Category: Sectors

QBE manages a sizable investment portfolio of about USD 27 billion as of June 30, 2022, being both policyholder and shareholder funds

Business Strategy & Outlook

QBE Insurance is an international property and casualty insurance company with around USD 20 billion of annual gross written premiums. It writes about 25% of its annual premiums in its home region of Australia and New Zealand, which accounts for more than half of the groups underwriting profit. Other key markets include North America, Europe, and Asia Pacific. QBE is predominantly focused on specialty insurance lines, but the offering is extremely wide ranging across property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health. The size and diversity of insurance is built on the back of hundreds of acquisitions made over decades. The extended period of global growth via acquisition failed to deliver the cost-synergies or scale benefits management had hoped. The strategy has rightfully shifted, and progress is being made in turning the business around. The balance sheet has been strengthened and operational efficiency improving. The way senior management has reshaped insurance portfolios, cut costs, tightened underwriting standards and increased accountability across the group looks impressive. In addition to divesting several businesses, a greater focus on returns has led to group wide improvement in attritional claims.

While reducing premiums, decisions to reduce exposure to certain areas–for example, large commercial properties, and properties in higher risk areas–has improved profitability and reduced volatility. The performance of investment markets brings another element of volatility to earnings. QBE manages a sizable investment portfolio of about USD 27 billion as of June 30, 2022, being both policyholder and shareholder funds. Around 90% is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and– to a lesser extent–equity market. The returns are to remain suppressed in the short-term but will gradually recover as global cash rates normalize.

Financial Strengths

QBE Insurance is in sound financial health. After a multi decade strategy of growth by acquisition, a much-needed period of consolidation has included the exit from Latin America, North American personal lines, a number of Asian markets where the group lacks scale, and underwriting agencies and travel insurance in Australia and New Zealand. QBE Insurance held USD 3 billion in gross debt with a debt/equity ratio of 32.4% at June 30, 2022. Debt/total capital of 24.5% is within management’s 15%-30% target. QBE’s prescribed capital amount, or PCA, multiple is 1.77 times, at the top of the group’s 1.6-1.8 times target range.

Bulls Say

Rising insurance premiums, underwriting discipline, productivity initiatives, and focus on profitable growth, to drive consistent excess returns.

The U.S. operations have significant upside potential. It is expected that years of disappointment to eventually lead to premium rates reflective of the underlying insured risks.
The strong balance sheet and positive premium pricing supporting dividend growth and the return of surplus capital to shareholders.

Company Description

QBE Insurance is an international property and casualty insurance company. It writes about 25% of its annual gross written premiums in its home region of Australia and New Zealand, which accounts for more than half of the group’s underwriting profit. Other key regions include North America and Europe. QBE Insurance offers a number of personal, commercial, and specialty lines, including property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health.

(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.

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Tags Australian Market

Dividend Stocks

Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book

Business Strategy & Outlook

Suncorp is a well-capitalized financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons, and Terri Scheer. In New Zealand, key brands include Vero, AA Insurance, and Asteron Life. At group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia. The group’s exposure to the Queensland market, where large natural peril events have been larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events.

Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounts for more than half of total lending. A smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors. A sale of the bank to ANZ Bank would see capital returned to shareholders and is pending regulatory approvals. While there are potential benefits to the bancassurance model, such as better customer insights versus stand-alone insurance peers, and better cross-selling opportunities, they have not delivered a material tangible improvement in earnings, returns, or switching costs. Selling home insurance to borrowers is the lowest hanging fruit, with recent improvements to give the group a single customer view likely to make the process smoother. Similar to its peers, Suncorp is focused on enhancing the digital offering to ensure simpler and faster quotes, claim processing, and to ensure the large insurer remains competitive on price. In response to changes in the way customers engage with their insurer, with less human contact and the expectation of being able to access services at any time, productivity improvements remain a priority.

Financial Strengths

Suncorp Group is in good financial health. As at June 30, 2022, Suncorp Insurance had a prescribed capital amount, or PCA, multiple of 1.77 times the regulatory minimum. The common equity Tier 1 ratio for the insurance business was 1.22 times post the final dividend payment, within the target range of 1.125-1.325 times the PCA, and well above the regulatory minimum of 0.6 times. The bank’s common equity Tier 1 ratio as at June 30, 2022 was 9.1%, within Suncorp’s 9% to 9.5% target range.

Suncorp targets a dividend payout of 60-80% cash earnings (excluding special dividends).

Bulls Say

Premium increases stick without an equal rise in claims and rising rates lift yields on fixed income, together lifting underlying profitability and dividends.
A benign claims environment with a lower incidence of major catastrophes would considerably boost underwriting profits.
Risk management has been improved, and productivity initiatives are expected to deliver greater cost efficiencies.

Company Description

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

(Source: Morningstar)

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

Tags Top Stories

Technology Stocks

Applied’s semiconductor system and services revenue from China is about 26% of revenue

Post author By lvc-admin
Post date October 21, 2022
No Comments on Applied’s semiconductor system and services revenue from China is about 26% of revenue

Business Strategy & Outlook

Applied Materials is the top vendor of semiconductor fabrication tools. While competitors tend to specialize in a single core competency, Applied competes in almost every key equipment segment with the exception of photolithography. As a result, all major chip makers develop strong relationships with Applied that span multiple process steps of their chip production. The firm is the dominant player in the material deposition and removal areas, among others. Applied boasts an impressive global presence with an installed base of more than 43,000 tools and field service engineers stationed in nearly every leading-edge chip-manufacturing facility in the world. With semiconductor fabrication becoming increasingly complex, resulting in more process steps and new manufacturing technologies, collaboration between chipmakers and equipment providers is set to reach unprecedented levels. Applied is to leverage existing relationships and insights into future customer technology needs to take advantage of the proliferating demand for state-of-the-art chips. The company’s scale and resources allow a research and development budget in excess of $2.7 billion to serve cutting-edge technologies. Recent inflections such as 3D architectures (including 3D NAND and FinFET transistors in logic/foundry) have been enabled by more advanced tools in deposition and removal. As a result, these segments have grown faster than the broader market in recent years, and firms such as Applied have directly benefited, as they can outspend smaller chip equipment firms in R&D to develop relevant solutions and build on existing market leadership.

Beyond semiconductors, Applied is a leading supplier of manufacturing tools for flat-panel displays, including organic light-emitting diodes, or OLED, panels. The cyclical nature of the chip industry and the display market is a ubiquitous threat to equipment suppliers. However, Applied’s expansive product portfolio and large installed base will allow the firm to comfortably weather business cycles over time, and the company is to experience solid growth over the long term.

Financial Strengths

Applied Materials is in a solid financial position. At the end of fiscal 2021, the firm had $5 billion in cash and cash equivalents versus $5.45 billion in long-term debt. The firm typically keeps a substantial cash position on its balance sheet, which is appropriate for chip equipment firms. During cyclical downturns, the cash cushion allows Applied to continue investing heavily in research and development in order to maintain its leading technology and competitive positions. The firm also does share repurchases and dividends to modulate excess cash, which is positive. Specifically, Applied aims to return between 80% and 100% of free cash flow to shareholders.

Bulls Say

Applied Materials is the chip equipment industry’s standard bearer. The firm has the broadest product portfolio and offers customers the closest thing to a one-stop shop.
Applied has been streamlining operations to lower its cost structure and has reinvested some of the savings in R&D while bolstering operating margins.
Applied has benefited from the proliferation of OLED displays, which share manufacturing technologies with those used in semiconductor fabrication. As these displays have become more complex in recent years, demand for Applied’s relevant tools has risen.

Company Description

Applied Materials is the world’s largest supplier of semiconductor manufacturing equipment, providing materials engineering solutions to help make nearly every chip in the world. The firm’s systems are used in nearly every major process step with the exception of lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement, and defect-inspection scanning electron microscopes.

(Source: Morningstar)

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

Tags Top Stories

Global stocks

Costa’s International segment operates farms in Morocco and China, and earns royalty income from licensing its blueberry genetics

Business Strategy & Outlook

Costa’s strong earnings growth to continue over the near term as expansionary investment in farms both domestically and in the firm’s China and Morocco businesses begins to bear fruit. However, Costa’s customer base is highly concentrated, and its products highly commoditized, and the company has carved an economic moat required to sustainably derive economic profits. Despite the potential for short-term fluctuations, which are inherent in an industry exposed to changes in weather and climate, the Australian fruit and vegetable industry has enjoyed a consistent trajectory, growing its value at an average of 3.4% per year over the past decade. Similar industry growth over the next decade is expected, underpinned by population growth, inflationary price increases, and some per capita increases in fruit and vegetable consumption.

It is expected expect Costa can outpace industry growth and capture market share, at least in the near term. Costa is growing its Australian market share to around 20% over the next five years, from 15% currently. However, this comes at a cost. With current projects such as the Monarto facility expansion increasing its footprint in mushrooms and ongoing berry expansion, Costa’s growth activities are capital intensive. The firm’s capital expenditure has expanded from around 5% of sales in 2016 to 11% in 2021, and the remaining is in the high single digits in the near term as the firm continues to ramp up growth with new projects. Costa’s International segment operates farms in Morocco and China, and earns royalty income from licensing its blueberry genetics. The Morocco operation is principally an export business, supplying blueberries to the U.K. and continental Europe, while China berry farming sales remain predominantly local. A significant growth is expected in the international segment over the short term as Costa continues to ramp up its international facilities. While labor costs are lower in these regions, without the biosecurity regulations of Australia, international farming is more exposed to import competition.

Financial Strengths

Costa’s balance sheet is in good shape. Net debt/EBITDA lifted to 1.8 in calendar 2021 as elevated capital expenditure, including the AUD 237 million 2PH Farms acquisition, was partially offset by the AUD 185 million equity raise. Costa’s AUD 176 million equity raising in calendar 2019 has placed the firm in a much more conservative position–suitable for a firm needing to ride out short-term fluctuations, which are inherent in an industry exposed to changes in weather and climate. Costa’s fiscal 2019 net debt/EBITDA would have ballooned to over 3.6 without the raising. This is much higher than the firm’s target range of 1.5-2.0, and would breach the estimate of the firm’s covenants, it is expected to be in the vicinity of 3.5. Costa’s balance sheet is well placed to underpin a dividend payout ratio of around 60% of underlying earnings per share. Conservative management of the balance sheet is also prudent considering the capital requirements ahead of the firm. With current projects such as the Monarto facility expansion increasing its footprint in mushrooms, investment in the Guyra tomato glasshouse, continued berry expansion, and ongoing international expenditure, Costa’s growth activities are capital intensive. The firm’s growth capital expenditure has expanded from around AUD 30 million in 2016 to AUD 128 million in 2021. While growth expenditure dipped to AUD 50 million in calendar 2020 as the firm tightened growth expenditure amid COVID-19 uncertainty, this expanded to more elevated levels around AUD 80 million in calendar 2021, not including acquisitions. A near-term growth capital expenditure of above AUD 60 million as the firm continues to ramp up expansionary projects.

Bulls Say

Costa’s strong market share in key categories mitigates its high customer concentration risk
International berry expansion to China is running according to Costa’s original five-year plan, and appears set for significant growth.
Costa is well positioned to capitalize on high growth in emergent product categories, such as blackberries.

Company Description

Costa Group is the largest fresh produce company in Australia, with an estimated market share of over 15%, principally supplying fresh fruit and vegetables to the major Australian supermarkets. While supplemented by third-party growers, the firm’s products are predominantly sourced from around 5,000 planted hectares of farmland, 30 hectares of tomato glasshouse facilities, and mushroom-growing facilities across Australia. Costa also operates berry farms in Morocco and China as part of its international business.

(Source: Morningstar)

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

Tags Australian Market

Global stocks Shares

Insurance Australia Group is a general insurer with around AUD 13.5 billion of annual gross written premiums, operating in Australia and New Zealand

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

Business Strategy & Outlook

Insurance Australia Group is a general insurer with around AUD 13.5 billion of annual gross written premiums, operating in Australia and New Zealand. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia; and State, NZI, AMI, Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand. General insurance in Australia and New Zealand is mature, with limited organic growth opportunities. The group’s strategy is focused on enhancing the digital offering to ensure simpler and faster quotes, claim processing, and to ensure the large insurer remains competitive on price. In response to changes in the way customers engage with their insurer, productivity improvements remain a key priority. Competition across both the direct-to-consumer and the broker channels is intense. A number of large global insurers are increasingly targeting the broker channel, such as AIG, Zurich, and Chubb. Others have meanwhile leveraged already established brands by offering white labeled products, or gone direct to market with their own low-cost offering.

Large insured events occur without warning, and Insurance Australia Group lacks meaningful geographic diversification outside of Australia and New Zealand. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events. The performance of investment markets brings another element of volatility to earnings. Insurance Australia Group manages a sizable investment portfolio of about AUD 12 billion, being both policyholder and shareholder funds. The majority is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and– to a lesser extent–equity markets.

Financial Strengths

Insurance Australia Group remains in good financial health following an equity raising in November 2020. As of June 30, 2022, the company had gross debt and hybrids of about AUD 2.0 billion, representing a gearing ratio (debt and hybrids/tangible capital) of 40%, within its 30%-40% target range. As of June 30, 2022, IAG’s prescribed capital amount multiple was 1.8 times, the top-end of the group’s long-term benchmark of 1.6-1.8 times. The common equity Tier 1 multiple was 0.97 times, within the target range of 0.9-1.1 times and well above the regulatory minimum of 0.6 times. After an additional release of business interruption provisions and AUD 350 million share buyback, the common equity Tier 1 multiple is closer to 1 time. Insurance Australia Group issued Berkshire Hathaway with 90 million new shares at AUD 5.57 per share in June 2015, which gives Berkshire a 3.7% position in the group. Berkshire is limited to a maximum holding in Insurance Australia Group of 14.9% and must at least maintain its initial 3.7% stake during the term of the 10-year quota share.

Bulls Say

The firm’s underwriting discipline, productivity initiatives, and focus on profitable growth will see returns consistently return its cost of capital.
IAG has collectively removed downside risk from 32.5% of its business while retaining exposure to earnings upside via profit share arrangements
A benign claims environment with a lower incidence of major catastrophes considerably boost underwriting profits.

Company Description

Insurance Australia Group is the largest domestic general insurer by gross written premium operating in Australia and New Zealand. The key general insurance markets in which IAG operates are home and contents, motor vehicle and compulsory third-party, and short-tail commercial. IAG sells insurance under several brands, including NRMA, CGU, SGIO, SGIC, WFI, and Swann in Australia, and NZI, State, AMI, and Lumley in New Zealand.

(Source: Morningstar)

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

Tags Australian Market

Global stocks Shares

Booking has built a leading network of hotel properties and other services, which drives an increasing user base

Post author By lvc-admin
Post date October 20, 2022
No Comments on Booking has built a leading network of hotel properties and other services, which drives an increasing user base

Business Strategy & Outlook

While COVID-19, inflation, and currency concerns continue to be overhangs on Booking’s near-term travel demand, the company is exhibiting solid financial health. Further, Booking’s global online travel agency leadership position is to increase over the next decade, driven by a healthy position in Asia-Pacific, continued leadership in Europe, and an expanding presence in vacation rentals, restaurant bookings, experiences, flights, and payments, all of which are backed by leading marketing and technology scale. Booking has built a leading network (the source of its narrow moat) of hotel properties and other services, which drives an increasing user base. This network effect is continuing to expand in both developed and emerging markets, as well as vertical markets such as rentals, attractions, flights, and payments (where it looks to focus near-term investment) resulting in a full connected trip offering. In developed markets, replicating Booking’s leading network in Europe is proving costly and time consuming for key competitors, given around 60% of all hotels in the region are small boutique establishments. In emerging markets, the firm has a presence in China with its Trip.com and Meituan-Dianping partnerships, and in its own Booking.com and Agoda.com platforms, which is crucial. This expanding network positions Booking well for the increasing global shift to booking via mobile applications. Booking.com is a top-10 travel iOS application in 157 markets versus 73 for Airbnb, and 28 for Expedia, according to App Annie on Oct. 3, 2022.

Focused entry from Google, Facebook, Alibaba, Amazon, and others could double the current handful of players that have dominant scale, leading to a meaningful impact on profitability. That said, replicating Booking’s network would require significant time and expense, and most of the aforementioned operators are to deploy a metasearch model (don’t control hotel relationships) versus directly competing against Booking’s OTA model (control hotel relationships).

Financial Strengths

Booking’s financial health is extremely sound, and the company has enough liquidity to operate at anemic travel demand levels while still investing in key growth areas into 2024. Debt/adjusted EBITDA was 1.5 times in 2019, but spiked to 13.7 times in 2020, due to incremental debt raised and weaker industry demand caused by the COVID-19 outbreak. That said, the ratio quickly declined to 3.8 times in 2021 and it is to reach 1.8 times in 2022, as the company pays down debt and travel recovers as the pandemic is contained.

Although Booking suspended share repurchases in 2020-21 due to near-term demand uncertainty stemming from COVID-19, it has resumed this shareholder return activity in 2022. The company is to complete its $15 billion authorization announced in May 2019 over the next few years. It is expected Booking to continue to generate strong free cash flow (operating cash flow minus capital expenditures) totaling almost $32 billion the next five years (2022-26). In addition to repurchases, Booking is to begin paying out 35% of its income in a form of a dividend starting in 2026, at that point the company will have solidified its position in current growth areas of the industry (vacation rentals, experiences bookings, payment facilitation, flight content, emerging market regions, and mobile applications). Finally, the firm could swallow a large acquisition in the space, should one present itself, given its free cash flow generation, cash, and untapped revolver position.

Bulls Say

Outsize online travel bookings growth witnessed the past few years in emerging markets should continue over the next 10 years, given low penetration levels and increased online usage, and Booking is well positioned.
Mobile application usage is increasing rapidly, and Booking has a dominant global position, which aids the 50%-plus of room nights that comes from direct traffic.
Booking is strengthening its network effect through organic initiatives and in fast-growing markets like experiences, vacation rentals and payments, resulting in a fully connected trip.

Company Description

Booking is the world’s largest online travel agency by revenue, offering booking and payment services for hotel and alternative accommodation rooms, airline tickets, rental cars, restaurant reservations, cruises, experiences, and other vacation packages. The company operates a number of branded travels booking sites, including Booking.com, Agoda, OpenTable, and Rentalcars.com, and has expanded into travel media with the acquisitions of Kayak and Momondo. Transaction fees for online bookings account for the bulk of revenue and profits.

(Source: Morningstar)

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

Tags US Market

Global stocks Shares

Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio

Post author By lvc-admin
Post date October 19, 2022
No Comments on Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio

Business Strategy & Outlook

Endeavour is Australia’s pre-eminent omnichannel liquor retailer, operating the largest network of brick-and mortar stores throughout the country, with more than 1,600 liquor outlets across the well-known Dan Murphy’s and BWS brands. Endeavour also has substantial interests in hotels and electronic gaming machines, operating more than 12,000 gaming machines across its portfolio of more than 300 hotels, pubs, and clubs. Endeavour is one of Australia’s leading employers, with staff of more than 28,000 throughout Australia. Endeavour’s business is divided into two segments. Its retail segment is Australia’s leading omnichannel liquor retailer, while its hotels segment provides hospitality services and gambling operations. Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio, which operates several wineries, as well as bottling and packaging facilities. Products produced are supplied exclusively to Dan Murphy’s, BWS, and ALH Group in Australia and provide a source high-margin differentiation while also minimizing supply chain risks in the wine category.

Shifting consumer trends toward online shopping and convenience have led to strategic investments in online shopping platforms and delivery capabilities, such as smartphone applications for each brand and online pure play retailers Jimmy Brings and Shorty’s Liquor. Almost 9% of all Endeavour’s liquor sales are transacted online. Endeavour’s revenue is highly skewed to the retail segment, which will contribute approximately 85% of revenue over the next decade, with the balance coming from the hotels segment. The split is more evenly balanced at an EBT level due to the higher margins achieved in the hotels business, with approximately 65% of EBT derived through the retail business and 35% through the hotels business. The consumer demand for alcohol is to be relatively steady through the economic cycle, exhibiting attributes of consumer defensives. The Australian hotels market will predominantly be driven by the same factors as the off-premises retail liquor market, namely population growth and inflation.

Financial Strengths

Endeavour Group is in reasonable financial shape. Endeavour’s leverage ratio, measured as net debt/EBITDA, including lease liabilities, was approximately 3.5 at the end of June 2022. Endeavour Group’s strong market positioning and wide economic moat provide us with confidence that current gearing levels are maintainable. There’s an interest coverage—defined as reported EBITDA/interest expense—of approximately 6 times at fiscal 2023 year-end. There might not be any material increase in the level of gearing as consistent with the investment-grade credit profile Endeavour is targeting.

Bulls Say

Endeavour’s dominant retail market share of about 50% is multiples of its closest competitor and provides a source of long-term maintainable cost advantage.
Endeavour’s partnership agreements with Woolworths allow the business to leverage the scale and capabilities of Australia’s largest supermarket.
Endeavour’s wide economic moat, strong competitive positioning and strong balance sheet will underpin a maintainable and steadily growing dividend.

Company Description

An investment in wide-moat-rated Endeavour Group provides investors with exposure to one of the most well entrenched dividend-paying businesses in the Australian retail landscape. Following decades of enduring organic growth through store rollouts, Endeavour’s off-premises retail segment—with more than 1,600 retail outlets mainly across its Dan Murphy’s and BWS brands—accounts for approximately half of all off-premises retail liquor sales within Australia. Endeavour’s immense scale in the off-premises retail segment is unrivaled within Australia. Indeed, Endeavour’s sales are almost three times larger than its nearest retail competitor, Coles.

(Source: Morningstar)

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

Tags Australian Market

Technology Stocks

AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles

Post author By lvc-admin
Post date October 14, 2022
No Comments on AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles

Business Strategy & Outlook

Advanced Micro Devices designs an array of chips for various computing applications. These products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives us confidence that the firm will generate excess returns over its cost of capital over the next decade and thus warrants a narrow economic moat rating.AMD outsources its chip designs to third-party foundries such as Taiwan Semiconductor Manufacturing and GlobalFoundries. While AMD has historically been a smaller x86 chip supplier than Intel, it has recently offered materially more competitive products across all of its segments, thanks to a combination of strong execution in new innovative chip designs and Intel’s own manufacturing struggles, which allowed AMD’s chief foundry partner TSMC to leapfrog Intel in process technology.

The firm is well positioned to enjoy data center growth driven by the shift from on-premises to cloud computing. In the mature PC market, AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in PCs and servers, though x86-based chips is to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semi custom processor applications, such as game consoles. AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though AMD isn’t as competitive in GPUs as it is in CPUs. In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. FPGAs can be reconfigured to address the unique needs of users. AMD is to leverage FPGAs in the data center alongside its CPUs.

Financial Strengths

At the end of June 2022, the firm reported $5 billion in cash and cash equivalents against total debt of $2.8 billion. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While it has generated solid cash flow in recent years, its longer-term competitiveness remains heavily dependent on its ability to retain healthy market share across the PC, server, and GPU segments.

Bulls Say

AMD’s recent CPU and GPU offerings have been more competitive with Intel’s and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies.
AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage.
AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.

Company Description

Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.

(Source: Morningstar)

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

Tags Top Stocks

Technology Stocks

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering

Post author By lvc-admin
Post date October 14, 2022
No Comments on Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering

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Business Strategy & Outlook

Coupa software is a moaty cloud-only platform in the business spending management, or BMS, space with significant market share gains to come. Coupa benefits from a narrow moat based on strong switching costs and a network effect. Coupa’s core platform allows users to procure indirect or direct spending for a company—including everything from bottled water to laptops. While these use cases vary in mission criticality, switching costs persist throughout the business from the significant implementation time and costs as well as risks involved in changing vendors. Coupa’s network effect is driven by the increased benefits each supplier and procurer gain when additional users are added to the platform. Since its founding, Coupa has enabled $3.3 trillion in spending through its platform—and such stickiness will allow cumulative spending to snowball, benefiting long-term investors. Once items are procured, Coupa’s platform enables invoicing, expense, and payment. By having all these functionalities within one system, users benefit from better visibility of their spending. Nonetheless, existing attach rates leave ample room to grow—which informs that a positive moat trend is at play—as Coupa customers continue to use more value-adding modules, which increases overall stickiness.

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering, as customers are willing to forgo the synergies of having their ERP and procurement vendor all in one in order to gain benefits of Coupa’s user experience. In addition, while it can be considered Workday to be the greatest long-term threat to Coupa given its cloud-only architecture and reputation for highly intuitive human capital management and financial service software, Workday has admitted that it cannot compete effectively with Coupa. This is comforting that at least Coupa has a considerable head start, which will be protected in the long run by its hard-to-dismantle network effect.

Financial Strengths

Coupa is in good financial health. As of January 2022, Coupa had $730 million in cash and marketable securities with $1.6 billion in convertible debt. The firm is rightly focusing on growth of the business over allocating capital toward dividends or share repurchases. A large proportion of debt does not mature until 2025 and 2026, and the firm does not face material risk in terms of funding it, as it is capable of issuing $1.5 billion in additional debt if investors do not take the option to convert the debt to stock. Coupa has an ability to raise additional debt if needed, as the company boasts healthy adjusted free cash flow. Altogether, the 2025 notes have a conversion price of $159.60 while the 2026 notes have a conversion price of $296.45. While Coupa acquired Llamasoft for $1.5 billion in 2020, the large acquisition was well justified—as significant synergies can be seen between Coupa’s bread and butter, indirect spending, and direct spending-related offerings, like Llamasoft’s supply chain design functionality. Coupa will not make such hefty acquisitions over the next 10 years. While Coupa currently is not achieving excess returns on invested capital, or ROICs, the firm will be able to do so by fiscal 2026. While Coupa could be excess ROIC positive today, Coupa is making the right approach in funneling significant sales and marketing spending on new customer acquisition today to reap the long-term benefits later—as Coupa software is sticky, which informs a narrow moat rating.

Bulls Say

Coupa could take share within the direct spending and supply chain design market much faster than expected as frustration with other solutions nears a tipping point.
Coupa could be able to push boundaries further on price increases for existing offerings.
Regulation on reporting third-party liabilities in a timely manner could expand to other industries, further necessitating the Coupa platform.

Company Description

Coupa Software is a cloud-based provider of business spend management, or BSM, solutions. Coupa’s BSM platform provides visibility into all spend, allowing companies to gain control over their spending, optimize their supplier network and supply chains, and manage liquidity. The platform’s transactional core consists of procurement, invoicing, expense management, and payment solutions, while supporting modules ranging from strategic sourcing solutions to supply chain design and planning solutions round out the comprehensive spend management ecosystem.

(Source: Morningstar)

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

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BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce

Post author By lvc-admin
Post date October 12, 2022
No Comments on BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce

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Business Strategy & Outlook

Fiscal 2023 should be another banner year for BRP’s sales given still robust consumer demand and high level of backfill units needed at its dealers. However, this will distract the team from its long-term product and operational priorities, which should improve the firm’s competitive positioning. BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should capture efficiencies in its plants. Firmwide centres of expertise and excellence should allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product line-up (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, acquisitions aren’t required for expansion. However, entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

BRP has fiscal 2025 goals of CAD 12 billion-CAD 12.5 billion in sales and CAD 13.50-CAD 14.50 in EPS. Sales of CAD 12.4 billion and EPS of $14.68 in fiscal 2025. Demand has persisted despite economic uncertainty, and innovation should continue to drive sales, particularly in the marine segment where BRP has launched Project Ghost (altering placement of outboard engines) and the Sea Doo Switch (marine is expected to grow to CAD 1 billion by 2025, from CAD 513 billion in 2022, according to BRP, although less than CAD 800 million with current products). In the base case, BRP’s brand intangible asset and leading market share position result in competitive returns on invested capital and a narrow economic moat. With further improvements to the manufacturing process and scale, BRP could also develop a cost advantage over time.

Financial Strengths

BRP has been reducing its leverage ratio in recent years, taking debt/adjusted EBITDA down to 1.4 times at the end of fiscal 2022 from more than 4 times in 2011, as profitability has improved. It’s not surprising that significant leverage was taken on under the management of private equity partners, and leverage will continue to be contained now that the company is publicly held. The firm is comfortable operating below its targeted leverage ratio of 2 times EBITDA, and it could be around 1-1.5 times at the end of fiscal 2023.BRP has a $1.5 billion term loan set to mature in May 2027, a $100 million term loan due 2024, as well as a small euro-denominated term loan to support research and development projects in Austria (where Rotax engines are developed). The company has a CAD 1.5 billion revolving credit facility through May 2027 to access incremental liquidity. In normal operating periods, the company expects cash on hand, cash from operations, and utilization of the credit facility should allow it to meet capital expenditure, working capital, and debt service needs. The firm has agreements in place with companies like Wells Fargo and TCF to provide floor-plan financing for dealers. The company maintains flexibility in its capital structure through stock repurchases. BRP continued on its normal course issuer bid in fiscal 2023, repurchasing around 464,000 subordinate voting shares, and also executed a substantial issuer bid for 2.4 million shares in fiscal 2022 (for CAD 250 million). Additionally, the firm returns excess cash to shareholders via a quarterly dividend of CAD 0.16 per share, which could rise at a 20% clip over the long term.

Bulls Say

BRP has white-space opportunities to expand the business faster than expectations, particularly in the marine business and some niches (like electric) of the year-round lines.
Demand from underpenetrated international markets and expansion into new markets like China could lead to demand that is higher than the forecast, which could raise utilization and productivity, leading to higher profitability.
Marine is becoming a segment with higher priority to the company, which could generate a better-than-expected operating margin as the category scales, providing cash flow upside.

Company Description

BRP designs, develops, manufactures, distributes, and markets snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names. It also builds engines under the Rotax brand (after discontinuing the Evinrude outboard engine business in 2020) and offers clothing, parts, and accessories that cater to its core consumers. In 2018, BRP created a marine group, acquiring boat manufacturers Alumacraft, Triton (which makes Manitou pontoon boats), and Telwater (in Australia). At the end of fiscal 2022, the company marketed its products through a network of more than 2,800 independent dealers and 170 distributors in about 120 countries.

(Source: Morningstar)

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

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