is the world’s largest home improvement specialty retailer, operating more than 2,300 warehouse-format stores offering more than 30,000 products in store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals. The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations business, which has been expanded through the tie-up with HD Supply (2020). The addition of the Company Store brought textile exposure to Home Depot’s lineup.

(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

Mizuho expanded its overseas business quite rapidly in the first half of the past decade

Business Strategy & Outlook

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and to remain so. A long-running deflationary environment in the country led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 56% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms’ business models. Mizuho expanded its overseas business quite rapidly in the first half of the past decade, with overseas loans rising from 12.6% of total loans in March 2011 to 29.4% by March 2016. Mizuho has since moderated the overseas growth in order to better manage risks and conserve capital, and overseas loans comprised 33.8% of total loans as of March 2022. Compared with its Japanese megabank rivals, which have taken control of local banks in the U.S. or Southeast Asia, Mizuho’s only such investment overseas is a 15% stake in Vietnam’s Vietcombank and a 7.5% stake in Vietnamese digital-payment firm M-Service. Almost all of its overseas operations are done through the main Mizuho entities (Mizuho Bank, Mizuho Trust, and Mizuho Securities). Mizuho also lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management alone for future returns. The need for massive expense reductions is thus even more important for Mizuho’s future profitability than it is for its two megabank rivals. However, the lack of existing businesses could ironically help Mizuho adapt more flexibly than its rivals if digitalization increasingly disrupts businesses such as credit card payments.

Financial Strengths

As of September 2022, Mizuho Financial Group’s common equity Tier 1 capital ratio was 11.4%, slightly below the average for global systemically important banks. Mizuho’s density of risk-weighted assets to total assets is also lower than that of many other G-SIBs, particularly those headquartered in the U.S., and its ratio of Tier 1 capital to total leverage exposure of 4.22% is well below the G-SIB average of around 6.0%. This presents a constraint on Mizuho’s ability to increase profits by expanding balance sheet size. Instead, the group has no choice but to improve efficiency with the current size of assets, or preferably with a smaller balance sheet. Mizuho’s liquidity coverage ratio of 126% compares with the G-SIB average of 134%. The LCR does not fully distinguish between currencies, and while Japanese banks’ yen liquidity is very strong, they depend on access to U.S. dollar funding for their large amount of U.S. dollar assets. Foreign-currency deposits of USD 227 billion covered 77% of Mizuho’s nonyen loans of USD 296 billion as of September 2022. For the remainder, Mizuho has issued large bonds in U.S. dollars and euros through the holding company, as well as bonds in CNY and AUD through Mizuho Bank.

Bulls Say

  • Mizuho has outlined aggressive cost-cutting plans that could surprise market expectations to the upside.
  • After years of system troubles and long delays in integrating its predecessor banks, Mizuho has left expectations at such a low level that there is room for upside surprise as long as the group just performs reasonably well.
  • Mizuho’s lack of a strong consumer finance or credit card business could ironically help it adapt more flexibly to disruptive innovation in this area.

Company Description

Mizuho Financial Group is roughly tied with megabank peer Sumitomo Mitsui Financial Group for the status as Japan’s second largest bank after Mitsubishi UFJ Financial Group. As of March 2021, Mizuho’s market share of domestic loans was 6.9%, compared with 7.0% for SMFG and 8.3% for MUFG. In Japan, Mizuho has more of a corporate focus than SMFG, which has a larger retail business. Its overseas weighting is slightly smaller than that of MUFG. Unlike its two Japanese megabank peers that own foreign banks outright or hold non controlling stakes in local banks overseas, Mizuho expanded in recent years beyond its traditional Japanese borrowers, mainly through its core banking and securities units, focusing on the financing needs of global multinational corporations.

(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

PPT will not be raising equity to fund any portion of the cash consideration

Investment Thesis

  • Trades below valuation and represents >10% upside to current share price. 
  • PPT is a diversified business with earnings derived from trustee services, financial advice and funds management. 
  • PPT has an opportunity to increase FUM via its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity, whilst PPT continues to maintain FUM in Australia equities which is near maximum capacity. This equates to flattish earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds). 
  • Retail and institutional inflow of funds is expected to be solid especially from positive compulsory superannuation trend and flow from Perpetual Private. 
  • Potential for Perpetual Private to drive growth in funds under management and funds under advice. 
  • Cost improvements in Perpetual Private and Corporate Trust.

Key Risks

  • Any significant underperformance across funds. 
  • Significant key man risk around key management or investment management personnel.
  • Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation. 
  • Average base management fee (bps) per annum (excluding performance fee) continues to be stable at ~70 bps but there are risks to the downside from pressures on fees. 
  • More regulation and compliance costs associated with the provision of financial advice and Perpetual Private. 
  • Exposure to industry funds which are building in-house capabilities (~15-20% of total PPT funds under management).

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • The company entered into a binding Scheme Implementation Deed to acquire 100% of shares in Pendal Group, targeted to be implemented by late CY22/early CY23 and Pendal shareholders receiving 1 PPT share for every 7.50 Pendal shares plus $1.976 cash/Pendal share (implying an offer price of $6.54/Pendal share), with acquisition expected.
  • Realise $60m of annual pre-tax synergies within the first two years and deliver double digit EPS accretion for PPT in the 12 months post implementation, with one-off costs to achieve synergies of $110m phased with majority incurred over 18 months and other transaction costs of $40m.
  • Create greater scale with $1.4bn in revenue and ~$456m in UPBT driven by increased economies of scale, and combined AUM of >$201bn, covering Global, US, UK, European and Australian equities, Multi Asset and Cash and Fixed Income strategies, significantly improving market position and brand recognition.
  • Expanded team with employees across 16 locations around the globe and enhanced global distribution network. Management expects to fund the cash component of the offer totalling $757m via a new debt facility, which will also re-finance Perpetual’s existing debt facility and include undrawn headroom for liquidity management purposes and expects pro forma leverage to be ~1.7x gross debt/pro forma EBITDA (~1.3x Net Debt/pro forma EBITDA) with de-leveraging occurring in year 3 post-implementation given the strong cash flow generation of the combined businesses with a clear pathway to 1.2x Gross Debt/pro forma EBITDA (~0.8x Net Debt)
  • The Board declared a fully franked final dividend of 97cps, resulting in a total dividend for the full year of 209cps, an increase of +16% y/y, representing a payout ratio of 80%, in line with company’s payout range of 60-90% UPAT on an annualised basis. 
  • ROE improved +44bps y/y to 16.2%

Company Description

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core segments in (1) Perpetual Investments which is one of Australia’s largest investment managers; (2) Perpetual Private which is one of Australia’s premier high net worth advice business; and (3) Perpetual Corporate Trust which provides trustee services. PPT manages ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as at 30 June 2021).

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

PTM saw FY22 revenue decline -26.4% yy to $232.8m primarily due to -6.1% yy decline in fee revenue

Investment Thesis

  • Trades on an attractive dividend yield. 
  • PTM is in a position to attract net inflows as value-oriented strategies may make a sustained comeback. 
  • There’s further pressure on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becomes more of the norm). 
  • Change in management or investment management team. 
  • Industry consolidation could benefit PTM (potential M&A target). 

Key Risks

  • Any significant outperformance across funds. 
  • Kerr Neilson’s departure from the Board could be disruptive. 
  • Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation. 
  • There are earnings risks to the downside from pressures on fees. 
  • Emergence of industry funds who are building in-house capabilities. 
  • PTM’s investment style becomes out of favour. 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Total revenue declined -26.4% y/y to $232.8m, as fee revenue decreased -6.1% y/y to $252.7m, with -7.2% y/y decline in management fees (excluding performance fees) amid -8.5% y/y decline in average FUM to $21.4bn, partially offset by +67.5% y/y increase in performance fees to $6.7m, primarily from absolute return mandates and Asia strategy driven largely by the benefit of downside protection provided by short positions, and the company incurred $20.4m unrealised losses on seed investments vs $46.7m profit in pcp.
  • Expenses increased +4.7% y/y to $86.1m, primarily driven by +3.9% y/y increase in staff costs reflecting increase in share-based payment expenses due to additional deferred equity granted to employees, and +16.7% increase in business development expenses which included the launch of the Platinum Investment Bond product (and its direct-to-market proposition) and associated new campaigns, the growth in social media advertising, and third-party distribution costs.
  • Underlying NPAT, which excludes gains and losses on seed investments (net of tax), declined -10.9% y/y to $118.2m.
  • FUM declined -22.6% y/y to $18.2bn, driven by negative investment performance of $2.2bn, net fund outflows of $2.2bn and the net distribution paid to investors of $0.9bn. 
  • The Board declared fully franked final dividend of 7cps, down -42% y/y, equating to ~9.8% annualized yield, taking full year dividend to fully franked 17cps, down -29% y/y. 
  • The Board extended its on-market share buyback for upto 10% of issued share capital for further period of upto 12-months, commencing from 4th October 2022, intending to buy shares should the Board determine that PTM’s share price is trading at a significant discount to its underlying value. 

Company Description

Platinum Asset Management (PTM) is an ASX-listed, Australian based fund manager which specializes in investing in international equities. PTM currently manages ~A$18.2bn.

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