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

Novartis Holds a Wide Portfolio of Drugs That Support Steady Cash Flows

Business Strategy & Outlook

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term growth. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While patent losses on anaemia drug Exjade and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure steady long-term growth. Novartis’ drug segment is poised for long-term growth driven by new pipeline products and existing drugs. Novartis’ strategy to focus largely in areas of unmet medical need should strengthen the firm’s pricing power.

 Additionally, Novartis differentiates itself by its sheer number of blockbusters, including Entresto for heart failure and Cosentyx for immunology diseases. Also, it has generated a strong late-stage pipeline with recent launches of migraine drug Aimovig and cancer drug Kisqali. Despite the patent losses on Exjade and Afinitor (and potentially multiple sclerosis drug Gilenya), the combination of a strong pipeline of new products and a diverse, well-positioned operating platform should translate into steady growth. Beyond the branded drug segment, Novartis also sells generic drugs through its Sandoz division. While the basic generic drugs typically offer more limited profits, the focus of Novartis’ generic unit on hard-to-make drugs like biologics, which should offer higher growth pathways and stronger margins. Novartis is getting more focused with its recent spin off of its eye care division, Alcon. While the drug division markets eyecare drugs, one can view the overlap with Alcon’s surgical and vision-care products as relatively minor. As a result, one cannot expect many dyssynergia by spinning off the Alcon business. The spinoff is in line with Novartis’ strategy to focus on human prescription drugs, which has been playing out over the past several years with the divestitures of the vaccine, animal health, and consumer healthcare businesses.

Financial Strengths

Novartis carries a solid financial position with debt/2023 projected EBITDA of 1.5 times and free cash flow after capital expenditures/debt of close to 0.5. Further, its diverse platform of drugs should translate into steady cash flows to easily service debt requirements. Novartis primarily uses its cash to fund its dividend, which represents close to 60% of the company’s core earnings. The continued dividend increases but at a slow rate over the next few years. Additionally, the company will continue to pursue acquisitions, which are likely to be funded by cash from operations and occasionally increased debt.

Bulls Say

  • Novartis’ solid late-stage pipeline should propel long-term growth. The company should launch several new drugs during the next several years in critical therapeutic areas such as immunology and oncology. 
  • Novartis recently divested its Roche share, yielding over $20 billion, which provides the firm with increased options to re-deploy capital. 
  • Novartis’ research and development focuses on areas of unmet medical need, which should yield several innovative drugs with strong pricing power.

Company Description

Novartis AG develops and manufactures healthcare products through two segments: Innovative Medicines and Sandoz. It generates the vast majority of its revenue from Innovative Medicines segment consisting of global business franchises in oncology, ophthalmology, neuroscience, immunology, respiratory, cardio-metabolic, and established medicines. The company sells its products globally, with the United States representing close to one third of total revenue.

(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

Sanofi’s Discontinuation of Cancer Drug Amcenstrant Is Disappointing, but No Major FVE Impact

Business Strategy & Outlook

Sanofi’s discontinuation of cancer drug amcenstrant does not have a major impact on the firm’s fair value estimate as projected peak annual sales for the drug at well below EUR 1 billion annually. However, the string of bad news (including the recent clinical hold on multiple sclerosis drug tolebrutinib) in the late-stage development is concerning. Nevertheless, drug development is risky, and failures are common. These pipeline setbacks aren’t overly concerning, and one continues to believe Sanofi will be able to develop the next generation of drugs to offset eventual patent losses, which is a key factor supporting its wide moat. 

Also, the limited patent losses over the next several years also provide time for Sanofi to refill its late-stage pipeline with several early-stage drugs that look encouraging. On amcenstrant, poor clinical data led to the discontinuation of the drug. A fairly high threshold of efficacy and safety was needed to keep the clinical studies going since there are many very competitive drugs already approved and many more in development for breast cancer. The previous failure of the drug in later-lines of breast cancer treatment did not bode well for the drug. Despite the setbacks, Sanofi’s drug development success improved. One is most bullish on late stage drugs efanesocotocog for hemophilia (strong phase 3 data), multiple sclerosis drug tolebrutinib (despite the clinical hold), and several mid-stage drugs targeting cancer and rare diseases.

Financial Strengths

Sanofi remains on solid financial footing, closing 2021 with a debt/EBITDA ratio of 2 times. Further, the company generates stable cash flows that should enable the firm to meet its dividend payments and still accumulate significant cash reserves. The company redeployed its cash through bolt-on acquisitions in the neighborhood of $2 billion-$5 billion each year to augment its internal research and development. The recent sale of Regeneron stock of close to $12 billion may open up the possibility of a larger acquisition.

Bulls Say

  • Sanofi is launching immunology drug Dupixent, which holds strong pricing power and major blockbuster potential across several indications.
  • Sanofi’s strong entrenchment in rare-disease drugs should translate into steady pricing power as payers tend not to push back on pricing in this area.
  • With a wide product offering in vaccines, consumer health and insulins, Sanofi is well positioned for the fast-growing emerging markets.

Company Description

Sanofi develops and markets drugs with a concentration in oncology, immunology, cardiovascular disease, diabetes, and vaccines. However, the company’s decision in late 2019 to pull back from the cardiometabolic area will likely reduce the firm’s footprint in this large therapeutic area. The company offers a diverse array of drugs with its highest revenue generator, Dupixent, representing just over 10% of total sales, but profits are shared with Regeneron. About 30% of total revenue comes from the United States and 25% from Europe. Emerging markets represent the majority of the remainder of revenue.

(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

ORA’s FY22 results came in above expectations, with underlying NPAT up +19.4% YoY

Investment Thesis:

  • Trading on fair value relative to the valuation and attractive yield of ~5%. 
  • Exposure to both developed and emerging markets’ growth.
  • Near-term headwinds should be in the price. 
  • Revised strategy following recent strategic review.
  • Bolt-on acquisitions (and associated synergies) provide opportunities to supplement organic growth.
  • Leveraged to a falling AUD/USD. 
  • Potential corporate activity.
  • Capital management (current on-market share buyback plus potential for additional initiatives). 

Key Risks:

  • Competitive pressures leading to margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in US, EM and Australia.
  • Emerging markets risk.
  • Adverse movements in AUD/USD.
  • Declining OCC prices.

Key Highlights: 

  • FY22 results summary. Compared to pcp:  Sales revenue was up +15.6% (+13% in CC) to $4,090.8m, underlying EBIT was up +14.6% (+12.7% in CC) to $285.5m and underlying NPAT was up +19.4% (+17.6% in CC) to $187.1m. 
  • Underlying operating cash flow up +10.6% to $272.6m with cash conversion improving +60bps to 73.5%, driven by earnings growth and continued working capital management, partially offset by higher base capex, which combined with higher tax payments and +101.5% increase in growth capex delivered -27% decline in FCF to $121.6m. 
  • Net debt increased +38.9% to $629m, driven by on-market share buyback and increased capex, equating to leverage of 1.8x, up +0.3x, vs long-term target of 2-2.5x. 
  • RoAFE increased +250bps to 22.4%, reflecting higher North American earnings, partially offset by higher Australasian average working capital. 
  • Capital management. The Company completed its on-market share buyback, purchasing ~30.7m shares at an average price of $3.55 and returning a further $109m to shareholders. The Board declared an unfranked final dividend of 8.5cps, up +13.3% YoY, taking full year dividends to 16.5cps (up +17.9% YoY) and representing a dividend payout ratio of 76.2%. 
  • Australasia. Compared to pcp: Revenue increased +9%, as higher aluminium costs were passed through to customers and slight growth in Cans and Glass volumes, partially offset by Glass product sales mix. 
  • EBIT increased +0.2% as inflationary pressures were more than offset by cost recoveries and improvement in operating efficiencies. However, margin declined -140bps to 16.6%, primarily due to the impact of higher aluminium costs passed through to customers.
  •  Underlying operating cash flow declined -1.3% amid lower cash EBITDA, partially offset by lower base capex. However, cash conversion improved +70bps to 72.9%. 
  •  RoAFE declined -80bps to 24.6%, driven primarily by higher average working capital.    
  • North America. Compared to pcp: Revenue was up +17.7% (+14.3% in CC), amid improvement in operating performance, with revenue growth for OPS and OV. 
  • EBIT increased +36.6% (+32.6% in CC) with margins improving +50bps to 4.2%, with significant earnings growth in both manufacturing and distribution driven by improvements in account profitability, operating efficiency, and a focus on managing inflationary inputs and cost to serve. 
  • Underlying operating cash flow increased +28.7% or US$18.9m with cash conversion remaining stable at 74.1%. 
  • RoAFE increased +530bps to 20.3%. 
  • FY23 outlook. Management anticipates: Earnings increasing YoY. 
  •  Australasia EBIT being broadly flat YoY with 1H23 impacted by inflationary cost increases ahead of further 2H23 customer price recovery, and cash conversion being >70%, excluding the G3 glass furnace rebuild, which is treated as base capex. 
  •  North America is expected to deliver further EBIT growth, reflecting the full year impact of FY22 price increases and ongoing implementation of profit improvement programs, and cash conversion remaining >70%. 
  •  Capex of ~$230m with growth capex of ~$150m. 
  •  Dividends staying towards the top end of 60-80% of NPAT target payout range. 

Company Description:

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.   

(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

Stockland continues to divest retail property, but faces a choice of selling assets in the near term

Business Strategy & Outlook

Stockland generates about two thirds of funds from operations, or FFO, from its commercial property portfolio, which is roughly two thirds retail property, the rest industrial and some office. Another third of earnings come from residential development. The development business is cyclical and its contribution to earnings swings substantially, while the commercial rental business is relatively stable. The earnings from the residential business will moderate as stimulus measures such as Homebuilder wash out of the pipeline.  In late 2021, Stockland revised its target asset mix, reducing retail assets, and increasing exposure to office, industrial and residential. The new target is about one third in residential (up from 15%), one half in office/industrial (up from 35%) and less than one third in retail (down from 50%). The office and industrial as fully priced in 2019, but the move has sidestepped some of the COVID-19 damage to retail property. Stockland continues to divest retail property but faces a choice of selling assets in the near term while recent coronavirus lockdowns weigh on values for retail assets, or holding out for recovery, but facing the risk of the ongoing structural shift to e-commerce. The group’s strategy of remixing toward food, services and entertainment gave early payback, but since mid-2019 that tactic is saturated.

In residential, tougher market conditions should enable Stockland to gain market share. It is Australia’s largest residential developer, usually selling between 5,000 and 7,000 land lots per year, and some smaller players will exit or slow down. That said, the pressure on the large players, and don’t expect the scorching volume growth of 2014-18 again within the 10-year discrete forecast period. Stockland acquired Halcyon in July 2021, significantly stepping up its exposure to the land-lease communities’ business.

Financial Strengths

Stockland is in good financial health, with gearing (net debt to assets) of circa 18%, as at June 30, 2022 (pro forma adjusted for the sale of Stockland’s retirement living business in July 2022). This is below the group’s targeted range of 20%-30%, but the gearing will rise as the commercial property values are expected to be marked down by valuers. Stockland will redeploy capital raised from recent disposals, into further acquisitions, particularly in industrial, and into office developments at North Sydney and its Piccadilly site in the Sydney CBD, plus the recently closed Halcyon purchase. While debt is lower than many other REITs, that is appropriate, given exposure to development activities. Stockland’s debt metrics could deteriorate if earnings from the cyclical residential division took a major hit, though this is unlikely given the level of precommitments and deposits Stockland typically obtains before commencing major construction works. The group could be exposed to refinancing risk if interest rates or credit spreads rose substantially. However, its average cost of debt was a remarkably low 3.4% for fiscal 2022 and about two thirds of debt is hedged, meaning the impact of higher rates is likely to be felt gradually over a number of years. Given a weighted average debt maturity was 5.3 years as at June 30, 2021 this is not a major threat. Cash and undrawn debt lines totalled about AUD 2.2 billion, providing further financial flexibility.

Bulls Say

  • The eventual resumption of population growth should support the value of Stockland’s assets and eventually underpin the viability of several development projects.
  • There remains demand for quality real estate from the likes of pension funds, sovereign wealth funds and other offshore investors, which should drive buying in the direct property market and push valuations upward.
  • Stockland has greater exposure to industrial property than most diversified REITs. Of the major property sectors, the industry is the least impacted by COVID-19 lockdowns and social distancing measures.

Company Description

Stockland is Australia’s largest housing developer, and this division generates about a third of the group’s funds-from-operations. Nearly two thirds comes from commercial property, mostly retail. It also has a growing land-lease business. The mix is evolving. Earnings from the residential development division are volatile and it is expected growth to moderate there. In commercial property the group is trimming retail and adding office and industrial via acquisitions and developments. Stockland-stapled securities comprise one share in the corporation that largely operates developments and one unit in a trust that holds the property portfolio.

(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

Even Against a Souring Backdrop, Wide-Moat Mondelez Continues to Bake Up Sweet Gains

Business Strategy & Outlook

Since taking the helm at Mondelez more than four years ago, CEO Dirk Van de Put has orchestrated a plan to drive balanced sales and profit growth by extending the distribution of its fare, fueling investments behind its local and global brands, empowering its local leaders, and increasing its innovation agility (aims that are hitting the mark). Against this backdrop, Mondelez targets 3%-5% sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends at home and abroad. Further, it has looked to acquire niche brands to build out its category and geographic exposure, which has been prudent. But despite opportunities to bolster sales, one can never expect the pendulum to shift entirely to top-line gains under Van de Put’s watch; rather, based on his tenure at privately held McCain Foods and past rhetoric, one can suspect ensuring such growth was profitable would prove to be the priority.

As such, the suggestion that Mondelez is poised to realize additional efficiency gains favorably. While management has refrained from quantifying its cost-saving aims, an additional $750 million in costs (a low- to mid-single-digit percentage of cost of goods sold and operating expenses, excluding depreciation and amortization) it could remove (on top of the $1.5 billion realized before the pandemic). This can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities. One doesn’t expect these savings to merely boost profits, though. In this vein, management has stressed a portion of any savings realized would be spent in support of its brands in the form of research, development, and marketing, buttressing the brand intangible asset underpinning Mondelez’s wide moat. This aligns with the forecast for research, development, and marketing to edge up to nearly 7% of sales on average over the next 10 years (or about $2.4 billion annually), above historical levels of 6% ($1.7 billion).

Financial Strengths

In assessing Mondelez’s balance sheet strength, one doesn’t foresee any material impediments to its financial flexibility. In this vein, Mondelez maintained $3.5 billion of cash on its balance sheet against $19.5 billion of total debt as of the end of fiscal 2021. As per forecast free cash flow will average around 15% of sales annually over 10-year explicit forecast (about $5.4 billion on average each year). And returning excess cash to shareholders will remain a priority. Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2031 (implying a payout ratio between just north of 40%), while also repurchasing around 2%-3% of shares outstanding annually. Beyond prudently bolstering shareholder returns, Mondelez will continue scouring the landscape to expand its reach by adding brands and businesses in untapped categories and/or geographies from time to time–although one doesn’t believe it has much of an appetite for a transformational deal. The opportunity to expand its footprint into untapped markets–such as Indonesia and Germany–or into other adjacent snacking categories (like health and wellness) could be in the cards. Recent deals have included adding Tate’s Bake Shop for $500 million in 2018, Perfect Snacks (in 2019, refrigerated snack bars), Give & Go (2020, an in-store bakery operator), Chipita (2021, Central and Eastern European croissants and baked goods), Ricolino (2022, a leader in the Mexican confectionery space), and Clif Bar (2022, U.S. manufacturer of energy bars) to its fold. But at just a low-single-digit percentage of sales, none of these deals are material enough to move the needle on its overall results.

Bulls Say

  • Mondelez’s decision to empower in-market leaders and fuel investments behind its local jewels (which historically had been starved in favor of its global brands) stands to incite growth in emerging markets for some time. 
  • The posit the firm is committed to maintaining a stringent focus on extracting inefficiencies from its business, including the target to shed more than 25% of its non core stock-keeping units to reduce complexity. 
  • Management has suggested it won’t sacrifice profit improvement merely to inflate its near-term sales profile.

Company Description

Mondelez has operated as an independent organization since its split from the former Kraft Foods North American grocery business in October 2012. The firm is a leading player in the global snack arena with a presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles. Mondelez’s portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm derives around one third of revenue from developing markets, nearly 40% from Europe, and the remainder from North America.

(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

Edison faces regulatory scrutiny to prove its investments are producing customer benefits

Business Strategy & Outlook

California’s aggressive clean energy goals, including the state’s quest to eliminate carbon emissions from the economy by 2045, offer Edison International more growth opportunities than most utilities. Edison will invest at least $6 billion annually, resulting in 7% annual earnings growth at least through 2025. It already has regulatory and policy support for investments to support grid safety, renewable energy, electric vehicles, distributed generation, and energy storage. Wildfire safety investments alone could reach $4 billion during the next four years. California will always present political, regulatory, and operating challenges for utilities. But state utility regulators are in a bind because implementing the state’s public policy mandates will require healthy utilities that are incentivized to invest in infrastructure. In August 2021, regulators approved nearly all of Edison’s 2021-23 investment plan. Regulatory proceedings in 2022 will address wildfire-specific investments and Edison’s $6 billion investment plan for 2024. In 2023, Edison will begin work with regulators to set an investment budget through 2028. Operating cost discipline will be critical to avoid large customer bill increases related to its investment plan. Edison faces regulatory scrutiny to prove its investments are producing customer benefits. It also must resolve and seek to recover what could end up being $7.9 billion of liabilities related to 2017-18 fires and mudslides.

Large equity issuances in 2019 and 2020—in part to fund the company’s $2.4 billion contribution to the state wildfire insurance fund and a higher equity allowance for ratemaking—weighed on earnings the last two years. Edison now has most of its financing in place to execute its growth plan. It is expected to continue its streak of 18 consecutive annual dividend increases. Edison’s management team seems committed to retaining a small share of unregulated earnings likely tied to low-risk energy management businesses wrapped into Edison Energy. It is not expected that the business is to have a material impact on shareholder returns in the near term.

Financial Strengths

Edison’s credit metrics are well within investment-grade range. California wildfire legislation and regulatory rulings in 2021 removed the overhang that threatened Edison’s investment-grade ratings in early 2019. Edison has kept its balance sheet strong with substantial equity issuances since 2019. Edison won’t have any liquidity issues as it resolves 2017-18 fire and mudslide liabilities while funding its growth investments. Edison issued $2.4 billion of new equity in 2019 at prices in line with the fair value estimate. This financing supported both its growth investments and half of its $2.4 billion contribution to the California wildfire insurance fund. The new equity also allowed Southern California Edison to adjust its allowed capital structure to 52% equity from 48% equity for ratemaking purposes, leading to higher revenue and partially offsetting the earnings dilution. Edison’s $800 million equity raise in May 2020 at $56 per share was well below the fair value estimate but was necessary to support its growth plan in 2020 and early 2021. Edison also raised nearly $2 billion of preferred stock in 2021 and might issue more preferred stock to limit equity dilution as it finances its growth program. In particular, Edison will have to raise equity to finance its $1 billion energy storage project in 2022. Dividends are to grow in line with SCE’s earnings.  The board approved a $0.15 per share annualized increase, or 6%, for 2022, its 18th consecutive annual dividend increase. Management has long targeted a 45%-55% payout based on SCE’s earnings, but the board appears to be comfortable going above that range based on the 2021 and 2022 dividends that implied near-60% payout ratios. As long as Edison continues to receive regulatory support, the board will keep the dividend at the high end of its target payout range.

Bulls Say

  • With Edison’s nearly $6 billion of planned annual investment during the next four years, it can project 7% average annual average earnings growth in 2022-25.
  • Edison has raised its dividend for 18 consecutive years to $2.80 in 2022, a 6% increase from 2021. Management appears comfortable maintaining a payout ratio above its 45%-55% target.
  • California’s focus on renewable energy, energy storage, and distributed generation should bolster Edison’s investments in transmission and distribution infrastructure for many years.

Company Description

Edison International is the parent company of Southern California Edison, an electric utility that supplies power to 5 million customers in a 50,000-square-mile area of Southern California, excluding Los Angeles. Edison Energy owns interests in nonutility businesses that deal in energy-related products and services. In 2014, Edison International sold its wholesale generation subsidiary Edison Mission Energy out of bankruptcy to NRG Energy.

(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

Reducing the Fair Value for Evercore to $158; shares undervalued though near term will be choppy

Business Strategy & Outlook

Starting in the back half of 2020 and especially after successful COVID-19 vaccines were announced, merger and acquisition volume picked up. Merger volume has been exceptionally strong, and it will normalize lower over the next several years. Evercore frequently has industry-leading productivity and growth. During 2017-21, advisory revenue per senior managing director was over $18 million annually compared with less than $10 million at multiple peers, according to the calculations. The high productivity is largely attributable to the company’s geographic mix being weighted more to the United States, which has had a healthier M&A recovery than the rest of the globe. A disciplined hiring and promotion philosophy also plays a key role. For much of the past decade, Evercore grew faster than peers, but it may be maturing, as it now had around 114 senior managing directors at the end of 2021 compared with about 60 in 2011. The investment management and institutional equities businesses that Ralph Schlosstein began building in 2010 usually accounts for around 20% of net revenue. The ISI Group acquisition in 2014 materially diversified Evercore’s business and was an accelerant to the equities business attaining a profitable scale. Evercore paid a full price for ISI, and much of the deal’s success hinges on whether Evercore can translate ISI’s research strength into equity underwriting deals and an underwriting capability into attracting incremental senior managing directors. While the institutional equities business largely underperformed expectations for years, some strong underwriting quarters and recent senior managing director headcount growth give an indication that the expected synergies are being realized. The company has retreated from institutional asset management and derives the bulk of its investment management revenue from wealth management to high-net-worth individuals.

Financial Strengths

Overall, Evercore appears to be in fine financial health. At the end of 2021, the company had notes payable of about $400 million. Most of the note’s payable don’t mature until 2026 or later. The company also generates significant amounts of free cash flow, as advisory, investment management, and flow-based equities trading are not capital-intensive businesses. Evercore has the ability to continue with its general policy of returning approximately all of its earnings to shareholders via dividends and share buybacks.

Bulls Say

  • Evercore has historically been able to increase advisory revenue faster than peers, and its revenue productivity per senior managing director often surprises to the upside. 
  • The company has significant amounts of cash and investment securities on its balance sheet.
  • Expansion of Evercore’s investment management and institutional equities businesses will provide a modest base of revenue even during a downturn in M&A activity. Additional offices outside the U.S. will help mitigate the company’s current reliance on the U.S. market.

Company Description

Evercore is an independent investment bank that derives the majority of its revenue from financial advisory, including merger, acquisition, and restructuring advisory. It also has institutional equities and investment management businesses that account for around 20% of net revenue. The company was founded in 1996 and went public in 2006. Evercore had approximately 1,950 employees at the end of 2021, and about 75% of its revenue is derived from the United States.

(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

Swiss Re Is an Undervalued and Fairly Run Reinsurer

Business Strategy & Outlook

Swiss Re has a history of overly aggressive expansion and typically too much leverage. The first example of this can be seen in the acquisition of General Electric Insurance Solutions in the earlier part of the new millennium. This was financed through a combination of debt and share issuance, a historic and largest Swiss Re acquisition in that period. Furthermore, Swiss Re continued down a path of building out its reinsurance securitization offering, structuring pools of credit, mortality and natural catastrophe risk. This did not work out well because the Swiss Re increased correlation and dependence and when financial markets fell so did the value of these securities. Swiss Re’s leverage position and problems with its securitization program led the business to complete a capital raise and take on Berkshire as a preferential terms’ investor. This investment built on a previously established relationship where Berkshire reinsured substantially all of Swiss Re’s yearly renewable-term United States mortality book, another area where Swiss Re had run into difficulties. 

The latest round has been aggressive expansion for commercial insurance and this came back to bite the business. What is a business that is still overleveraged and one where the levels of debt do need to be addressed? However, from an operational perspective one can see a company that is focusing on building a cleaner and more traditional reinsurance business, one that focuses on underwriting and shifts away from reliance on investment returns to fund unprofitable long-tailed lines of underwriting. One can see a turnaround in corporate solutions starting to come to fruition and the nascent stronger move into more specialist lines of business and find the management team to be a lot more disciplined. However, one would like to see the business reign in its buybacks and concentrate more on building out the long-term profitability of this business.

Financial Strengths

Swiss Re does not have a particularly strong balance sheet. It would help the business immensely if management chose to pay down more debt. Swiss Re has around $11.2 billion of debt. The majority of this is long term, and the most substantial portions don’t mature for a few years. The shape of the debt isn’t well balanced, with the vast majority issued as subordinated. This means there are some pockets of very high interest rates and this is reflected in the broader group’s interest. Swiss Re pays an annual dividend that it intends to grow annually in line with long-term earnings growth and maintain the prior year’s dividend as a minimum level. The business also actions buybacks, though given the macro uncertainty it would be prudent if the business held off over the next few years from doing this.

Bulls Say

  • Swiss Re looks to be on the cusp of producing consistent results in the long term under the performing commercial insurance division. 
  • The quality of Swiss Re’s investment portfolio is high. 
  • Swiss Re pays a good dividend.

Company Description

Swiss Re was established in 1863 in Zurich. Since then, the business appears to have cycled through quite a few strategies. Namely in the early part of the millennium Swiss Re took on an investment banker who eventually led the business. Over the next 10 years CEO Jacques Aigrain built Swiss Re’s financial solutions into a powerhouse and helped the company complete its first securitization, finalized in 2005 for credit reinsurance. This division became a leader for Swiss Re but then disaster struck during the global financial crisis. Swiss Re mothballed this unit and approved a CHF 5 billion capital raise. Now the business concentrates more fundamentally on property and casualty, life and health reinsurance. Swiss Re also has a good commercial insurance offering named corporate solutions.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Treasury’s volume share gains and positive mix shift support strong enough brand assets

Business Strategy & Outlook

Treasury Wine Estates has increasingly focused on building high-end brands in its portfolio, particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 90% in fiscal 2022 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. Continued end-market premiumization to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020. In recent years, global wine consumption has proven sluggish, but high-priced wines have bucked this trend, with luxury and masstige volumes growing at mid- to high-single-digit rates in developed regions such as Australia and the U.S., per company estimates. However, Treasury faced an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations.

Treasury also faces risks from unfavorable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. That said, the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns. And bringing in a significant proportion of its grape and bulk wine from outside suppliers increases the proportion of variable costs and ensures a lower-cost supply in times of surplus. But it cannot be believed Treasury’s volume share gains and positive mix shift support strong enough brand assets to offset industry fragmentation, a proliferation of branded offerings, limited customer switching costs, and potential for changing consumer tastes. As such, despite a strong position in Australia, the company will likely continue to combat competitive pricing and promotional activity globally.

Financial Strengths

Treasury is in good financial health. The firm’s net debt/adjusted EBITDA ratio, including operating leases stood at 1.8 times at June 2022, and EBITDA to cover interest expense (including operating leases) an average of 8 times over the next five years. The company’s next major debt maturity is in fiscal 2024, but there are no issues either relaying or refinancing this payment. At June 2021 the company’s liquidity, comprising cash and undrawn committed debt facilities, was solid at approximately AUD 1.3 billion. Over the long run, there’s probably some room for additional debt, given management’s target of net debt/adjusted EBITDA of 2.0 times through the cycle, potentially stretching to 2.5 times, compared with the low levels today. That said, the company will remain focused on maintaining an investment-grade credit profile. The company aims to pay out 55%-70% of its earnings as dividends; an average of about 65% over the next five years. Treasury can continue to pay out dividends near the top of this range, but anticipate dividends to be only partially franked from fiscal 2025. While Treasury is an Australian taxpayer, the majority of earnings are derived outside Australia, and the available franking credits to be exhausted more quickly than they are replenished over the coming years.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine. 
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands. 
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilization, improving margins, and higher ROICs.

Company Description

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(Source: Morningstar)

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

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

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

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

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

Categories
Dividend Stocks

Fresenius is pursuing the biosimilar market, which looks like a relatively large intermediate to long-term opportunity

Business Strategy & Outlook

Fresenius SE’s prowess in dialysis and injectable therapies has created opportunities to vertically integrate into several medical service and technology businesses by organic and inorganic means. Through its partial ownership of Fresenius Medical Care, the company seeks to benefit from that unique entity’s position as the world’s top dialysis service and product provider. In the U.S., this segment operates a convenient network of dialysis clinics at a similar scale as key peer DaVita, with the two firms cumulatively serving about three fourths of the U.S. dialysis outpatient population. Fresenius has established a number of clinics in more fragmented international markets, too, where it has a relatively. long runway for growth by opening or acquiring new clinics. Fresenius leads the dialysis product market primarily by providing haemodialysis equipment and consumables to clinics globally but also sells at-home haemodialysis and peritoneal dialysis tools.

Fresenius focuses on being a reliable provider of injectable therapies in its Kabi segment. This strategy requires Fresenius to efficiently manufacture safe and high-quality solutions, and because of this core competency, Fresenius has been a net beneficiary of competitor shortages in recent years. Fresenius also provides the pumps to automatically administer injectable therapies. By integrating into a hospital’s workflow and systems, Fresenius aims to benefit from recurring consumable sales during the pump’s long working life. Fresenius is also pursuing the biosimilar market, which looks like a relatively large intermediate to long-term opportunity. Through its Helios and Vamed segments, Fresenius provides services related to healthcare facility operation, management, and construction. In its Helios segment, it aims to provide top-quality hospital services in Germany, Spain, and Latin America, and it continues to look for acquisition opportunities especially in the latter two geographies. In Vamed, it helps caregivers operate more efficiently by providing construction project management, ongoing operations management, and post-acute care services.

Financial Strengths

Fresenius SE operates with an investment-grade credit profile. On a consolidated basis as of September 2021, Fresenius owed about EUR 27 billion in debt and lease obligations, including EUR 13 billion of debt and leases owed by Fresenius Medical Care that is not guaranteed by Fresenius SE. With about EUR 2 billion of cash as of September 2021, the company’s net leverage stood around 3.6 times. While easily manageable, management has expressed a desire to deleverage further after taking the hit to profits in the dialysis business in 2021. However, refinancing and acquisition-related activities may make Fresenius a debt issuer once it hits its deleveraging goal. Beyond acquisitions, Fresenius’ capital allocation strategy regularly includes dividends with a payout ratio around 20% of net income. And while the company typically does not make large share repurchases, those activities could become more attractive for Fresenius in future periods if acquisition opportunities do not present themselves, which would welcome at recent prices.

Bulls Say

  • Underlying demographic trends—such as aging, obesity, and diabetes—and international expansion opportunities should keep Fresenius’ dialysis services and related medical product growth in positive territory after the pandemic recedes.
  • Kabi’s biosimilar pipeline targets AbbVie’s Humira and Amgen’s Neulasta products, which could lead to a relatively large new revenue stream in this segment in the intermediate term.
  • The company maintains a manageable balance sheet, which should give it financial flexibility during potential future shocks.

Company Description

Fresenius SE is a healthcare holding company based in Germany with four segments. The company owns a large stake in dialysis service provider and equipment manufacturer Fresenius Medical Care, which accounts for about half of its consolidated revenue. The Kabi segment manufactures intravenous drugs, nutrition products, infusion and transfusion therapies, and related pumps. The Helios segment operates private hospitals in Germany, Spain, and Latin America. Vamed provides a variety of services such as healthcare facility construction and operation management, including post-acute care rehabilitation.

(Source: Morningstar)

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