Category: Sectors

NetEase maintains a high level of profitability above 30% operating margin for its gaming business, thanks to stable revenue from core titles

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Business Strategy & Outlook

NetEase started as a Chinese internet portal in the late 1990s but has now become the second-largest mobile game company in the world. The firm owns one of the most well-known massively multiplayer franchises in China—Fantasy Westward Journey. Over the past decade, NetEase has capitalized on the industry shift toward mobile gaming and now focuses on developing innovative, high-quality, and long-cycle games with a mobile-first approach. Over the past years, the firm has established iconic titles such as Onmyoji, Knives Out, and Identity V. Every year, the company publishes dozens of games across almost every genre and game play. In addition, NetEase is also collaborating with firms such as Blizzard, Marvel, and Microsoft to release games based on famous global intellectual property like Diablo, Harry Potter, and Lord of the Rings. Over the foreseeable future, NetEase is to continue to leverage its in-house research and development team and user data to develop next-generation games. Like its global gaming peers, NetEase maintains a high level of profitability (above 30% operating margin) for its gaming business, thanks to stable revenue from core titles and the steady development of new franchises. The firm is positioned to not only continue capitalizing on the success of Westward Journey titles, but to also keep diversifying its revenue into new franchises.

While games will remain NetEase’s core cash flow driver, the firm’s investments in other areas (music streaming, online education, e-commerce) also offer long-term potential. Cloud Village, the group’s music streaming arm, had over 180 million monthly active users in 2021 and remained the second-largest music streaming platform in China. Youdao is the group’s attempt at cracking the online education market, but recent regulatory changes in China add uncertainty to this business model.

Financial Strengths

NetEase has a rock-solid balance sheet. At the end of December 2021, the company had CNY 98 billion in cash, cash equivalents, short-term investments, and time deposits under current assets. There was also a restricted cash balance of CNY 2.9 billion under current assets. This compares with only CNY 19.4 billion of short-term debt. Thanks to its strong net cash position and strong operating cash flow that amounted to 147% of net income in 2021, the firm should have no problem funding its gaming business and innovative businesses. NetEase’s capital structure is conservative but not uncommon among Chinese internet firms, given that the company needs to have abundant cash on hand to quickly seize opportunities in the fast-changing internet industry and give it a leg up on competition. Given the growth potential in the Chinese internet space, many of these companies under the coverage do not pay dividends. However, NetEase has returned capital to shareholders via dividends and has set quarterly dividends at 20%-30% of its anticipated net income after tax in each quarter starting in the second quarter of 2019. In addition, the company announced the expansion of its share-repurchase program in May 2020, from up to $1 billion worth of outstanding ADSs to $2 billion, this amount was maintained in 2021. At the end of December 2021, approximately $1.8 billion ADSs had been repurchased under such program.

Bulls Say

NetEase’s expertise in asymmetric multiplayer (Identity V and Dead by Daylight) would allow it to capitalize on future opportunities in this genre.
The firm has done an admirable job at organically expanding into Japan, and it is likely that it will be able to replicate same success in Europe and the U.S.
NetEase Music could see stronger user growth now that Tencent Music was told to end its exclusive licensing agreements with music labels on anti-trust grounds.

Company Description

NetEase, which started on an Internet portal service in 1997, is a leading online services provider in China. Its key services include online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. The company develops and operates some of the China’s most popular PC client and mobile games, and it partners with global leading game developers, such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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Global stocks

Poshmark now has access to the resources of a profitable multinational sponsor, affording investments in marketing and international expansion

Business Strategy & Outlook

Poshmark is among the largest apparel resale platforms on the market, boasting an interactive marketplace that benefits from a triumvirate of secular tailwinds: social commerce, an ongoing mix shift toward online retail sales, and the stratospheric growth of the apparel resale market. The firm’s strategy coalesces around four key priorities: product innovation, category expansion, international growth, and buyer acquisition. As a slew of firms have entered the resale space, competition has arisen around exclusive access to customers, inventory assortment, and distribution channels, with long-term equilibrium remaining uncertain. Consolidation looks inevitable, evidenced by the firm’s pending acquisition by narrow-moat South Korean Conglomerate Naver (expected to close in the first quarter of 2023), particularly as the scope of resale firms’ offerings see increasing category, price point, and geographic overlap. Poshmark’s right to win hinges on its ability to convincingly answer the “why Poshmark?” query, attracting platform participants with some combination of competitive seller services, frictionless listing, quick inventory turnover, attractive fees, broad assortment, and authentication services. Working in its favour, the firm now has access to the resources of a profitable multinational sponsor, affording investments in marketing and international expansion that were previously off the table as investors demanded a quicker route to profitability.

Each international market must be approached as a greenfield development, with local competitors boasting a home field advantage at the outset. Winning any of a handful of culturally similar markets (Canada, Australia, the U.K., Germany, France) would meaningfully expand the long-term addressable market, but the firm’s entry into India will remain dubious, which has proven notoriously difficult to monetize. Finally, the management is to target efforts at ameliorating the shipping pain point, with more diversified last-mile providers and a thrust toward higher-priced products likely helping to defray costs that currently constitute about a quarter of average order values, weighing on GMV growth.

Financial Strengths

Poshmark’s financial strength is sound. The firm carries no long-term debt, has $581 million in cash and cash equivalents on its balance sheet as of the second quarter of 2022, and the firm is to be free cash flow positive (operating cash flow plus capital expenditures) by 2024. The management has adequate wiggle room to pursue moat-bolstering investments, while narrowing operating losses should provide a route to enduring operating profitability by 2026. Provided that the firm realizes the planned $30 million run-rate synergies from its acquisition by narrow-moat South Korean conglomerate Naver, Poshmark could achieve operating profitability as early as 2024.Poshmark’s waterfall of investment priorities as consistent with other high growth firms: pursuing internal investments and strategic mergers and acquisitions. There’s no pressure building for shareholder returns through repurchases or cash dividends until the firm achieves operating profitability, with the model suggesting the inception of a modest repurchase program in 2027, though this timeline could be delayed by a strategic acquisition or more circuitous route to positive earnings. As Poshmark emerges from its high-growth phase, it will encourage management to consider optimizing the firm’s capital structure (adding debt) and initiating a cash dividend, but this remains a long-dated concern as forecasts don’t contemplate a dividend until 2030.

Bulls Say

Five straight quarters of operating profitability during 2020 and 2021 (ending in the third quarter of 2021) suggest a strong underlying business model once customer acquisition costs normalize.
Early traction in Australia and Canada could augur well for long-term success in those and other culturally similar markets.
The firm’s planned acquisition by Naver could accelerate marketing spending, customer acquisition, and position Poshmark more effectively to win the peer-to-peer resale space.

Company Description

Poshmark is one of the largest players in a quickly growing e-commerce resale space, connecting more than 30 million active users on a platform that sells men’s and women’s apparel, accessories, shoes, and more recently consumer electronics and pet products. The marketplace operates in four countries–the U.S., Canada, Australia, and India–with a capital-light, peer-to-peer model that dovetails nicely with prevailing trends toward social commerce, apparel resale, and an ongoing pivot toward the e-commerce channel. With $1.8 billion in 2021 gross merchandise volume, or GMV, hence the firm captured about 13%-14% of the domestic online resale market, with rolling lockdowns and tangled supply chains providing a meaningful impetus for channel trial during 2020 and 2021.

(Source: Morningstar)

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

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Global stocks

Alibaba’s internet services had annual active consumers of over 1 billion as of March 2022, versus the 1.2 billion online population in June 2022

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Business Strategy & Outlook

Alibaba is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. There’s a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba. Alibaba’s internet services had annual active consumers of over 1 billion as of March 2022, versus the 1.2 billion online population in June 2022 per Quest mobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Gross merchandise volume per annual active user was CNY 8,833 for the year ended March 2022 for Alibaba, higher than CNY 3,285 in 2021 for Pinduoduo and CNY 5,905 in 2021 for JD.

The Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, it is also believed AL iCloud and globalization offer long-term potential. While AL iCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities.

Financial Strengths

Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience initiatives through its current balance sheet and strong cash flow profile. Additionally, the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. The company is to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.

Bulls Say

Gross merchandise volume per annual active user was CNY 8,833 for the year ended March 2022 for Alibaba, higher than CNY 3,285 in 2021 for Pinduoduo and CNY 5,905 in 2021 for JD.
Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021.
Alibaba’s China commerce adjusted EBITA margin was 32.5%, higher than JD Retail’s 3.1% non-GAAP EBIT margin and PDD’s 12.4% non-GAAP EBIT margin for the 12 months ended December 2021.

Company Description

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%).

(Source: Morningstar)

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

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Carnival has carved out a broad offering across demographics, the product still has to compete with other land-based vacations

Business Strategy & Outlook

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships as of October 2022. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in years prior to the pandemic, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, international travel has waned as a result of COVID-19, which could spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers have resumed cruising since the summer of 2021 (after a year-plus no-sail halt), cruise operators have been able to reassure passengers of both the safety and value propositions of cruising (offering a holiday product at 25%-50% less than land alternatives).

On the yield side, Carnival is to see some pricing pressure as future cruise credits continue to be redeemed through 2023, a headwind partially mitigated by the return of capacity via rising occupancy. And on the cost side, higher spend to maintain tighter health protocols should begin to alleviate in 2023, helping manage expenses. Higher than normal dry dock days could temper profits as the fleet is redeployed, crimping near-term profitability. As of Sept. 30, 2022, 95% of capacity was already deployed and eight of the company’s nine brands will have their entire fleets sailing by year-end. These persistent concerns, in turn, should lead to average returns on invested capital including goodwill, that are set to languish below the 10.4% weighted average cost of capital estimate until 2028, which supports no-moat rating.

Financial Strengths

Carnival has secured adequate liquidity to survive its slow resumption of cruising, with around $7 billion in cash and investments at the end of September 2022. This should help finance the little cash burn remaining through the end of the redeployment ramp-up, which earlier in the pandemic had run around $500 million or more per month. The company has raised significant levels of debt since the onset of the pandemic with $35 billion in total debt, up from around $12 billion at the end of 2019. The company is focused on reducing debt service as soon as reasonably possible in order to reduce future interest expense. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term. By math, Carnival has more than one year’s worth of liquidity to operate successfully in a no-revenue environment. There’s no imminent credit crunch in the near term, as long as capital markets continue to function properly. Liquidity remains accessible, as Carnival was able to issue $1 billion in senior unsecured notes during its second quarter (due 2030), which was set to help refinance certain 2023 debt maturities while supporting capital spend. In August, Carnival was also able to extend the maturity (to 2024) of its convertible notes while maintaining the original rate (5.75%). Additionally, in order to free up cash to support operating expenses, Carnival eliminated its dividend in 2020 ($1.4 billion in 2019). Another $4.8 billion in current customer deposits were on the balance sheet, offering working capital that can be utilized to run the business and indicating demand for cruising still exists. And equity markets have also been accommodating, with the company facilitating a $500 million at-the-market equity raise in early 2022, indicating access to cash remains.

Bulls Say

As Carnival continues to deploy its fleet, passenger counts and yields could rise at a faster pace than the current capacity limitations are repealed.
A more efficient fleet composition (after pruning 23 ships since the onset of the pandemic) may benefit the cost structure to a greater degree than initially expected, as sailings fully resume.
The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Description

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with all of its capacity set to be redeployed in 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(Source: Morningstar)

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

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Dividend Stocks

AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry

Post author By lvc-admin
Post date October 8, 2022
No Comments on AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry

Business Strategy & Outlook

A confluence of several issues–poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel–has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive assets under management higher. It is still believable there will always be a room for active management, the advantage when it comes to getting placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

With $667 billion in managed assets at the end of August 2022, AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry and is structurally set up to hold on to assets regardless of market conditions, being diversified across its three main asset class segments: equities (43% of managed assets), fixed income (40%), and other investments (made up of the firm’s asset allocation services and certain other alternative investments) accounting for the remainder. However, this has not always translated into solid organic growth or above-average profitability, with AllianceBernstein’s adjusted GAAP operating margins of 23.4% on average during 2017-21 being well below the group average of 30%.

Financial Strengths

AllianceBernstein is structured as a limited partnership, required to pay out essentially all of its available cash flows as dividends to unitholders (but allowing it to be taxed at a significantly lower rate than most corporations). The firm has traditionally managed a fairly conservative capital structure. This does not place the company at a competitive disadvantage relative to its peers, though, because most asset managers tend to carry little to no debt on their balance sheets. At the end of June 2022, AB had $800 million in debt (tied primarily to its commercial paper program) and $1.2 billion in unrestricted cash and cash equivalents on its books. The company maintains an $800 million revolving credit facility expiring September 2023, used primarily as backup liquidity for AB’s commercial paper program, and a $900 million committed unsecured senior credit facility with Equitable Holdings, which can be used for AB’s general business purposes (and where AB had $800 million outstanding at the end of June 2022 with an interest rate of approximately 0.5%). While the company’s structure as a limited partnership does limit the amount of capital that AB can allocate to other purposes, the firm does generally hold more cash than debt on its books, which along with substantial liquid investments and solid operational cash flows should enable AB to make investments in other assets/businesses from time to time.

Bulls Say

With nearly half of its AUM invested internationally, and 44% of managed assets sourced from non-U.S. domiciled clients, AB is one of the more global asset managers.
AB had $10 billion in its institutional pipeline at the end of June 2022, as well as a commitment from Equitable to invest $10 billion in the firm’s buildout of its private alternatives and private placements offerings.
The combination of CarVal Investors operations with AB’s private market capabilities has created a platform with $54 ($40) billion in total (fee-earning) AUM at the start of the third quarter.

Company Description

AllianceBernstein provides investment management services to institutional (46% of assets under management), retail (38%), and private (16%) clients through products that includes mutual funds, hedge funds, and separately managed accounts. At the end of July 2022, AB had $689.0 billion in managed assets, composed primarily of fixed-income (40% of AUM) and equity (43%) strategies, with other investments (made up of asset allocation services and certain other alternative investments) accounting for the remainder. The company also provides sell-side research and brokerage services through its Sanford Bernstein subsidiary.

(Source: Morningstar)

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

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EDP is well positioned to benefit from the extension of production tax credits planned by the extension of the Inflation Reduction Act

Business Strategy & Outlook

EDP is the European utility with the second-largest weight of renewables (behind Orsted), accounting for two thirds of the group’s EBITDA. They consist of EDP Renovaveis’ wind and solar assets chiefly located in the United States and Iberia and EDP’s hydro assets in Iberia and Brazil. Renewables are the main growth driver as per estimates due to the commissioning of new capacity and capital gains from asset rotations. EDP plans to install 12.5 GW of net capacity by 2025 or 2.5 GW per year, still less than 4 GW-6 GW planned by Enel, Iberdrola, or Engie but almost 3 times as much as 0.9 GW of the previous 2019-22 business plan. As the third-largest renewables player in the U.S. through EDP Renovaveis, EDP is well positioned to benefit from the extension of production tax credits planned by the extension of the Inflation Reduction Act. The second-largest division is formed by EDP’s electricity networks in Iberia and Brazil, contributing around one third of EBITDA. Networks’ profitability will grow thanks to investments in Brazilian networks and indexation to high inflation. The third division is client solutions and energy management, which weighs around 5% of group EBITDA. It is composed of Iberian thermal power plants and supply activities.

The almost zero implicit valuation of EDP’s Iberian operations when stripping out the market value of EDP’s stakes in its subsidiaries EDP Brazil and EDP Renovaveis reflect an excessive holding discount. To eliminate it, EDP’s management is contemplating changing the group’s capital structure. This could lead to a “reverse acquisition” of EDP by EDP Renovaveis. Such a situation where a subsidiary acquires its parent is called a downstream merger. The subsidiary buys back its shares from the parent and then redeems them or issues them to a shareholder in the acquiree. Consequently, the merger may be completed without increasing EDP Renovaveis’ share capital. EPS will grow annually by 9.9% on average through 2026 and a return to dividend growth as of 2023.

Financial Strengths

Net debt to increase from EUR 11.57 billion in 2021 to EUR 16.7 billion in 2026 as organic operating cash flow will be too low to cover hefty investment plan and dividend payments. The net debt/EBITDA to decrease from 3.1 in 2021 to 2.9 in 2026, averaging 2.8 during the period. Net debt/equity will average 0.9 through 2026. EBIT/net interest coverage will strengthen from 4.5 in 2021 to 5.5 in 2026. EDP’s dividend policy is based on a floor of EUR 0.19 per share, equal to the dividend paid since 2012, and a 75%-85% payout ratio. Taking the maximum between EUR 0.19 and an 80%-based dividend, the earnings estimates point to a EUR 0.19 dividend in 2022 and an average annual growth of 11.3% between 2022 and 2026.

Bulls Say

Being an early mover, EDP has an attractive portfolio of renewables assets, especially in the U.S.
EDP should beat its 2023-25 financial targets due to soaring power prices in Europe.
EDP might push EDP Renovaveis to do a downstream merger to eliminate the holding discount.

Company Description

EDP is a vertically integrated utility company and is the largest generator, supplier, and distributor of electricity in Portugal. In addition to Portugal, EDP has sizable operations in Spain, Brazil, and the U.S. EDP owns 82.6% of EDP Renovaveis, the third-largest wind power owner/operator in the world. EDP also owns 51% of Energias do Brasil, an electric utility that serves a population of almost 8 million.

(Source: Morningstar)

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

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Netflix Looks to Advertising to Spark Top-Line Growth

Post author By lvc-admin
Post date October 7, 2022
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Business Strategy & Outlook

Netflix is a pioneer in subscription video on demand and is now the largest online video provider in the U.S. and the world. The economic moat rating of narrow is based on intangibles resulting from the use of data stemming from the firm’s massive worldwide subscriber base. From its origin in the U.S., Netflix expanded rapidly into markets abroad as the service now has more subscribers outside of the U.S. than inside. The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.” However, the firm has recently ramped up its production using more traditional methods. Many consumers use, and will continue to use, SVODs like Netflix as a complementary service, especially as SVOD prices increase and pay television bundle prices decrease (due to the shift to over-the-top, or OTT, delivery). With a number of new services from media firms launched over the last five years, many consumers now pay for or have access to multiple services.

One potential issue for these platforms is the potential for consumers to move between the services with minimal friction. This usage pattern and increased competition will constrain Netflix’s ability to raise prices without inducing greater churn. Netflix will trial an ad-supported tier in fourth-quarter 2022 into 2023 as the firm looks to capture potential subscribers that were unwilling to pay the ad-free price. While the potential audience could be large, particularly in emerging markets, management will need to ensure that the lower-priced tier doesn’t cannibalize the full-price subscriber base in more saturated markets like the U.S. Netflix will expand further into local-language programming to augment its offering in many countries. This will generate a competitive response from the firm’s global and local rivals, which will augment their own first-party content budgets. In turn, Netflix’s international expansion will continue to hamper margin expansion.

Financial Strengths

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The company’s weak free cash flow due to this spending is a concern, as one doesn’t see the need to spend decreasing in the near future. The net cash burn was over $2 billion in 2017, over $3 billion in 2018, and $3.5 billion in 2019. While the firm generated positive free cash in 2020 due to pandemic-related production shutdown, Netflix returned to a slight cash burn in 2021. As of June 2022, Netflix has $14.2 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($3.0 billion recognized on the balance sheet and $15.6 billion not yet reflected on the balance sheet).

Bulls Say

Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years.
Netflix has built a substantial content library that will benefit the firm over the long term.
International expansion offers attractive markets for adding subscribers.

Company Description

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, internet connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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Franklin has used acquisitions to alter its product portfolio to the point where equities now account for just 32% of AUM

Post author By lvc-admin
Post date October 6, 2022
No Comments on Franklin has used acquisitions to alter its product portfolio to the point where equities now account for just 32% of AUM

Business Strategy & Outlook

While the combination of rising interest rates and an equity market selloff has negatively affected Franklin Resources’ assets under management, it is cautiously optimistic about the firm over the near to medium term. Franklin came into fiscal 2022 (ending September) with $1.530 trillion in AUM, which rose to a record $1.578 trillion at the end of December 2021, but market losses of more than $150 billion and outflows of more than $35 billion since the start of calendar 2022 left the company with $1.388 trillion in managed assets at the end of August. So far, market losses have had a bigger impact on AUM than fund flows, with Franklin reporting a 9.2% (13.8%) market loss for its managed assets during its fiscal third quarter (last two fiscal quarters). The firm’s investment performance has hewed close to benchmark returns for both its equity and fixed-income operations the past couple of quarters, with the better diversification of its product portfolio since the Legg Mason acquisition (as well as the addition of several alternative asset managers to the platform the past couple of years) helping the company to hold on to more assets than its equity-heavy peers.

There’s been big proponents of consolidation among the U.S.-based asset managers, expecting firms to pursue scale within existing product sets, as well as pursue nonaffected investment products like alternative assets, as a means of offsetting the impact of fee and margin compression being driven by the growth of low-cost passively managed products. During the past several years, Franklin has used acquisitions to alter its product portfolio to the point where equities now account for just 32% of AUM, while 38% is invested in fixed-income products, 10% in multi-asset/balanced funds, 16% in alternative assets, and 4% in money market funds. Although this shift in Franklin’s product mix to keep margins from deteriorating in the face of industry wide fee compression and rising costs (necessary to improve investment performance and enhance product distribution), near-term organic growth will struggle to stay positive in the face of current market headwinds.

Financial Strengths

Franklin entered fiscal 2022 with $3.2 billion in debt on a principal basis (including debt issued/acquired as part of the Legg Mason deal): $300 million of 2.8% notes due September 2022, $250 million of 3.95% notes due July 2024, $400 million of 2.85% notes due March 2025, $450 million of 4.75% notes due March 2026, $850 million of 1.6% notes due October 2030, $550 million of 5.625% notes due January 2044, and $350 million of 2.95% notes due August 2051. The firm also has a $500 million revolving credit facility that remains untapped. At the end of June 2022, Franklin had $5.8 billion in cash and investments on its books. More than half of these types of assets have traditionally been held overseas, with as much as one third of that half used to meet regulatory capital requirements, seed capital for new funds, or supply funding for acquisitions. Assuming Franklin closes out the year in line with the expectations, and rolls over its debt due September 2022, it will enter fiscal 2023 with a debt/total capital ratio of 22%, interest coverage of close to 20 times, and a debt/EBITDA ratio (by the calculations) of 1.5 times. Franklin has generally returned excess capital to shareholders as share repurchases and dividends. During the past 10 fiscal years, the firm repurchased $7.4 billion of common stock and paid out $7.1 billion as dividends (including special dividends). While Franklin’s current payout ratio is slightly lower than the firm’s 40% average payout (when excluding special dividends) the past five years, it is expected that only mid-single-digit annual increases in the dividend going forward. Franklin spent $208 million, $219 million, and $755 million buying back 7.3 million, 9.0 million, and 24.6 million shares, respectively, during fiscal 2021, 2020, and 2019. With the company potentially paying down debt over the next several years, share repurchases will likely be limited in the near term.

Bulls Say

Franklin Resources is one of the 20 largest U.S.-based asset managers, with more than two thirds of its AUM sourced from domestic clients. It is also the fifth-largest global manager of cross-border funds.
The purchase of Legg Mason has lifted Franklin’s AUM closer to $1.5 trillion, hoisting it into the second-largest tier of U.S.-based asset managers, which includes firms like Pimco, Capital Group, and J.P. Morgan Asset Management.
Franklin maintains thousands of active financial advisor relationships worldwide and has close to 1,000 institutional client relationships.

Company Description

Franklin Resources provides investment services for individual and institutional investors. At the end of July 2022, Franklin had $1.430 trillion in managed assets, composed primarily of equity (32%), fixed-income (38%), multi-asset/balanced (10%) funds, alternatives (16%) and money market funds (4%). Distribution tends to be weighted more toward retail investors (49% of AUM) investors, as opposed to institutional (49%) and high-net-worth (2%) clients. Franklin is also one of the more global firms of the U.S.-based asset managers been covered, with more than 35% of its AUM invested in global/international strategies and 25% of managed assets sourced from clients domiciled outside the United States.

(Source: Morningstar)

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

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Xcel took an early lead in renewable energy development primarily due to the favorable wind conditions in its central U.S. service territories

Business Strategy & Outlook

Xcel Energy’s regulated gas and electric utilities serve customers across eight states and own infrastructure that ranges from nuclear plants to wind farms, making the company a barometer for the entire utilities sector. That barometer is signaling a clean energy future ahead. Xcel took an early lead in renewable energy development primarily due to the favorable wind conditions in its central U.S. service territories. The company now plans to invest $26 billion in 2022-26, much of it going to renewable energy projects and electric grid infrastructure to support clean energy. That could make investment climb above $30 billion in 2027-31 based on state and federal clean energy policies.

Transmission projects to support renewable energy represents about one third of Xcel’s investment plan, but that could go higher based on recent studies that show transmission is a constraint to meeting clean energy targets. Politicians and regulators in Colorado, Minnesota, and New Mexico are pushing aggressive environmental targets, which could extend Xcel’s growth potential. One example is the 460-megawatt Sherco solar project that Minnesota regulators approved in September on the site of a soon-to-close coal plant. Xcel aims to eliminate coal generation by 2034 and deliver 100% carbon-free electricity by 2050. Xcel’s investment plan gives investors a transparent runway of 6% to 7% annual earnings and dividend growth potential. However, realizing this growth requires political, regulatory, and customer support for clean energy investments, particularly in Xcel’s largest jurisdictions, Colorado and Minnesota, where it plans to invest $20 billion in 2022-26. Xcel’s substantial growth investment plan results in more regulatory risk than its peers. Xcel has made substantial progress in recent years bringing earned returns closer to allowed returns through constructive regulatory negotiations across its system. Lower energy costs have helped keep customer bills mostly flat despite higher infrastructure charges. Regulatory support for Xcel’s growth investments could wane with rising energy prices.

Financial Strengths

Xcel Energy has a strong financial profile. Its biggest financial challenge is raising enough capital at reasonable prices to fund its $26 billion investment plan during the next five years with minimal equity dilution. Most of Xcel’s planned investments benefit from favorable rate regulation, but regulatory lag could weigh on cash flow. Xcel’s strong balance sheet has helped it raise capital at attractive rates. The company is to maintain EBITDA/interest coverage near 5 times as long as regulators grant timely rate increases. Xcel’s consolidated debt/ capital leverage ratio could creep toward 60% during its heavy spending in 2023-25, but there are normal levels around 55%, which includes $1.7 billion of long-term parent debt. Parent debt boosts shareholder returns on equity about 100 basis points, offsetting some of the regulatory lag. Xcel has $3.9 billion of refinancing needs in 2022-26 and it will need more than $7 billion of new debt. Xcel has been issuing large amounts of new debt since 2019 at coupon rates around 100 basis points above U.S. Treasury yields. Xcel took care of its equity needs for at least the next two years with a forward sale in late 2020 to raise $720.9 million at $61 per share. This followed a $459 million forward sale initiated in late 2018 at $49 per share. These were good moves with the stock trading above the fair value estimate when the deals priced. The board has accelerated its dividend increases the past few years. The $0.11 per share annualized raises for 2021 and 2022 bring the dividend to $1.94. This is still at the low end of management’s 60%-70% payout target for 2022, so annualized increases will have to start climbing near 7% to keep up with earnings growth and management’s payout target.

Bulls Say

Xcel has raised its dividend every year since 2003, including a 6% increase for 2022 to $1.94 per share & similar dividend growth going forward is expected.
Renewable energy portfolio standards in Minnesota and Colorado are a key source of support for wind and solar projects.
The geography of Xcel’s service territories gives it among the best wind and solar resources in the U.S. and a foundation for growth.

Company Description

Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with nearly half of its electricity sales coming from carbon-free energy.

(Source: Morningstar)

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

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Coty’s Turnaround Continues to Progress Despite Severe Inflation and Economic Uncertainty

Post author By lvc-admin
Post date October 6, 2022
No Comments on Coty’s Turnaround Continues to Progress Despite Severe Inflation and Economic Uncertainty

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Business Strategy & Outlook

One was not enthralled with Coty’s leadership prior to the pandemic, which lacked beauty experience, but Sue Nabi, a successful 20-year veteran of wide-moat L’Oreal who took the reins in September 2020, has the qualifications to right the ship. Her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to accelerate Coty’s prestige division by expanding from its core fragrance portfolio into makeup, build a skincare portfolio across mass and prestige, enhance its digital capabilities, further penetrate China, stabilize its mass-beauty business, and become an industry leader in sustainability. One can impressed by the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and the further progress in the years to come.

Coty is the second-largest global player in fragrance, with a portfolio of licensed brands, such as Calvin Klein and Gucci. Its prestige business (62% of fiscal 2022 sales, largely fragrance) generally reports mid-single-digit organic growth (in line with the category). However, mass beauty (38%, primarily cosmetics) has faced consistent sales declines, as Coty’s brands (CoverGirl, Max Factor, Rimmel) have suffered from historical underinvestment while many new brands have entered the market. One can be optimistic that Nabi’s strategy will improve Coty’s growth profile, but the less sanguine on the firm’s ability to secure a moat. Collectively, Coty has not demonstrated brand strength, preferred relationships with its channel partners, or a cost advantage, and thus conclude it does not possess an economic moat. The fallout from the pandemic put Coty in violation of its debt covenants, but a $1 billion convertible preferred equity investment from private equity firm KKR (which it has since converted to common and sold), and the sale of a majority stake of its salon/retail haircare business for nearly $3 billion in proceeds should secure Coty’s liquidity position, giving the firm the necessary breathing room to allow Nabi’s turnaround strategy to advance.

Financial Strengths

Since the acquisition of the P&G beauty business in fiscal 2017, Coty’s net debt/adjusted EBITDA has remained over 4 times. It ended fiscal 2022 with leverage at 4.6 times, just under the 4.75 limit imposed by the firm’s debt covenants. The Coty’s leverage to fall over the next five years, to below 3 times by fiscal 2025. Cash was tight for Coty heading into the pandemic, given the $600 million January 2020 investment in Kylie Cosmetics. But KKR’s $1 billion convertible preferred equity investment and the suspension of dividends on common shares (both announced in May 2020) provided much needed liquidity. These moves as prudent, given the uncertain environment caused by the global pandemic. Between September and November 2021, KKR converted its entire preferred stock position to common shares, which it then sold on the open market, saving Coty $77 million in annual preferred dividend payments. The firm to reinstate a dividend on its common shares in fiscal 2024, averaging a 20%-30% payout ratio over the long term. Outside of funding operations, Coty’s top priority for cash is debt reduction, which is sensible, given its relatively high leverage ratio. The Coty is likely to resume acquisitions once its debt leverage falls below 4 times, but as it is uncertain as to the magnitude and timing of potential deals, one has not modelled unannounced transactions. The firm will refrain from share repurchase until fiscal 2024, at which time it will repurchase 2%-8% of shares annually, in the absence of acquisitions. The share repurchases as a prudent use of cash when shares trade below the assessment of its intrinsic value.

Bulls Say

Coty is a major player in the fast-growing beauty industry and is the second-largest global provider of fragrances, one of the four major beauty categories, representing 15% of the total beauty market.
CEO Sue Nabi, an accomplished veteran of the beauty industry, has the experience and qualifications to reinvigorate Coty’s business.
Coty plans to increase its exposure to fast-growing markets (skincare, prestige cosmetics, China, e-commerce), where it has historically been underexposed, which should enhance its growth profile.

Company Description

Coty is a global beauty company that sells fragrances, colour cosmetics, and skin/body care. The firm licenses brands such as Calvin Klein, Hugo Boss, Gucci, Burberry, and Davidoff for its prestige portfolio. Coty’s most popular colour cosmetic brands are CoverGirl, Max Factor, Rimmel, Sally Hansen, and Kylie. Coty also holds a minority stake in a salon and retail haircare business, including brands Wella, Clairol, OPI, and GHD. Francois Coty founded the firm in 1904 and it remained private until its 2013 IPO. It had focused on prestige fragrances and nail salon brands until the 2016 acquisition of Procter & Gamble’s beauty business. This nearly doubled the firm’s revenue base, and launched it into mass-channel cosmetics and professional hair care.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

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