Category: Sectors

Categories
Shares Small Cap

Bank of Queensland brings forward cost savings to offset margin pressure

Business Strategy and Outlook

Bank of Queensland is one of Australia’s top-10 largest banks, but is considerably smaller than the four major Australian banks. Preceding the global financial crisis, the bank grew aggressively via acquisitions and the rollout of its distinctive owner-manager branch franchise model. However, expanding the branch network and diversifying away from traditional residential lending came at a cost, with additional equity required to fund growth, significantly increased bad debts, and multiple banking systems, which resulted in deteriorating cost/income and returns on equity. 

The aim is to ensure the bank is more competitive, particularly in the home loan market, but this investment giving the bank any competitive edge. At best, it can narrow the gap to peers, but with the big investment budgets of the majors, those innovations are likely to be hard to keep up with. Bank of Queensland has branches owned by branch managers and corporate branches. The model has the potential for the bank to outperform its peers on customer service, with owner branch managers building relationships with local customers, and niche business lending specialists with an understanding of borrower needs and industry.

Financial Strength

The capital structure and balance sheet provide comfort that the bank can manage a large increase in loan losses associated with COVID-19, but it remains the greatest threat to the bank’s capital position. Common equity Tier 1 capital was 9.8% as at August 2021, well above APRA’s 8.5% minimum capital benchmark for standardised banks. It is expected that the bank will pay out around 60% to 65% of earnings given the credit growth outlook, elevated investment in the banking platform, and integration of ME Bank. Our fair value estimate for no-moat rated Bank of Queensland is unchanged at AUD 8.50.

With the elevated savings rate in 2020, the bank has been able to increase its share of funding from customer deposits to 70% as at Aug. 31, 2021, up from pre-COVID-19 levels of 64% as at Aug. 31, 2019. In March 2020 the RBA announced the Term Funding Facility, or TFF, which provided three-year funding at 0.25%. From Nov. 4, 2020, new drawdowns would pay 0.1%. The initial funding available via the TFF was set at 3% of the bank’s outstanding loan balance, with an additional 2% of balances announced in November.

Bulls Say’s

  • The appointment of new senior executives and a clean out of the troubled commercial loan portfolio has ensured a more risk-conscious culture. 
  • Substantial capital raisings bolstered the balance sheet, ensuring that the bank satisfies capital rules and can still fund investments in technology and expand loan balances. 
  • Productivity improvements not only lead to improved operating margins, but a more streamlined loan approval process lifts mortgage growth rates. 
  • Management extract greater cost and revenue synergies from the acquisition of ME Bank.

Company Profile 

Bank of Queensland, or BOQ, is an Australia-based bank offering home loans, personal finance, and commercial loans. BOQ operates both owner-managed and corporate branches, and is the owner of Virgin Money Australia. Its BOQ business includes the BOQ branded commercial lending activity, BOQ Finance and BOQ Specialist businesses. The division provides tailored business banking solutions including commercial lending, equipment finance and leasing, cashflow finance, foreign exchange, interest rate hedging, transaction banking, and deposit solutions for commercial customers

(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

Attractive valuation and yield makes Aurizon an appealing stock

Investment Thesis:

  • Undemanding valuation relative to the market. 
  • Current share price is factoring in several negative sentiments already. 
  • Higher (and stabilizing) commodity prices should translate into improving volumes. 
  • Better than expected performance on the cost out. 
  • Attractive dividend yield 
  • Mostly defensive earnings backed by contracts, providing stability in shareholder returns. 
  • The Company does have long-term plans to reduce exposure to coal.

Key Risks:

  • Significant decline in commodity prices leading to mine closures or reduce volumes from customers. Any potential declines in iron ore prices. 
  • Structural decline in some commodities (e.g. coal). 
  • High costs impacting margins. 
  • Contract repricing resulting in longer term revenue loss. 
  • Pricing pressure to increase. 
  • Potential cuts to dividends given the elevated payout ratio. 
  • Weather related impacts.

Key highlights:

  • Management noted that they have identified growth opportunities. Near-term earnings appear to be more stable.
  • Group revenue of $3,019m was down -1%, EBITDA of $1,482m was up +1% (with operating costs down -4%), and NPAT of $533m mostly unchanged
  • The flat earnings outcome for the year were driven by a decline in Coal volume being offset by higher earnings in Bulk and Network, primarily due to the commencement of WIRP fee billing.
  • Cost improvements came on the back of lower access and lower fuel expenses, with cost pressure from volume growth in Bulk being offset by transformation benefits
  • AZJ maintained its 100% dividend payout ratio with a final dividend of 14.4cps (up +5% YoY + 70% franked), taking FY21 dividend to 28.8cps.
  • The segment wise contribution of Aurizon is as follows:
  • Network: FY21 revenue was up +4% YoY (Track Access +4%, Services & Other -19%) and EBITDA was up +6% to $849m. Segment earnings were driven by revenue growth and supported by lower operating costs (down -3%) and Energy & Fuel expenses (down -5%).
  • Coal: FY21 revenue was down -9% YoY (Above Rail -8%, Track Access -13%) and EBITDA down -13% to $533m, with earnings supported by lower operating costs (down -4%) and access costs (down -11%). Top line growth was impacted by a decline in haulage volumes over the year.
  • Bulk: FY21 revenue was up +4% YoY (net of access, revenue was up +10%), driven by new contract and services growth. EBITDA was up +27% to $140m, with earnings driven higher by lower operating costs (down -6%) and access costs (down -23%)

Company Description: 

Aurizon Holdings Ltd (AZJ) operates an integrated heavy haul freight railway in Australia. It transports various commodities, such as mining, agricultural, industrial and retail products; and retail goods and groceries across small and big towns and cities, as well as coal and iron ore. The Company also operates and manages the Central Queensland Coal Network that consists of approximately 2,670 kilometres of track network; and provides various specialist services in rail design, engineering, construction, management, and maintenance, as well as offers supply chain solutions. In addition, it transports bulk freight for customers in the resources, manufacturing, and primary industries sectors. The Company was formerly known as QR National Limited and changed its name to Aurizon Holdings Limited in December 2012. AZJ is headquartered in Brisbane, 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
Funds Funds Research

Vanguard Total International Stock Index Fund Investor Share: A fund providing outstanding diversification with ultralow fee

Investment Objective 

The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in developed and emerging markets, excluding the United States.

Approach

Vanguard’s portfolio managers use full replication to track the FTSE Global All Cap ex U.S. Index. This benchmark starts with all stocks listed outside of the United States and sorts them by their free-float adjusted market cap. It targets firms that land in the top 98% of each country’s market capitalization. The index uses buffer rules around the cutoff point to keep turnover low, and it applies some additional liquidity requirements to ensure that its holdings are investable. The index weights its final constituents by market cap, which helps further mitigate turnover and trading costs. It reconstitutes semiannually in March and September.

Portfolio 

This fund captures the entire foreign stock market. Its comprehensive portfolio effectively diversifies stockspecific risk, with only 9% of assets in its 10 largest holdings. . Sector weightings are comparable, with financial and industrial stocks collectively representing almost one third of the portfolio. Eurozone stocks represent the largest regional allocation, at 20% of the portfolio, while Japan and the United Kingdom make up an additional 16% and 9.4%, respectively. The fund does not hedge its currency risk, so its exposure to currencies like the euro, yen, and pound can add to its volatility. Stocks listed on emerging-markets exchanges account for a little more than 28% of this fund. Allocating to these companies improves the fund’s reach and shouldn’t materially impact its risk or performance. The fund includes small caps but weights its holdings by market cap. So, it leans toward large-cap multinationals, with companies like Taiwan Semiconductor, Nestle, and Samsung among its biggest names.

People

The portfolio managers on this fund are part of Vanguard’s Equity Index Group. Christine Franquin and Michael Perre share responsibility for this fund. They are both principals at Vanguard and captain some of Vanguard’s largest index-tracking funds listed in North America. This duo not only oversees the portfolio but also executes trades on a day-to-day basis

Performance

This fund’s category-relative performance has not stood out from its competitors in the foreign large-blend category. The Admiral share class managed to slightly edge out the average of its peers by 18 basis points annualized over the 10 years through November 2021. The fund’s larger-than-average stake in emerging- markets stocks was a drag during the first few years of that period and partially explains its mediocre showing. The fund’s composition looks a lot like the category average, and it remains fully invested in order to tightly track its target index. That means it tends to post average performance during volatile periods like the coronavirusdriven sell-off in the first quarter of 2020. The fund’s 24% decline was comparable to the loss incurred by the category norm over those three months.

Recent category-relative performance has been stronger. The portfolio led the category average by 67 basis points per year over the trailing three years through November 2021, landing just outside the top third of the category. Poor stock selection in the financials and information technology sectors on the part of some active managers hurt their category-relative performance and boosted the fund’s standing.

Top holdings of the fund

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About the fund

The fund tracks the FTSE Global All Cap ex U.S. Index, which includes stocks of all sizes from foreign developed and emerging markets. It weights them by market cap, an approach that benefits investors by capturing the market’s collective opinion of each stock’s value while keeping turnover low. This is one of the broadest portfolios in the foreign large-blend category. Its exceptional diversification mitigates the impact of holding the worst-performing names. It holds more than 7,000 stocks and has only 9% of assets in its 10 largest positions. Its regional composition looks modestly different from a typical fund in the category because it has a larger dose of emerging-markets stocks. But their weight in the portfolio isn’t large enough to materially increase the fund’s risk or compromise its category relative performance.

(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

Burberry Group Plc 1H22 revenue recovery with strong mainline and digital full – price sales

Investment Thesis

  • The rejuvenation of Burberry under a new creative director is underway, in our view. 
  • Leveraged to increasing consumer consumption in Asia (China). 
  • Leveraged to tourism flows (international travel) as consumers seek out experiences. 
  • Building a credible offering in the important category of leather goods.
  • Improving cash flow generation and a progressive dividend policy.
  • Strong balance sheet, which provides the Company flexibility.   
  • Capital management initiatives (e.g., Share Buyback). 

Key Risks

  • Execution risk with Burberry turnaround under new management team.
  • Fails to build a credible offering in the Leather Goods segment.  
  • Increased competition from existing players and new emerging brands. 
  • Value destructive acquisition of brand(s). 
  • Macroeconomic conditions deteriorate globally, impacting consumer spending and less tourism movements (i.e. travelers overseas).
  • Geopolitical tensions among regions restricting funds & tourists flow or a breakout of health epidemic impacting tourists flow in Europe / Asia. 
  • Significant change at the senior management level (Creative Director).  

Strong Margin accretion – driven by full sales price sales and cost out initatives

Management’s strategy to exit mainline and digital markdowns and the deliberate tight management of outlet business resulted in a significant shift towards full-price sales (within comparable store sales growth of +37% over pcp, full price sales advanced +49%, growing +121% and +10% across 1Q and 2Q, respectively), which underpinned an improvement of +130bps (at CER) in gross margin to 69.3% despite significant pressures from Brexit duties and channel mix. BRBY saw GBP 20m in cost savings (achieved GBP 55m of annualized savings, bringing cumulative savings to GBP 205m and providing a completely restructured cost base), delivering an improvement of +11.2% (at CER) in adjusted operating margin to 16.2%.

Company Profile 

Burberry Group Plc (BRBY), listed on the London Stock Exchange, is a global luxury brand with a British heritage. The Company designs and sources apparel and accessories, which it distributes via retail, digital, wholesale and licensing channels globally. 

(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
ETFs ETFs Research Sectors

iShares Core MSCI Total International Stock ETF: Access to the entire foreign market with low cost

Tile letter on red rack in word ETF (abbreviation of Exchange Traded Fund) on wood background

IShares Core MSCI Total International Stock ETFs seek to track the investment result of an index  composed of large,  mid and small capitalization non US equities.

Approach

This fund earns a High Process Pillar rating for capturing the entire opportunity set available to its actively managed competitors in a cost-effective way. BlackRock’s portfolio managers track the MSCI ACWI ex USA Investable Market Index. This benchmark starts with all stocks listed outside of the United States and sorts them by their free-float-adjusted market cap. The final portfolio does not hold every stock in its benchmark index. Instead, the managers buy a representative sample of stocks to match index performance. They nearly fully replicate the large-cap segment and hold a portion of the smaller companies in the index. This reduces the need to trade smaller and less liquid names, which reduces transaction costs.

Portfolio

This fund captures the entire foreign-stock market. Its comprehensive portfolio effectively diversifies stock specific risk, with only 10% of assets in its 10 largest holdings. Sector weightings are comparable, with financials and industrial stocks collectively representing about one third of the portfolio. Country and regional allocations aren’t far off the category average, either. The fund does not hedge its currency risk, so its exposure to currencies like the euro, yen, and pound can add to its volatility. Stocks listed on emerging-markets exchanges account for a little more than 28% of this fund, while a typical competitor has a 10% stake. 

People

Industry-leading technology and BlackRock’s global footprint support a strong team of portfolio managers, earning an Above Average People Pillar rating. Alan Mason is head of portfolio management for the Americas and helps manage this portfolio. Rachel Aguirre was promoted to iShares head of product engineering in early 2021 and no longer serves as a manager on this fund. This change should not disrupt the fund’s ability to track its bogy because it retains its three remaining managers and much of their workflow is automated.

Performance

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(Source: Factsheet)

Top holdings of the fund (%)

C:\Users\Akhila\Downloads\Screenshot 2021-12-08 top hold.png

About the fund

The fund tracks the MSCI ACWI ex USA Investable Market Index, which includes stocks of all sizes from foreign developed and emerging markets. It weighs them by market capitalization, an approach that benefits investors by capturing the market’s collective opinion of each stock’s value while keeping turnover low. Market-cap-weighting can be tough to beat because the market tends to do a good job valuing stocks over the long term. Its exceptional diversification mitigates the impact of holding the worst-performing names. It holds more than 4,300 stocks and has only 10% of assets in its 10 largest positions. The fund’s regional composition looks modestly different from the category average.

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
Sectors Technology Technology Stocks

Electronic Arts delivered strongest 2Q earnings in its entire history driven by Apex Legends and FIFA

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

Investment Thesis:

  • Attractive long-term drivers in online gaming 
  • Strong core franchises in Madden NFL, FIFA, The Sims and Need for Speed 
  • New product release surprise on the upside including Apex Legends 
  • The growing popularity in Esports should benefit EA
  • Mobile advertising presents significant opportunity (though not without execution risk)
  • Solid free cash flow generation and strong balance sheet, the Company has ample room to support capital management initiatives (such as a share buyback)

Key Risks:

  • New competition and new product release from existing competitors could impact EA’s growth rate.  
  • Key franchises or new product releases fail to attract gamers or meet investor growth expectations. 
  • Cloud gaming could be disruptive for incumbents. 
  • Adverse regulatory changes. 
  • Concentration of revenue / earnings to a small group of games. 
  • Disruption to mobile growth (e.g. growth in smart glasses displaces smartphones). 
  • Loss of content licensing agreements with owners (FIFA, NFL)

Key highlights:

  • Electronic Arts Inc (EA) delivered the strongest 2Q in the history of EA, beating consensus estimates at both the top line ($1.83bn vs estimate of $1.75bn) and bottom line (EPS of $1.02 vs estimate of $0.56) driven by live services led by Apex Legends (reached $1.6bn in lifetime bookings) and FIFA Ultimate Team.
  • The Company’s net bookings of $1.85bn beat management’s guidance by $126m
  • Management remained positive on the launch of Battlefield 2042 (over 7.7 million players took part in the beta) noting that interest in Battlefield 2042 is higher than the interest the Company received heading into 2018’s Battlefield
  • the acquisitions of Glu, Codemasters, Metalhead and Playdemic should help EA make mobile a major growth driver (important to sustain topline growth as console and PC engagement declines as the pandemic recedes), and strong digital mix for full game sales
  • After a successful relationship between EA and soccer’s global governing body FIFA over multiple decades, it appears recent contract renewal discussions are not going well as the disagreement comes down to fees
  • Net bookings of $7.625bn (vs $7.3bn previously) driven by ongoing strength from Apex and FIFA and just under $100m from six months of Playdemic, partially offset by pressure on some of mobile titles including product changes and IDFA impacts
  • Management closed the acquisition of Playdemic, further strengthening the mobile native organization within EA, which management expects could be sharply focused on accelerating growth in portfolio of more than 15 top mobile live services as well as introducing new experiences that take powerful IP including Battlefield in the expanding mobile audience.

Company Description: 

Electronic Arts (NASDAQ: EA) is a leading digital interactive entertainment company, with leading gaming brands globally. The Company develops and distributes content and services on mobiles, personal computers (PCs) and gaming consoles. Some of the Company’s key franchises Madden NFL, EA SPORTS FIFA, The Sims and Need for Speed. The Company’s portfolio of games includes fully owned original IP games and also licensed content. Apex Legends, Anthem, Battlefield, The Sims, EA SPORTS, Need for Speed, Dragon Age, and Plants vs. Zombies are trademarks of Electronic Arts Inc. John Madden, NFL and FIFA are the property of their respective owners and used with permission. According to EA data, the Company has greater than 300 million registered players around the globe.

(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
Funds Funds

Touchstone Flexible Income Fund Class Y: A flexible Income fund providing income as well as capital appreciation

Approach

The strategy’s primary hunting grounds include U.S. investment-grade and high-yield corporates, preferred stock, municipal bonds, and U.S. Treasuries. The strategy gains exposure to high-yielding corporate and municipal bonds via closedend funds–an uncommon tactic–which compose 5% to 15% of assets. Within these positions, the team focuses on the fund’s discount and quality of cash flow rather than its underlying holdings. Unlike most peers, the team doesn’t invest in emerging-markets debt, nor do they take on any currency risk. The strategy is benchmark-agnostic and flexible in its construction across asset classes and credit quality. It can invest up to 40% in junk-rated debt, which had peaked near 30% (including non-rated debt) up until September 2020. As of October 2021, the strategy’s non-investment grade exposure stands at 45%, owing to the increase in nonrated debt over the last year. The strategy tends to be concentrated; it is common to see individual positions between 2% and 4% each.

Portfolio

 The strategy continued to maintain a high allocation to preferred securities (34% of assets as of October 2021), followed by structured credit (32%, mostly in commercial mortgage-backed securities). The team modestly added shorter term Treasuries and maintained a nominal allocation to cash and cash equivalents towards the end of 2020 due to near zero interest rates. However, in the first quarter of 2021, the portfolio cut its 9% allocation to Treasuries to zero as the long-end of the curve sold off and no desirable returns were seen in the short-end. Post the first quarter of 2021, the portfolio’s exposure to treasuries, mostly short-dated, has increased drastically to 16% as of October 2021, owing to the flat credit curve and the credit spreads for riskier securities having tightened to pre-pandemic levels. The team has also reduced the exposure to corporate credits, both investment-grade (3.7%) and high yield (6.4%), given tight credit spreads. The portfolio’s exposure to nonrated debt has increased and stood at 30% as of October 2021, an increase of roughly 18 percentage points from last year. Most of this exposure comprises multifamily MBS originated by Freddie Mac, but still carry some risk.

Performance

 Institutional share class has shown middling performance within its nontraditional Morningstar Category peer group, returning 3.8% annualized. From November 2018 through November 2021, the strategy’s I share class has gained 6.5% annualized, outpacing more than 65% of its category peers, and beating its typical rival by 60 basis points. The team has made good use of its flexible mandate by tilting towards Treasuries and high-quality securitized credit heading into 2020 which helped ease some pain as the markets tumbled during the coronavirus-led self-off from Feb. 20 to March 23, 2020. However, the strategy’s 14.2% loss over that stretch was still in line with its peers. As markets recovered, the strategy gained a swift 25.3% from March 24, 2020, through to the end of the year, owing to the addition of battered corporate credits that rebounded later that year

(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

Vanguard Mid-Cap Growth Fund Investor Shares: A Solid Mid-Cap Growth offering with rock bottoms fees

Approach

Frontier’s approach is best described as growth-at-a-reasonable-price. The team, like Wellington, also invests with a multi-year time horizon, though the end portfolio is more diversified, owning 70 to 80 stocks, while sector bets have stayed within 10 percentage points of the index over the years. Rounding out the subadvisor group is RS, which employs a sector-neutral approach to build a 60-80-stock portfolio. While risk management efforts–such as a desired 2:1 upside/downside ratio for each stock and the use of technical indicators–have proven efficacious on RS’ small-cap offering, they have consistently failed to have the intended impact in the mid-cap arena.

Portfolio

Portfolio’s sector weightings hover fairly close to the Russell Midcap Growth Index’s. As of June 2021, the biggest overweighting was to consumer discretionary, with 19% of assets, more than the Russell Midcap Growth Index’s 16%. The Wellington team purchased hospitality firm Hilton Worldwide Holdings in 2021’s second quarter, believing its asset light business model, good management team, and strong growth prospects in Asia will serve the stock well going forward. Conversely, the end fund held modest underweights to industrials and information technology.

portfolio vanguard.png

People

This strategy’s three subadvisors are experienced, stable, and capable, driving a People rating upgrade to Above Average from Average. The group has been more successful in the small-cap space over the years, and the standalone RS Mid Cap Growth offering has struggled since its July 2008 inception. In October 2021, Vanguard slashed RS’ stake to 20% from 45%. Frontier also came on board in December 2018 and manages 40% of fund assets (down from 45%). While the January 2020 retirement of Stephen Knightly was a loss, a thoughtful transition to Chris Scarpa–who had been a comanager since 2010–and the grooming of longtime analyst Ravi Dabas as comanager mitigate concerns.

Performance

The current subadvisors have been in place here together since December 2018. Since then, through October 2021, the fund’s 28.5% annualized gain lagged the Russell Midcap Growth Index’s 31.1% return and 60% of its mid-cap growth. Frontier Mid Cap Growth–the strategy behind Frontier’s sleeve–gained 30.6% annualized gross-of-fees between December 2018 and October 2021, slightly lagging the index but placing in line with peers. While stock selection was strong in financials, it was poor in healthcare, and the underweighting to the solidperforming information technology sector also detracted. 

Wellington–via its Focused Mid Cap Growth strategy–has been the strongest-performing subadvisor but long had had the lowest allocation, though Vanguard raised its stake to 40% of fund assets from 10% in October 2021. Between December 2018 and October 2021, its 31.8% annualized gain gross-of-fees bested 57% of peers. The sleeve benefitted from solid picks in I.T., including DocuSign and Square.

performance vanguard.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 Technology Stocks

ResMed witnesses strong revenue growth of 10%

Investment Thesis:

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

Key Risks:

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

Key highlights:

  • The net result was strong revenue growth of 10% for our ResMed business in the June quarter
  • In 4Q21, Revenue in the U.S., Canada, and Latin America (excluding Software as a Service), grew +18%, over the pcp, on demand for sleep devices and masks, including recovery of core sleep patient flow that was previously impacted by Covid-19 and increased demand following a recent product recall by one of RMD’s competitors, partially offset by lower Covid-19 related demand for RMD’s ventilators
  • Revenue in Europe, Asia, and other markets grew by 2% on a constant currency (CC) basis, on strong sales across RMD’s mask product portfolio, partially offset by weaker device sales due to the incremental Covid-19 respiratory care revenue in the pcp
  • Excluding the impact of the incremental respiratory care revenue associated with Covid19, revenue increased by 35% on a constant currency basis
  • Software as a Service revenue was +5% higher than the pcp, on continued growth in resupply service offerings and stabilising patient flow in out-of-hospital care settings

Company Description: 

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

(Source: Banyantree)

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

Strong customer retention and new business growth drives QBE earnings higher

Investment Thesis:

  • New CEO announced could bring a fresh perspective and potential rebasing of earnings. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. 
  • Solid global reinsurance program should insulate earnings from catastrophe claims. 
  • Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio). 
  • Committed to the share buyback program. 
  • Undertook a simplification process and sold non-core operations.

Key Risks:

  • Prolonged period of pricing pressures. 
  • Adverse CAT claims. 
  • Ongoing prolonged period low interest rates and volatility in credit spreads which affects QBE’s predominately defensive portfolio. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. However, at the same time, as it underwrites across the globe, the business it is more difficult to forecast and analyse claims and pricing environment as well as reinsurance.
  • Undesirable investment returns below management guidance. 
  • Prolonged poor performances in Asia

Key highlights:

  • QBE delivered 1H21 net income of $441m (vs loss of $712m y/y) as QBE continued to post solid premium rate increases (average group-wide rate increases averaged +9.7%) across all segments, as well as strong customer retention and new business growth.
  • However, management warned rate momentum is showing signs of moderating in some geographies and products, particularly in International Markets.
  • QBE’s operational efficiency program saw expense ratio improve -60bps over pcp to 13.7%. Balance sheet remained strong with gearing improving to 31.1%.
  • The Board declared an interim dividend of 11cps (up +175% over pcp) and guided to typically higher catastrophe incidence and Crop result variability in 2H21.
  • QBE saw expense ratio improve -60bps over pcp to 13.7%, with management announcing its next phase of efficiency program (focused on IT modernisation and digitisation) remains on track to deliver an expense ratio of 13% by 2023, anticipating a restructuring charge of $150m to be expensed over three years (of which $29m was recognised in 1H21).
  • Gross written premium increased +20% to $10,203m reflecting the strong premium rate environment

Company Description: 

QBE Insurance Group Ltd (QBE) is a global general insurer that underwrites commercial and personal policies across North America, Australia and New Zealand, Europe and emerging markets. QBE’s Equator Re segment is its captive reinsurer, providing reinsurance protection to the entire Group’s operating divisions.

(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.