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

Vivendi Looks to Canal+ and Havas for Growth with Further M&A on the Horizon

Business Strategy & Outlook:

Vivendi’s transformation into a pure-play media firm, completed in 2014, left it with two primary business units: Canal+, the largest pay-TV company in France, and Universal Music Group, the largest global music label. However, controlling shareholder Vincent Bollore has dragged Vivendi back to its inglorious past as a conglomerate, exemplified by the purchases of Havas, the world’s sixth-largest ad agency holding company, and Editis, a French-language book publisher. Bollore also led the spinout of UMG, the firm’s crown jewel, in September 2021 with Vivendi holding on to a 10% stake in the music label. As a result of the UMG transaction, Canal+ is now the largest segment for Vivendi, representing 60% of revenue. While Canal+ appears to be returning to growth after years of decline, the core French pay-TV business remains a drag on growth. The growth for Canal+ will continue be driven by overseas operations via subscriber growth and new country launches. 

Canal+ is attempting to transition from a traditional pay-TV business to a content aggregator. Companies that depend heavily on buying or aggregating content from other creators may find themselves squeezed, particularly in markets with multiple aggregators. Now the second-largest segment with roughly 25% of revenue, Havas is heavily leveraged to Europe and North America, which account for over 80% of revenue. Havas competes against larger players in these regions; the only GDP-level growth in these mature markets and further expansion into Asia-Pacific and Latin America, largely via acquisitions of local agencies. Editis now generates roughly 10% of total revenue for Vivendi. The firm is the second-largest French-language publishing group, with 50 publishing houses covering everything from children’s books to popular literature to dictionaries to manga. 

Financial Strengths:

While Vivendi has done an admirable job of cleaning up the mess from the early 2000s, it remains in flux in terms of how to use its cash and where it invests. The large number of divestitures, including the sale of 30% of Universal Music, over the last few years has left the company with a net debt position of only $1.9 billion as of June 2021. However, management continues to use cash to buy stakes in firms in peripheral industries such as the Telecom Italia and Mediaset. The firm will look for additional acquisitions over time to releverage the balance sheet. The firm shall rush into an acquisition and overpay for it.

Bulls Say:

  • The spinout of Universal Music Group should reduce the conglomerate discount that has plagued the stock.
  • StudioCanal is a leading studio that benefits from the increased global demand for French-language original content.
  • Vivendi will return much of the cash from the UMG sale to shareholders via special dividends.

Company Description:

Vivendi’s transformation into a pure-play media firm was completed in 2014, but recent acquisitions and the spinout of Universal Music Group have again changed the firm. The company now operates multiple divisions with one very large core segment: Canal+, a leading producer and distributor of film and TV content in France, produces over 80% of revenue. It also owns Havas, the world’s sixth-largest ad agency holding company; Editis, a French-language book publisher; Gameloft, a mobile game publisher; and minority stakes in multiple companies in Europe.

(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

Kering SA: Online Penetration is growing at a solid pace

Investment Thesis:

  • Solid momentum in the core Gucci brand, aside from the disruption caused by the Coronavirus. 
  • Sales momentum will be assisted once international tourism returns. 
  • Leveraged to increasing consumer consumption in Asia (China, India). 
  • Leveraged to tourism flows (international travel) as consumers seek out experiences. 
  • New upcoming brands.
  • Strong cash flow generation and solid dividend yield.
  • Strong balance sheet, which provides the Company flexibility.  
  • Key cornerstone investor (Pinault Family) provides stability in the share register.  

Key Risks:

  • Adverse currency movements, especially EUR strength against the U.S. dollar (USD) and Chinese Renminbi (RMB). 
  • Increased competition from existing players and new emerging brands. 
  • Key brands – Gucci (>70% of revenue), Saint Laurent (>10% of revenue), Bottega (>5% of revenue) – cease to resonate with consumers and growth halts. 
  • Value destructive acquisition of brand(s). 
  • Macro-economic conditions globally deterioration, impacting consumer spending and less tourism movements (i.e. travelers overseas).
  • Geopolitical tensions among regions restricting funds & tourists flow or a breakout of health epidemic impacting tourists flow in Europe / Asia. 
  • Significant change at the senior management level (divisional CEOs or Creative Director).  
  • Significant changes with the key cornerstone investor (leading to influence on long-term company strategy or shareholder outcomes). 
     

Key Highlights:

  • Revenue increased +34.7% over pcp (+35% on a comparable basis with North America up +76%, APAC up +33%, Japan up +21%, Western Europe up +10% and Rest of the World up +48%) and +13% over pre-Covid FY19 to €17,645.2m, driven by outstanding performances from all Houses, which generated revenue of €17,019m, up +34.3% over pcp (+34.9% on a comparable basis).
  • Recurring operating income rose sharply, up +60% over pcp (up +5% over FY19) to reach a new record €5,017.2m, with margin improving +450bps over pcp (down -170bps over FY19) to 28.4%, with recurring operating income from the Houses up +53.7% over pcp to €5,175.3m with margin expanding +380bps to 30.4% despite all Houses continuing to invest significantly in their operations.
  • Capital management – using strong cashflow to deleverage the balance sheet and increase shareholder returns. The Company delivered +87.6% YoY growth in FCF to €3.9bn which combined with proceeds from the disposal of an additional 5.9% in Puma (stake is now ~4%, covering the exchangeable bond due in 2022), saw management reduce net debt by -92.2% over pcp to €168m (debt/equity down -16.6% to 1.2%), resume share-buyback to repurchase 0.7% of shares for €540m (1.3% remaining with second tranche to cover 0.5% and expected to be completed by 26th April 2022), increase dividends by +50% over pcp to €12 and reinforce KER’s eyewear portfolio with the acquisition of LINDBERG.
  • Online penetration is growing at a solid pace. The Company saw online sales continue to grow at an solid pace, up +55% over pcp, leading to a doubling of the online channel’s penetration rate in two years, and now accounting for 15% of total sales in the retail (23% North America, 26% Western Europe, 7% APAC and 5% Japan), as management continued to drive brand engagement with the upcoming generations of luxury shoppers and target new customers through the metaverse by Balenciaga’s appearance on Fortnite and Gucci leveraging a presence on Roblox gaming platform, apart from successful internalization of all brand.com sites, which allows the Company to use e-concession only if complements KER’s own sites and control all the key elements of presence.
  • Outlook – management hints towards price increases and M&A activity. Though no specific guidance was provided for FY22, management flagged Gucci (which increased prices twice in 2020 and in 2021) along with KER’s other labels would again raise prices in a “targeted manner” in the year and pointed towards potential acquisitions to expand the Company’s footprint and bolster jewellery offering, which management believes has high potential.

Company Description:

Kering (KER), listed on the Euronext Paris (Paris stock market), is a global luxury group made up of iconic brands in Fashion, Leather Goods, Jewellery and Watches. The Company designs, manufactures and markets its goods globally. The group’s core brands are Gucci, Saint Laurent and Bottega Veneta. 

(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

Pandemic-Driven Home Improvement Trend Pushes Demand Forward for Kingfisher; Shares are Undervalued

price of btc is going to breakout

Business Strategy & Outlook:

Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base. Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity.

With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.

Financial Strengths: 

Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus. Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance.

Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.

Bulls Say:

  • Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U.K. and France, as well as people spending more time indoors during the pandemic.
  • Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations.
  • As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.

Company Description:

Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Watsco to continue executing its buy and build strategy to outperform market growth

Business Strategy and Outlook

Watsco is the largest player in the fragmented heating, ventilation, air-conditioning, and refrigeration distribution industry with low-double-digit percentage market share. The company predominantly operates in the United States (approximately 90% of revenue) with an outsize presence in the Sunbelt states. Since entering the HVACR distribution market in 1989, Watsco has operated a “buy and build” strategy and has completed over 60 acquisitions that have expanded the company’s geographic footprint and product assortment. Watsco’s acquisition strategy has primarily targeted smaller family-owned businesses. The firm also operates three joint venture partnerships with narrow-moat-rated HVAC manufacturer Carrier. These JVs account for approximately 60% of consolidated revenue, and the relationship grants Watsco exclusive distribution rights for Carrier products across select regions of the U.S. 

According to the Air-Conditioning, Heating, and Refrigeration Institute, shipments of air-conditioners and furnaces in the U.S. have grown at about a 6% compound annual rate since the 2009 housing crisis trough. Over the same period, Watsco increased its top line at about a 10.5% CAGR, driven by about 5% average same-store sales growth and 5.5% average growth from acquisitions (including the formation of Carrier JVs). 

Residential HVAC demand (along with repair and remodel spending) soared during the pandemic, driven by more time spent at home and increased discretionary income. Strong pricing power for HVAC manufacturers and distributors accompanied the robust demand environment. Fiscal 2021 was an excellent year for Watsco with over 20% year-over-year revenue growth and record operating margin (10% compared with the 8% 10-year average). However, it is unlikely this performance is maintainable over the long run. Despite upcoming regulatory tailwinds, it is anticipated to see only modest HVAC shipment growth over the next 10 years (using 2021 as the base year) as the replacement cycle matures. Nevertheless, it is alleged Watsco will continue to execute its buy and build strategy to outperform market growth.

Financial Strength

Watsco has a perennially strong balance sheet as the firm has historically operated with very low financial leverage. While Watsco generates sufficient operating cash flow to reinvest in organic growth opportunities and acquisitions and return capital to shareholders, the firm does have an unsecured revolving credit facility that it uses to fund its capital allocation outlays. Nevertheless, Watsco’s net debt/EBITDA ratio averaged less than 0.5 during the last 10 years. It is held management will continue to operate with a conservative balance sheet for the foreseeable future.

Bulls Say’s

  • Watsco will continue to effectively employ its “buy and build” strategy to consolidate the HVAC distribution market and compound cash flow. 
  • Watsco serves end markets with attractive long-term growth prospects driven by an undersupplied U.S. housing stock, structurally higher R&R spending, and favorable regulatory changes (for example, energy efficiency standards). 
  • Watsco’s investments in digital technology have differentiated the firm from its competition.

Company Profile 

Watsco is the largest heating, ventilation, air-conditioning, and refrigeration products distributor in North America. The company primarily operates in the United States (90% of 2021 revenue) with significant exposure in the Sunbelt states. Watsco also has operations in Canada (6% of sales) and Latin America and the Caribbean (4% of sales). The company’s customer base consists of more than 120,000 dealers and contractors that serve the replacement and new construction HVACR markets for residential and light commercial applications. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

More Questions Than Answers in Perpetual’s Offer for Pendal

Business Strategy and Outlook

Perpetual has three business offerings: as an asset manager, a private wealth advisor, and a corporate trust service provider. Acquisitions form part of the group’s strategy to build scale and expand its products and services.  Product, channel, and geographic diversification is a key focus for the investments business. It is executing this by mainly acquiring fund managers. This follows a history of subpar performance in its Australian investments business and its inability to grow organically. Recent acquisitions of Barrow Hanley and Trillium expand its addressable market and add to its asset class offerings. Priorities include growing its distribution offshore, expanding its clientele, and broadening its product suite. 

The private wealth business caters to the established wealthy, medical professionals, business owners, family offices, and aged care providers. It increases the value added to clients by providing a variety of services beyond financial planning. These capabilities are propped up by acquisitions. The Fordham acquisition is one example, where it allows Perpetual to extend accounting services to its clients. In return, its acquirers also act as referrers of new business.  The corporate trust business provides outsourced responsible entity, custodial, and trustee services to debt capital markets as well as to managed funds. Ongoing agendas include acquisitions to add scale–in the process allowing it to further lower its pricing–as well as the provision of value-added services such as data and analytic solutions to help increase the stickiness of its client base. 

The management’s initiatives are projected to revive growth in earnings and economic returns in the medium term. With increased investment, both Barrow Hanley and Trillium should offset outflows from Perpetual’s Australian equity funds and help grow fee revenue. The moatworthy private wealth and corporate trust businesses are also strong drivers of earnings growth: The former is positioned to gain market share in the domestic financial advice industry, while the latter benefits from growing securitisation volume and increasing demand for outsourced responsible entity services.

Financial Strength

Perpetual is currently in reasonable financial health with a modestly geared balance sheet. Perpetual has about AUD 248 million of debt as at Dec. 31, 2021. It has a gearing ratio (debt/[debt plus equity]) of 21.5% at the end of the period, below its stated target gearing of 30%. A gross debt/EBITDA ratio of 0.8 times is forecasted in fiscal 2022. Perpetual has stated it expects to reduce the gross debt/EBITDA to zero within five years following the acquisition of Barrow Hanley, which was completed in November 2020. Perpetual has revised its dividend payout ratio to 60%-90% of underlying profit after tax, in line with its focus on acquisitive growth. Although it is preferred that the firm maintains a balanced payout ratio, free cash flow is estimated to be sufficient to cover dividends even at a 90% payout ratio, in the absence of sizable acquisitions.

Bulls Say’s

  • New acquisitions, such as Trillium and Barrow Hanley, materially improve Perpetual’s growth prospects. There is potential for upside from increased reinvestment, which should help revive net inflows. 
  • The private wealth and trust segments benefit from tailwinds such as growth in the high-net-worth client space, as well as progressive increases in securitisation volume following the 2008 financial crisis. 
  • Large scale of FUMA and relatively low capital requirements provide recurring revenue streams and support strong returns on capital and positive free cash flows.

Company Profile 

Perpetual is one of Australia’s oldest financial services firms, founded in 1886. It has three operating segments, with the investments business being the main earnings generator. It mainly employs an active value style in managing listed assets. Perpetual also provides financial planning services to high-net-worth clients via its private segment. In its trust segment, it provides outsourced responsible entity services to funds, as well as custodial and trustee services in the debt capital markets, particularly in securitisation issuances.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Medibank Expected To Protect High Returns on Equity Rather Than Chase Growth

Business Strategy and Outlook

Medibank is Australia’s largest private health insurer operating under the Medibank and ahm brands. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. Government policy settings are expected, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

It is believed that Medibank’s current strategy, which has seen growth in policyholder numbers and margins, should see the positive trends continue. Initiatives included increasing the number of service providers where individuals pay no-gap, introducing reward programs (such as discounts) for members, investing in the digital offering to make claim lodgment easier, adding tools and resources such as 24/7 nurse teleservice, and a new focus on in-home care. To help support margins there has also been a renewed focus on claim costs. Medibank secured audit rights with hospitals which allows the insurer to investigate where rehabilitation referrals of a hospital exceed industry averages and expanded efforts to identify errors in claims made by hospitals.

Despite larger players generating respectable return 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 the least a pull-back in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission.

Financial Strength

In a debt-free position Medibank is in sound financial health. The insurer is projected to fund long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range.Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021.

Bulls Say’s

  • Industry growth is tied to a steadily increasing population, ageing demographics and the rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs. 
  • Premium growth is generally tied to the increasing cost of healthcare. 
  • The symbiotic relationship with the private hospital operators and buyer power over general practitioners is a key strength of Medibank’s business model. The majority of private hospital income is paid by the insurers.

Company Profile 

Previously owned by the Australian government, Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.8 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Self-help measures planned to optimize Kingfisher’s store footprint

Business Strategy and Outlook

Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base. 

Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity. 

With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.

Financial Strength

Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus.Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance. Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.

Bulls Say’s

  • Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U. K. and France, as well as people spending more time indoors during the pandemic. 
  • Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations. 
  • As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.

Company Profile 

Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

It is alleged the acquisition of Suez will be significantly value-accretive for Veolia

Business Strategy and Outlook

Veolia Environment is the world’s largest water company. Treatment and distribution of water accounts for 30% of the group’s revenue. In France, where Veolia is the historical leader, the business has been affected by a wave of contract renewals since 2010, which reduced profitability. Still, the indexation of those contracts to inflation should support earnings if high inflation persists. 

Veolia’s waste management accounts for 40% of turnover. This business is more cyclical and was hit by economic crises in Europe over 2009-13. Since 2015, the economic recovery in Europe has boosted waste volumes and enhanced margins. The group intends to increase the profitability and structural growth of this division by expanding exposure to hazardous waste treatment, which exhibits efficient scale. Veolia’s third main business is energy. This business makes up 20% of the turnover and encompasses energy services, heating and cooling networks, and electricity. This is more defensive than waste management. However, the weight of municipal clients limits pricing power.

In April 2021, Veolia and historical rival Suez reached a merger agreement after seven months of fierce battles for the former to acquire the 71.1% it did not hold in the latter at EUR 19.85 per share in January 2022. Veolia agreed to relinquish activities representing EUR 7 billion or 40% of Suez turnover and EUR 1.2 billion of EBITDA comprising French waste and water businesses and some international water activities like in Italy or Morocco. Importantly, Veolia managed to seize all the assets it’s deemed strategic: water activities in Spain and Chile (Agbar), the U.S. regulated water business and waste activities in the U.K. and Australia. Despite the high price paid, it is alleged the acquisition of Suez will be significantly value-accretive for Veolia thanks to the high amount of synergies. The European Commission cleared the deal on Dec. 14, 2021, conditional on remedies representing around EUR 0.3 billion of turnover. The last antitrust issue is the U.K. where the CMA is conducting an investigation that might lead to a disposal of some of the local waste assets acquired from Suez.

Financial Strength

Veolia’s standalone net debt decreased from EUR 13.2 billion in 2020 to EUR 9.5 billion at the end of 2021. This drop was notably driven by a EUR 2.5 billion rights issue in October 2021 and the issuance of EUR 0.5 billion of hybrid bonds accounted as equity to fund the acquisition of Suez which was completed in January 2022. On a proforma basis, net debt amounted to EUR 18.2 billion at year-end 2021. In 2022, projections are done on pro forma net debt to decrease to EUR 17.14 billion as the EUR 9 billion cash outflows dedicated to the tender offer for 71% of Suez shares not held by Veolia in January are more than offset by the EUR 10.4 billion disposals of Suez assets that Veolia agreed to relinquish to a consortium formed by GIP, Merdiam, Caisse des Depots and CNP Assurances. Experts’ 2022 net debt estimate implies a net debt/EBITDA ratio of 2.7, below the group’s guidance of around 3 times. Beyond 2022, it is foreseen the leverage ratio to decrease to 1.7 in 2026 on EBITDA growth notably fuelled by the achievement of the EUR 0.5 billion synergies. Analysts forecast dividend to grow by 14.9% per year on average between 2021 and 2026, in line with the current income growth, as targeted by the group. This points to a 2026 dividend of EUR 2, twice as higher as the EUR 1 paid on 2021 results.

Bulls Say’s

  • The acquisition of Suez will be significantly value accretive for Veolia thanks to high synergies despite the high price paid. To get the comparable international assets through bolt-on acquisitions would have been much more costly. 
  • Inflation is positive for Veolia thanks to the indexation of 70% of its contracts, the ability to pass through cost increases in other contracts and the long position in electricity and recycled materials. 
  • Increasing exposure to hazardous waste will structurally increase the group’s margins and returns on invested capital.

Company Profile 

Veolia is the largest water company globally and a leading player in France. It is also involved in waste management with a significant exposure to France, the United Kingdom, Germany, the United States, and Australia. The third pillar of the group is energy services, giving the group significant exposure to Central Europe. Veolia started to refocus its activities in 2011, leading to the exit of almost half of its countries and of its transport activity, which should be completed within the next few years. 

(Source: MorningStar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Global Markets

Inghams Group – The Board declared a fully franked Dividend of 6.5 cps, in line with the pcp, and Equates to Payout Ratio of 60.9%

Investment Thesis:

  • Trading on undemanding multiples and below our valuation. 
  • Potential for an improvement in the pricing environment. 
  • Quality management team who has managed disruptions for the Covid-19 pandemic well. 
  • Quality assets and operates as Australia and New Zealand’s largest integrated poultry producer.
  • Project Accelerate has proven successful in driving automation and labour productivity, which supports earnings uplift despite decrease in revenue.  
  • Procurement initiatives implemented with benefits in line with expectation.
  • Investing to increase capacity and capability across the business in Australia and New Zealand plants.
  • Capital management initiatives are possible with a strong balance sheet.

Key Risks:

  • Re-negotiation of key contracts with large customers on unfavourable terms. 
  • Increase in feed and electricity costs, which may be pushed to customers through market price increases, reducing competitiveness. 
  • No news on the appointment of a new CEO creates uncertainty. 
  • Customer concentration risk in QSR (Quick Service Restaurants) and Supermarkets. 
  • Susceptible to exotic disease breakouts, impacting ING’s ability to supply poultry products. 
  • Significant reduction in volume and quality from parent stock supplier.
  • Material interruptions to ING’s complex and interlinked supply chain.

Key Highlights:

  • Group core poultry sales volumes grew +5.6%, driven by strong volume growth of +6.5% in Australia.
  • Statutory EBITDA of $220.4m, and Underlying EBITDA of $222.4m, was up +2.2% and +1.7%, respectively.
  • Statutory NPAT of $38.4m, up +8.8% and Underlying NPAT of $39.7m, up +5.9%
  • Cash flow from operations of $186.6m, was up +4.7%. Cash conversion ratio of 83.5% reflects seasonal working capital cycle and in-line with the pcp.
  • ING retained a solid balance sheet with net debt of $264.6m and leverage of 1.3x, a significant reduction from 1.7x in the pcp.
  • Total capital expenditure of $24.0m was lower than the pcp, reflecting completion of hatchery projects, ongoing project disruptions caused by Covid-19 lockdowns and delays in equipment being shipped.
  • The Board declared a fully franked dividend of 6.5 cps, in line with the pcp, and equates to payout ratio of 60.9% of Underlying NPAT post AASB 16 adjustments, which is at the lower end of ING’s 60 – 80% target range.
  • In Australia segment, Core poultry volumes grew +6.5% to 203.4kt, despite Covid-19 lockdowns and challenging market conditions. Revenue grew +1.9% driven by core poultry revenue growth of +2.2%, which grew despite weak pricing across the Wholesale channel due to excess supply, partially offset by feed revenue, declining -2.0% as customers transition supply away in preparation for closure of the ING’s WA Feedmill. Underlying EBITDA declined -0.3% to $185.1m, reflecting a lower Intercompany royalty charge, reduced by $3.2m.
  • In New Zealand segment, Core poultry volumes were flat at 33.7kt, as Covid-19 lockdowns were reintroduced. Core poultry revenue increased +3.6%, due to price increases applied across all channels to help offset higher feed costs and inflationary pressures related to supply chain disruption. Underlying EBITDA of $19.1m increased $3.3m versus the pcp, with the change to intercompany royalty charge accounting for $3.2m.

Company Description:

Inghams Group Ltd (ING) is Australia and New Zealand’s largest integrated poultry producer. The Company produces and sells chicken, turkey and stock feed that is used by the poultry, pig, dairy and equine industries. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Chorus posted solid 1H22 Results; Dividend guidelines increased and announced share buyback

Investment Thesis 

  • CNU trades on a dividend yield of ~4.7%.
  • Once UFB capex and capex on fiber network significantly fades, CNU is very cash generative and its capex will revert to maintenance spend.
  • Significant barriers to entry with high capex required for new competitors.
  • Benefits from population growth (i.e. potential for more connections) and increasing bandwidth requirements from trends such as end-users watching TV on the internet or increasing content on the internet. 
  • Fiber remains the best possible broadband product and has become the preferred broadband product of choice for customers. CNU announced in January 2017 that CNU reached an agreement with the government to take fiber to ~200,000 more customers (on top of the 1.1m already planned for first year UFB roll-out). CNU commenced UFB2 rollout in July 2017, which is expected to complete around December 2024. This would result in high penetration with ~85% of NZ population with access to fiber by 2024. The NZ government provided an additional up to ~NZ$291m in funding (whereas other fiber companies received ~NZ$16m in funding to extend fiber to ~33k more premises).

Key Risks

  • Potential changes to management and strategy with new incoming Kate McKenzie.
  • Increasing prevalence in usage of wireless networks over fiber networks, especially in regional NZ, where there is either poor or no broadband coverage.
  • Any capital expenditure blowout.
  • Network outages or reliability issues.
  • Regulatory risk. 

1H22 Results Highlights Relative to the pcp: 

  • Revenues increased +1% to $483m largely due to gains from ongoing network optimisation programme. 
  • Operating expenses declined -9.3% to $136m amid ongoing focus on reducing discretionary costs and decline in some expense lines due to Covid-19 restrictions. 
  • EBITDA increased +5.8% to $347m, which combined with +2.4% increase in D&A expense amid growth in network asset base and -7.8% decline in interest costs due to the refinancing of debt at lower rates in 1H21 (weighted average effective interest rate declined -30bps to 3.7%) delivered NPAT of $42m, up +55.6%. 
  • Capex declined -25.5% to $263m with fibre remaining the dominant category of spend at 85% and copper related expenditure continuing to trend downwards. 
  • Credit metrics improved with net debt to EBITDA declining to 4.03x from 4.24x at 1H21, and well within bank covenants (financial covenants require senior debt ratio to be no greater than 4.75x) and BBB/Baa2 rating by S&P/Moody.

Dividend guidance increased + share buyback announced

Given the finalisation of crucial inputs by Commerce Commission for the new regulatory framework together with the subsequent increase in credit thresholds for CNU by ratings agencies (Moody’s and S&P recognise that the new regulatory regime now provides CNU with some certainty over the revenues that can be earned from the fibre network), management upgraded their FY22 dividend guidance by +34.6% to 35cps and forecast FY23 dividend to be a minimum of 40cps and the FY24 dividend a minimum of 45cps. CNU also announced a share buyback of up to $150m (might be suspended if management identifies more accretive opportunities for shareholder value to be realised). 

Company Profile

Chorus Ltd (CNU) is a dual-listed (ASX and NSX) wholesale and retail telecommunications company based in New Zealand. CNU maintains and builds the Chorus local access network made up of local telephone exchanges, cabinets and copper and fiber cables throughout New Zealand.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.