Category: Sectors

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Funds Funds Research Sectors

WCM Focused International Growth Fund Institutional Class: A promising option

Approach

The managers first generate ideas through a quality-growth screen, which includes companies with market caps of at least $3.5 billion, a good liquidity profile, and other metrics such as strong and improving margins. The team excludes non-growth industries such as utilities and looks for companies with solid returns on invested capital. Factors such as economies of scale, intellectual property, and legal or regulatory advantages are key. The team also places a heavy emphasis on culture, believing that culture drives certain companies forward and helps maintain their competitive edge. The team takes its best ideas and builds a relatively concentrated portfolio of roughly 30 to 40 international stocks. Because of their benchmark-agnostic approach, the portfolio may have extreme over- and underweighting to various sectors.

Portfolio

The managers use their best ideas to build a concentrated portfolio. . Coming out of the 2007-09 global financial crisis, the managers felt like their portfolio was too concentrated at about 20 holdings. They’ve gradually increased that count, and in July 2021 had 35 holdings. While still relatively concentrated (the typical foreign large-growth peer held 83 stocks in July), the expansion helps reduce individual stock risk. The managers take other prudent steps to minimize risk and remain relatively diverse. They avoid sectors that they believe offer little growth potential and as of July 2021, the fund had no exposure to energy, real estate, or utilities.

Portfolio Holdings .png

People

Co-CEO and manager Kurt Winrich’s upcoming retirement has been long in the works and the team will still have four capable managers to pick up the slack. Mike Trigg, who has been on the strategy since the fund’s 2011 inception, is the final decision-maker here. . Peter Hunkel, who has also managed since the fund’s inception, is responsible for portfolio construction. The team promoted Sanjay Ayer, also a former Morningstar equity analyst, to the management ranks in June 2019. Ayer joined WCM in 2007 and manages the WCM Global Growth Fund WCMGX and the WCM Emerging Markets Fund WCMEX, which have had success under him. Paul Black, co-CEO of WCM, is a named manager here but serves mainly as an advisor to the team. 

Performance 

Strong stock selection has fueled the fund’s outperformance. Picks in technology and industrials, in particular, have been among the biggest contributors to its performance. That helped the strategy weather 2020’s first-quarter coronavirus-driven slide. The fund held up slightly better than the index losing 29.4% from Jan. 18 to March 23, 2020, compared with the index’s 30.3% loss. The managers then opportunistically added MercadoLibre MELI and Ferrari RACE, which benefitted the strategy coming out of the bear market. In 2021, the fund has returned to its winning ways. Its 12.7% return handily beat the index’s 4.6% and the Morningstar Category’s 4.5%. That was good for the top decile in the category. Holdings such as ASML Holdings NV ADR ASML and Shopify SHOP were among the leading contributors in that period.

Performance .png

About the Fund

WCM Focused International Growth Fund seeks long term capital appreciation by investing in equity securities of non-U.S. domiciled companies or depository receipts of non-U.S. domiciled companies.

(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
Financial Markets Sectors Technology Technology Stocks

Equinix reports strong results driven by increased gross bookings in key American regions

The concept of 5G network with magnifying glass on modern circuit board, high-speed mobile internet and new generation networks technology background

Investment Thesis:

  • In our view, considering the quality of the business, EQIX is trading at fair valuation (from the perspective of trading multiples, dividend yield and our DCF valuation). 
  • Attractive long-term outlook in global digitization and data requirements of companies, with 5G and cloud computing as key drivers. 
  • Businesses moving away from on-premise centres towards colocation and cloud networks. 
  • Diversified client base and revenue stream minimises contractual risk. 
  • Opportunity for future market share expansion via potential acquisitions.

Key Risks:

  • Increases to operating expenses – particularly electricity costs. However, the contracts between Equinix and its customers provide for rights and protection clauses to permit the Company to pass on electricity cost increases that exceed 5%. 
  • Rising technology and acceptance of cloud-based services may incentivise businesses to fully leverage cloud infrastructure rather than connecting with IBX data centres. However, management has downplayed these concerns, stating that there must still be direct interconnection between Cloud and businesses within the data centres. 
  • Newer IBX data centres have twice the cooling needs as old centres. Potential power limitations could force the company to have a lower utilization rate of its cabinets.  
  • Increased competition in the industry from the likes of Google, Apple, Microsoft and Digital Reality Trust, and the possibility of formation of strong strategic alliances amongst competitors 
  • EQIX is subject to exchange rate risk due to the company’s diverse geographical scale of operations. However, the company hedges many of these exposures. 
  • REIT classification mandates a minimum of 90% of taxable income paid to shareholders. This may hinder EQIX’s ability to increase its cash via retained earnings and could render the company’s balance sheet inflexible.

Key highlights:

  • Over the quarter, revenues up +8% to $1.7bn, adjusted EBITDA up +7% and AFFO was ahead of management’s expectations.
  • Strong quarterly result, with revenues up +8% to $1.7bn, adjusted EBITDA up +7% and AFFO growth of +10% (normalised and constant currency) was ahead of management’s expectations.
  • Interconnection revenues grew +12%
  • On a normalized and constant currency basis, Americas’ revenue growth of +8% YoY was among the highest in as many quarters. Adjusted EBITDA of $326m was up +3%.
  • Asia-Pacific reported normalized and constant currency revenue up +11% YoY and normalised MRR up +9% YoY, with management noted MRR growth was partially impacted by Covid related constraints in Singapore and political uncertainty in Hong Kong.
  • Total gross debt at the end of the quarter was $11.8bn, with weight average borrowing costs of 1.72% (95% of the debt is at fixed rate) and weight average maturity of debt 9.6 years. 
  • Net leverage ratio at the end of the period was 3.8x

Company Description: 

Equinix (NASDAQ: EQIX) is a leading company in internet connection and data centres. It is the global market leader in colocation data centre industry, providing data services and platforms for over 9800 companies across 24 countries. This allows companies to connect to their online ecosystem and meet their interconnection needs for their business operations. EQIX also offers additional solutions such as the Equinix Cloud Exchange Fabric to connect data centres to cloud networks, and the recently introduced Equinix SmartKey to offer encryption protection for the data security management of companies.

(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
Financial Markets Sectors Technology Technology Stocks

Apple Inc is focused on sustaining growth and margins

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Investment Thesis 

  • High barriers to entry.Strong strategic position in the rapidly growing global smartphone market especially with high end consumers. Loyal consumer base resulting in lower competitive pressure, and higher pricing power. 
  • Large cash balance and strong free cash flow supporting share buyback and dividend payout.
  •  Leading positions in iPhone; iPads; and Macs. 
  •  Services segment remains on track to double FY16 revenue by FY20. 
  • In terms of Other products (such as wearables and home products), AAPL seized the leading position off the back of a surge in smartwatch sales in a market expected to grow single digit till 2022 and double digit thereafter. 
  • Strong senior executive team reducing (not totally eliminating) key man risk.

Key Risks

  • Geo-political tensions. The current trade war between the US and China pose a threat to the company’s future profits. AAPL currently obtains components from single or limited sources (mostly China), the Company is subject to significant supply and pricing risks. Also, Greater China is a major market contributing to approximately 21% (Q218) of total revenue and any retaliatory efforts from Beijing could impact those sales. 
  • Whilst there are only a handful of competitors, the competition is Intense from Android manufacturers. The most notable competitors in the smartphone market (which contributes 62% of Apple’s revenues) are the Korean giant Samsung and two rapidly growing Chinese smartphone players in Huawei and Xiaomi. On raw performance specs (i.e., camera, maps, screen size, charge time, etc.), one may assert that AAPL devices are technically inferior to a handful of Android devices. 
  • Movements in U.S. dollar (USD). The greenback’s strong gain recently (due to rise in U.S. interest rates and moderating growth in other parts of the globe) has seen it rise to the highest level in nearly seven months, meaning foreign currency earnings of AAPL can be worth less when translated back to USD. The weakness in foreign currencies relative to USD will have an adverse impact on net sales during 2018.

Key highlights to 4Q18 results

  • 4Q18 revenue of $62.9bn, up +20% from the year-ago quarter, and quarterly diluted EPS of $2.91, up +41%, driven by record sales and strong momentum for iPhone, Wearables and Services. On the conference call, management highlighted “[revenue] was ahead of our expectations. That’s an increase of 20% over last year and our highest growth rate in three years”. 
  •  Gross margin was 38.3%, flat sequentially, in line with management’s expectations, as leverage from higher revenue offset seasonal transition costs. 
  •  International sales (61% of the quarter’s revenue) was strong, especially in Japan, up +34%, Rest of Asia Pacific, up +22%. The Americas (44% of revenue) saw revenue of $27.5bn, up +19%, whilst Europe at $15.4bn, was up +18% and China was up +16% at $11.4bn. 
  • Services revenue reached an all-time high of $10.0bn. Excluding a one-time favorable adjustment of $640m (in 4Q17), Services revenue grew from $7.9bn to $10bn, up +27% over the pcp. 
  • By product, iPhone, Services and Other products saw 29%, 17% and 31% sales growth, respectively, whilst disappointingly, iPad and Mac saw -15% and 3% sales growth respectively. 
  • iPhone ASP was $793 compared to $618 a year ago, driven by strong performance of iPhone X, 8 and 8 Plus, as well as the successful launch of iPhone XS and XS Max in the September quarter this year, while we launched iPhone X in the December quarter last year.

Company Profile

Apple Inc. (AAPL) designs and manufactures media devices and personal computers (Macs), and sells a variety of related software, services, accessories, networking solutions and third party digital content and applications. The company leads the world in innovation with iPhone, iPad, Mac, apple watch and Apple tv.

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 Research Sectors

Altius Sustainable Bond Fund- A fund that aims to provide a total return approach

The Altius Sustainable Bond Fund offers investors fixed interest investments, which are managed with the consideration of environment, social and corporate governance (ESG) principles. The Manager recently expanded its exclusion of companies engaged in thermal coal to all fossil fuels (or at least have revenue no greater than 10% sourced from these activities). The Fund is a credible offering. It is run by an investment team with strong credentials and lengthy investment experience in managed assets in the investment class (the team of six comprises three PMs all with at least 25 years’ experience and the remaining team members all with over 10 years’ experience).

Downside Risk: 

  • Interest rate risk (however the Fund’s total return focus should limit this). 
  • The Manager gets the thematic and top-down view wrong. 
  • Key man risk – Bill Bovingdon, Chris Dickman and Gavin Goodhand.

Investment Team:

The fund is managed by Australian Unity’s Cash and Fixed Interest team (Altius) consisting of experienced fixed interest investment professionals. The investment team is supported by a very experienced Investment Advisory Committee, which meet every quarter (formally). Below are the 

  • Bill Bovingdon – Executive Director, Chief Investment Officer 
  • Chris Dickman – Executive Director, Senior Portfolio Manager
  • Gavin Goodhand – Senior Portfolio Manager
  • Yen Wong – Head of Credit Research
  • Kirsten Lee – Credit Analyst.
  • Vincent Tang – Senior Portfolio Analyst

Performance:

(%)Fund  Benchmark**Out-performance
1-month-0.110.35-0.46
3-months0.390.77-0.38
1-year (p.a.)-0.550.32-0.23
3-years (p.a.1.422.49-1.07
5-year (p.a.)1.532.13-0.6
Since inception (p.a.)*2.262.65-0.39

Fees Structure:

The Fund has lowered its management fees 0.56% p.a. to 0.37%p.a. The Fund charges no performance fee.

Fund Positioning:

Sector Allocation:

Top 10 Holdings:

About the fund:

The Altius Sustainable Bond Fund is an Australian fixed interest fund that invests in companies which conduct their business and apply capital responsibly, considering a range of environmental, social and governance (ESG) issues. The Fund aims to provide a total return approach, offering duration exposure at appropriate points in the cycle, as well as positioning the portfolio defensively in a rising rate environment and invests only in domestic assets, thus avoiding importation of global risks (e.g. currency) and offering a different risk profile.

(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
Technology Stocks

Threat-prevention Solution providing robust growth for Palo Alto Network Inc

Graphic of investment stock market data analysis business

Business Strategy and Outlook

Palo Alto Networks became a leading cybersecurity provider through its next-generation firewall appliance altering the requirements of an essential piece of networking security. The firm’s portfolio has expanded outside of network security into areas such as cloud protection and automated response. Looking ahead, Palo Alto’s nascent threat-prevention solutions will provide robust growth along with a significantly improved margin profile.

Core to Palo Alto’s technology is its security operating platform, which provides centralized security management. The ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand. Palo Alto will continue to outpace its security peers by focusing on providing solutions in areas like cloud security and automation. Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks. Although it is expected that Palo Alto will remain acquisitive and dedicated to organic innovation, significant operating leverage will be gained throughout the coming decade as recurring subscription and support revenue streams flow from its expansive customer base.

Financial Strength 

Palo Alto is financially stable and would generate strong cash flow as it expands its operating margin profile. The company has historically operated at a loss (excluding fiscal 2012), and we expect it to turn profitable by fiscal 2023 on a GAAP basis. Palo Alto ended fiscal 2021 with $2.9 billion in cash and cash equivalents and total debt of $3.2 billion in 2023 and 2025 convertible senior notes. The $1.7 billion 2023 notes mature in June 2023 and have a 0.75% fixed interest rate per year paid semiannually, while the $2.0 billion of notes that mature June 2025 have a 0.375% interest rate paid semiannually. Palo Alto issued note hedges for both maturity dates to alleviate potential earnings per share dilution. The company announced a $1.0 billion share-repurchase authorization in February 2019, which was increased to $1.7 billion the following year with an expiration at the end of 2021, and has subsequently extended the program. Palo Alto continues to use share buybacks to return capital to shareholders, and believe that it will not pursue any dividend payouts.

The fair value estimate of $585 per share is consistent with a fiscal 2022 enterprise/sales ratio of 11 times and 4% free cash flow yield and upgraded its moat to wide.

Bulls Says 

  • Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers. 
  • Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and we think Palo Alto is typically on the short list of potential vendors. 
  • The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

Company Profile

Palo Alto Networks is a pure-play cybersecurity vendor that sells security appliances, subscriptions, and support into enterprises, government entities, and service providers. The company’s product portfolio includes firewall appliances, virtual firewalls, endpoint protection, cloud security, and cybersecurity analytics. The Santa Clara, California, firm was established in 2005 and sells its products worldwide.

(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 Sectors

Transurban toll revenue declined -17.6% to $616m driving a -20.7% decline in EBITDA

Investment Thesis

  • Hard to replicate critical infrastructure assets. 
  • Consistent growth in earnings driven by four key factors: 1) Traffic (with mature toll roads delivering on average 2-4% annual traffic growth); 2) Prices (with escalation set with agreements with governments); 3) operational efficiency improvements; and 4) development contribution from new assets. 
  • Attractive yield – steady and growing distribution stream. 
  • Integration of technology and systems to enhance operations. 
  • Growth by asset acquisition and/or development of greenfield and brownfield projects. 
  • Exposure to infrastructure assets in the U.S. 
  • Strong management team with experience in deploying the developer-operator business model. 
  • West Gate Tunnel dispute is a drag on share price.

Key Risks and project deliverables

  • Bond yields experience a significant increase in the short term and track upwards over the long term. 
  • Valuation appears full at current levels. 
  • Project development cost blowouts. 
  • Reduced traffic volumes. 
  • Regulatory changes within the sector. 
  • Unfavorable financing arrangements. 
  • Poor acquisitions (derived from inaccurate modelling of traffic).

FY21 Results Highlights

  • Average daily traffic (ADT) decreased by 0.4% vs FY20 or 7.0% excluding the contribution from new assets, M8/M5 East and NorthConnex, which opened during the year and performed ahead of expectations. 
  • Free Cash decreased by 13.5% vs FY20, primarily reflecting the impacts of reduced traffic in Melbourne and North America due to Covid-19 related mobility restrictions as well as increases in cost related to strategic growth projects. 
  • FY21 distribution of 36.5cps including a final distribution of 21.5 cps for 2H21. 
  • Statutory profit of $3,272m, which includes $3,726m gain on sale of TCL’s Chesapeake assets. 
  • The Board declared a distribution of 21.5 cps for 2H21 which takes the total FY21 distribution to 36.5cps, of which 1.0 cent is fully franked. TCL highlighted that its distribution reinvestment plan is open for this distribution payment.

Company Profile 

Transurban Group (TCL) develops, operates, and maintains urban toll road networks in Australia and the United States. The company holds interest in 15 roads in Melbourne, Sydney, Brisbane, and Virginia. Transurban Group is headquartered in Docklands, Australia.

(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
Technology Stocks

Check Point Software Technologies Ltd: Changing the cybersecurity mindset in a hybrid cloud world

Business Strategy and Outlook

Check Point Software Technologies is a top player in the cybersecurity market. It generates revenue from selling products, licenses, and subscriptions to protect networks, cloud environments, endpoints, and mobile users. Historically, firms purchased security point solutions to combat the latest threats and had to manage various software and hardware vendors’ products simultaneously. Changing the cybersecurity mindset in a hybrid cloud world, Check Point’s Infinity architecture consolidates various security products into a single management plane that deploys the latest updates across all attack vectors. With its vast customer base of over 100,000 businesses and renowned product leadership for existing threat technology, it is believed that Check Point’s consolidated security architecture provides ample upselling and cross-selling opportunities as enterprises increase their reliance on cloud-based products and distributed networking. With its growth lagging security peers, Check Point will ramp up sales and marketing efforts to showcase the advantage of its platform approach and next-generation security offerings. Check Point has adjusted its selling model to be subscription-based, and further ingrain the company with businesses that favor predictable operating expenditures. Its subscription-based Infinity Total Protection architecture offers all of Check Point’s products on an annual pay-per-user basis. This concept may help permeate Check Point’s product throughout an organization, since there are no additional costs for using more products, which then creates higher switching costs and better customer retention.

Check Point Software Moat Ratings upgraded to wide and increased fair value from $ 132 to  $137

Morningstar analysts have upgraded its moat roating for Check point Software to wide from narrow. For moat trend,analyst maintained a stable view of point in regards to the firm and increased its fair value estimate is now $137 from $132. Check Point’s shares attractive for patient investors in the steady, but lower growing firm.For Check Point’s stable trend, analyst  believes the company has a large, loyal customer base that relies upon its sticky products, but a conservative approach of investing in development and sales and marketing efforts has caused leading competitors to make inroads in the broader security landscape.

Financial Strength

Check Point can be viewed as financially stable firm that should continue to generate strong operating cash flow. .At the end of 2020, the company had no debt with $4.0 billion in cash, equivalents, and marketable securities. Check Point has never paid a dividend, and it is expected to continue to repurchase shares following the announcement of an additional $2 billion buyback authorized during 2020 (with a $350 million cap per quarter).Outside of the repurchase program, it is also expected that Check Point to primarily use its cash for operating expenditures to capitalize on customers requiring cloud-based threat protection. Additionally, Check Point will continue to make tuck-in acquisitions to bolster its presence in the cloud and mobile-based security markets.

Bulls Say 

  • Customers may adopt Check Point’s Infinity platform over using multiple vendors for cybersecurity protection. This should further embed the company’s products and increase switching costs. 
  • Check Point’s movement into cloud-based and mobile user security offers large growth opportunities to supplement its network security portfolio. Its existing customer base may prefer Check Point for security consistency. 
  • Increasing subscription-based sales and growing recurring revenue should further bolster Check Point’s stellar operating margin profile.

Company Profile

Check Point Software Technologies is a pure-play cybersecurity vendor. The company offers solutions for network, endpoint, cloud, and mobile security in addition to security management. Check Point, a software specialist, sells to enterprises, businesses, and consumers. At the end of 2020, 45% of its revenue was from the Americas, 43% from Europe, and 12% from Asia-Pacific, Middle East, and Africa. The firm, based in Tel Aviv, Israel, was founded in 1993 and has about 5,000 employees.

(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

Allspring Diversified Income Builder Fund – Class C: A fund providing high income

Fund Objective

The investment seeks long-term total return, consisting of current income and capital appreciation.

Approach

The strategy targets a yield of 4%-5% and allocates 60%-90% of assets in fixed income, with the remainder in stocks. The team may also employ tactical shifts, vetted by the firm’s tactical trading council, by trading currencies or equity sector indexes, but these can be difficult to execute well consistently. Since introducing a multisleeved approach in early 2018, this strategy has undergone three prospectus benchmark shifts that signal it continues to experiment with its profile. The most recent adjustment (February 2020) decreased the equity exposure by 10 percentage points to 25% in order to make room for a more diversified bond sleeve. Other adjustments include the removal of a REITs sleeve in September 2018, the addition of a securitized bond sleeve in March 2019, and the introduction of an options sleeve in January 2020.

Portfolio 

As fixed-income markets have proved richly priced, the portfolio managers cited more attractive capital appreciation and dividends in the equity space, prompting an uptick in the equity holdings to roughly 38% here by September 2021. Within that equity sleeve, technology stocks (Microsoft MSFT is a holding) and healthcare stocks (such as Bausch Health Companies BHC, DaVita DVA, and AbbeVie ABBV) occupied roughly 27% and 17% of assets, respectively. 

High-yield bonds dominate the fixed-income portion of the strategy (59% of the portfolio as of September 2021), and it is worth noting that these are more sensitive to equity markets than the investment-grade fare employed by many peers for downside protection in stressed markets. Other bond sleeves here are modest but diversifying relative to the portfolio’s historical profile and include municipal bonds (3%) and securitized bonds (2%).

People

Kandarp Acharya as co manager alongside Margie Patel, who was the sole manager since 2007 but is departing this strategy (though she remains on Allspring Diversified Capital Builder EKBYX) as of Dec. 13, 2021. This move is accompanied by the arrival of quantitative researcher Petros Bocray, a 15-year firm veteran and Acharya’s collaborator on Allspring Asset Allocation EAAIX.

Performance

Over the strategy’s short tenure with its new contours (January 2018 through November 2021), the 5.5% annualized return of its R6 share class modestly outpaced the 5.3% return of the Morningstar Conservative. Target Risk Index and trailed the 6.7% return of its custom benchmark (60% ICE BoA U.S. Cash Pay HY Index, 25% MSCI ACWI, and 15% Barclays Aggregate Index). From an absolute return perspective, the strategy also generated a higher return than the 5.0% median of its typical allocation–15% to 30% equity Morningstar Category peer.This strategy has a riskier profile than many strategies in the category, particularly during stress periods, resulting in risk-adjusted returns (as measured by the Sharpe ratio) that trail all comparative points (typical category peer and benchmark as well as custom benchmark) over the aforementioned period. In three recent stress periods (when energy prices plummeted from June 2015 to February 2016, the 2018 fourth-quarter high-yield sell-off, and the coronavirus-driven market panic of Feb. 20-March 23, 2020), the fund lagged its category index by more than double and trailed its typical peer.

Top 10 Holdings

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About the fund

The Fund seeks high current income from investments in income-producing securities. The Fund will normally invest at least 80% of its assets in income producing securities, including debt securities of any quality, dividend paying common and preferred stocks, convertible bonds, and  

derivatives. The strategy targets a yield of 4%-5% and allocates 60%-90% of assets in fixed income, with the remainder in stocks. The team may also employ tactical shifts, vetted by the firm’s tactical trading council, by trading currencies or equity sector indexes, but these can be difficult to execute well consistently.

(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

Tyson Sets Sights on Improving Long-Term Efficiency

Business Strategy and Outlook

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers (86% of fiscal 2021 sales) are limiting their consumption of red and processed meat (69% of Tyson’s sales), they are consuming more chicken (29%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 14%, it is likely to increase over time, as this is an area of acquisition focus. The beef segment has been a bright spot in Tyson’s portfolio in recent years, as strong international demand, coupled with a drought-induced beef shortage in Australia, has increased the segment’s operating margins to 10% over the past four years from 2% prior to 2016. 

Conversely, the chicken segment has suffered from executional missteps that have resulted in structurally higher costs relative to competitors. About 80% of Tyson’s products are undifferentiated (commoditized), so it is difficult for them to command price premiums and higher returns. Although Tyson is the largest U.S. producer of beef and chicken, we do not believe this affords it a scale-based cost advantage, as its segment margins tend to be in line with or below those of its smaller peers.

Financial Strength

Tyson’s financial health as solid and don’t see any issues to suggest that it will be unable to meet its financial obligations. While Tyson generates healthy cash flow and is committed to retaining its investment-grade credit rating, the business is inherently cyclical, with many factors outside of its control. But management has made changes to improve the predictability of earnings. Chicken pricing contracts, which now link costs and prices, and a greater mix of prepared foods (from 10% in 2014 to the current 19%) both serve as stabilizers. 

In terms of leverage, net debt/adjusted EBITDA stood at a rather low 1.2 times at the end of fiscal 2021, below Tyson’s typical range of 2-3 times. At the end of September, Tyson held $2.5 billion cash and had full availability of its $2.25 billion revolving credit agreement. Together, this should be sufficient to meet the firm’s needs over the next year, namely about $2 billion in capital expenditures, nearly $700 million in dividends, and $1.1 billion in debt maturities. Management has expressed a commitment to enhancing the income returned to shareholders in the form of its dividend (targeting a 2.0%-2.5% yield over time).

Bulls Say’s

  • China’s significant protein shortage resulting from African swine fever should boost near-term protein demand, while the country’s continued moderate increase in per capita consumption of proteins will drive sustainable growth. 
  • While investor angst over chicken price-fixing litigation has weighed on shares, Tyson’s recently announced settlements materially reduce this overhang. 
  • In the current inflationary environment, Tyson’s cost pass-through model limits potential profit margin pressure

Company Profile 

Tyson Foods is the largest U.S. producer of processed chicken and beef. It’s also a large producer of processed pork and protein-based products under the brands Jimmy Dean, Hillshire Farm, Ball Park, Sara Lee, Aidells, State Fair, and Raised & Rooted, to name a few. Tyson sells 86% of its products through various U.S. channels, including retailers (48%), food service (28%), and other packaged food and industrial companies (10%). In addition, 14% of the company’s revenue comes from exports to Canada, Mexico, Brazil, Europe, China, and Japan.

(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 Markets Global stocks

Fisher & Paykel reported strong FY21 earnings with operating revenue up by 56% and NPAT up by 82%

Investment Thesis:

  • Global leader in invasive and non-invasive inhalation, nasal high flow therapy and during surgery. 
  • Strong global market position in a significantly under-penetrated treatment of sleep apnea market and chronic obstructive pulmonary disease. 
  • Increasing uptake of Nasal high-flow (NHF) therapy and consumables growth on the back of this. 
  • High barriers to entry in establishing global distribution channels. 
  • Strong R&D program ensuring FPH remains ahead of competitors. 
  • New product releases 
  • Bolt-on acquisitions to supplement organic growth.

Key Risks:

  • Consolidation / normalization of sales post the COVID-19 driven demand. 
  • 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. 
  • FPH needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on FPH’s valuation.

Key highlights:

  • Fisher & Paykel Healthcare Corp (FPH) reported very strong FY21 results, with operating revenue of $1.97bn up+56% (or +61% in constant currency (CC)) and earnings (NPAT) of $524m up +82% (or+94% in CC) over the previous corresponding period (pcp).
  • FPH saw an increase of +49% (constant currency) in revenue for new applications consumables; i.e. products used in non-invasive ventilation, Optiflow nasal high flow therapy and surgical applications, accounting for 66% of Hospital consumables revenue.
  • The Board declared a final dividend to 22.0cps up +42% on pcp. Total dividend for FY21 of 38.0cps was up +38%. 
  • Balance sheet remains strong with FY21 net cash of $303m, up from $42m in FY20.
  • COVID-19 has aggressively accelerated FPH’s global devices installed base and changing clinical practices. FPH achieved +337% growth in hospital hardware in FY21 vs pcp.

Company Description: 

Fisher & Paykel Healthcare (FPH) is a designer, manufacturer and marketer of products for use in respiratory care, acute care, surgery and treatment of obstructive sleep apnea. The Company sells its products in over 120 countries. FPH’s products are used in the treatment of more than 12 million patients. In the hospital setting, FPH products are used in invasive inhalation, non-invasive inhalation, nasal high flow therapy, and during surgery. In long-term care facilities and home settings, FPH technologies assist in the treatment of obstructive sleep apnea (OSA) and chronic obstructive pulmonary disease (COPD), and other chronic respiratory conditions.

(Source: Banyantree)

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