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.

Categories
Dividend Stocks

Calendar 2021 Guidance Met and Cash Can Now Begin to Flow Again for Cimic

Business Strategy and Outlook

Cimic has developed the ability, reputation, and balance sheet strength to undertake numerous large-scale contract mining and construction projects simultaneously and in different countries. Few companies, apart from Cimic, in the domestic contract mining and construction market have the reputation, skill, knowledge, or capability to undertake challenging megascale mining and infrastructure projects. But excess returns of the recent past look to be a function of the China-driven commodities boom.

Cimic’s annual operating revenue is split 60%-65% engineering and construction work, 20%-25% contract mining and 10%-15% services and property development work. Cimic’s contract mining business is highly capital-intensive but inherently lower risk than construction. Domestic and international mining contracts are normally schedule-of-rates style, with Cimic assuming risk on productivity and volumes. Cimic lowers operating risk on contract mining work by mainly undertaking open-cut mining at coal and iron ore sites with quality deposits for large resource companies. However, competition can be fierce for new contract mining work and renewals.

Financial Strength

Cimic is in strong financial health. The company finished December 2021 with AUD 502 million in net debt, leverage (ND/(ND+E)) of 32% and net debt to EBITDA a comfortable 0.6. The company sold a 50% stake in its Thiess mining contracting business to the U.K.’s Elliot in 2020, the transaction generating AUD 2.1 billion net cash proceeds. Cimic’s capital intensity is tempered with exposure to the equipment heavy mining contracting sector lessened. This should enhance the rate of cash conversion in future. 

In addition to the cash proceeds, the Thiess sell-down reduces Cimic’s lease liability balance by approximately AUD 500 million. Net operating cash flow exceeded AUD 1.0 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years. But net operating cash flow fell to AUD 927 million in 2019, not helped by one-off BIC Contracting exit costs in the Middle East and has been negative through to June 2021 due to COVID-19 and unwind in factoring. Traditionally, the company has a strong balance sheet and cash flow, which provides the necessary flexibility to tender for large infrastructure and mining contract projects. 

Bulls Say’s

  • Cimic could remain under pressure due to slower demand for mining services. Mining construction often involves higher levels of risk, as a result of fixed-price, fixed-time, and long-duration contracts. 
  • Cimic’s CEO was confidently forecasting strong earnings before COVID-19 led to an about-face and withdrawal of guidance. But Cimic says it is now building positive cash flow momentum again with awarding of new work. 
  • Increased focus on infrastructure construction projects and maintenance has helped stabilise earnings during weak market conditions for the domestic mining and energy sectors.

Company Profile 

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 76% of Cimic.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

Glaxo’s Diverse Portfolio Looks Poised to Support Steady Earnings Growth Over the Long Term

Business Strategy and Outlook:

As one of the largest pharmaceutical companies, GlaxoSmithKline has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product line up and expansive list of patent-protected drugs create a wide economic moat, in our opinion. The magnitude of Glaxo’s reach is evidenced by a product portfolio that spans several therapeutic classes as well as vaccines and consumer goods. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. Glaxo is expected to be a major competitor in respiratory, HIV, and vaccines over the next decade.

On the pipeline front, Glaxo has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and immune system, with genetic data to help develop the next generation of drugs. The benefits of this strategies are showing up in Glaxo’s early-stage drugs. This focus is expected to improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers.

Financial Strength:

Glaxo remains on fairly stable financial footing, with debt/EBITDA at 2.8 as of the end of 2021. While the company carries more debt than several of its peers, it generates relatively strong cash flows that should be largely stable. Glaxo has relatively higher debt levels than its peer group, and analysts don’t expect a major acquisition, but several smaller tuck-in acquisitions are likely as the firm augments its internal research and development efforts. Additionally, with the expected divestment of the consumer division in 2021, the combined dividend of the newly separated consumer group and the remaining pharma group are expected to be lower than the current dividend of the combined company as Glaxo has signalled a desire to invest more into the business at the expense of the dividend.

Bulls Say:

  • Glaxo’s next-generation respiratory drugs and HIV drugs look poised for strong growth over the next five years. 
  • Glaxo faces relatively minor near-term patent losses, setting up steady long-term growth. 
  • The firm’s well-positioned Shingrix vaccine should support strong long-term growth based on excellent efficacy and limited competition.

Company Profile:

In the pharmaceutical industry, GlaxoSmithKline ranks as one of the largest firms by total sales. The company wields its might across several therapeutic classes, including respiratory, cancer, and antiviral, as well as vaccines and consumer healthcare products. Glaxo uses joint ventures to gain additional scale in certain markets like HIV and consumer products.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

Solid Quarter for National Australia Bank With Margin Pressure Offset by Valuable Loan Growth

Business Strategy and Outlook

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand. 

The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers.The macro economic impact of the coronavirus has put the near-term outlook for credit growth and profitability under a cloud. The main current influences on earnings growth are modest credit growth, a product of household risk aversion and deleveraging, and delays to business plans for capital expenditure. Intense competition is constraining interest margins. Operating expenses are expected to moderate from 2021 though after years of rising risk and compliance spend.

After enjoying super low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020. As a result of which, Morningstar analysts expect a return to midcycle levels around 0.18% in fiscal 2025. The MLC wealth divestment completed in May 2021 after reaching an agreement with IOOF for AUD 1.44 billion as the bank simplifies and refocuses on its core banking operations.

Solid Quarter for National Australia Bank With Margin Pressure Offset by Valuable Loan Growth 

National Australia Bank’s first-quarter cash profit of AUD 1.8 billion is a strong start to the year. Operationally performance in the quarter was solid. The bank continues to sustain home loan growth ahead of the market, growing by 2.6% in the quarter. But with net interest margins, or NIM, trending lower, for the earnings run rate to hold, the release of loan loss provisions will need to step up. NIM fell 5 basis points to 1.64%, Morningstar analysts maintained a fair value estimate to AUD 28 per share. Morningstar analysts continue to assume NIM improvements in fiscal 2023 on a higher cash rate with a recovery to a NIM of 1.85% by fiscal 2025. Despite cost inflation, analysts think the bank can keep operating costs flat in dollar terms in fiscal 2023 and expect the benefits of fewer systems, more streamlined loan processing to allow the bank to reduce branch costs and staff numbers over time

Financial Strength 

National Australia Bank is in good financial health, with common equity Tier 1 of 12.4% above the regulator’s 10.5% benchmark as at Dec. 31, 2021. The bank slashed the fiscal 2020 dividend to AUD 60 cents per share on both lower earnings and a reduced dividend payout ratio. Morningstar analysts expect the payout to average 70% of earnings before notable items over the next five years, in line with the target range of 65%-75% introduced in 2020. National Australia Bank has AUD 3.5 billion in excess capital, assuming a target common equity Tier 1 ratio of 11% (management target of 10.75% to 11.25%). This assumes completion of the AUD 2.5 billion share buyback announced in July 2021 and the acquisition of Citigroup’s Australian consumer business.

Bulls Say

  • Management focus is on successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth. 
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from the rebound in demand for business credit. 
  • NAB has the ability to achieve significant cost savings and drive operational efficiency improvements

Company Profile

National Australia Bank is the most business-focused of the four major banks, holding the largest share of business loans and the number-three spot in home loans. National Australia Bank is currently the third-largest bank by market capitalization, with the franchise covering consumer, small business, corporate, and institutional sectors. Under the UBank brand the bank also owns one of Australia’s largest digital-only banks. Offshore operations in New Zealand round out the group.

 (Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

WHSP Growing Shareholders Money In Distinctive Ways Than Other Fund Managers And Capital Allocators

Business Strategy and Outlook

WHSP is a value investment style-oriented investment house with approximately AUD 9 billion in net asset value. Its approach to growing shareholder value is somewhat distinct from many fund managers and capital allocators, benefitting from advantages in its corporate structure, investment-style and from an unconstrained investment mandate. WHSP allocates capital largely in Australian equity markets–both public and private–where it feels its reputation as a long-term passive allocator of capital provides it with advantages. This reputation has been built over decades and is supported by a cross-shareholding with Brickworks–a unique corporate structure in Australian equity markets—partially shielding WHSP from the vagaries of equity markets. As a result, WHSP has greater flexibility to allocate capital in a manner abiding with true value investing paradigms, importantly including the ability to invest in a contrarian manner and with long time horizons. The group’s structure–as an investment holding company with a source of captive capital–provides further advantages. Constraints imposed by the requirement to fund redemptions in bear markets, and/or the need to ‘index hug’ in bull markets are less of a concern to WHSP, as often is the case for mutual fund structures. While these attributes are advantageous, they don’t provide a guarantee that the firm’s past successes will be replicated. 

WHSP provides capital on a long-term and passive basis, differing from private equity firms which are actively involved in management and strategy of investee enterprises. WHSP’s investment horizon also differs from uncertainty rating for WHSP. With negligible debt carried at the parent entity-level, WHSP’s cost of capital is therefore estimated at 11.0%. Analysts have incorporated the expected benefits of the Milton Corporation merger within their fair value estimate as of June 23, 2021. At the time, Analysts increased their fair value estimate by 9% to AUD 23.10 per share. It is seen that immaterial cost synergies associated with combining the two investment houses. Analysts’ valuation uplift is predominantly driven by WHSP financing the transaction with its overvalued scrip, which prior to the announcement was trading at a 43% premium to their fair value estimate.

Financial Strength

WHSP has an appropriately conservative approach to the use of debt. Net debt for the WHSP parent entity stood at AUD 26 million at fiscal 2021 year-end. Historically, WHSP’s approach has been for the parent-entity to remain ungeared and to hold significant cash balances at times. Holding significant cash balances at certain points in the equity market cycle is a central component of the value investment style and WHSP’s model for long-term shareholder value creation. Nonetheless, the advent of ultra-low interest rates in recent years has made the holding cash punitive. Therefore, the group uses debt facilities to access liquidity to take advantage of periods when equity market prices detach from long-term fundamentals. Nonetheless, WHSP parent-level gearing will remain modest with an upper limit of 15% (net debt equity) in place. The financial leverage of the group’s parent-entity is the most appropriate indicator of the financial health of WHSP. The financial exposure of WHSP to the fixed obligations, including debt, of its investments is inadvertently misstated in its consolidated financial statements. Under IFRS accounting standards, variation exists in terms of the extent and manner of reporting balance sheet items of WHSP’s investments in the group’s consolidated financial statements. The level of ownership in each investment dictates whether balance sheet items are fully consolidated or not. Regardless of the extent of WHSP’s ownership in each of its individual investments, there exists no material recourse or guarantees from WHSP of the debt or other fixed obligations of any of its investments. WHSP aims to pay steadily increasing dividends to shareholders from operating cash flow of the WHSP parent entity. The financial statements of the WHSP parent entity reflect WHSP’s status as an investor and the cash flows which WHSP receive as an investor in the multitude of businesses which it invests in

Bulls Say’s

  • WHSP’s uncompromising value investment style will likely see shareholder value creation continue. 
  • A cross-shareholding provides a strong defence against the short-term whims of equity markets. 
  • TPG’s recent merger with Vodafone Australia could improve the merged entity’s competitive position

Company Profile 

Washington H. Soul Pattinson, or WHSP, is a value-oriented investment house which invests in public and privately held companies. As an investor, WHSP allocates capital with a view to taking a long-term position in its investments and on a passive basis. A long-held cross-shareholding in one of its investments–Brickworks–has provided a shield to WHSP from the short term-ism that is often pervasive in equity markets. In 2021, WHSP merged with fellow investment house, Milton Corporation 

(Source: MorningStar)

General Advice Warning

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

Categories
Dividend Stocks Shares

Dividend of BCE Inc. has been increasing 5% each year since 2015 and is expected to be the norm through 2026

Business Strategy and Outlook

BCE has been investing heavily to upgrade its wireline network by extending fiber to the home, or FTTH, which positions the firm to take share over its footprint. BCE also remains a leader in providing wireless service throughout Canada and has a formidable media business. 

BCE is the biggest Canadian broadband provider, with nearly 4 million high-speed Internet customers at the end of 2021 and a footprint that reaches three fourths of the nation’s population. Its two biggest competitors, cable companies Rogers (in Ontario), and Videotron (in Quebec) have about 2.5 million and 1.8 million subscribers, respectively. As a legacy phone provider, BCE has historically had an inferior network, contributing to better penetration rates for Rogers and Videotron. FTTH will meaningfully reduce operating costs, allow BCE to offer speeds comparable to or better than competitors, and charge higher prices. 

BCE is second to none in Canadian wireless and expects it to remain atop the market with Rogers and Telus. However, it is expected the wireless market to remain competitive and believe pricing will remain under pressure for the incumbents, even if the Shaw merger with Rogers is completed, due to regulatory scrutiny. Long term, average revenue per user will be stagnant, which will limit the firm’s ability to expand wireless margins. 

BCE also distinguishes itself from competitors with a high-quality and diversified media unit (Rogers is the only other Canadian telecom firm with media exposure, and BCE has superior assets). Crave is BCE’s over-the-top video-on-demand service available throughout Canada with a wealth of content, including from HBO, Showtime, and Starz. BCE is also the exclusive provider of HBO Max content in Canada and owns Canada’s top network (CTV) and top sports station (TSN). In total, BCE owns or has exclusive Canadian rights to 30 television channels, over 100 radio stations, an out-of-home advertising business, and broadcast rights for a multitude of sports teams, leagues, and even

Financial Strength

Although BCE ended 2021 with a net debt/EBITDA ratio of 3.0, above the 1.75-2.25 that it targets, and is expected the leverage ratio to stay above the firm’s target range throughout our five-year forecast, the firm’s financial position as strong and likely to improve. At the end of 2021, the company had CAD 207 million in cash, and an interest coverage ratio (adjusted EBITDA to interest expense) of over 9.0. BCE has CAD 1.5 billion to CAD 2.6 billion maturing each year between 2022 and 2025, but it is not anticipated it will have difficulty rolling the obligations over. BCE also had about 3.5 billion of available liquidity at the end of 2021 thanks to its committed credit facility. Higher debt levels in recent years are attributable to acquisitions (the biggest of which was the acquisition of a portion of MTS’ business for close to CAD 1.5 billion in cash), spectrum purchases, its fiber-to-the-home network buildout, and cash needs for pension funding. BCE will continually participate in spectrum auctions, it is not foreseen any upcoming auctions that will be as big as 2021’s 3500 MHz auction, where BCE spent CAD 2 billion. It is also expected capital spending to come down significantly after 2022, as the firm passes the accelerated portion of its fiber buildout, and any big mergers or pension contributions is not expected, as the company has eliminated its pension deficit. These should result in higher free cash flow that can go toward paying down debt. The company has sufficient flexibility should opportunities arise. BCE has increased its dividend by at least 5% each year since having to cut it during the financial crisis in 2008. The increase has been right at 5% each year since 2015, and is expected to be the norm through 2026. 

Bulls Say’s

  • The immense network improvement that will result from BCE’s fiber-to-the-home buildout will lead to wireline share gains and margin improvement. 
  • With the Canadian wireless market far less penetration than the U.S. and Europe, a long growth runway exists. As an industry leader, BCE is well positioned to take advantage. 
  • BCE’s fiber-to-the-home buildout leaves it well positioned for a transition to 5G, which will require significant fiber capacity.

Company Profile 

BCE is both a wireless and Internet service provider, offering wireless, broadband, television, and landline phone services in Canada. It is one of the big three national wireless carriers, with its roughly 10 million customers constituting about 30% of the market. It is also the ILEC (incumbent local exchange carrier–the legacy telephone provider) throughout much of the eastern half of Canada, including in the most populous Canadian provinces–Ontario and Quebec. Additionally, BCE has a media segment, which holds television, radio, and digital media assets. BCE licenses the Canadian rights to movie channels including HBO, Showtime, and Starz. In 2021, the wireline segment accounted for 54% of total EBITDA, while wireless composed 39%, and media provided the remainder.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Expert Insights

Suncorp’s Battered Bottom Line Masks Positive Momentum Across the Group

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy and Outlook:

There are positive signs for the future of Suncorp and perhaps early validation of management’s strategic investments though. Australian gross written premiums, or GWP, increased 5%, with the insurer benefiting from premium rate increases as well as growth in policy numbers. In New Zealand, increases were even larger, with GWP up 14%. Improved digital sales and service capabilities, including claims lodgment and tracking, should bring cost savings and improve the customer experience. Lifting marketing of key brands and simplifying product offerings are also likely helping. Cost inflation in home and motor insurance in the mid-single digit percent range has so far been offset by rate increases and further negated by work the insurer is doing to manage costs. Tools to better allocate work to builders and benchmark repair costs are examples.

Suncorp has a point with areas government should focus on. Improve public infrastructure, provide subsidies to improve resilience of private dwellings, address planning laws and approval processes, and remove inefficient taxes and charges on insurance premiums.

Financial Strength:

Suncorp has a track record of returning surplus capital to shareholders via special dividends and share buybacks. The fully franked final dividend of AUD 23 cents is down from AUD 26 cents per share last year, with the payout ratio at the top end of the 60%-80% target range. Home loans grew at an annualised rate of 5.3%, but net interest margins, or NIM, tumbled 12 basis points to 1.97%. Growth in premiums and home loans have come at cost. Operating expenses increased 5.8% as Suncorp ramps up spend on digital initiatives and marketing, and insurance commissions grow with premiums. Digital sales made up 38% of Australian insurance sales in the half, up from 33% in first-half fiscal 2021, with some brands already at 50%.

Company Profile:

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

TransDigm’s Commercial Aerospace Business Seen Performing Well During First Quarter

Business Strategy and Outlook

TransDigm Group operates as a holding company with a clear, consistent strategy: acquire businesses with proprietary aircraft components, primarily sole-source products, with high aftermarket content. TransDigm’s businesses manufacture and sell replacement parts for ignition systems, pumps, actuators, and flight controls, among other things. Since aircraft must be fully maintained to be operational and TransDigm is the only provider of many of their products, the company has significant pricing power. The firm operates with a high degree of financial leverage to amplify operating results. 

This strategy works because potential competing spare parts must be licensed by the Federal Aviation Administration to be identical to the original product. Since TransDigm’s designs are proprietary, it is challenging for would-be competitors to prove that their design is identical. This barrier to entry allows TransDigm to extract value from regulator-required maintenance and enables the firm to aggressively price spare parts. TransDigm had its IPO in 2006, after 13 years of private ownership, and it still uses private equity strategies of creating value. The firm aims to improve the operations of its target companies by increasing prices, productivity, and encourage employees to generate new business. TransDigm is highly decentralized and has numerous business units. It encourages business unit leaders to think like owners by setting aggressive targets for managers and allowing them to achieve these goals however they choose to. 

The coronavirus pandemic has substantially reduced travel and consequently grounded a large chunk of the global passenger fleet, though domestic air travel is rebounding. The progression of the global fleet age remains an open question with large ramifications for TransDigm. If airlines use the current fleet to bring back capacity during a potential commercial aviation recovery, TransDigm would benefit from the continued maintenance of these aircraft. If airlines take delivery of new aircraft and use newer, under-warranty aircraft to bring back capacity, it is likely to reduce TransDigm’s addressable market for several years.

Financial Strength

TransDigm considers itself a private-equity-like public company, so its capital allocation is meaningfully different than most aerospace and defense companies that are covered. TransDigm continuously utilizes financial leverage–gross debt is usually 7-8 times unadjusted EBITDA. While Analysts’ are normally concerned about such high leverage, it is alleged TransDigm’s private equity roots make it quite capable of handling debt. Management has been in place and using the same leveraged strategy since the founding of the firm in 1993. It is not anticipated that the company will reduce leverage meaningfully. The company has been diligent at keeping debt maturities several years away. The company does not have a material debt maturity coming due until 2024, which is seen, gives the company ample time to recover from the COVID-19 challenges to aviation. TransDigm was able to raise debt during April 2020, when airlines were struggling the most. It is alleged that TransDigm would be able to raise additional debt from capital markets if necessary because of the highly visible pricing power and intellectual property backing the firm.

Bulls Say’s

  • Roughly three quarters of TransDigm’s sales are solesource, which gives it immense pricing power. 
  • About 90% of TransDigm’s products are proprietary, which protects its sole-source incumbency. 
  • TransDigm has historically been able to acquire companies at reasonable prices and meaningfully improve operations

Company Profile 

TransDigm manufactures and services a diverse set of components for commercial and military aircraft. The firm organizes itself in three segments: a power and control segment, an airframe segment, and a small nonaviation segment. It operates as an acquisitive holding company that targets firms with proprietary, sole-source products with substantial aftermarket content. TransDigm regularly employs financial leverage to amplify operating results. 

(Source: MorningStar)

General Advice Warning

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

Categories
Dividend Stocks

Freight Demand To Remain Strong In Near Term, Benefitting Cummins

Business Strategy and Outlook

It is viewed Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation. 

The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. It is likely, Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to growing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, it is probable the truck market to also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. It is viewed this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. It is seen, some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins. 

Cummins has exposure to end markets that have attractive tailwinds. In trucking, it is likely new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, it is alleged Cummins will continue to invest in BEVs and fuel cells to power future truck models. It is foreseen a zero-emission world is inevitable, but is believed Cummins can use returns from its diesel business to drive investments.

Financial Strength

Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, it is seen the company can meet its near-term debt obligations given its strong cash balance. It is also viewed, comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities. Cummins can also generate solid free cash flow throughout the economic cycle. It is alleged the company can generate over $2 billion in free cash flow in Analysts’ midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, it is likely management is determined to improve its distribution business following its transformation efforts in recent years. It is probable Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. In Analysts’ view, Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth. 
  • Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions. 
  • Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.

Company Profile 

Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry.

(Source: MorningStar)

General Advice Warning

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

Categories
Dividend Stocks Philosophy Technical Picks

La Nina and Investment Markets Wipe Out Profits, but Suncorp Inches Closer to Management Targets

Business Strategy and Outlook

Suncorp is a well-capitalised financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons and Terri Scheer. In New Zealand key brands include Vero, AA Insurance and Asteron Life. Some brands are specific to certain states, but at a group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia. 

The group’s exposure to the Queensland market, where large natural peril events have tended to be larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events. Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounting for more than half of total lending. Suncorp Bank’s smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors.

Financial Strength 

Suncorp Group is in good financial health. As at Dec. 31, 2021, Suncorp Insurance had a prescribed capital amount, or PCA, multiple of 1.71 times the regulatory minimum. Following the payment of the final dividend, a special dividend, and AUD 250 million buyback, at a group level that leaves Suncorp with AUD 492 million of capital in excess of its common equity Tier 1 target. This excess capital provides a buffer for unforeseen insurance and bad debt events. The common equity Tier 1 ratio for the insurance business was 1.28 times post the final dividend payment, within the target range of 1.08-1.28 times the PCA, and well above the regulatory minimum of 0.6 times. The bank’s common equity Tier 1 ratio as at Dec. 31, 2021 was 9.9%, above Suncorp’s 9% to 9.5% target range. Suncorp targets a dividend payout of 60-80% cash earnings (excluding special dividends).

Bulls Say’s

  • Suncorp owns a portfolio of well-known insurance brands and a regional bank that lacks switching or cost advantages. A focus on processes and systems, largely digitising customer interactions, should support underlying earnings growth. 
  • General insurance is inherently risky, with factors such as weather, natural disasters, and investment markets affecting earnings and capital adequacy. 
  • Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but customers are price sensitive.

Company Profile 

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

SkyCity is priced attractively for patient investors

Business Strategy and Outlook:

COVID-19 continues to weigh heavily on the firm’s near-term outlook. The Auckland casino–SkyCity’s core property–waded through over 100 days in lockdown during the period, heavily affecting visitor numbers at the group’s venues in the first half of fiscal 2022. Additionally, visitor numbers to the group’s second-biggest venue in Adelaide were subdued as capacity restrictions and domestic border closures in South Australia persistent for most of the first half of fiscal 2022. These are viewed as short-term issues, and it is expected SkyCity to bounce back when restrictions ease. SkyCity’s long-dated and exclusive licences in Auckland and Adelaide create a regulatory barrier to entry, underpinning the firm’s narrow economic moat, and position the business well to participate in the recovery as restrictions ease.

The Adelaide casino has remained open, albeit with restrictions for much of the first half of fiscal 2022. Renovations are complete and the group is poised to receive extra income from additional parking spots once city visitors return at greater levels. For now, the parking spots are being given away for a song, subject to visiting the casino facilities. New Zealand moved to a traffic-light COVID-19 protection framework in December 2021. This will reduce lockdowns and restrictions as the country allows more freedom for those who are vaccinated. Under red, the most extreme level of the traffic light system, hospitality venues may remain open with restrictions. While preferable to a full closure, we think it will still dampen revenue as many visitors choose to stay home out of an abundance of caution.

Financial Strength:

With a balance sheet well-positioned to weather the storm, analysts think current depressed prices present an opportunity for patient investors to gain exposure to a high-quality gaming business at a discount. However, the path to full capacity is likely to be gradual and material short-term catalysts are lacking. The analysts expect the recovery of SkyCity’s EBITDA to its prepandemic levels to take until fiscal 2023. In the second half of fiscal 2022, it is expected that the combined benefit of additional parking bays and the casino renovation to raise Adelaide’s EBITDA margins to 20% from 16%, in line with guidance. Visitors to the city of Adelaide have been subdued, at around 50% of prepandemic levels in the year to August 2021. 

Company Profile:

SkyCity Entertainment operates a number of casino-hotel complexes across Australia and New Zealand. The flagship property is SkyCity Auckland, the holder and operator of an exclusive casino licence (expiring in 2048) in New Zealand’s most populous city. The company also owns smaller casinos in Hamilton and Queenstown. In Australia, the company operates SkyCity Adelaide (exclusive licence expiring in 2035).

(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.