Category: Global stocks

Global Stock refer to share that are traded on multiple exchanges with different currencies. For example, if a publicly-traded company issues shares in dollars on the New York Stock Exchange and in pounds on the London Stock Exchange, it is issuing global registered shares. Global stock to a portfolio offers diversification and may provide higher returns. Global stock markets may experience higher levels of volatility than other domestic markets with bigger swings to both the upside and downside.

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Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S

Post author By lvc-admin
Post date May 23, 2022
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Business Strategy and Outlook

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S. construction spending. It is forecasted strengthening demand growth for the public sector and modest growth for the private sector. Accounting for roughly half of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. At a national level, it is expected public infrastructure spending to grow by 6% per year on average, an acceleration from the last couple of decades. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provided stability and near-term funding certainty, but didn’t solve the still-weakening gas tax. However, long-term federal funding was passed in late 2021, totalling $1.2 trillion.

The outlook for road spending differs considerably from state to state. Differences in population growth, road conditions, funding mechanisms, and overall state fiscal health influence spending. Vulcan’s largest states by revenue–Texas, California, Virginia, Tennessee, and Georgia–have significant road spending needs and strong finances to support high growth. Private-sector demand consists of residential and nonresidential construction, including commercial and industrial properties. Nonresidential construction is the most important driver in the category, as spending is more material-intensive per dollar than residential construction. It is forecasted that the nonresidential spending growth to slow to 4% in the longer term, as many key sectors to make more efficient use of their construction spending. Additionally, it is expected residential starts to converge the long-term housing-start forecast of 1.5 million by 2030. Residential construction historically supports nonresidential construction growth.

Financial Strength

At the end of the fourth quarter of 2021, net leverage was roughly 2.5 times net debt/adjusted EBITDA, compared with the company’s target of roughly 2-2.5 times. Continued improvement in construction markets should help leverage to improve further, falling below 1 times net debt/adjusted EBITDA by the end of 2024, all else equal. The weighted average debt maturity is 11 years (as of year-end 2021), so maturities look quite manageable.

In June 2021, Vulcan announced the acquisition of U.S. Concrete. Given the healthy balance sheet before the close, the deal is unlikely to hamper Vulcan’s financial health. This case is bolstered by the relatively smaller size of U.S. Concrete. With the poorly timed and expensive acquisition of Florida Rock Industries in 2007, Vulcan’s debt surged from roughly $500 million to $3.7 billion. Combined with the recession that devastated construction activity, Vulcan’s leverage soared to more than 8 times debt/adjusted EBITDA. The company took difficult but important steps to protect its cash flow and improve its balance sheet in the aftermath. The company learned a lesson, given its current approach to M&A with more discipline. The acquisition of Aggregates USA in 2017 exemplifies Vulcan’s more disciplined, balance sheet-friendly approach

Bulls Say’s

Vulcan has a favourable geographic footprint in states that have a strong need for increased road work and the capability to fund it.

Not-in-my-backyard tendencies make the permitting process incredibly difficult for new quarries, forming high barriers to entry and protecting Vulcan’s business from incoming entrants.

Vulcan has made significant progress on its costcutting initiatives, demonstrated by its improving cost per ton despite relatively flattish demand.

Company Profile

Vulcan Materials is the United States’ largest producer of construction aggregates (crushed stone, sand, and gravel). Its largest markets include Texas, California, Virginia, Tennessee, Georgia, Florida, North Carolina, and Alabama. In 2021, Vulcan sold 222.9 million tons of aggregates, 11.4 million tons of asphalt mix, and 5.6 million cubic yards of ready-mix. As of Dec. 31, 2021, the company had nearly 16 billion tons of aggregates reserves

(Source: Morning Star)

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.

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

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

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Activewear Is a Growth Category, but Under Armour Lacks a Competitive Edge

Post author By lvc-admin
Post date May 23, 2022
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Business Strategy & Outlook

The Under Armour as lacking an economic moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, Under Armour’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, its North America sales have not grown over the past five years as it restructured and demand for performance gear, Under Armour’s primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, the long-term benefits for Under Armour will be limited as compared with global brands wide-moat Nike and narrow-moat Adidas. A Under Armour has fallen behind on innovation and its product is not sufficiently differentiated.

Under Armour has recently had problems in both its direct-to-consumer and wholesale businesses. Although sales through its direct-to-consumer channels increased to $2.3 billion in 2021 from $1.5 billion in 2016 (calendar years), Nike and others have experienced much greater direct-to-consumer growth in this period. Under Armour has opened its own stores as wholesale distribution has slowed, but 90% of them in North America are off-price. Still, its direct-to-consumer revenue will rise to 61% of total revenue in fiscal 2032 from 42% in its last fiscal year. This should allow Under Armour to have better control over its brand, but one cannot see evidence that it allows for premium pricing and see it as a defensive move. The Under Armour’s international segment will produce growth over the long term, but the firm faces significant competition from global and native operators with established brands and distribution networks. According to Euromonitor, the combined sportswear markets in Asia-Pacific and Western Europe were about $160 billion in 2021, greater than North America’s roughly $140 billion. As Under Armour generates only about 30% of its revenue in Europe and Asia-Pacific, it has room for growth, but it lacks strong retail partnerships and brand recognition.

Financial Strengths

The Under Armour has enough liquidity to get through COVID-19 even as the effects have not fully passed. Prior to the crisis, the firm’s long-term debt consisted only of $593 million in 3.25% senior unsecured notes that mature in 2026. Then, in May 2020, Under Armour completed an offering of $500 million in 1.5% convertible senior notes that mature in 2024. However, as this additional funding has proven to be unnecessary, the firm has already paid down more than 80% of this convertible debt. Even after these debt repayments, at the end of March 2022, the firm had $1 billion in cash and $1.1 billion in borrowing capacity under its revolver. Thus, the Under Armour to operate in a net cash position for the foreseeable future. Under Armour’s free cash flow to equity has recovered from the pandemic impact, totaling about $850 million over the past two fiscal years. The forecast about $5.6 billion in free cash flow generation over the next decade. Although the firm does not pay dividends, it recently authorized its first share buyback program. The firm repurchased $300 million in shares in February 2022, and the forecast another $20 million in buybacks in fiscal 2023. Moreover, Under Armour’s restructuring has reduced base operating expenses by about $200 million, and the forecast its capital expenditures will remain low at about 2% of sales. The firm may use some of its free cash flow for acquisitions, but one cannot forecast acquisitions due to the uncertainty concerning timing and size. Although its growth has been largely organic, the firm acquired three fitness apps for a combined $710 million in past years as part of a strategy that has been mostly abandoned. It has also made some smaller investments, such as an investment of $39.2 million in its Japanese licensee, Dome, in 2018 to raise its ownership stake to 29.5%. Under Armour later had to write down this investment because of restructuring at Dome.

Bulls Say

Under Armour quickly became no-moat Kohl’s second biggest brand after its introduction in 2017. This partnership allows Under Armour to reach more female customers. Kohl’s is expanding shelf space for activewear.

Under Armour’s restructuring has produced an average annual savings of $200 million. The firm can reinvest these savings into marketing and international expansion while improving its operating margins.

Under Armour could gain shelf space and distribution as Nike has reduced or eliminated shipments to some major sportswear retailers.

Company Description

Under Armour develops, markets, and distributes athletic apparel, footwear, and accessories in North America and other territories. Consumers of its apparel include professional and amateur athletes, sponsored college and professional teams, and people with active lifestyles. The company sells merchandise through wholesale and direct-to-consumer channels, including e-commerce and more than 400 total global factory house and brand house stores. Under Armour also operates a digital fitness app called MapMyFitness. The Baltimore-based company was founded in 1996.

(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.

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.

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Massive Opportunity for Sea but Path to Profitability Remains Difficult to Navigate

Post author By lvc-admin
Post date May 23, 2022
No Comments on Massive Opportunity for Sea but Path to Profitability Remains Difficult to Navigate

Business Strategy & Outlook

The Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. Per Euromonitor, Shopee has 30% share of its main market, Indonesia, and it estimated about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process, it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, one cannot see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, the growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

The massive potential for Sea is evident as e-commerce is 7%-8% of overall retail sales in Southeast Asia, compared with 22% for China. It forecasted a 23% five-year compound annual growth rate for the digital economy in the region. China’s e-commerce is expected to grow 11% in the same period. Given the robust macro backdrop, this should provide a conducive landscape for Shopee to succeed. Despite a massive opportunity, Shopee remains vulnerable to increased sales and marketing expenses and low switching costs. Other platforms can offer the same products with subsidies to consumers who are cost-conscious. This also implies the possibility of new competitors in e-commerce in the region that can replicate the same strategy. Given the lack of differentiation for Shopee, one can see further heavy subsidies in order to ward off threats and maintain market share, which could be impossible to continue in the long term in the pursuit of profitability. The company has indicated a goal for Shopee to be cash flow positive by 2025, but this could be a challenge without clear key advantages.

Financial Strengths

One cannot believe that Sea has any financial issues outside of the concerns about heavy cash burn. It has cash and short-term investments of USD 11.7 billion against only USD 3.3 billion total debt as of the end of 2021. Short-term liquidity is not an issue as the firm has USD 286 million of short-term debt and its current ratio is 2 times. The main concern is that the cash balance could erode quickly if sales and marketing and research and development expenses continue at this rate. In 2021, cash (excluding stock-based compensation and depreciation) operating expenses were USD 5.0 billion, which implies that Sea should be able to withstand cash burn for at least two years in a worst-case scenario where it generates zero revenue. It would not surprise us if Sea raises additional capital in order to have more of a cash buffer, but one cannot believe this poses any risk for now should the company become profitable. Outside of cash burn concerns, there are no red flags concerning leverage nor interest expenses.

Bulls Say

Sea could maintain its leading market share as Southeast Asia e-commerce expands without having to sacrifice profitability through increased sales and marketing spending.

Garena could find another hit game that increases bookings in addition to Free Fire. Also, India could rescind its sanctions on Free Fire

SeaMoney could increase its market share above its current 3% and become the one of the preferred payment options in Southeast Asia.

Company Description

Sea operates Southeast Asia’s largest e-commerce company, Shopee, in terms of gross merchandise value and number of transactions. Sea started as a gaming business, Garena, but in 2015 expanded into e-commerce, which is now the main growth driver. Shopee is a hybrid C2C and B2C marketplace platform operating in eight core markets. Indonesia accounts for 35% of GMV, with the rest split mainly among Taiwan, Vietnam, Thailand, Malaysia, and the Philippines. For Garena, Free Fire was the most downloaded game in January 2022 and accounted for 74% of gaming revenue in 2021. Sea’s third business, SeaMoney, facilitates e-wallet payments on Shopee and offline and provides other digital financial services such as credit lending.

(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.

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.

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Global stocks

InterContinental Hotels has over 100 million loyalty members, providing an immediate demand channel for third-party hotel owners joining its brand

Business Strategy and Outlook

It is alleged of InterContinental to retain its brand intangible asset (a source of its narrow moat rating) and expand room share in the hotel industry in the next decade. Renovated and newer brands supporting a favourable next-generation traveller position as well as its industry-leading loyalty program will drive this growth. The company currently has a mid-single-digit percentage share of global hotel rooms and 11% share of all industry pipeline rooms. Projection is that its total room growth averaging 3%-4% over the next decade, above the 1.8% supply increase estimated for the U.S. industry.

With 99% of rooms managed or franchised, InterContinental has an attractive recurring-fee business model with high returns on invested capital and significant switching costs (a second moat source) for property owners, as managed and franchised hotels have low fixed costs and capital requirements, and contracts lasting 20-30 years have meaningful cancellation costs for owners.

InterContinental’s brand and switching cost advantage is anticipated to strengthen, driven by new hotel brands, renovation of existing properties, technology integration, and a leading loyalty program, which all drive developer and traveller demand for the company. InterContinental has added six brands since 2016; it now has 16 in total. InterContinental announced in August 2021 a new luxury brand, with details to be provided soon. Additionally, the company announced a midscale concept in June 2017, Avid, which the company sees as addressing an underserved $20 billion market with 14 million guests, under a normal demand environment. Also, InterContinental has recently renovated its Crowne Plaza (13% of total room base) and Holiday Inn/Holiday Inn Express (62%) properties, which can support its brand advantage. Beyond this, the firm has over 100 million loyalty members, providing an immediate demand channel for third-party hotel owners joining its brand.

Financial Strength

InterContinental’s financial health remains good, despite COVID-19 challenges. InterContinental entered 2020 with net debt/EBITDA of 2.6 times, and its asset-light business model allows the company to operate with low fixed costs and stable unit growth, which led to $584 million in cash flow generation in 2021. During 2020, InterContinental took action to increase its liquidity profile, including suspending dividends and deferring discretionary capital expenditures. Also, the company tapped $425 million of its $1.3 billion credit facility, which has since been repaid. As a result, InterContinental has enough liquidity to operate at near zero revenue into 2023. It can be gathered that banking partners would work to provide InterContinental liquidity as needed, given that the company holds a brand advantage, which will drive healthy cash flow as travel demand returns. InterContinental’s EBIT/interest coverage ratio of 5.2 times for 2019 was healthy, and theoretically it can average 9.0 times over the next five years after temporarily dipping to 3.4 times in 2021. Conjectures are that the company generates about $2.3 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26, which it uses to pay down debt, distribute dividends, and repurchase shares (with the last two starting in 2022).

Bulls Say’s

InterContinental’s current mid-single-digit percentage of hotel industry room share is set to increase as the company controls 11% of the rooms in the global hotel industry pipeline.
InterContinental is well positioned to benefit from the increasing presence of the next-generation traveler though emerging lifestyle brands Kimpton, Avid, Even, Hotel Indigo, Hualuxe, and Voco.
InterContinental has a high exposure to recurring managed and franchised fees (around 95% of total operating income), which have high switching costs and generate strong ROIC.

Company Profile

InterContinental Hotels Group operates 884,000 rooms across 16 brands addressing the midscale through luxury segments. Holiday Inn and Holiday Inn Express constitute the largest brand, while Hotel Indigo, Even, Hualuxe, Kimpton, and Voco are newer lifestyle brands experiencing strong demand. The company launched a midscale brand, Avid, in summer 2017 and closed on a 51% stake in Regent Hotels in July 2018. It acquired Six Senses in February 2019. Managed and franchised represent 99% of total rooms. As of Dec. 31, 2021, the Americas represents 57% of total rooms, with Greater China accounting for 18%; Europe, Asia, the Middle East, and Africa make up 25%.

(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.

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Global stocks

Market saturation and increased route overlap with competing low-cost carriers to result in margin pressure for Ryanair Holdings

Post author By lvc-admin
Post date May 19, 2022
No Comments on Market saturation and increased route overlap with competing low-cost carriers to result in margin pressure for Ryanair Holdings

Business Strategy and Outlook

Ryanair is the largest European carrier based on passenger numbers. Since 2008, the company has grown at an annual rate of 9% from 51 million passengers in 2008 to 149 million passengers in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market. Market share growth coupled with a firm grasp on cost containment should drive double-digit profit growth over the medium term. A decade of air travel growth was brought to a grinding halt by the coronavirus pandemic. Short-haul, domestic leisure demand should see a speedier recovery, while long-haul, international and business flights face a prolonged recovery as a result of lingering international travel restrictions.

Ryanair’s short-haul, low-cost model and solid balance sheet with ample liquidity places the group in a favourable position to gain market share from weak and failing participants. The group was able to secure an additional 75 orders for the new Boeing 737 MAX, which brings total aircraft orders to 210. The new fuel-efficient plane will allow the group to achieve its target of 225 million passengers in five years’ time, while keeping operating costs low. It is forecasted that annualized revenue and EBIT growth of 7% and 12% to 2027, respectively, from pre-pandemic levels, with margins normalizing at the group’s long-term average of 18%.

To achieve its long-term growth targets, the group is deviating from its long-standing strategy of only serving secondary airports toward targeting higher-cost and slot-constrained primary airports. It is believed that the current downturn will allow the group to access slots and negotiate favourable rates with airports that are desperate for revenue. In time, these higher-cost airports could become a cost headwind for the group. Over the long term, market saturation and increased route overlap with competing low-cost carriers could result in greater price competition, resulting in margin pressure.

Financial Strength

As of Sept30,2021, Ryanair reported debt of EUR 5.7 billion and a cash balance of EUR 4.2 billion, equating to net debt of EUR 1.5 billion. At the onset of the COVID-19 pandemic, and the ensuing crisis that unfolded in the travel industry, Ryanair swiftly accessed the capital markets and raised EUR 400 million in equity to shore up its balance sheet. The group has repaid the EUR 670 million U.K. CCFF loan and a EUR 850 million bond, with no major maturities until 2023. It is believed the group has adequately restructured its cost base and put sufficient measures in place to stem cash outflows over winter and as it heads into 2022. Also, the group has sufficient liquidity to honour its capital and investment obligations. In addition to the EUR 4.2 billion liquidity it has available, the group’s fleet is largely unencumbered and is a source of additional liquidity, should the need arise. It is believed Ryanair is in a sound financial position.

Bulls Say’s

The group’s solid balance sheet and liquidity headroom will allow it to be opportunistic and capture greater market share from weak and failing peers.
The downturn allows the group to negotiate better terms with suppliers and labour, which will benefit the unit cost structure once air travel recovers.
Delivery of 210 new Boeing 737 MAX aircraft will transform the group’s fleet to a younger, more fuelefficient one.

Company Profile

Ryanair is the leading airline group by passenger numbers in Europe. The company employs a low-cost no-frills model to offer low fares to leisure customers on short-haul intra-European routes. In 2020, the most recent pre-pandemic fiscal year, the company carried 149 million passengers, utilizing a fleet of 467 Boeing 737 aircraft across its 1,800 routes. To keep costs low the company serves predominantly lower-cost secondary airports. The company generated sales of EUR 8.5 billion in fiscal 2020

(Source: MorningStar)

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

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

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

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Imperial’s Focused Approach Should Unlock Value

Post author By lvc-admin
Post date May 19, 2022
No Comments on Imperial’s Focused Approach Should Unlock Value

Business Strategy & Outlook

Stefan Bomhard has a new mantra for Imperial Brands: focus. The CEO unveiled a five-year strategic plan in 2021 that will concentrate investments both geographically and on emerging categories that

are likely to become the largest profit pools in the future. The plan makes sense because it essentially recognizes Imperial’s place in the marketplace–it is a fast follower, rather than a leader,

in most markets, but a highly profitable one with strong cash flow generation potential that should drive returns to shareholders higher in the coming years.

The overarching shift in strategy seems to be that investment will focus on categories and geographies where Imperial has existing strengths, and where consumer demand is likely to be strong. In

the core cigarette business, for example, Imperial prioritizes five tobacco markets (U.S., U.K., Germany, Spain, and Australia) in which it holds significant share and which in aggregate represent

more than 70% of Imperial’s tobacco operating profit. The company has lost share in these markets (except the U.S.) for several years, and increased investments behind its key brands should help stabilize volume declines. Other markets, as well as the firm’s smaller brands, will be managed to maximize cash flow. In next generation products, Bomhard plans to diversify the big bet placed on vaping by exiting vaping markets in which it has not gained traction, in order to target its investments on more profitable

opportunities. In heated tobacco, it is shifting its geographic focus from Japan, where it has very limited share and distribution structure, to Europe, where it has pockets of large shares.

The Bomhard’s plan will unlock value. By making more consumer and capability-centric investments, we expect the financial performance of the company to improve. Imperial has already ceded first mover advantage to Philip Morris International, and the strategy to improve performance seems to depend on regaining share, rather than driving category growth. This is unlikely to come cheap and may require higher spending going forward.

Financial Strengths

With net debt/adjusted EBITDA standing at 2.2 times at the end of fiscal 2021, Imperial’s balance sheet is roughly in line with most peers, including PMI, although gearing is much lower than that of British American Tobacco. The company has deleveraged from its 2015 acquisitions of U.S. assets from Reynolds American and Lorillard, and now intends to maintain an investment-grade credit rating. Imperial’s presence in developed markets makes it a cash-generating machine, even more so since the U.S. acquisitions. The firm has been operating in recent years on a strongly negative cash conversion cycle, and cash conversion has been up there with the best-in-class performers across the global consumer staples space. The cash conversion (defined as operating cash flow divided by operating income) to run close to 100% over five-year explicit forecast period. Imperial remains on course to return to a more normalized leverage position of below 2.5 times net debt/adjusted EBITDA by 2022, the company’s stated leverage target.

Management abandoned its medium-term guidance of 10% dividend growth in 2019, then went one step further in fiscal 2020 by cutting the second-half dividend by one third. With a payout ratio now below net income, the dividends to grow in line with earnings at a low- to mid-single-digit

rate. This is the right strategy because Imperial had been tying its own hands with the 10% growth guidance, at a time when financial flexibility is necessary to invest in long-term growth.

Bulls Say

The appointment of Simon Langelier, chairman of cannabis oil extract manufacturer PharamCielo, to the board of directors could open the door for Imperial to exploit more liberal legislation in the U.S.

Imperial generates some of the highest margins in the industry on its cigarette portfolio.

If plain packaging legislation spreads, Imperial, through its value portfolio, may be the manufacturer best positioned to benefit.

Company Description

Imperial Brands is the world’s fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2021 volume of 232 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories,

and it has a logistics platform in Western Europe, Altadis. Through acquisition, Imperial is the third-largest manufacturer in the U.S. and owns the Winston and blue brands.

(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.

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.

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Beyond Meat’s first-mover advantage will result in an enduring market leadership position

Post author By lvc-admin
Post date May 18, 2022
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Business Strategy and Outlook

Beyond Meat is a pioneer in the plant-based meat, or PBM, industry, offering the first burger to look and taste like meat, although it was soon followed by Impossible Foods and many others. Given the rapidly changing marketplace, although it is too early to tell if Beyond’s first-mover advantage will result in an enduring market leadership position.

However, it is still optimistic on the prospects for the meat like PBM market. It is expected that a primary growth driver to be the 20% of consumers willing to adjust their habits to benefit the environment, as Beyond’s products emit 90% less greenhouse gases and require 93% less land, 99% less water, and 46% less energy to produce than their meat equivalents. The PBMs will be very successful abroad, in China and India in particular, the world’s two most populated countries, each with 1.4 billion people. The products offer a great solution for China, which does not have enough arable land to feed its huge population, and a great fit for India’s large vegetarian population. Both countries are highly amenable to the products, with surveys showing 96% of China’s and 94% of India’s populations are likely to try the products, compared with 75% of U.S. consumers. It’s expected the global PBM market will grow from $6 billion in 2021, according to Euromonitor, to $31 billion by 2031 (a 19% compound annual growth rate), as PBMs grow from 1.1% of the ground meat market to nearly 5%. The model Beyond’s market share is increasing from 8.4% in 2021 to 12% in 2031 as PBMs gain a larger share of the overall meat category and Beyond’s brand continues to win with consumers, given its strong performance in taste tests and ongoing R&D investments. Beyond is the global preferred supplier of McDonald’s McPlant patty (expected to launch in various countries in 2022-24) and will co-create products with Yum Brands to be used at KFC, Pizza Hut, and Taco Bell across the globe. It is expected that these deals will collectively result in over $200 million in incremental annual revenue by 2025, supporting $72 fair value estimate for Beyond Meat

Financial Strength

In March 2021, Beyond issued $1 billion in 0% coupon convertible notes that expire in 2027. This should provide adequate liquidity until the firm generates positive free cash flow, which is expected to occur in 2026. As of March 2022, Beyond held $548 million cash, which should be sufficient to meet its needs in 2022, specifically about $230 million to fund operations and $50 million in capital expenditures. However, if demand for Beyond’s products falls short of the forecast, or costs exceed the expectations, Beyond could opt to issue additional debt or shares, which could dilute current shareholders. It is continued to expect capital expenditures to be the primary use of cash, as the company will spend a significant portion of sales to build capacity in order to meet growing demand. But the level of investment should moderate from 2021, when Beyond invested $136 million (29% of sales) to build capacity ahead of product launches with McDonald’s and Yum Brands. In 2022 and beyond, it is expected that the capital investments between 6% and 8% of sales annually for the remainder of 10-year explicit forecast (still above the average for packaged food peers as the firm continues to expand capacity). The firm will not initiate a dividend over the next 10 years, but it is expected there will be sufficient cash on hand for moderate share repurchases, which is a model beginning in 2028. It can be viewed this as a prudent use of cash when shares trade below the assessment of its intrinsic value

Bulls Say’s

Plant-based meats should continue to gain share from traditional meat, driven by significant environmental benefits and consumers’ shift away from red meat. Beyond Meat should be a major beneficiary, given its first-mover advantage and strong performance in taste tests.
Europe and Asia represent large opportunities for Beyond, where consumers are more favourable to PBMs than in the U.S., and Impossible Foods is banned in Europe, as its products contain GMOs.
New deals with McDonald’s and Yum Brands should be material catalysts in 2022-24, representing over $200 million in sales

Company Profile

Beyond Meat is a provider of plant-based meats, such as burgers, sausage, ground beef, and chicken. Unlike other vegetarian products, Beyond Meat seeks to replicate the look, cook, and taste of meat, is targeted to omnivores and vegetarians alike, and is sold in the meat case. The products are widely available across the U.S. and Canada and in 83 additional countries as well. International revenue represented 31% of 2021 sales. The firm’s products are available in retail stores and the food-service channel. In 2019, before the pandemic struck, sales were evenly split between these two channels, although mix stood at 70% retail/30% food service in 2021.

(Source:MorningStar)

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

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

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JD’s Special Dividend Doesn’t Imply Long-Term Commitment to Recurring Dividend

Post author By lvc-admin
Post date May 18, 2022
No Comments on JD’s Special Dividend Doesn’t Imply Long-Term Commitment to Recurring Dividend

Business Strategy and Outlook

JD.com has emerged as a leading disruptive force in China’s retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share increased from 21% in 2016 to an estimated 27% in 2020. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model. JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. JD is the largest retailer in China by revenue. Among listed Chinese peers, JD’s net product revenue in 2020 was 2-3 times higher than for Suning, the second-largest listed retailer. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. The increase in mix from higher-margin third-party platform business and efficiency of scale will also help lift margins.

In the medium term, investment into community group purchase and JD logistics is anticipated, and the higher mix of lower-margin supermarket categories will hold back some of the margin gains. Starting in April 2017, the logistics business became an independent business unit that opened its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply chain management, integrated warehouse, and delivery services to penetrate into less developed areas. As the logistics business gains scale and reaches higher capacity utilization, gross profit margin improvement is projected. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.

Financial Strength

JD.com had a net cash position of CNY 135 billion at the end of 2020. Its free cash flow to the firm has continued to be positive at CNY 8.1 billion in 2020. JD has not paid dividends. JD.com has invested heavily in fulfillment infrastructure and technology in recent years, leading to concerns about its free cash flow profile and margin improvement story. Management will put more emphasis on growing revenue per user, expansion into lower-tier cities and the businesses’ profitability. Therefore, JD will not invest in new areas as aggressively as before, so JD will be able to maintain a positive non-GAAP net margin versus being unprofitable before. Its financial strength will improve in future. Most of the initial investments in the third-party logistics business have been carried out, and utilization of the warehouses has picked up. Its technology team is already in place without the need to add substantial head count. JD will also be cautious in its investment in the group-buying business and new retail, given a profitable business model has not been established in the market. JD has tried to improve its asset-heavy model by transferring a portfolio of warehouses to establish a CNY 10.9 billion logistics property core fund in partnership with the sovereign wealth fund of Singapore, GIC. JD will own 20% of the fund, lease back the logistics facilities, and receive management fees for managing the facilities. The deal will be completed in phases with the majority of them completed in 2019.

Bulls Say’s

JD.com’s nationwide distribution network and fulfillment capacity will be extremely difficult for competitors to replicate.
The partnership with Tencent could allow JD.com to gain significant user traffic from Tencent’s dominant social-networking products in China.
JD is now the largest supermarket in China; the high frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.

Company Profile

JD.com is China’s second-largest e-commerce company after Alibaba in terms of gross merchandise volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses.

(Source: MorningStar)

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

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

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Narrow-Moat Alcon Has Defensive Characteristics, Refractive Is Most Exposed To Recession Risks

Post author By lvc-admin
Post date May 18, 2022
No Comments on Narrow-Moat Alcon Has Defensive Characteristics, Refractive Is Most Exposed To Recession Risks

Business Strategy and Outlook

As a global leader in eyecare, Alcon provides products and equipment for various vision conditions such as refractive errors, cataracts, and advanced vitreoretinal problems. The firm is the second-biggest player in contact lenses and has a robust portfolio in liquid eyecare solutions for allergies and dry eye. Despite a strong market position, Alcon remains in turnaround mode following years of underinvestment as a Novartis subsidiary. The company has committed significant capital to the turnaround program with greater sales and marketing spending, and capital expenditures that are expected to total over $1.5 billion over the next three years. Looking past expected lumpiness of near-term results, management’s turnaround efforts will largely pay off and there is a positive view of the outlook on the core business.

Alcon’s strategy centers on growth in premium product lines, implementing cost-saving initiatives to drive margin expansion, and capitalizing on secular long-term growth in global eyecare. Specifically, the firm has identified three main areas of growth for the business: advanced intraocular lenses (PanOptix, Vivity), premium daily contact lenses (Total1, Precision1), and liquid eyecare (Systane, Pataday). Within each of these markets, Alcon has a premium product that should allow for near-term above-market growth. Alcon’s leading position in phacoemulsification for cataract surgery, with a 50% market share, helps pull in demand for standard intraocular lenses, or IOL, from bundling, and Alcon now holds a greater-than-50% share in IOLs, as well. The firm recently launched a value-priced phaco system that should generate share gains in emerging markets, which have been slower to adapt phaco because of higher up-front costs. Alcon’s standard IOL business is expected to grow about in line with market, and the introduction of PanOptix to the U.S. market should enable above-market growth for the advanced lens portfolio. PanOptix is the first trifocal in the U.S., and this lens has benefited from its first-mover advantage, with the product achieving 75% share of advanced IOL sales in the U.S. and Japan.

Financial Strength

Alcon’s financial strength is satisfactory. The firm took on $3.5 billion of debt in early 2019 related to the spin-off from Novartis, and the company ended 2021 with a moderate degree of leverage (debt/EBITDA ratio of 2.6). Interest coverage is a moderate concern to us in the near term given that interest expenses are projected to exceed operating income in 2021. This is partly due to the refinancing of $2 billion of debt in 2019, which resulted in higher interest expense. Still, this also lengthened the maturity of the debt, giving Alcon improved longer-term financial stability. Given current assumptions about operating income growth over the coming years, interest coverage is not anticipated to be a long-term concern, and the coverage ratio is expected to surpass 10 times by the back half of the 10-year forecast period. In early 2019, about a month before Alcon once again became a public firm, the company acquired fluid-based intraocular lens maker Powervision for $285 million. The firm is likely to make a few similarly sized tuck-in acquisitions over the next few years, in the range of $50 million to $500 million, such as the $475 million acquisition of Ivantis in November 2021. With Alcon’s total market cap at around $35 billion, this acquisition range is meaningful but not necessarily material to the overall business, and the company has enough free cash flow to pursue acquisitions of this size. Positive free cash flow to the firm is projected throughout the 10-year explicit forecast period, indicating the firm has ample financial flexibility.

Bulls Say’s

Alcon stands to benefit from several secular trends in eyecare: an increasing prevalence of myopia, demand for better eyecare from a growing middle-class in emerging markets, and growth driven by an aging population.
As a stand-alone public firm, Alcon will have the necessary financial flexibility to make investments for the longer term, and patient investors could be well rewarded.
Alcon’s product pipeline (fluid-based intraocular lenses, accommodating contact lenses, Systane line expansion) will help the firm maintain and expand its position as the global leader in eyecare.

Company Profile

Alcon, headquartered in Fort Worth, Texas, is the global eyecare leader with a diverse portfolio in ophthalmology including contact lenses, eye drops, surgical equipment, and related surgical products. Novartis purchased Alcon from Nestle in 2010 and, following nine years as a Novartis subsidiary, the company was spun-off as a public company in April 2019. The company reports five distinct segments: implantables (16% of revenue), consumables (31%), equipment (9%), contact lenses (27%), and ocular health (17%). The company is geographically diversified, with only about 40% of revenue from the U.S. market, and the firm has a strong presence in the European Union and Japan.

(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.

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Rocket’s Earnings Fall in Q1 as Higher Rates Bite Into Refinance Volumes; Fair Value Estimate to $14

Post author By lvc-admin
Post date May 18, 2022
No Comments on Rocket’s Earnings Fall in Q1 as Higher Rates Bite Into Refinance Volumes; Fair Value Estimate to $14

price of btc is going to breakout

Business Strategy and Outlook

While Rocket Companies offers a variety of products and services, the firm is best known for its Rocket Mortgage segment, which provides Rocket with most of its revenue. The mortgage industry is fractured and highly competitive, but Rocket has distinguished itself by operating as an entirely digitally lender, originating and servicing its mortgages through its mobile app and website. Rocket has made substantial investments in automating the mortgage process and has been an industry leader in increasing loan processing speed and removing pain points for consumers. These investments along with its control over the appraisal and titling process, through its ownership of Amrock, have allowed the firm to offer an industry-leading mortgage experience to borrowers while also enjoying a cost structure advantage over its competitors.

As a digital lender Rocket is able to scale its capacity for mortgage volume up or down quickly since each loan requires less manual attention. This flexibility will be needed as rising mortgage rates push mortgage origination volume well below their 2020 and 2021 highs. Rocket is particularly exposed to this trend as it is strongest in refinance activity and price sensitive first-time homebuyers. As origination activity is curtailed by higher interest rates, Rocket’s revenue and earnings is anticipated to fall from 2021, particularly as pricing in the mortgage secondary market has cooled down. That said, through the full cycle Rocket is expected to gain market share from other lenders. Consumers have become more comfortable with conducting their finances digitally during the pandemic, and digital lenders, like Rocket, have benefited from this tailwind. Rocket has had strong success in expanding its partner network. New partnerships with firms like Mint and Morgan Stanley, in which these firms offer Rocket’s mortgages to their customers, will help drive growth. While Rocket’s revenue and earnings will likely remain volatile, a symptom of the cyclical nature of the mortgage industry, the company’s strong competitive position and trends in consumer behavior will provide it with long-term secular growth.

Financial Strength

Rocket operates in a highly cyclical industry, as a result its revenue and earnings have the potential to drop sharply due to economic factors completely out of its control. While Rocket does resell the mortgages it makes within days of origination, the sheer volume of mortgages that Rocket creates means that the company has billions in mortgage debt on its balance sheet at any given point in time. At the end of December, Rocket had more than $19 billion in mortgages, which were financed by equity and less than $13 billion in funding facilities. The combination of volatile revenue and substantial funding needs means that Rocket’s financial strength is an important factor to watch, particularly during slower markets. Despite this, there are no significant concerns about Rocket’s financial health at this time. The company has a strong balance sheet and has been able to maintain constant profitability, even during slow periods for mortgage origination. Rocket had over $2.1 billion in cash at the end of December 2021 and only $6 billion in debt not directly tied to its mortgage holdings. With net debt of roughly 1.5 times the projected 2023 EBITDA, Rocket should have more than enough financial resources to see it through a slow mortgage market, should one develop.

Bulls Say’s

Rocket has been steadily gaining market share in both its direct-to-consumer and partner network mortgage origination channels.
Rocket’s digital origination model gives it a cost advantage over its peers and allows it to respond rapidly to market developments.
Rocket has been able to sign major partnerships to expand its partner network. Deals with Morgan Stanley and Intuit’s Mint represent major wins for the company

Company Profile

Rocket Companies is a financial services company that was originally founded as Rock Financial in 1985 and is currently based in Detroit. Rocket Companies offers a wide array of services and products but is best known for its Rocket Mortgage business. The company’s mortgage lending operations are split between its direct-to-consumer lending, which sees borrowers accessing the company’s lending arm directly through either its mobile app or website, and its partner network where mortgage brokers and other firms use Rocket’s origination process to offer loans to their customers. The company has rapidly gained market share in recent years and is now the largest mortgage originator in the U.S. as well as the servicer for more than 2 million loans.

(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.

Tags USA Market