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Global stocks

Costco’s Advantages Should Weather Near-Term Supply Chain Challenges and Long-Term Competition

Business Strategy and Outlook

With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, it is expected that Costco’s durable competitive advantages lead to consistent, strong performance despite retail’s upheaval. The competitive environment is intense and becoming more challenging as Amazon scales and physical rivals deliver an omnichannel experience, but it is believed that the values that Costco offers (driven by cost leverage, procurement strength, and top-class store efficiency) should allow it to keep traffic high. With ample opportunity to expand globally, Costco Is expected to post consistently strong returns even as it grows. 

Through a financial crisis, the maturation of digital general merchandise retail, the expansion of Amazon’s Prime offering, a credit card provider switch, a robust pre-pandemic economy, two meaningful fee increases, and the COVID-19 outbreak, Costco’s membership renewal rates in the United States and Canada have remained at roughly 90%. The traffic-driving values that Costco offers in its stores are fueled by cost leverage and procurement strength that, in turn, feeds additional store visits. 

As per Morningstar analyst perspective, it is believed that the firm’s food and fuel offerings drive traffic and suspect that Costco is poised to thrive even as digital sellers expand. Although it is expected to keep pace with rivals by further developing its omni channel offering (a mid- to high-single-digit share of fiscal 2021 sales, excluding same-day grocery and various other services, came from e-commerce), it is  believed that Costco’s value proposition should support continued member growth and in-store sales expansion.

Financial Strength

With strong cash flow generation and a dedicated subscriber base, Costco is in good financial health. Costco had $11 billion in balance sheet cash as of the end of fiscal 2021 against just $7.5 billion in debt. The geographic mix of new store openings will shift as Costco grows to more than 1,000 warehouses; it is expected that openings and digital investments will leave capital expenditures at roughly 2% of sales, in line with the firm’s five-year average. Despite the spending, analysts expect the firm will be able to balance growth with returning capital to shareholders without meaningfully altering its leverage metrics. Morningstar analyst expects that firm’s conservative balance sheet approach to endure despite continued share repurchases. With free cash flow to the firm expected to average around 2%-3% of sales (consistent with recent results), it can be observed that Costco has significant financial flexibility. It is suspected such returns will include special dividends, which Costco paid in fiscal 2013, 2015, 2017, and 2021. 

Bull Says

  • Costco’s membership format exhibits strong customer loyalty, with renewal rates holding steady around 90% in a variety of economic environments and despite Amazon’s growth (particularly Prime) and the broader digitization of retail. 
  • Costco’s focused assortment reduces complexity while concentrating its buying power, which we believe grants it exceptional procurement leverage. 
  • Costco should be a safe harbor in retail seas roiled by the COVID-19 pandemic, with its competitive advantages holding returns steady.

Company Profile

The leading warehouse club, Costco has 815 stores worldwide (at the end of fiscal 2021), with most sales derived in the United States (72%) and Canada (14%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 40% of fiscal 2021 sales, with non-food merchandise 29%, warehouse ancillary and other businesses (such as fuel and pharmacy) nearly 17%, and fresh food 14%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 7% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

(Source: Morningstar)

General Advice Warning

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

Categories
Global stocks Shares

Novartis results beat consensus delivering revenue of US$12.95bn

Investment Thesis:

  • Relatively high barriers to entry, with a significant amount of funds deployed in R&D every year. 
  • Recent and upcoming divestments will streamline the business and provide increased focus to deliver shareholder returns. 
  • Recent product launches indicate solid sales momentum, with near-term product pipeline potentially providing further upside. 
  • Selective bolt-on acquisitions to supplement organic growth. 
  • Operating efficiency focuses to further support earnings growth. 
  • As the new management team improves Company culture, investors are less likely to ascribe a discount to the stock based on legacy issues.

Key Risks:

  • Recently launched products fail to deliver sales growth as expected by the market. 
  • New product pipeline fails to yield “blockbuster” products or delays in bringing key products to market. 
  • R&D programs do not yield new long-term ideas. 
  • Increased competition (pricing pressure & innovative products) from new entrants or existing players. 
  • Value destructive M&A. 
  • Regulatory / litigation risks.

Key highlights:

  • NOVN’s product development pipeline continues to progress well without any major disruptions.
  • Novartis (NOVN) 2Q21 results beat consensus on both top and bottom line, delivering revenue of US$12.95bn (vs estimates of US$12.49bn) and EPS of US$1.28 (vs estimate of US$1.08) as disruption from the pandemic waned, with management announcing the growth drivers and launches continue to show excellent momentum with +35% growth and now contributing to more than 50% of top line.
  • The Oncology business continued to recover delivering +7% growth with sales reaching US$3.9bn during the quarter, with management expecting to see accelerated growth if trends move toward pre-Covid-19 levels in 2H21.
  • Financial position remained strong with the Company not experiencing liquidity or cash flow disruptions during 2Q21 due to the Covid-19, ending the quarter with total liquidity of US$5.4bn.
  • FY21 net sales to grow low to mid-single digit, with Innovative Medicines to grow mid-single digit and Sandoz to decline low to mid-single digit, and core operating income to grow midsingle digit (ahead of sales), with Innovative Medicines growing mid to high-single digit, ahead of sales, and Sandoz declining low to mid-teens.
  • The Company retained strong capital structure (credit rating of A1/AA- by Moody’s/S&P), not experiencing any liquidity or cash flow (2Q FCF up +17% over pcp) disruptions during 2Q21 due to the COVID-19 pandemic.

Company Description: 

Novartis AG (NOVN) is an innovative healthcare company headquartered in Basel, Switzerland, with approximately 125,000 employees. In 2017, the Group reported net sales of US$49.1bn, while R&D throughout the Group amounted to approximately US$9.0bn. The Company sells its products in approximately 155 countries. The group has two segments which it reports on: (1) Innovative Medicines (Oncology / Pharmaceutical), and (2) Sandoz generics division.

(Source: Banyantree)

General Advice Warning

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

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Funds Funds

Kotak Bond Direct Growth: Stable team supports the process and has the potential to outperform in the long term with its active duration positioning

Kotak Bond is actively managed and run by an experienced team with a robust investment strategy. The fund has delivered consistent returns, and we believe it is a strong choice for investors who seek a quality portfolio and are willing to occasionally take a higher investment risk for higher returns.

Approach 

The strategy is run using a team-based approach and has a strong fundamental process in place. The fund is more focused towards taking active duration bets and invests primarily in high-quality credits. Credit analysis is divided into banking, nonbanking financial companies, and manufacturing debt, further demarcated into three buckets based on the strength of the business, management, and corporate governance standards. The qualitative assessment is then followed by rigourous quantitative analysis wherein financial ratios such as leverage, coverage, and solvency ratios are considered.

Portfolio

In 2021, the manager maintained a high allocation to government securities mainly towards the medium and long end because of attractive yields. He is overweight at the medium end because he believes that, regardless of whether the yield went up or down, the middle of the segment would provide a good level of carry and roll-down advantage. At the same time, the steepness of the curve made the longer end of the curve look appealing. However, because of the uncertainty surrounding the rate hike, he kept a limited the fund avoids investing in anything below AAA segment and intermittently holds higher cash/money market instruments to take opportunistic trading calls when markets are bumpy.

People

Abhishek Bisen is an experienced manager who has been with the fund house since October 2006. He took over this fund in April 2008 along with Deepak Agrawal. From July 2015, Bisen has been sole manager after Agrawal moved out to manage credit and shorter-maturity funds. Bisen is well-engrained in Kotak’s philosophy, and his skills complement the investment process. The fixed-income strategies are run using a team-based approach that follows an inclusive culture. It fosters the collective input of the investment specialists closest to the source of investment information.

Performance

Abhishek Bisen has delivered robust returns during his tenure from April 2008 to November 2021. It ranked in the first quartile by outperforming 82% of its peers, delivering returns of 8.19% versus the category average of 7.39%. In 2021, he maintained a higher exposure to medium-duration bonds and government securities. This resulted in superior risk-adjusted returns for the fund. We believe the fund has the potential to outperform with its active investment strategy across interest-rate cycle. 

(Source: Morningstar)

General Advice Warning

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

Categories
Funds Funds

HDFC Corporate Bond Growth: A fund focused to generate optimise return by investing in high credit rated instruments

Approach 

The investment philosophy is to optimise returns without taking excessive duration or credit risk. with most performance is driven by selecting securities offering attractive yields within the AAA rated segment. Expectedly, the investment approach relies on fundamental research. It entails combining qualitative aspects with quantitative analysis. This in turn helps the managers to determine issuer exposure they can take, thereby acting as a risk-management tool for the individual portfolio and the fund company. The investment team lays more emphasis on risk control, thereby focusing on balancing safety, liquidity, and return.

Portfolio 

The fund’s investment mandate is to invest at least 80% of assets in corporate bonds having a rating of AA+ and above. Anupam Joshi’s emphasis on liquidity and risk control is borne out by the fund’s portfolio, where almost 100% of assets are invested in AAA or equivalent rated securities. Papers issued by public-sector undertakings such as NABARD, PFC, and REC continue to find a place in the portfolio. From the private sector, established names such as HDFC and Tata Sons, in which the manager has confidence, feature in the portfolio. On the duration front, the team believes interest rates will move up from where they are currently, but it will be a more gradual increase. In line with the same, the modified duration of the fund has been reduced in the past year to 2.72 years in November 2021 from 3.35 years in October 2020. Finally, Joshi will build cash when there aren’t attractive investment opportunities and to ride out periods of volatility and uncertainty.

People

Anupam Joshi joined HDFC Mutual Fund in October 2015 and has been managing this fund since then. Earlier, he was associated with IDFC Mutual fund as portfolio manager from 2008 till his exit from the fund house.

Performance

Under Anupam Joshi (October 2015-November 2021) the fund’s direct share class has clocked an annualised return of 8.45%, outperforming the category average (6.51%) and featuring in the top performance quartile. Under the difficult environment of 2020, the fund clocked a return of 12.09%, outperforming the category average of 9.10%. In 2021, too, the fund’s direct share class has delivered a top-quartile performance. The fund is also a top-quartile performer over the trailing one-, three- and five-year periods.

About the fund  

The scheme seeks to generate income/capital appreciation through investments predominantly in AA+ and above rated corporate bonds. Its benchmark against NIFTY Corporate Bond Index. The investment strategy is well-defined for this fund, which also paves way for its effective and predictable execution. It’s a low-risk, short- to medium-duration strategy that works on the philosophy of optimising returns for investors without exposing them to excessive duration or credit risk. Therefore, investments are made only in AAA rated securities and the duration is maintained within a range of 1.0 to 4.0 years.

Joshi brings in his own style of investing while managing this fund. For instance, earlier the fund was managed with an approach of holding majority of investments till maturity, thus allowing a linear roll-down in its average maturity. Joshi prefers managing the fund more actively. The strategy has its limitations: In times when credit markets are buoyant, the fund may find it hard to match peers that, within the defined mandate of the category, can go down the credit curve. The fund may also struggle against peers that follow a more dynamic approach to duration management, compared with Joshi’s measured approach, during fast changing interest-rate scenarios.

 (Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

Strong Growth Returns for MSC Industrial but Operating Environment Remains Challenging

Business Strategy and Outlook

MSC has become one of the largest industrial distributors in U.S., and it is especially well known in the metalworking industry, wherein the firm enjoys approximately 10% market share.While MSC’s sales declined in 2020 (negative 5%) and sales growth was anemic in 2021 (2%) amid the global pandemic, over the longer term, but as per Morningstar analyst perspective it is expected that mid-single-digit growth prospects for the company driven by a return to healthier end-market demand and market share gains from smaller local and regional distributors.

Because MSC has national scale and a robust portfolio of products and value-added inventory management services, it is well positioned to capitalize on the growing trend of manufacturers consolidating spending with large distributors. Although national accounts can generate lower gross profit margins, they can also generate higher volume, which MSC can leverage to improve operating margins. MSC’s focus on providing inventory management solutions has helped the firm expand customer wallet share over the years, and we expect that trend to continue.

MSC has proved to be a consistent free cash flow generator throughout the business cycle, and in our view, it has allocated its free cash flow in a balanced, shareholder-friendly manner. We expect MSC to continue to use its excess cash to increase its regular dividend and repurchase shares. The company also occasionally pays special dividends, most recently in fiscal 2021 ($3.50 per share) and 2020 ($5.00 per share).

Strong Growth Returns for MSC Industrial but Operating Environment Remains Challenging

MSC Industrial Direct enjoyed strong year-over-year revenue growth during its fiscal first quarter ended Nov. 27. Sales increased nearly 10% as the company executed on its growth initiatives and end market demand improved (industrial production has expanded at a steady pace for much of 2021). In terms of the growth initiatives, MSC saw notable growth during the quarter from its industrial vending and in-plant initiatives as well as from its e-commerce platform (MSCDirect.com). 

While MSC’s first-quarter revenue growth was encouraging (and caused us to increase our full-year fiscal 2022 revenue growth projection to 8% from 6.5% previously), supply chain challenges and inflationary headwinds persist. CEO Erik Gershwind said the company is seeing little evidence of easing supply chain bottlenecks, labor shortages are severe, and inflation is the most extreme he can recall. Yet, despite these challenges, MSC managed to expand adjusted operating margin 30 basis points year over year 11.3%. Management was disappointed with its gross margin, which contracted 30 basis points year over year (to 41.6%) as the firm’s price/cost dynamic had not been as favorable as management would have liked (price/cost was slightly positive during the quarter). However, MSC realized nice leverage on its operating expenses (7.5% growth compared with 10% top-line growth). MSC intends to increase prices by more than 2% in fiscal 2022 to improve gross margin, and management is still targeting about a 42% gross margin (unchanged year over year), which we think is achievable.

Morningstar analyst have increased fair value estimate about 2% to $87 per share due to our stronger revenue growth outlook and the time value of money.

Financial Strength 

MSC has historically operated with a very conservative balance sheet, and it has only significantly flexed its balance sheet for large acquisitions (2006 and 2013) and large share buybacks (MSC spent $384 million to repurchase 5.3 million shares in 2016) a handful of times. At the end of its fiscal first-quarter 2022, MSC had an outstanding debt balance of $763 million. MSC’s earnings provide the firm with substantial headroom to service its debt obligations. During fiscal 2021, MSC incurred about $15 million of interest expense and generated $441 million of adjusted EBITDA, which equates to a comfortable interest coverage ratio of about 30 times. MSC has a proven ability to generate free cash flow throughout the cycle. It has generated positive free cash flow every year since 2001, and the firm’s free cash flow generation tends to spike during downturns due to reduced working capital requirements. This dynamic played out in 2020 with free cash flow increasing 26% despite sales declining 5%. Given the firm’s relatively conservative balance sheet and consistent free cash flow generation, it is believed that MSC’s financial health is satisfactory.

Bulls Say  

  • As end-market demand improves, MSC could return to mid- to high-single-digit sales growth and highteens return on invested capital. 
  • MSC’s national scale and focus on value-added inventory management services should help the firm take market share from smaller regional and local distributors. 
  • MSC generates consistent free cash flow and runs a shareholder-friendly capital-allocation strategy. The company should continue to utilize its free cash flow to increase its regular dividend, repurchase shares, and occasionally pay special dividends.

Company Profile

MSC Industrial Direct is a value-added industrial distributor with a focus on metalworking and maintenance, repair, and operations products and services. The company offers 1.9 million products through its distribution network which has 11 fulfillment centers. Although MSC has a presence in Canada, Mexico, and the United Kingdom, it primarily operates in the United States. In fiscal 2021, 94% of the firm’s $3.2 billion of sales was generated in the U.S.

(Source: Morningstar)

General Advice Warning

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

Categories
Global stocks

Status Quo Likely to Be Maintained on U.S. Health Insurance and Tax Rates

Business Strategy and Outlook:

Centene aims to be the top provider of government- sponsored health plans. Although it has grown at a solid clip organically, Centene also has made significant acquisitions- most notably the 2020 WellCare merger–to meet that goal. Technology investments to boost efficiency have helped Centene prosper in this relatively low-margin managed care sector, as well.

Centene leads the Medicaid managed-care business; those plans accounted for about two thirds of its medical membership. The Medicaid program is jointly funded by federal and state governments and primarily serves low-income individuals of any age and people with disabilities. The Affordable Care Act expanded the Medicaid population starting in 2014, and we think this program may be used in the future to expand insured rates further.

Through the acquisition of WellCare in early 2020, Centene added to its Medicare-related capabilities, particularly in the fast-growing Medicare Advantage program. With positive demographic trends and increasing popularity relative to traditional Medicare plans, we see the Medicare Advantage program as one of the most attractive growth opportunities in health insurance in the long run. This opportunity largely explains the appeal of the WellCare deal, although WellCare also added to Centene’s Medicaid footprint, too.

Financial Strength:

The fair value estimate of the stock is USD 91.00, which reflects 17 times price/earnings multiple on 2022 expected earnings.

Centene’s balance sheet remains in fine financial shape even after the WellCare merger in early 2020. With total debt around $19 billion at the end of September 2021 (including $2 billion issued for the pending Magellan Health acquisition) and the potential to deleverage in the near term primarily through profit growth, we project that the company’s gross leverage could decline to roughly 3 times in the next couple of years. Debt/capital appears likely to return to its target of the mid- to high-30s in the near future, too. The company’s maturity schedule appears easily manageable, as well, with the company facing limited maturities during the next five years, which includes its $2 billion term loan facility, borrowings on its revolver ($150 million), a construction loan ($188 million), and finance leases ($495 million).

Bulls Say:

  • Centene represents a countercyclical investment opportunity in managed care, as it can benefit from economic downturns through increasing enrollment in its Medicaid and individual exchange products. 
  • With a focus on government-sponsored programs, Centene could benefit from potential U.S. policy changes to reach universal, affordable coverage in the long run. 
  • Centene’s midteens annualized earnings growth goal through 2024 puts its near the top of its MCO peers in that metric.

Company Profile:

Centene is a managed-care organization focused on government-sponsored healthcare plans, including Medicaid, Medicare, and the individual exchanges. Centene served 22 million medical members as of September 2021, mostly in Medicaid (68% of membership), the individual exchanges (10%), Medicare Advantage (6%), and the balance in Tricare (West region), correctional facility, and international plans. The company also serves 4 million users through the Medicare Part D pharmaceutical program.

(Source: Morningstar)

General Advice Warning

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

Categories
Fixed Income Fixed Income

PIMCO ESG Global Bond Fund: A Fund providing exposure to core bond holding with ESG bias

The Fund provides exposure to investment grade securities from around the globe while incorporating PIMCO’s ESG screening framework. The strategy can be used as a core bond holding in client portfolios who have an ESG bias. The PIMCO Global Bond Fund is in attraction due to the well-resourced / experienced investment team and PIMCO’s well established investment process. PIMCO’s ESG framework involves three stages: (1) Exclude (restrictions on certain sectors). (2) Evaluate (best in class ESG issuers + prime engagement candidates). (3) Engage (engage issuers to improve ESG related business practices).

Downside Risk

  • Interest rate risk (bond prices and yields are inversely related). 
  • Credit risk (the risk of downgrades or even default) & inflation risk. 
  •  Personnel risk – significant turnover among the 3 lead PMs.

Fund Performance (As at Aug, 2021)

C:\Users\Akhila\Downloads\Screenshot 2021-12-29 144804.png

Investment Process

PIMCO applies a wide range of strategies including Duration analysis, Credit analysis, Relative Value analysis, Sector Allocation and Rotation and individual security selection. The Manger looks to make active decisions with a long-term focus and avoid extreme swings in duration or maturity with a view to creating a steady stream of returns. The Manager has designed and structured a global investment process that includes both top-down and bottom-up decision-making. The first and most important step in the firm’s process is to get the long-term view correct. The figure below provides a summary of the key elements in the investment process.

C:\Users\Akhila\Downloads\Screenshot 2021-12-29 145011.png

Secular analysis: The Manager considers its secular analysis as critical to the investment process, with the firm devoting three days every year to a “Secular Forum”. At this forum, the firm formulates PIMCO’s outlook for global bond markets over the next three to five years. Selected members of the investment staff are assigned secular topics to monitor, including monetary and fiscal policy, inflation, demographics, technology, productivity trends, and global trade. Secular researchers tackle their subjects on a global basis and approach them over a multi-year horizon. At the forum the researchers present their findings to all of the firm’s investment professionals. 

Decision making: Post Secular and Economic Forums, the Investment Committee (senior portfolio managers) develop major strategies that serve as a model for all portfolios using a consensus-based approach. The IC utilises top-down analysis provided by the forums as well as bottom-up input from specialists who focus on various fixed income sectors and the regional portfolio committees. The Investment Committee sets targets for portfolio characteristics such as duration, yield curve exposure, convexity, sector concentration and credit quality and ensures themes are consistently applied across all portfolios. The portfolio management group including the PIMCO Global Strategy team, through the incorporation of the Investment Committee’s model portfolio characteristics, will then construct the Fund.

About the fund

 The ESG Global Bond Fund is an actively managed portfolio of global fixed interest investment which incorporates PIMCO’s ESG screening. The portfolio predominantly invests in governments, corporate, mortgage and other global fixed interest securities.

(Source: Banyantree)

General Advice Warning

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

Categories
Global stocks

Cintas Corp Posts Solid Second-Quarter Results

Business Strategy and Outlook:

Cintas is the dominant provider in the $16 billion U.S. uniform rental/sales and related ancillary-services industry. It enjoys a roughly 43% market share, and no singular end market comprises a significant portion of total revenue. Despite its already impressive position, Cintas is expected to grow over the next 10 years. The firm constantly considers new product lines while emphasizing cross-selling to its existing customers. About 60% of its annual sales growth derives from new client wins, and at $4 billion-$5 billion, the remaining unvended market remains sizable, and the G&K acquisition added 170,000 uniform rental clients to Cintas’ book of business.

Cintas is a highly cyclical business; its uniform rental segment moves closely with U.S. employment trends, and given the current market environment, revenues will increase in fiscal 2022 after marginal growth in fiscal 2021. The firm recovered quickly after the 2009 recession, with revenue exceeding pre-recession levels by fiscal 2012, and Cintas still generated economic profits despite sustaining revenue losses for five straight quarters. Management has navigated this tough economic environment well over the last year, and cost management has been impressive.

Financial Strength:

The fair value estimate of the stock has been increased due to raised revenue guidance and time value of money.

Cintas’ balance sheet is considered to be healthy. At the end of the fiscal 2021 (ended May 31, 2021), the firm posted $494 million in cash and equivalents and about $1.6 billion of total long-term debt. Long-term debt was down significantly from the $2.5 billion posted at the end of fiscal 2020. Solid free cash generation will enable the firm to continue reducing leverage as desired in the years ahead. Cintas’ debt/EBITDA was near 1.4 times at the end of fiscal-year 2021, versus 1.6 times at the end of fiscal-year 2020–$1 billion dollars of debt will mature in fiscal 2022, followed by about $350 million of debt maturing in 2023 and about $50 million in 2025. Beyond that, no more debt will mature until 2027 and beyond.

Bulls Say:

  • Cintas’ industry-leading operating efficiency stems from its significant scale-based cost advantages, achieved through superior route density. 
  • The firm’s impressive sales execution is supporting robust new business wins and greater penetration among existing customers. It’s also helping Cintas to realize material cross-selling opportunities with the former G&K operations. 
  • There is still ample opportunity for expansion, as companies in the sizable unvended market look to outsource their uniform programs and facilities services.

Company Profile:

In its core uniform and facility services unit (80% of sales), Cintas provides uniform rental programs to businesses across the size spectrum, mostly in North America. The firm is by far the largest provider in the industry. Facilities products generally include the rental and sale of entrance mat, mops, shop towels, hand sanitizers, and restroom supplies. Cintas also runs a first aid and safety services business (11% of sales), a fire protection services business (6% of sales), and a uniform direct sales business (3% of sales).

(Source: Morningstar)

General Advice Warning

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

Categories
Fixed Income Sectors

Bentham Professional Global Income Fund: Strong Multi-strategy Credit Approach

Fund Objective

The Fund aims to provide exposure to global credit markets and to generate income with some potential for capital growth over the medium to long term. The Fund aims to outperform its composite benchmark over the suggested minimum investment timeframe.

Fund Strategy

The Fund is actively managed and focused on generating stable investment income by providing a diversified exposure to domestic and global credit markets while managing interest rate risk and currency risk. Bentham seeks to add value through actively managing asset allocations across different credit sectors, trading individual securities and managing its interest rate and currency risk. Bentham manages the Fund on a top-down basis.

Approach

Bentham Global Income holds a range of investments, including Australian and global hybrids, high-yield debt, investment-grade credit, collateralised loan obligations, and cash. Although not currently utilized, Aberdeen Asset Management manages a European convertible component from London. At least 50% of securities must be investment-grade, while Bentham can short credit to a maximum of 35%. Duration is actively managed and usually below the Bloomberg Ausbond Composite Bond Index; it may even be negative. Bentham’s investment in risk-monitoring systems is important in keeping tabs on the array of complex instruments held and the resulting credit and currency exposures.

Portfolio 

The strategy offers a diverse range of fixed-interest asset classes, with the asset mix varying greatly since inception. Syndicated loans (42%), cash (14%), CLOs (12%), and bank capital securities (16%) were the four largest allocations as of October 2021. Capital securities and corporate investment-grade were the largest gainers over the past year at 3.1% and 4.7%, respectively. 

Portfolio Bentham.png

People 

Encouragingly, Bentham retains a formal connection to Credit Suisse’s Credit Investments Group, one of the most deeply resourced groups in the market. This provides welcome global information sharing and asset selection, especially in the loan space. Nik Persic is the other key person and now has 16 years of working with Quin after joining Credit Suisse in 2005 from Commonwealth Bank of Australia, where he held roles in equity capital markets and institutional research.

Performance

Long-term performance has been excellent, despite the contrarian duration positioning in 2014-16. A prolonged negative duration call was an anchor on performance before Bentham aggressively reversed it during 2019. The year 2020 has enabled the team to highlight its flexibility, rotating its portfolio significantly whilst also trading high levels of credit default swap hedges–an almost 2% contribution. Synthetic credit delivered a similar benefit. Loans unsurprisingly have been the backbone of the strategy, delivering solid long-term performance with almost all physical credit being additive over three, five, and seven years.

Bentham Performance .png

(Source: Morningstar)

General Advice Warning

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

Categories
Shares Small Cap

Bega Cheese economic moat required to sustainably generate economic profits

Business Strategy and Outlook

Bega has transformed from a dairy processor with a focus on business to business operations to a branded consumer food company with a more diversified earnings base and less exposure to volatile milk prices. While dairy will remain a key category for Bega Cheese, the focus will be on high value products such as cream cheese and infant formula. In January 2021, Bega finalised the acquisition of Lion Dairy and Drinks from Kirin Group for AUD 534 million. As part of the acquisition, Bega acquired leading brands in milk-based beverages and yoghurt, white milk, and plant-based beverages, in addition to 13 manufacturing sites and Australia’s largest national cold chain distribution network. 

Revenue from the branded segment, which includes spreads, grocery products and Lion’s Dairy and Drinks portfolio, to expand at a CAGR of 18% to fiscal 2026, underpinned by new product innovation and bolt-on acquisitions. Bega Cheese has made limited investment in its brands, particularly in Australia where Fonterra is the licensee of the Bega brand, however since acquiring the spreads and grocery business in 2018, marketing spend as proportion of revenue has increased to 3% from 1% and it is anticipated to remain the higher level.

Financial Strength

Our fair value estimate is AUD 5.20 per share. Bega’s balance sheet is sound. Leverage, measured as net debt/EBITDA improved to 2.3 at June 30, 2021, from 2.4 at the prior period and comfortably below covenants. This is a pleasing position post the major acquisition of Lion Dairy and Drinks in fiscal 2021 which was funded through AUD 267 million of new and extended debt facilities and a AUD 401 million equity raising. It is expected that further deleveraging in coming years as acquisition synergies are achieved, earnings improve and noncore assets are divested, with net debt/EBITDA falling below 2.0 by 2023. Bega has the capacity to pursue smaller acquisitions while maintaining a dividend payout ratio of 50% normalised EPS. The group’s fiscal 2022 EBITDA guidance of AUD 195 million to AUD 215 million has necessitated an 11% downgrade to our fiscal 2022 EBITDA forecast to AUD 215 million.

Bulls Say’s 

  • Bega is shifting investment to the spreads and grocery business, which we view as less commoditised and higher margin than dairy, with strong niche positions in Vegemite and peanut butter 
  • External factors outside of Bega’s control, such as the weather, can adversely impact supply and demand dynamics. This can impact commodity prices, inputs costs and the firm’s supply chain and lead to volatile earnings 
  • Changing consumer trends toward dairy-free and vegan diets could lead to declines in per-capita dairy and cheese consumption, weighing on the majority of Bega’s earnings

Company Profile 

Bega Cheese is an Australian based dairy processor and food manufacturer of well-known brands including Bega Cheese and Vegemite. Bega Cheese operates two segments: the branded segment which produces consumer packaged goods primarily sold through the supermarket and foodservice channels and the bulk segment which produces commodity dairy ingredients primarily sold through the business-to-business channel.

(Source: Morningstar)

General Advice Warning

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