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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Global stocks Shares

Blackmores has seen strong growth in its international segment

Business Strategy & Outlook

Blackmores’ customer profiles are very different in its two key markets, Australia and China. Vitamin-taking Australians tend to be older or females either before or during pregnancy, while in China the market is dominated by young, online shoppers who view international vitamin and dietary supplements as luxury purchases. Nonetheless, the importance of perceived product quality—largely

an extension of brand positioning—is common to both customer groups. Blackmores’ brand intangible assets support its narrow economic moat. Blackmores’ position within the core Australian market as stable and the market as well penetrated. Actual performance in Australia is clouded by informal exports of products purchased for the daigou channel and sent to China. In fiscal 2021, roughly 9% of ANZ sales were ultimately sent to China. While this contribution remaining below 10% due to coronavirus and regulatory changes requiring daigous to register as businesses and pay taxes, this will be offset by growth in the direct China segment.

China presents a large opportunity for Blackmores as it is the second-largest global VDS market after the U.S, and it will contribute roughly 30% of group revenue at mid-cycle. Other than the informal daigou trade, Blackmores primarily distributes into China via cross-border e-commerce where the product is sold on online platforms. Further opportunity lies in establishing a sizable offline retail business, but this hinges on the company obtaining regulatory approval. Blackmores has seen strong growth in its international segment, which now contributes more to earnings than the China segment

and is forecast to remain larger. The segment is largely composed of regions in Southeast Asia including Malaysia, Thailand and Indonesia. Blackmores aims to continue the momentum after entering India in 2021 and gaining halal accreditation to serve Muslim consumers, particularly in Indonesia.

Financial Strengths

Blackmores is in a solid financial position with net cash of AUD 92 million as at June 2022. It should maintain its net cash position over the forecast period and afford a 45% dividend payout ratio. Free cash flow conversion of net income has averaged 102% over the preceding five years (before acquisitions), above the average 54% dividend payout ratio. Free cash conversion of net income to average 93% over the next five years.

Bulls Say

  • A reputation for quality is fundamental in the VDS market and Blackmores’ reputation is untarnished.
  • Bar fiscal 2020, the company has earned returns on invested capital well above its single-digit cost of capital, demonstrating its brand strength and associated pricing power.
  • Blackmores’ new CEO brings experience in navigating international brand sales and distribution in Asian markets which should allow the company to progress its business outside of Australia.

Company Description

Blackmores is a leading Australian vitamin and health supplement manufacturer and is the larger of two major vitamin brands by market share in Australia. Overseas sales also contribute a significant amount to earnings, particularly from Southeast Asia and the Chinese market via both formal (cross-border e-commerce) and informal (daigou) sales channels.

(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
Global stocks Shares

The Continued Recovery of the Hotel Industry Will Drive High Growth for Park Hotels

Business Strategy & Outlook

Park Hotels & Resorts is the second largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all the international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper upscale hotels that should help to diversify Park’s hotel brands to include Marriott, Hyatt, and IHG hotels. In the short term, the coronavirus significantly impacted the operating results for Park’s hotels with high-double-digit RevPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations across the country allowed leisure travel to quickly recover, leading to significant growth in 2021 and 2022. The company should continue to see strong growth as business and group travel also recover to Prepandemic levels with Park eventually returning to 2019 levels by 2024. However, the hotel industry will continue to face several long-term headwinds. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing Park from pushing rate increases. Finally, while the shadow supply created by Airbnb doesn’t directly compete with Park on most nights, it does limit Park’s ability to push rates on nights where it would have typically generated its highest profits. Still, the Park does have some opportunities to create value. Management has only had control of the portfolio for three years, and there is some additional growth that can be squeezed out of current renovation projects. The Chesapeake acquisition should provide an additional source of growth as the company drives higher operating efficiencies across this new portfolio. The pandemic could create additional opportunistic ways for Park to grow the portfolio.

Financial Strengths

Park is in solid financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which will serve stakeholders well. Park does not currently have an unsecured debt rating. Instead, Park utilizes secured debt on its high-quality portfolio. Currently, the majority of Park’s debt is secured by five of its largest hotels, leaving Park with 39 consolidated hotels that are free of debt encumbrance. Even if Park is unable to pay its debt obligations, the company can return the collateral secured by its debt to the lenders and proceed with its unencumbered business essentially debt free. That said, debt maturities in the near term should be manageable through a combination of refinancing, the company’s free cash flow, and the large cash position Park currently has on their balance sheet. Additionally, the company should be able to access the capital markets when acquisition opportunities arise. In 2024, which is the year hotel operations should return to normal, net debt/EBITDA and EBITDA/interest will be roughly 4.1 and 4.2 times, respectively, both of which suggest that the company should weather any future economic downturn and that it would be able to selectively acquire assets as the market recovers. As a REIT, Park is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cashflow from operating activities, providing Park plenty of flexibility to make capital allocation and investment decisions. The Park will continue to be able to access the capital markets given its current solid balance sheet and its large, higher-quality, unencumbered asset base.

Bulls Say

  • Potentially accelerating economic growth may prolong a robust hotel cycle and benefit Park’s portfolio and performance. 
  • Low leverage gives Park greater financial flexibility to be opportunistic with new investments or return more capital to shareholders through dividend growth or share buybacks. 
  • Park’s management identified several enhancement initiatives that it can execute to drive EBITDA higher on the newly acquired Chesapeake portfolio.

Company Description

Park Hotels & Resorts owns upper-upscale and luxury hotels with 27,224 rooms across 45 hotels in the United States. Park also has interests through joint ventures in another 4,297 rooms in seven U.S. hotels. Park was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017, so most of the company’s hotels are still under Hilton brands. The company has sold all its international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets.

(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
Global stocks

Raising the Valuation of Carlsberg After Margins Expand in First Half

Business Strategy & Outlook

Until recently, Carlsberg had underperformed its close peers. Although it has a very strong competitive positioning in its native Denmark and other Scandinavian markets, in other major developed markets it is a second-tier player and has suffered shelf space loss, including the high-profile removal of the flagship brand from Tesco’s shelves in 2015. In addition, Carlsberg’s second-largest market, Russia, has been undergoing volume declines since 2012 due to a decadelong government clampdown on the availability and affordability of beer and a shrinking drinking age population. Returns on invested capital were regularly below the cost of capital, and the low-teens operating margin was below that of the firm’s largest competitors. Yet, under new management at around the same time as the Tesco incident, Carlsberg has come out fighting and now looks in far better shape. SAIL’22, an umbrella for strategic initiatives designed to cut costs and reignite growth, has been a coherent set of strategies to deliver the margin opportunity that for several years was possible. Progress has been decent, with organic sales having grown by over 3% annually over the five years of the program, in spite of the COVID-19-related declines in 2020, and almost 200 basis points being added to the operating margin, which stood at 16.3% on an adjusted basis in 2021. Benchmarking against competitors, however, there is further room for improvement, and the encouragement was that the recently unveiled SAIL’27 strategy suggests more profitability improvement to come. Mix should play a pivotal role. Some of Carlsberg’s markets, including China, are undergoing structural premiumization, and Carlsberg’s premium and above portfolio, including the Tuborg and 1664 brands, as well as line extensions to the Carlsberg brand, should continue to grow at rates well above the market. Medium-term guidance under SAIL’27 is 3%-5% organic revenue growth. The medium-term growth slightly below the midpoint of that guidance, primarily because of Carlsberg’s heavy presence in developed markets, in which beer is likely to lose share to other categories including wine and spirits.

Financial Strengths

Carlsberg is in sound financial shape, and after a multiyear period of paying down debt, it is now less leveraged than Heineken and AB InBev. Following the S&N acquisition in 2008, Carlsberg’s net debt/EBITDA ratio increased to 4.1 times. Since that time, debt has fallen from DKK 48 billion to just DKK 29 billion at year-end 2021, when the adjusted net debt/EBITDA ratio stood at just under 1.4 times. Under the SAIL’22 initiative, management targets a net debt/EBITDA ratio of 2 times, so Carlsberg has some room for releveraging for M&A, increasing the dividend, or repurchasing shares. Carlsberg increased its annual dividend 60% in 2018 and after a further 9% increase in 2021, its payout ratio was 49% last year. This is more or less in line with the large-cap consumer staples peer group. The free cash flow to average over DKK 12 billion over the next five years, and with leverage under control and an average of DKK 4 billion paid out in dividends at the new annualized rate, Carlsberg now has more balance sheet optionality than it has had in several years. The company completed a share-repurchase program of DKK 4 billion and announced an additional program to repurchase a further DKK 1 billion in the first quarter of 2022. Acquisitions could be one use of the company’s excess cash. That said, it showed little interest publicly in the assets being divested by AB InBev as part of the SABMiller acquisition, and most deals have been bolt-on in nature in recent years. The Grolsch and Peroni brands, sold to Asahi, had the potential to be value-accretive to Carlsberg. With cash and stock, Carlsberg could enter into a transformative deal, especially as the company delivers on its SAIL’22 and SAIL’27 targets of strengthening the core business.

Bulls Say

  • Although Carlsberg is under indexed in premium segments, it does have a presence with brands such as Tuborg and 1664 Blanc, and the premiumization of the portfolio could be seen as a long-term opportunity. 
  • Carlsberg is present in the attractive market of Vietnam and has the opportunity to raise its economic interest in its local subsidiary, Habeco. 
  • Management’s medium-term guidance around its SAIL’27 strategy implies that there is more margin expansion to come in the years ahead, which will further close the financial performance gap to Heineken.

Company Description

Carlsberg is the fourth-largest brewer in the world following the combination of Anheuser-Busch InBev and SABMiller, with major operations in Russia, Europe, and Asia. It holds leading shares in Russia, Scandinavia, Laos, Cambodia, and parts of western China. Its key brands include Carlsberg, Tuborg, Baltika, Holsten, and Somersby. The company’s 2021 beverage volume was split among Northern and Western Europe (30%), Eastern Europe (39%), and Asia (31%).

(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
Global stocks

Heineken Delivers Strong First Half of 2022, but Risks Loom

Business Strategy & Outlook

Heineken’s “green diamond” strategy, its new approach to long-term value creation, focuses on four metrics: growth, profitability, capital efficiency, and sustainability and responsibility. The newly announced Evergreen strategy targets growth and profitability. Growth targets are vague and noncommittal, but the Heineken has structural growth drivers that will allow it to generate above-average net revenue growth. Volume growth in early-stage emerging markets such as central and southern Africa, premiumization in its late-stage developing markets such as Brazil, and a limited amount of pricing should combine to drive mid-single-digit growth in the medium term. Heineken plans to extract EUR 2 billion gross in costs by 2023, primarily from reducing headcount by around 9%, at a cost of EUR 900 million in operating and capital expenditure, and it targets an EBIT margin of 17% by 2023, which is achievable and probably beatable. As per report 18% as a reasonable medium-term margin expectation, driven by product mix and operating leverage as volume grows in some of Heineken’s greenfield emerging markets. Some organizational change will be required, however, and embedding a culture of cost control, especially given the size of the headcount reduction, without affecting the productivity of employees as being the biggest challenge new CEO Dolf van den Brink will face. Still, there are opportunities to expand margins through footprint optimization, and process standardization and digitalization. Heineken’s returns on invested capital are structurally lower than those of Anheuser-Busch InBev, for example. The ownership of pubs in the U.K. is an example of the heavy investments Heineken has made in its growth and competitive advantages. While it’s notable that return on assets has been dropped as a performance metric in the green diamond strategy, this is mostly related to the drop in demand during COVID-19 lockdowns, and if Heineken delivers on its volume growth and margin expansion opportunities, higher returns on invested capital should follow. The mid teens ROICs in the medium term, up from about 10% now on a normalized basis.

Financial Strengths

Heineken is in solid financial health. The company increased the gearing on its balance sheet in 2012 to acquire the remaining shares of Asia Pacific Breweries. Following the acquisition, Heineken’s adjusted net debt/EBITDA ended 2012 at 3.4 times, and the firm has committed to reducing that ratio to maintain its credit ratings. Despite a spike in the net debt/EBITDA ratio caused by the COVID-19 disruptions in 2020, by 2021, despite the U.K. pubs acquisition, the company had deleverage to levels below most of its peer group, with adjusted net debt/EBITDA at 2.6 times. Even if it increases the dividend at a high-single-digit rate and initiates a share-repurchase program in the outer years, Heineken’s roughly EUR 2 billion in annual free cash flow should allow it to deleverage to net debt/EBITDA of under 2 times by 2023, which would still be well below AB InBev’s current level of roughly 4 times and in line with the 2 times is the normalized durable level in the brewing industry. Given the limited options for transformative mergers and acquisitions, Heineken is unlikely to be involved in any major transactions in the near term, but the bolt-on acquisitions of small and midsize breweries are still possible, particularly in Asia. Equity swaps and the use of stock are possibilities, as was the case in the 2010 merger with Femsa. The stated target payout ratio is 30%-35%. The firm also reduced the dividend significantly during the financial crisis in 2009. This level of payout gives the firm plenty of flexibility to make organic or acquisition investments to expand the business.

Bulls Say

  • The premium portfolio includes Heineken, the only truly global premium lager brand, Affligem, Lagunitas, and Birra Moretti. It is well positioned to capture market share through premiumization. 
  • Although it will weigh on ROIC, the acquisition of Punch Taverns means.

Heineken controls almost 3,000 pubs in the U.K., a competitive advantage that will give it direct feedback from consumers in a competitive market. 

  • Heineken is the global leader in cider, a category that is growing around 2.5 times faster than beer, and several key markets offer significant room for growth.

Company Description

Heineken is Western Europe’s largest beer producer, selling 231 million hectolitres in 2021, and following the Anheuser-Busch InBev acquisition of SABMiller, it is the world’s second-largest brewer. It has the leading position in many European markets, including the Netherlands, Austria, Greece, and Italy. Its flagship brand, Heineken, is the world’s leading international premium lager and has spawned several brand extensions. Its brand portfolio spans nonalcoholic, Belgian, and craft beer. Heineken is the world’s biggest cider producer.

(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
Global stocks

Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance

Business Strategy & Outlook

Cleanaway’s strategy is positive, which seeks to maintain its leading position in commercial and industrial, or C&I, and municipal waste collections and to continue to improve its moat profile by investing in midstream materials recovery assets and, where possible, in downstream disposal assets. Cleanaway’s is the leading player in C&I and municipal waste with around 140,000 C&I customers and some 90 municipal council waste collection contracts. The economics of the waste management industry are overwhelmingly local in nature. Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance. This local market dominance in turn delivers route density that better spreads fixed costs—an imperative for-profit generation in waste collection. Cleanaway is a relative latecomer to disposal, biological treatment, and midstream materials recovery with global players waste management competitors Veolia and Suez possessing high-quality disposal assets Cleanaway cannot replicate. An exit from the Australian market by either player would be the only route to materially increasing disposal earnings.

As such, the sale of the Lucas Heights Landfill by Suez to Cleanaway–the result of the Veolia-Suez merger–is a rare windfall. Cleanaway’s growth into materials recovery is optimistic which feature more favourable economics than waste collection. Under its “Blueprint 2030” capital allocation strategy, the group will continue to focus investment in materials recovery and energy from waste, or EfW. Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in greenfield materials recovery, waste treatment, and EfW projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industry’s midstream. Further diversifying Cleanaway away from waste collections, the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.

Financial Strengths

Cleanaway debt-funded its acquisition of key Australian post-collection assets from Suez. Leverage–defined as net debt/EBITDA excluding IFRS-16 lease liabilities–sits at 2.78 times at the end of fiscal 2022, up from 1.0 times at fiscal 2021 year-end. Nonetheless, significant headroom to Cleanaway’s leverage covenant on existing debt facilities–calibrated at 3.0 times–exists. Therefore, balance sheet flexibility exists should further acquisition opportunities arise. Cleanaway’s balance sheet amid COVID-19 induced turbulence is comfortable. Specifically, Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021–fiscal 2024 period, Cleanaway’s sources of cash— those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations over said period. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or greenfield–under Cleanaway’s Blueprint 2030 strategy. Return of capital to shareholders could be considered in the absence of suitable mid- or downstream waste asset investment opportunities.

Bulls Say

  • Cleanaway is benefiting from industry consolidation.
  • Municipal waste contracts provide relatively stable cash flows through the economic cycle.
  • Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.

Company Description

Cleanaway Waste Management is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment, and valorisation, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I,

waste stream segments and in non-hazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection markets.

(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
Global stocks

Heineken Delivers Strong First Half of 2022, but Risks Loom

Business Strategy & Outlook

Heineken’s “green diamond” strategy, its new approach to long-term value creation, focuses on four metrics: growth, profitability, capital efficiency, and sustainability and responsibility. The newly announced Evergreen strategy targets growth and profitability. Growth targets are vague and noncommittal, but the Heineken has structural growth drivers that will allow it to generate above-average net revenue growth. Volume growth in early-stage emerging markets such as central and southern Africa, premiumization in its late-stage developing markets such as Brazil, and a limited amount of pricing should combine to drive mid-single-digit growth in the medium term. Heineken plans to extract EUR 2 billion gross in costs by 2023, primarily from reducing headcount by around 9%, at a cost of EUR 900 million in operating and capital expenditure, and it targets an EBIT margin of 17% by 2023, which is achievable and probably beatable. The 18% as a reasonable medium-term margin expectation, driven by product mix and operating leverage as volume grows in some of Heineken’s greenfield emerging markets. Some organizational change will be required, however, and embedding a culture of cost control, especially given the size of the headcount reduction, without affecting the productivity of employees as being the biggest challenge new CEO Dolf van den Brink will face. Still, there are opportunities to expand margins through footprint optimization, and process standardization and digitalization. Heineken’s returns on invested capital are structurally lower than those of Anheuser-Busch InBev, for example. The ownership of pubs in the U.K. is an example of the heavy investments Heineken has made in its growth and competitive advantages. While it’s notable that return on assets has been dropped as a performance metric in the green diamond strategy, this is mostly related to the drop in demand during COVID-19 lockdowns, and if Heineken delivers on its volume growth and margin expansion opportunities, higher returns on invested capital should follow. The mid teens ROICs in the medium term, up from about 10% now on a normalized basis.

Financial Strengths

Heineken is in solid financial health. The company increased the gearing on its balance sheet in 2012 to acquire the remaining shares of Asia Pacific Breweries. Following the acquisition, Heineken’s adjusted net debt/EBITDA ended 2012 at 3.4 times, and the firm has committed to reducing that ratio to maintain its credit ratings. Despite a spike in the net debt/EBITDA ratio caused by the COVID-19 disruptions in 2020, by 2021, despite the U.K. pubs acquisition, the company had deleverage to levels below most of its peer group, with adjusted net debt/EBITDA at 2.6 times. Even if it increases the dividend at a high-single-digit rate and initiates a share-repurchase program in the outer years, Heineken’s roughly EUR 2 billion in annual free cash flow should allow it to deleverage to net debt/EBITDA of under 2 times by 2023, which would still be well below AB InBev’s current level of roughly 4 times and in line with the 2 times is the normalized durable level in the brewing industry. Given the limited options for transformative mergers and acquisitions, Heineken is unlikely to be involved in any major transactions in the near term, but the bolt-on acquisitions of small and midsize breweries are still possible, particularly in Asia. Equity swaps and the use of stock are possibilities, as was the case in the 2010 merger with Femsa. The stated target payout ratio is 30%-35%. The firm also reduced the dividend significantly during the financial crisis in 2009. This level of payout gives the firm plenty of flexibility to make organic or acquisition investments to expand the business.

Bulls Say

  • The premium portfolio includes Heineken, the only truly global premium lager brand, Affligem, Lagunitas, and Birra Moretti. It is well positioned to capture market share through premiumization. 
  • Although it will weigh on ROIC, the acquisition of Punch Taverns means Heineken controls almost 3,000 pubs in the U.K., a competitive advantage that will give it direct feedback from consumers in a competitive market. 
  • Heineken is the global leader in cider, a category that is growing around 2.5 times faster than beer, and several key markets offer significant room for growth.

Company Description

Heineken is Western Europe’s largest beer producer, selling 231 million hectoliters in 2021, and following the Anheuser-Busch InBev acquisition of SABMiller, it is the world’s second-largest brewer. It has the leading position in many European markets, including the Netherlands, Austria, Greece, and Italy. Its flagship brand, Heineken, is the world’s leading international premium lager and has spawned several brand extensions. Its brand portfolio spans nonalcoholic, Belgian, and craft beer. Heineken is the world’s biggest cider producer.

(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
Global stocks

Ocado Retail delivering low single digit margin a result of slower sales growth, coupled with the impact of higher utility and fuel costs

Investment Thesis:

  • The largest dedicated online grocery supermarket globally.
  • Attractive end markets, with grocery the most defensive and often the largest retail category in most regions. 
  • Ability to monetise OCDO’s expertise and IP via licensing deals with commercial consumers.  
  • OCDO’s technology can be an enabler to traditional bricks and mortar supermarkets rather than a threat given it will allow these players to defend against the threat of Amazon. 
  • Ongoing focus on R&D and innovation (e.g., entry into adjacent markets). 
  • Announcements of additional commercial partners. 
  • Corporate activity – potential takeover target. 
  • Potential move into other areas of retailing (e.g., general merchandise) via partnerships. 

Key Risks:

  • Build out of new customer fulfilment centres (CFC) underperforms.
  • The grocery segment is highly competitive with large established players and smaller technologically driven companies.
  • Margin erosion due to pricing pressure from irrational competitors
  • Ability to find talented professionals to lead the R&D / innovation program (given the Company is competing with the likes of Amazon, Apple & Google). 
  • New and improved competing technology which erodes OCDO’s IP competitive advantage. 
  • Regulatory / litigation risks. 

Key Highlights:

  • FY22 outlook. Management expects; Revenue: Ocado Retail growing low single digit reflecting the impact of the cost of living crisis in the UK on consumer behavior, UK Solutions & Logistics delivering fee growth of >30% reflecting the accelerated capacity build out in UK and cost recharges growing at least in line with Retail revenue growth as the company supports clients to build into the growing capacity, and International Solutions delivering OSP fee revenue growth of >100% with increase of live international CFCs from 4 to 12 and continued ramp in ISF volumes, and double digit growth in Kindred revenues from £10m in pcp.
  • EBITDA: Ocado Retail delivering low single digit margin a result of slower sales growth, coupled with the impact of higher utility and fuel costs, UK Solutions & Logistics delivering +50% growth reflecting increased fees due to the increasing live capacity for clients and engineering costs growing slower relative to this new capacity and International Solutions remaining flat vs pcp with rising margin contribution as revenues growth is offset by increased investments in platform development and a minimum level of engineering cost required to support new CFCs in the early stages of ramp. 
  • Total capex of £800m (30% U.K. + 50% international + 20% technology) driven by accelerating roll out of OSP worldwide. 
  • Ocado Re: Imagined – transforming the economics of OSP. The Company unveiled new “game-changing” technology, Ocado Re:Imagined, underpinning the Ocado Smart Platform (OSP) to make it the fastest, most flexible, most sustainable and most cost-effective suite of solutions for operating online grocery, and helping improve economics materially by 30-40% reduction in labor cost in CFC, increasing UPH (mature site productivity) up from 200 to >300, decreasing total cost of MHE by >15%, decreasing time to install and test MHE by -50% to 5 months and increasing share of orders delivered in <4hrs from placing by >5x. OCOD announced it remains on track for delivery starting 2H23 and is experiencing strong partner response given the new series of automatic bots and lightweight grids will allow installation of new capacity at a much faster pace, in smaller buildings and with lower capex. 
  • Strong cash position – supports significant growth plans without additional financing. Following the end of 1H22, OCDO successfully raised gross liquidity of £878m via a £578m equity placing and a £300m revolving credit facility, bringing total liquidity to around £2bn, to provide the liquidity for capex, underpinning delivery of the committed and expected CFC programme for partners over the mid-term (on track to roll out 50 modules i.e. 10 sites at an average of 5 modules each per year in the coming 4-6 years, with ~80% of this build programme already ordered) without the need for any additional financing, post which the business is expected to become cash flow positive. 

Company Description:

Ocado Group (OCDO) listed on the London Stock Exchange in July 2010 and has over 15 years of trading history. OCDO is a global leader in online grocery retailing with over 600,000 active customers. The Company’s key competitive advantage lies in the unique end-to-end operating solution for online grocery retail based on its proprietary technology and intellectual property (IP). The company has two key operating segments: (1) Retail (online grocery retailing); and (2) Ocado Solutions (licences out Company’s IP and technology to commercial partners globally).  

(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.

Categories
Global stocks Shares

RMD Delivered Another Solid FY22 and Quarterly Results

Investment Thesis:

  • Global leader in a significantly under-penetrated sleep apnea market. 
  • High barriers to entry in establishing global distribution channels. 
  • Strong R&D program ensuring RMD remains ahead of competitors.
  • Momentum in new mask releases. 
  • Bolt-on acquisitions to supplement organic growth.
  • Leveraged to a falling Australian dollar. 

Key Risks:

  • Disruptive technology leading to better patient compliance.
  • Product recall leading to reputational damage.
  • Competitive threats leading to market share loss.
  • Disappointing growth (company and industry specific).
  • Adverse currency movements (AUD, EUR, USD).
  • RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation.

Key Highlights:

  • 4Q22 group revenue of $915m was up +4% YoY (or up +8% in constant currency), driven by Americas Devices (up +11%) and Americas Masks & Other (up +13%). Revenue growth was driven by demand and competitor’s ongoing product recall. RMD did not drive any incremental revenue from Covid-19 related demand during the quarter versus the $20m benefit in the prior year quarter. Excluding the impact of Covid-19 related demand in the prior year, revenue increased by +10% on a constant currency basis. Rest of the World (RoW) revenue was a drag on group performance over the quarter (negatively impacted by currency), with RoW Devices down -10% YoY and RoW Masks & Other down -4% YoY.
  • Operating gross profit margin increased by 50bps to 57.8% in the June quarter, driven by improvement in average selling prices (ASP) in a positive product mix (higher margin high acuity patients), which was partially offset by higher freight and manufacturing costs, negative geographic mix and unfavourable foreign currency movements.
  • SG&A expenses for the fourth quarter increased by +7% or in constant currency terms increased by +11% over the June quarter, driven predominantly by increases in employee-related costs and T&E expenses. R&D expenses for the quarter increased by 7% or in constant currency terms increased by 11%.
  • Operating profit (EBIT) for the June quarter increased by +4% to $271.5m, driven by revenue growth and gross profit margin improvement, partially offset by higher operating expenses. Effective tax rate for the June quarter was 17.6% versus 21.5% in the prior year quarter.
  • NPAT for the quarter increased by +10% to $219.2m and diluted earnings per share for the quarter of $1.49 was also up +10% YoY. 
  • RMD ended the fourth quarter with a cash balance of $274m. As at June-30, RMD had $780m in gross debt and $500m in net debt. As at June-30, RMD had approximately $1.4bn available for drawdown under their revolver facility.

Company Description:

ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio). 

(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.

Categories
Global stocks

Landstar’s immense network of third-party carriers and owner-operators should remain highly valuable to shippers

Business Strategy and Outlook 

Landstar ranks among the largest third-party logistics providers in the highly fragmented $90 billion domestic asset-light truck brokerage space. Since Landstar doesn’t own tractors, only a fleet of trailers, it has much lower operating leverage than pure asset-based truckload carriers. Thus, it enjoys a variable cost structure with relatively low capital intensity that generates solid capital returns–more than 30% on average over the past five years. Moreover, as one of the largest providers, Landstar has built a vast network of shippers, asset-based truckload carriers, and independent sales agents that support a wide economic moat. Landstar’s trucking capacity is unusual for an asset-light broker because it relies in part on captive owner-operators (which the firm refers to as business capacity owners), in addition to unaffiliated third-party carriers, to haul freight. BCOs represent roughly half of revenue, haul exclusively for Landstar, and most operate fewer than five trucks. The firm pays BCOs a fixed percentage of revenue, which reduces its gross-margin percentage (net revenue/gross revenue) variability relative to peers like C.H. Robinson and Echo Global Logistics. It also specializes in odd-size freight (around one third of sales represents unsized/flatbed business) and irregular routes–factors that bestow incremental competitive differentiation. Additionally, rather than using a captive salesforce, Landstar contracts with a vast network of independent, commission-based sales agents.

Landstar’s immense network of third-party carriers and owner-operators should remain highly valuable to shippers. This is because shippers desire efficient access to the small carrier base throughout the cycle and the broader trucking industry will probably continue to face periodic growth constraints due to the limited driver pool, including the impact of intensifying regulation. Overall, the highway brokerage market to grow at a faster clip, than the combined for-hire trucking and intermodal markets, as large 3PLs continue to process more for-hire truckload and less-than-truckload freight.

Financial Strength

Landstar’s capital structure to be healthy and sustainable. The balance sheet is strong, with more than $290 million in cash and short-term investments at the end of 2020. The company is not highly leveraged, with a very reasonable debt/total capitalization ratio near 20% (including capital leases used to fund trailing equipment), in line with the five-year average. Debt/EBITDA was less than 1 times for 2020. Landstar enjoys a history of solid free cash flow generation, averaging 5.5% of total gross revenue over the past five years (through 2020). The free cash flow to average roughly the same percentage of revenue over the forecast horizon, though it will probably be higher in 2021, given the robust operating backdrop. Cash flow should be more than sufficient to fund share repurchases, regular dividends, and small opportunistic acquisitions.

Bulls Say’s

  • Landstar’s vast network of third-party truckload carriers creates a robust value proposition for shippers, particularly during periods of tight supply. The firm is also one of the largest-capacity providers for specialty flatbed shipping; this has proved to be no small advantage. 
  • Landstar has a long history of excellent execution and impressive profitability throughout the freight cycle. 
  • Landstar’s asset-light operating model has generated average returns on capital in excess of 30% over the past five years, well above returns generated by most traditional asset-intensive carriers.

Company Profile 

Landstar System is an agent-based asset-light third-party logistics provider focused on over-the-road truck transportation (92% of revenue). It also offers intermodal (3%) and global air and ocean forwarding (3%). The remainder of its revenue stems from warehousing services and premiums from insurance programs offered to captive owner-operators.

(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.

Categories
Global stocks Shares

Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health

Business Strategy and Outlook 

As a new public company, Bausch & Lomb will be primarily focused on ramping up research and development to become more competitive in its key markets of contact lens and solution, eyecare surgery, and ophthalmic pharmaceuticals. Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health since the collapse of the historical Valeant business, which drew both financial resources and time from senior leadership. With Joe Papa moving to Bausch & Lomb as CEO, the company will have a leadership team that is already very familiar with the business, both areas of strength and product lines that may require more investment. While the near-term results are sure to be lumpy as Bausch finds its footing as public company and incurs short-term separation costs, the business should achieve consistent profitability in the longer term—justifying the narrow economic moat rating—and even if growth continues to trail peers, the returns on invested capital to remain at a decent level, further evidence of underlying business strength.

Bausch’s research and development efforts to focus initially on the contact lens, cataract equipment, and intraocular lens markets. The contact lens business is a market that requires consistently high rates of investment, and Bausch recently entered the daily silicone hydrogel sub-market with the launch of its premium Infuse lens. This lens will be further expanded for toric and presbyopia patients within the next few years. In the surgical space, Bausch trails market-leader Alcon with an approximate 20% share in cataract and vitrectomy (compared with Alcon’s 50%), and the company is overdue for a launch of a new phacoemulsification system, as well. A new phaco launch within five years, which should provide a boost to growth and profits considering the high-margin nature of newer systems. Bausch currently does not have much of a presence in premium intraocular lenses, and also it will be a main research focus for Bausch as the company attempts to play catch up with its peers.

Financial Strength

Bausch & Lomb has adequate financial strength. Following the spinoff from Bausch Health, the company will hold about $2.5 billion of debt with an additional $500 million on a revolver, and the firm will have debt/EBITDA leverage of about 2.9 times. While this is higher than the initial post-spinoff leverage target of 2.5 times, current leverage is reasonable, and the company will work to somewhat reduce leverage over the next few years from free cash flow, it will average over $500 million per year through the five-year explicit forecast period. Interest coverage ratios remain high, as well. The operating income to exceed 2.5 times interest costs for the foreseeable future, and the interest coverage to rise over time. On the other hand, though, some risk related to rising interest rates, which may increase interest expense over time, considering that Bausch’s $2.5 billion term loan is a floating debt instrument. Still, on balance, it  does not show that Bausch faces material financial risk, and the firm would be able to handle any marginal increases in debt service costs

Bulls Say’s

  • As a standalone public firm, Bausch & Lomb will have the necessary financial flexibility to make investments for the longer term, and patient investors could be rewarded. 
  • Bausch & Lomb stands to benefit from several secular trends in eyecare: an increasing prevalence of myopia, demand for better eye care from a growing middle class in emerging markets, and an aging population. 
  • Investors’ worry about Bausch & Lomb’s potential exposure to Bausch Health debts is misplaced, as the firm now operates as a separate legal entity and therefore should be valued as an independent company.

Company Profile 

Bausch & Lomb, headquartered in Laval, Quebec, Canada, is the fourth-largest vision care company by sales in the United States and the market leader in consumer vision care in India and China. The firm, which was previously a subsidiary under parent company Bausch Health, was spun off to become a public company once again in May 2022. The firm reports in three segments—vision care and consumer (60% of revenue), surgical (20%), and ophthalmic pharmaceuticals (20%). The company is geographically diversified, with 48% of revenue in the Americas, 30% from EMEA, and 22% from Asia-Pacific countries.

 (Source: MorningStar)

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