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Dividend Stocks

Hanesbrands’ Investments in Key Brands as Part of Its Full Potential Plan Support Its Narrow Moat

Business Strategy and Outlook

Hanesbrands is the market leader in basic innerwear (69% of its 2020 sales) in multiple countries. In May 2021, the firm unveiled its Full Potential plan to expand Global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced ecommerce, for example), and streamline its portfolio.

As part of Full Potential, Hanes intends to build on Champion’s increasing popularity in North America, Asia, and Europe. Although COVID-19 and the discontinuation of the C9 label at Target hurt sales in 2020,it is believed that Champion will continue its growth path in 2021 as it and other activewear apparel have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands. Moreover, Hanes recently found a new home for C9 as an exclusive brand for wide-moat Amazon. Hanes’ management forecasts Champion will reach $3 billion in global sales in 2024, up from about $2 billion this year, which we see as an achievable goal.

Another key strategy for Hanes is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past three years. Hanes, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. It is believed that the combination of strong pricing and production efficiencies allow Hanes to maintain operating margins above 20% for its American innerwear business despite somewhat inconsistent sales.

Morningstar analyst maintains per share fair value estimate of $26 after the release of Hanes’ 2021 third-quarter report.The fair value estimate implies 2022 adjusted price/earnings of 13 and enterprise value/adjusted EBITDA of 10.

Financial Strength 

Hanes is saddled with heavy debt from its acquisition spree in 2013-18 and closed September 2021 with $3.7 billion in debt. However, the firm also had nearly $900 million in cash and no borrowings under its revolving credit facilities of just over $1 billion. Moreover, it intends to refinance its $700 million in 5.375% 2025 senior notes at a lower interest rate to save about $35 million per year in interest costs. Hanes has a stated goal of bringing debt/EBITDA below 3 times by 2024.The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. .Hanes, unlike many peers, did not suspend its dividend due to the virus. Its annual dividend has been set at $0.60 per share since 2017.Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. We do not include acquisitions in our model due to uncertainty about timing, size, and profitability.

Bulls Say 

  • Hanes’ Champion is a contender in the hot but crowded athleisure space. The brand is already well known in North America and parts of Europe, and there is significant potential in China and other underpenetrated markets. 
  • Hanesbrands has successfully introduced brand extensions that have allowed it to expand shelf space and increase price points in the typically staid category of basic apparel. 
  • After a review, Hanesbrands announced a new strategic plan called Full Potential to boost growth and reduce expenses, which should benefit its brand strength.

Company Profile

Hanesbrands manufactures basic and athletic apparel under brands including Hanes, Champion, Playtex, Bali, and Bonds. The company sells wholesale to discount, midmarket, and department store retailers as well as direct to consumers. Hanesbrands is vertically integrated as it produces more than 70% of its products in company-controlled factories in more than three dozen nations. Hanesbrands distributes products in the Americas, Europe, and Asia-Pacific. The company was founded in 1901 and is based in Winston-Salem, North Carolina.

(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.

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Funds Funds Sectors

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
LICs LICs

Regal Investment Fund raises $212m through placement and entitlement offers

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Cash Flow TTM is 16.72%. Regal Investment Fund is a Closed Ended Fund Type. Its dividend in July 2021 is 1.0111%. In June 2021, their revenue was AUD$ 262.81 Million and Net Profit is 174.87 Million.

Price Earnings TTM is 2.4% while Earnings per Share is 1.637. Their Year-to date Return is 34.17% and Premium/Discount percent is almost 1.03%. Regal Investment Fund Dividend Indicated Gross Yield is 25.78%.

On 6 October 2021, RF1 announced it was conducting a Placement and Accelerated Entitlement Offer to institutional and wholesale investors and a General Entitlement Offer to eligible unit holders. Combined the Fund was seeking to raise up to $212m.

RF1 successfully completed the Placement and Entitlement Offers during the month, raising $212m. All units issued under the Placement and Entitlement Offers were issued at a price of $3.79 per unit, representing the NAV of the Fund at 1 October 2021 and a substantial discount to the unit price at the time the capital raising was announced.

Capital raised under the Offer will be allocated to existing strategies in line with the Fund’s investment objective with the aim of further diversifying RF1’s portfolio across both private and public alternative investments. The Manager is covering all fees and expenses associated with the Offer.

Asset Allocation

Asset ClassNet Allocation

Australian EquitiesInternational EquitiesCash & Cash EquivalentsOver the Counter DerivativesUnlisted Unit Trusts
52.8%7.7%25.2%0.6%13.7%

Company Profile 

Regal Investment Fund is a listed investment trust incorporated in Australia. The Fund’s Investment Objective is to provide investors with exposure to a selection of alternative investment strategies managed by Regal, with the aim of producing attractive risk adjusted absolute returns over a period of more than five years with limited correlation to equity markets.

(Source: Bloomberg)

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

Mastercard Has Multiple Characteristics That Should Draw Investors’ Attention

Business Strategy and Outlook

Mastercard has multiple characteristics that should draw investors’ attention. First, despite the evolution in the payment space, and view Mastercard’s position in the current global electronic payment infrastructure as essentially unassailable. Second, Mastercard benefits from the ongoing shift toward electronic payments, which provides plenty of opportunities to utilize its wide moat to create value over the long term. 

Mastercard is not without issues in the near term. Cross-border transactions, which are particularly lucrative for the networks, came under heavy pressure due to the fallout from the pandemic and a reduction in global travel. From a longer-term point of view, it is likely that smaller and more regional networks are building out additional capacity for cross-border transactions, which could eat into growth a bit in the coming years, but we haven’t seen a material effect yet. While this situation bears watching, Visa and Mastercard’s global networks remain unparalleled, and this will remain the case for many years to come.

 A downturn in the economy would slow overall growth, as Mastercard’s revenue is sensitive to the volume and dollar amount of consumer transactions. The company has already seen growth decline significantly due to the pandemic.

Morningstar analysts  increased the fair value estimate to $352 per share from $337 due to time value since the last update and some adjustments to assumptions. The fair value estimate equates to 33.6 times projected 2022 earnings, adjusted for one-time expenses.

Financial Strength 

Mastercard’s balance sheet is in solid shape. The company added a small amount of debt to its balance sheet in 2014 and in the years since has steadily increased debt. Still, debt/EBITDA at the end of 2020 was a very reasonable 1.5 times, and Mastercard’s leverage is still a bit below Visa’s. The company has shown a relatively limited appetite for M&A, and the business model requires very little balance sheet investment, so management has considerable flexibility. On the other hand, an overly conservative balance sheet structure could impede long-term shareholder returns.

Bulls Say 

  • Mastercard has been outperforming Visa in terms of growth. Its smaller size and some leveling in market share between the two could maintain this trend. 
  • There is still plenty of runaway for growth in electronic payments. Electronic payments only surpassed cash payments on a global basis a couple of years ago. 
  • Management is appropriately focused on long-term growth opportunities and not near-term margins.

Company Profile

Mastercard is the second-largest payment processor in the world, having processed $4.8 trillion in purchase transactions during 2020. Mastercard operates in over 200 countries and processes transactions in over 150 currencies.

(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
Technology Stocks

Clover Shows How Fiserv Can Adapt

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Business Strategy and Outlook

Fiserv’s merger with First Data in 2019 kicked off a string of three similar deals that took place in short order. But it is believed that Fiserv’s move was not attractive relative to the other two, and the company materially didn’t strengthen its competitive position. However, there is a valid strategic rationale for these deals, and the introduction of First Data’s acquiring business should boost overall long-term growth, given the secular long-term tailwind the business enjoys.

First Data has been a laggard compared with peers over the past decade, as it was overwhelmed by an excessive debt load due to a leveraged buyout just before the financial crisis and the defection of a major bank partner. However, in recent years the company worked its leverage down to a more manageable level, and growth improved, suggesting its issues are not structural. With financial health no longer a concern, the stage could be set for First Data to narrow the growth gap with peers. While First Data remains relatively reliant on its banking partners, initiatives such as Clover suggest it is capable of adjusting to a changing industry. Clover, the company’s small-business solution that has similarities to Square’s offering, has seen strong growth, with volume running at an annualized rate of almost $200 billion. 

The COVID-19 pandemic did illustrate one negative of this merger: The acquiring business is significantly more macro-sensitive than Fiserv’s legacy operations. But payment volume has steadily improved and returned to year-over-year growth. Unless the pandemic takes a sharp negative turn, the long-term secular tailwind appears to be reasserting itself and the worst seem to be past the industry. Over the long term, the acquiring operations should be the company’s strongest engine for growth.

Financial Strength 

There are no major concerns about Fiserv’s financial condition. While the First Data merger was stock-based, debt/EBITDA was 4.1 at the end of 2020, as Fiserv absorbed First Data’s heavier debt load. This level is not excessive, considering the stability of the business. Management appears to be focused on debt reduction in the near term. The company enjoys strong and relatively stable free cash flow and doesn’t pay a dividend. This creates significant flexibility and should allow the company to pull leverage down to a level in line with the historical average fairly quickly. 

Bulls Say 

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • The ongoing shift toward electronic payments has created and will continue to create room for acquirers to see strong growth without stealing share from each other. 
  • First Data’s growth had accelerated before the merger as it worked past its financial issues, and the business now has access to greater resources under Fiserv’s roof.

Company Profile

Fiserv is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing, for U.S. banks and credit unions, with a focus on small and midsize banks. Through the merger with First Data in 2019, Fiserv now provides payment processing services for merchants. About 10% of the company’s revenue is generated internationally.

(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

Continental benefits from Auto Industry Trends in Connectivity, Electronics and Safety

Business Strategy and Outlook

Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental’s revenue growth, healthy return on invested capital, and a narrow economic moat rating. After an acquisition binge that culminated in 2007 with the purchase of Siemens VDO, Continental has grown from being predominantly a European tiremaker to a global supplier of automotive components, systems, and modules. In 2008, Continental became an acquisition target as Schaeffler unsuccessfully bid for the company (it still holds 46% of the voting interest). Continental should benefit from automotive industry trends, including advanced driver-assist systems, autonomous driving features, V2X connectivity, and increased vehicular electronics. 

The company invests in and successfully cultivates innovative technologies. Management’s long-term targets are to annually increase revenue in excess of 5% and generate adjusted EBIT margins in the 8% to 11% range. Management spun off its powertrain division in September 2021 into a new company called Vitesco that trades under the ticker VTSC. Since 2008, powertrain segment revenue has grown at an average annual rate of 6%. In 2019, pro forma Vitesco had EUR 9.1 billion in prepandemic revenue and an adjusted EBITDA margin of 9.5%.

Continental sees Q3 Chip Crunch Hit to Results, Maintains Adjusted Guidance; EUR 143 FVE Unchanged 

Narrow-moat-rated Continental reported third-quarter earnings per share from continuing operations of EUR 1.27, handily beating the EUR 0.81 FactSet consensus by EUR 0.46 and jumping EUR 4.54 from the EUR 3.26 loss reported in the COVID-19-affected year-ago period. Consolidated revenue missed consensus by nearly 1%, declining 7% to EUR 8.0 billion from EUR 8.7 billion last year. However, excluding currency effect, organic revenue declined 9%. Our EUR 143 Fair Value Estimate remains unchanged. 

Third-quarter adjusted EBIT was EUR 419 million for 5.2% margin, down from a EUR 727 million with an 8.4% margin last year as the chip crunch made customer production sporadic during the quarter. Consolidated revenue is expected to be in a range of EUR 32.5 billion-EUR 33.5 billion with adjusted EBIT margin forecast in a range of 5.2%-5.6% and free cash flow in the range of EUR 0.8 billion – EUR 1.2 billion. However, management lowered its tax rate assumption to 23% from 27% due to the lower profitability guidance, which had minimal effect on our fair value.   

Financial Strength 

Continental’s financial health appears to be in good shape. Management targets investment-grade credit ratings and a gearing ratio (net debt/equity) range of 40% to 60%. At the end of 2020, the company’s liquidity was EUR 10.8 billion, the gearing ratio was 44%, and total adjusted debt/EBITDAR, which treats operating leases as debt and rent expense as interest, was 2.6 times. Since 2010, Continental has averaged 1.8 times total adjusted debt/EBITDAR, while netting cash against debt results in about a 1.4 times ratio. 

Maturities appear well laddered with the exception of roughly EUR 2.2 billion in short-term debt. The company syndicated a new 365-day EUR 3.0 billion line of credit in 2020 due to the pandemic, which was unused at year-end. While Continental’s EUR 4.0 billion revolving bank line of credit due in 2025 had not been utilized, short-term debt includes EUR 1.5 billion outstanding on other lines of credit. The large short-term debt balance has typically been rolled to the next year.

Bulls Say’s 

  • Continental is well positioned to capitalize on auto industry trends like safety, electronics, fuel economy, and emissions reduction. As a result, we expect the company’s revenue to average growth in excess of average annual growth in global vehicle production. 
  • The ability to continuously innovate new process and product technologies should enable Continental to maintain a narrow economic moat. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile 

Continental is a global auto supplier and tiremaker. Operating segments include the autonomous mobility and safety segment and the vehicle networking and information segment in the automotive group, plus tires and ContiTech, which uses rubber in industrial and automotive components and systems, in the rubber group. Last year, pro forma for the spin-off of the powertrain segment, automotive group revenue was around 50% of the total with AM&S and VN&I each accounting for about 25%. Rubber group revenue, also at around 50% of the total, includes tires at about 32% and CT at around 18%. The company’s top five customers are Daimler, Stellantis, Ford, the Renault-Nissan-Mitsubishi alliance, and Volkswagen, representing about 37% of total revenue (as reported, before the Vitesco spin-off).

(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 Shares

Monash IVF Group Ltd reported solid dividend yield of 4.6%

Investment Thesis

  • High barriers to entry with unique expertise and assets. 40-year heritage of leadership in science and innovation in ARS and women’s imaging, coupled with the depth of experience from the doctors and clinical team which will continue to underpin MVF’s future growth and maintain treatment success rates. 
  • Ageing Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favorable demographic tailwinds. 
  • Improving balance sheet with flexibility to execute expansion strategies. Earnings increasingly become diversified as the Malaysian business gains momentum. 
  • Potential earnings diversification and growth via international expansion and increased presence in diagnostics. 
  • Demonstrated capacity to perform well in terms of cost out and earnings growth despite tough conditions (i.e., lower cycle volumes).
  • Transparent and detailed disclosures.

Key Risks 

  • Regulatory risk as changes in government funding may increase patient’s out-ofpocket expenses and thereby volume demand. 
  • Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue 
  • The Australian market does not rebound following this period of downturn. Population of males and females with fertility problems decline. 
  • Loss of key specialists. 
  • Loss of market share especially to low-cost providers, with one already appearing in Victoria.  
  • Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment. 
  • Execution of international forays into Malaysia goes poorly.

FY21 Result Highlights

  • Revenue was up +26.3% to $183.6m underpinned by market share gains and strong industry volumes. 
  • Adjusted EBITDA was up +37.1% to $47.7m, with margin improving to 26% (from 23.9%) despite a +12% increase in marketing expenditure and patient communication digitisation activities and ~$1.7m of further costs for suspension of Ni-PGT genetic testing program. 
  • Adjusted NPAT of $23.3m, was up +61.5% and ahead of profit guidance ($21m-$23m). Reported NPAT of $25.5m was up +116.9%. 
  • MVF Australian FY21 Stimulated Cycles (STIMS) was up +36.6% driven by industry growth of 31.1% and 0.6% market share gains to 21.0%. Management pointed out “in Q1FY21, Monash IVF serviced the pent-up demand/deferred treatment created by the initial COVID-19 related temporary suspension of IVF services. Notwithstanding on-going and sporadic COVID-19 related lockdowns, IVF services have been largely undisrupted and as a result, growth continued throughout the year. Market Share gains were achieved in Victoria, New South Wales, Queensland and Northern Territory whilst the exceptionally high level of market share in South Australia was maintained above 60%. STIM industry growth of 31.1% supported the strong volume growth across the Group bringing the 5-year annual CAGR to 5.6%”. 
  • International STIMS was up +25.1% or 208 cycles. 
  • The positive diagnostics ultrasound performance was driven by obstetrics growth and a shift of activity from public to privately owned clinics. Ultrasound scan volumes were up +12.9% to 92,776 and Non-invasive Pre-natal testing were up +17.8% to 15,877. 
  • MVF appointed five experienced Fertility Specialists and a Medical Director of Genetics. 
  • MVF is opening its Sydney CBD flagship clinic and has earmarked further new clinics in the pipeline for FY22.

Company Profile 

Monash IVF Group Ltd (MVF) offers assisted reproductive technology services, ultrasound services, gynecological services, in-vitro fertilization services, consultancy services and general clinical services to patients in Australia and Malaysia. MVF comprises 40 clinics and ultrasound practices and employs ~100 doctors and has a network of 650 associated health professionals.

(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
Dividend Stocks Shares

Honda Is Fighting the Chip Shortage With a Strong Balance Sheet

Business Strategy and Outlook

Honda’s products and strong financial position should keep it on solid ground, but the competition is fierce and the U.S. market’s move to light trucks, where Honda’s lineup is not as complete as competitors, may be permanent. Ongoing risks include foreign-exchange volatility, a highly competitive U.S. market, and rising steel prices. 

Honda’s brand and reputation for quality drive demand for its vehicles, but its longtime niche in fuel-efficient cars historically positioned the company well to take advantage of consumers seeking more fuel-efficient vehicles. Over 2003-09, the U.S. car/light-truck mix moved to 55%/45% from 46%/54%, but as gas prices fell and light-truck fuel economy improved, cars have lost share to just 24% in 2020. In 2020, cars made up 41% of Honda’s U.S. sales mix.Honda’s car focus gives it an advantage whenever the critical U.S. market has high gas prices, but with cheap oil,  but Honda leaves share on the table in segments such as full-size pickups and large SUVs, as it does not have product in these segments. 

Despite a strong car and crossover lineup, formidable threats remain, such as rising commodity prices. Honda can mitigate this problem by using more common-size vehicle platforms to reduce costs, but even that is no guarantee. 

Honda Is Fighting the Chip Shortage With a Strong Balance Sheet

Honda’s fiscal 2022 second quarter showed more semiconductor shortage problems than rival Toyota. Honda said on its earnings call that the chip shortage impact is worse than it previously thought so it has lowered fiscal 2022 earnings guidance after raising it in August. Operating profit is now guided to JPY 660 billion yen, down from JPY 780 billion, which is the originally guided figure on May 14. Total company revenue, however, is guided to JPY 14.6 trillion, down from JPY 15.45 trillion in August and JPY 15.2 trillion in May. 

Second-quarter total company operating income fell by 29.7% to JPY 198.9 billion, with a JPY 114.1 billion unfavorable variance from lost revenue more than offsetting a JPY 36.7 billion favorable foreign exchange contribution and slightly lower overhead costs.

Financial Strength

Honda’s financial position is excellent, as the company has a small debt load. We estimate Honda’s cash and available credit lines at March 31, 2021, to be about JPY 6.7 trillion. This flexibility is important because it gives the company plenty of room to acquire more capital in the debt markets if needed.Excluding the captive finance company, Honda held about JPY 2.6 trillion in cash at the end of September. We calculate a net cash position at Sept. 30, excluding the captive finance arm, of over JPY 1.8 trillion. As of year-end fiscal 2021, the consolidated company has JPY 3.9 trillion of unused credit lines. Its debt/EBITDA ratio excluding the financing arm is generally well below 1 but was 1.3 in fiscal 2012 due to the Japan earthquake and Thai flooding. We do not see Honda having any problems meeting debt maturities, and we expect the company even before financial services results to be free cash flow positive over our forecast period.

Bulls Says 

  • Honda’s popular vehicles usually allow it to use fewer incentives than the Detroit Three, boosting the firm’s profits and improving the resale value of its vehicles. 
  • Honda enjoys a reputation for quality, especially in America’s large coastal markets, but management is concerned about quality problems in recent years and Honda has slipped in U.S. J.D. Power quality rankings. 
  • In 2020, Honda produced about 96% of its vehicles sold in the U.S. in North America. This means Honda is better positioned than Toyota (71%) to withstand the yen when it is very strong against the dollar.

Company Profile

Incorporated in 1948, Honda Motor was originally a motorcycle manufacturer. Today, the firm makes automobiles, motorcycles, and power products such as boat engines, generators, and lawnmowers. Honda sold 19.7 million cars and motorcycles in fiscal 2021 (4.5 million of which were autos), and consolidated sales were JPY 13.2 trillion. Automobiles constitute 65% of revenue and motorcycles 14%, with the rest split between power products and financial services. Honda also makes robots and private jets.

 (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

Recovery Plan of Qantas is constructive and is ahead of target

Investment Thesis:

  • Attractive way to play the Covid reopen trade for investors  
  • All segments delivering return on invested capital > weighted average cost of capital 
  • Strong position in the domestic market (Qantas Domestic and Jetstar continue to remain the two highest margin earning airlines in the domestic market)
  • Jetstar is well positioned for growth and rising demand in Asia 
  • Partnership with Woolworths for Loyalty bodes well for membership and earnings 
  • Oil price hedging in FY20 could contribute to performance 
  • Increased competition in the international segment
  • Relative to peers, strong balance sheet strength
  • Investment grade credit rating  

Key Risks:

  • Disasters that could hurt the QAN brand
  • Ongoing price led competition forcing QAN to cut prices affecting margins
  • Leveraged to the price of oil
  • Adverse currency movements result in less travel 
  • Labour strikes
  • Depressed economic conditions leading to less discretionary income to spend on travel

Key highlights:

  • QAN’s FY21 revenue declined 58% over pcp as the decline in international operations was partially offset by record performance by Qantas Freight, which combined with 49% fall in operating expenses and 71% decline in fuel expenses saw the Company deliver underlying EBIT loss of $1.5bn vs $395m profit in pcp
  • Covid levels in 2H21 while state borders were open generated enough cash from $6.4bn in 3Q21, with management forecasting net debt to be in target range of $4.5- 5.6bn by end of FY22
  • The Company’s cost-cutting program remained ahead of schedule, with $650m taken out of its cost base during FY21, remaining on track to deliver $850m by the end of FY22 and $1bn in FY23
  • Recent outbreaks and associated domestic and trans-Tasman border closures to have an impact in the order of $1.4bn on the Group’s Underlying EBITDA in 1H22
  • Group Domestic capacity to increase from 38% in 1Q to 53% of pre-Covid capacity in 2Q and rise to ~110% in 2H22
  • Recovery plan progress remains ahead of schedule: The Recovery Plan delivered $650m in savings in FY21, ahead of its $600m target and remains on track to deliver $850m by the end of FY22 and greater than $1bn in ongoing savings by the end of FY23
  • Liquidity boosted by securing a further $0.6bn
  • Balance sheet repair commenced, reducing net debt to $5.9bn by end of FY21 from $6.4bn in 3Q21, with further debt reduction remaining a priority
  • Investment grade credit rating of Baa2 from Moody’s maintained
  • Shareholder distributions scrapped until the Group’s earnings and balance sheet have fully recovered in accordance with the Financial Framework

Company Description: 

Qantas Airways Ltd (QAN) provides passenger and freight air transportation services in Australia and internationally. QAN also operates a frequent flyer loyalty program. QAN was founded in 1920 and is headquartered in Mascot, Australia support. 

(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

Resolution Capital Global Property Securities Fund: A diversified portfolio of stocks of real estate sectors

wherein individual Portfolio Managers hold 25 to 35 stocks each. The Fund’s objective is to exceed the total returns of the Benchmark (FTSE EPRA/NAREIT Developed Index (AUD) Net TRI) after fees on a rolling 3-year basis.           

Downside Risks:

  • Deterioration in Global economy, especially the property market (deterioration of property prices and fundamentals). 
  • The Portfolio Manager/analysts miss-calculate their bottom-up valuation. 
  • Softening in bond yields negatively impacting pricing. 
  • Key person risks, i.e. Andrew Parsons, Marco Colantonio, Robert Promisel, Julian Campbell-Wood and members of the investment team.
  • risk.

Fund Performance & Current Positioning:

(%)FundBenchmarkOut-performance
1-month 2.64%1.90%+0.74%
3-months 14.10%12.29%+1.81%
1-year 26.67%34.93%-8.26%
3-year (p.a.)9.68%7.18%+2.50%
5-year (p.a.)8.65%6.16%+2.49%
Since Inception (p.a.)13.48%12.33%+1.15%

(Source: Resolution Capital)

Fund Positioning:

StockSectorListing% of portfolio*
PrologisIndustrialUS8.10%
Invitation HomesResidentialUS6.50%
WelltowerHealthcareUS4.70%
Kimco Realty CorporationRetailUS4.20%
EquinixData CentresUS4.10%
Essex Property TrustResidentialUS3.60%
Canadian Apartment PropertiesResidentialCanada3.10%
Kilroy Realty CorporationOfficeUS3.10%
CubeSmartSelf-StorageUS2.90%
Mitsubishi Estate CompanyOfficeJapan2.80%
Total43.10%

(Source: Resolution Capital)

Key Highlights:

  • Investment Team:

The investment team is well-resourced with strong credentials and investment experience and is appropriately aligned and remunerated. The PMs have strong credentials and lengthy experience in real estate: Andrew Parsons, Marco Colantonio, Robert Promisel, have at least 30 years industry experience whilst Julian Campbell-Wood has 17 years’ experience. Performance reviews are conducted twice per year and based on Investment performance of all client Funds strategies, Research analysis and outcomes, Compliance with mandate guidelines and Adherence to ESG policies.

  • Investment Philosophy and Process:

In our view, the Fund adopts the bottom-up stock picking fundamental process that most other peers typically follow. A key advantage in the fund’s investment process is the utilisation of their proprietary database to collate their research that enables cross comparisons among regions and sectors to highlight any discrepancies. 

  • Performance:

Although past performance is not an indicator for future performance, it is an indicator of whether the Fund’s strategy has worked in the past. Although the Fund has performed well on an absolute basis, the Fund has underperformed relative to its benchmark in the past year by -8.3%. Nevertheless, over 3- and 5-year, and since inception, the fund has performed well relative to the benchmark.

  • Association with Pinnacle is a positive: 

ASX-listed Pinnacle Investment Management holds a minority 44.5% stake in Resolution Capital whilst key staff own the remaining 55.5%. Pinnacle provides support via distribution and administration services, which is viewed as positive.

About the Fund:

The Resolution Capital Global Property Securities Fund (Unhedged) – Series II provides exposure to a diversified portfolio of stocks within a range of real estate sectors across developed markets (North America, U.K, Europe, and Asia Pacific). The Fund’s objective is to exceed the total returns of the Benchmark (FTSE EPRA/NAREIT Developed Index (AUD) Net TRI) after fees on a rolling 3-year basis.

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.