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Dividend Stocks Shares

Solid Year for Pendal; Strong Returns to Normalize, but The Hunt for New Money Is Picking Up

Business Strategy and Outlook

Pendal Group is one of Australia’s largest active fund managers, with AUD 139.2 billion in funds under management, or FUM. The business has diversified considerably since being spun out by Westpac in 2007, following the acquisition of U.K.-headquartered JO Hambro in October 2011. 

Pendal’s strategy centres on product, geographic, and asset class diversification. This positions it to capture FUM across various market cycles and fend off competitive pressures from low-cost passive products. It boasts a broad product suite across asset classes, including Australian and global equities, fixed interest and property. Pendal focuses on catering to growing investor needs with large addressable markets, and has seeded 14 funds per year, on average, over the last five years. It has an active pipeline of new products, more recently having launched multiple retirement income and ESG-themed funds. 

The group sources FUM from diversified institutional and adviser clients across Australia, U.S., U.K., and Europe. This provides higher growth opportunities and helps mitigate disruptions from a particular geography. Growth is supported by its strong distribution relationships in each of the region which it operates. Client concentration in its core FUM pool (excluding Westpac which accounts for 12% of total FUM) is relatively low. The 10 largest clients for JO Hambro account for just a third of its FUM. Institutional money currently represents 39% of FUM. 

Solid Year for Pendal; Strong Returns to Normalize, but The Hunt for New Money Is Picking Up 07 Nov 2021 

Pendal’s fiscal 2021 results were unsurprisingly solid, with underlying NPAT up 25% from the prior year to AUD 165 million. Strong markets, investment outperformance and net outflow reductions saw average funds under management, or FUM, grow 14% from the prior year to AUD 108 billion. Base fee margins were resilient at 0.48% and performance fees more than quadrupled. Dividends per share grew 11% to AUD 0.41, representing a payout ratio of 89%.An increasingly diversified clientele and product breadth expands its channels for new money, while relatively low fee margins should help it better withstand fee pressure. The strong performance in fiscal 2021 has improved the momentum of Pendal’s net flows–notably in its U.S. pooled and Australian wholesale channels.

Financial Strength 

Pendal is in sound financial health, with a net cash position of AUD 249 million as of Sep. 30, 2021. The firm has AUD 49 million worth of debt as of Sep. 30, 2021. This was used to fund the acquisition of Thompson, Siegel & Walmsley, or TSW, which has completed in the September quarter of 2021. It was poised to take on about AUD 200 million in debt to help fund TSW’s purchase. However, strong participation in Pendal’s capital raising for TSW has reduced the debt and balance sheet funding required to complete the acquisition. We forecast Pendal’s debt to be discharged within three years. Low capital investment requirements, strong free cash flow, and the balance sheet underpin a high payout of between 80% and 95% of underlying net profit after tax. We expect dividends to broadly match earnings per share growth. Dividends are not fully franked, given the large portion of overseas earnings.

Bulls Say 

  • The diversity of funds / strategies help Pendal grow and hold on to funds under management throughout various market conditions. 
  • The higher-margin overseas JOHCM and TSW businesses give Pendal a stronger organic growth profile than most Australian peers from opportunities in new and existing geographies. 
  • A focus on expanding its product offering with differentiated strategies allows Pendal to stay ahead of emerging investor needs and fend off competition from low-cost passive investments.

Company Profile

Pendal Group is one of Australia’s largest active fund managers. The business is split across three segments: Australian-based Pendal Australia; U.K.-headquartered JO Hambro Capital Management, or JOHCM, and U.S.-based Thompson, Siegel & Walmsley, or TSW. Pendal manages funds across several asset classes via a multiboutique structure. As of Sept. 30, 2021, funds under management, or FUM, stood at AUD 139.2 billion

(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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Shares Technology Stocks

NEXTDC reports strong results as of ongoing cloud adoption

Investment Thesis

  • Australia is still in the early stages of cloud adoption. The NBN’s implementation will drive demand from cloud providers for NXT’s asset follows more efficient and cheaper broadband. 
  • Extremely high-quality collection of sites.
  • Tier 4 gold centers focus on the premium end where pricing is more stable.
  • NXT has balance sheet capacity to handle more debt and self fund expansion through operating cash flow from the base building. 
  • Capital intensive nature of the sector provides a high barrier to entry.
  • Government adoption of cloud and the subsequent need to outsource present an opportunity.
  • Sticky customers are unlikely to churn which creates a strong customer ecosystem.
  • The Company’s national footprint enables it to scale more effectively than competitors.
  • Margin expansions demonstrate strong operating leverage.
  • Additional capacity has been announced.
  • Given the global demand for data, mergers and acquisitions are on the rise.

Key Risks

  • There is no product diversification (NXT only operates data centres).
  • NXT and competitors have significantly increased their supply of data centres.
  • Delays in the construction or ramp-up of data centres have an impact on the earnings growth profile.
  • Pressures from competitors (price discounting by NXT or competitors).
  • Higher power densities in Australia as a result of increased average rack power utilization.
  • Inadequate customer demand to generate a satisfactory return on investment.
  • NXT’s ability to expand and pursue growth opportunities may be hampered if sufficient capital is not obtained on favourable terms.
  • The risk of leasing (NXT does not own the land or building where its data centres are situated).

FY21 results highlights 

  • Data center service revenue was up +23% to $246.1million and at the bottom end of upgraded guidance of $246m to $251m.
  • Underlying EBITDA increased by +29 percent to $134.5 million, exceeding the company’s revised guidance of $130 million to $133 million.
  • Operating cash flow increased by 148% to $133.2 million.
  • Capex was down -18% to $301 million, falling short of the $380-400 million range.
  • NXT had $1.7 billion in liquidity (cash and undrawn debt facilities) at the end of the fiscal year, and its balance sheet strength is supported by $2.6 billion in total assets, indicating that it is well capitalised for growth.
  • Contract utilisation increased by 8% to 75.5MW. (7) NXT’s customer base increased by 183 (or 13%) to 1,547.
  • Interconnections grew 1,667 (or +13%) to 14,718, and now equates to ~7.7% of recurring revenue.

Company Profile 

NEXTDC Limited (NXT) is a Data-Center-as-a-Service (DCaaS) provider offering a range of services to corporate, government and IT services companies. NXT has a total of five data centers located in major commerce hubs in Australia, with three more due to be completed within the next 2 years. These facilities are network-neutral, meaning they operate independently of telecommunication and IT service providers. Currently NXT has a total of 34.7 MW built for data and serving housing, with a target to reach 104.1MW by the end of 1H18. 

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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Dividend Stocks Expert Insights

Australia and NZ Banking Group reported strong FY21 results with cash profit up by 65%

Investment Thesis:

  • Loan deferrals are falling, with economic conditions not as dire as earlier predicted
  • ANZ is trading on an undemanding valuation, with 1.2x Price to Book (P/B) and dividend yield of 5.2%
  • Extensive fiscal and monetary policy support are providing enough liquidity in the market to avoid mass stress points in property market and unemployment numbers
  • All else being equal, ANZ is offering an attractive dividend yield on a 2-yr (5.4%) and 3-Yr (5.8%) view
  • Net interest margin (NIM) remains under pressure, but some offsetting tailwinds could see NIMs hold up better than market expectations
  • The banks have aggressively provisions for loan losses, should this surprise on the upside the share price will see additional support
  • Strong capital position could lead to ongoing capital management initiatives
  • Continued focus on cost could yield results which come in ahead of market expectations

Key Risks:

  • Any unexpected customer remediation provisions
  • Loan deferrals turn into structurally impaired loans
  • Intense competition for already subdued credit growth
  • Increase in bad and doubtful debts or increase in provisioning especially any Australian and institutional single exposure loan losses
  • Funding pressure for deposits and wholesale funding
  • Credit risk with potential default of mortgages, personal and business loans and credit cards
  • Potential changes to Australian Banking legislation
  • Significant exposure to the Australian property market
  • Operating costs come in below market expectations

Key highlights:

  • It reported strong FY21 results which reflected Cash profit (from continuing operations) up +65% to $6,198m due to partial reversal of Covid-19 related credit provisions  
  • Mainly driven by Australia Retail & Commercial despite challenges in home loans processing
  • In August 2021, ANZ commenced a buy-back of $1.5bn shares on-market
  • Statutory profit was up +72% to $6,162m
  • Cash profit (from continuing operations) up +65% to $6,198m due to partial reversal of Covid-19 related credit provisions and driven by Australia Retail & Commercial despite challenges in home loans processing
  • In terms of credit quality, ANZ’s total provision result was a net release of $567m (collective provision (CP) release of $823m and individually assessed provision (IP) charge of $256m)
  • Net Interest Margin were stable at 2.61%.

Company Description: 

Australia and New Zealand Banking Group Ltd (ANZ) is one of the four major banking institutions in Australia with an international presence having activities in general banking, mortgage and instalment lending, life insurance, leasing, hire purchase and general finance. In addition, ANZ operates in international and

investment banking, investment and portfolio management and advisory services, nominee and custodian services, stock broking and executor and trustee services.

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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Dividend Stocks

Macquarie Group source new growth opportunities for good future earnings outlook

Investment Thesis

  • Significant operations across the globe, which provides diversity in business and geographic mix.
  • Changing business mix has seen the company move to more reliable (annuity style) earnings stream – making it a more quality (less volatile) business. 
  • Solid management team. 
  • Strong infrastructure business, which should benefit further government polices to drive economic growth. 
  • Push into green energy is a positive. 
  • Solid balance sheet, with surplus capital available for deployment (i.e. growth opportunities). 
  • Management unable to quantify FY21 earnings guidance due to the ongoing Covid-19 pandemic.
  • Potential capital management initiatives in the absence of investment in growth opportunities. 

Key Risks

  • Weakness / volatility in financial markets.
  • Change in regulatory landscape.
  • Weakness in asset values (e.g. MQG’s co-investments).
  • Increased competition for advisory work.
  • Value / EPS destructive acquisitions.
  • Company fails to achieve its FY20 guidance. 

1H22 Result Summary

  • Net operating income of A$7.8bn increased +41% over pcp, driven by higher Fee and commission income (+32% over pcp), Net interest and trading income (+20% over pcp), Net other operating income (+75% over pcp) and Share of net profits/(losses) from associates and joint ventures (A$242m vs loss of A$54m in pcp), which combined with total operating expenses of A$5.1bn (+19% over pcp), delivered NPAT of A$2.04bn (+107% over pcp). 
  • Net credit and other impairment charges declined -48.5% over pcp to A$230m, with lower charges recognised across most operating segments reflecting improvement in expected macroeconomics conditions.
  • Annualised ROE increased +350bps over 2H21 to 17.8%.
  • The Board announced A$1.5bn of capital raising in the form of a non-underwritten institutional placement followed by a non-underwritten share purchase plan, to provide additional flexibility to invest in new opportunities.
  • The Board declared an interim ordinary dividend of A$2.72 per share (40% franked), up +101.5% over pcp, representing a payout ratio of 50%.

Company Profile 

Macquarie Group (MQG) is a leading provider of financial, advisory, investment and funds management services. The company has operations around the globe, including world’s major financial centres. The company operates the following key divisions: Macquarie Asset Management; Corporate and Asset Finance; Banking and Financial Services; Commodities and Global Markets; and Macquarie Capital. MQG has over 14,000 employees in over 25 countries across Europe, Middle East & Africa, Asia, Americas and Australia).  

(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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Dividend Stocks

Westpac Banking Corp reported solid FY21 along with $3.5bn off-market Buy-Back

Investment Thesis 

  • Strong franchise model with management pushing towards lowering the bank’s cost to income ratio.
  • Improving loan growth profile and potential to grow above system growth. 
  • Better than expected outcome on net interest margin (NIM). 
  • Excess capital presents the potential for additional capital management (buybacks). 
  • Strong provisioning coverage.
  • Macro environment – domestic & global – is improving with extensive monetary and fiscal policies. 
  • A well-diversified loan book.

Key Risks

  • Intense competition for loan growth.
  • Margin pressure.
  • Ongoing remediation expenses. 
  • Housing market stress. 
  • Increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits and wholesale funding (increased funding costs).
  • Any legal fees, settlements, loss or penalties.

FY21 Results Highlights

Relative to the pcp: 

  • Statutory net profit of $5,458m, was up +138%. Cash earnings of $5,352, was up +105%. Excluding notable items, cash earnings of $6,953m, was up +33%. Cash EPS of 146 cents, was up +102%. 
  • WBC reported 2021 impairment benefit of $590m and sound credit quality with stressed exposures to total committed exposures at 1.36%, down 55bps. Australian 90+ day mortgage delinquencies at 1.07%, down 55bps. Impaired exposures down 23% in the year. 
  • Net Interest Margins of 2.04%, was down 4bps. WBC’s Australian mortgage lending was up +3% ($14.7bn) whilst Australian business lending was up +4% in 2H21. WBC’s total customer deposits was up +4% ($24.9bn). 
  • ROE of 7.6%, was up +372bps. Excluding notable items, ROE of 9.8%, up +212bps. 
  • CET1 capital ratio was 12..

Details of up to $3.5bn off-market Buy-Back

According to WBC’s Buy-Back booklet: (1) The Buy-Back provides Eligible Shareholders the opportunity to sell some or all of their Shares to Westpac. Participation is voluntary. (2) Eligible Shareholder can offer to sell some or all of your Shares to Westpac: at a Discount to the Market Price nominated by you of between 8% and 14% inclusive (at 1% intervals); and/or at the final Buy-Back Price (as a Final Price Application). Shareholders can also select a Minimum Price. If the Buy-Back Price is below the Minimum Price, none of the Shares will be bought back.

Westpac Banking Corp (WBC) is one of the major Australian Banks. The bank services individuals and businesses such as SMEs, corporations, and institutional clients. The bank’s core segments include Retail Banking, Business Banking, Institutional Banking, Consumer Banking and its wealth management business, BT Financial Group (Australia).  

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

BorgWarner Q3 Results Take Chip Crunch Hit

20025825 - closeup image of businessman drawing 3d graphics

and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. The acquisition of Delphi Technologies on Oct. 1, 2020, supports our thesis.

BorgWarner is also well positioned for growth in hybrids and battery electric vehicles. The Delphi acquisition adds electric and electronic controls to BorgWarner’s electric motors and driveline technologies. Regardless of the powertrain automakers chose, BorgWarner’s revenue growth potential remains unchanged. BorgWarner’s drivetrain business includes wet dual-clutch and torque transfer technologies. Dual-clutch transmissions, which contain eight or more gears, compared with older technology automatic transmissions equipped with four gears, can generate 5%-15% in fuel savings.

Financial Strength:

BorgWarner maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. Despite being acquisitive, the company has pursued a conservative capital strategy as total debt/total capital has averaged less than 15% over the past 10 years. Total adjusted debt/EBITDAR, which takes into consideration operating leases and rent expense, averaged less than 1 times over the same period. However, the company could have taken more advantage of the benefits of financial leverage without incurring the pitfalls of excessive debt. BorgWarner has adequate liquidity and can generate sufficient free cash flow to weather cyclical turns and to meet its financial obligations. The company refinanced a $251 million senior note that was due in September 2020.

Bulls Say:

  • Global clean air legislation enables BorgWarner’s topline growth to exceed worldwide growth in demand for light vehicles. 
  • The popularity of sport utility and crossover vehicles around the globe supports growth in BorgWarner’s torque transfer technologies. 
  • Volkswagen, Ford, and Hyundai are BorgWarner’s three largest customers and, on average, make up about one third of revenue.

Company Profile:

BorgWarner is a Tier I auto-parts supplier with four operating segments. The air management group makes turbochargers, e-boosters, e-turbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, powertrain sensors, cabin heaters, battery heaters, and battery charging. The e-propulsion and drivetrain group produce e-motors, power electronics, control modules, software, automatic transmission components, and torque management products. The two remaining operating segments are the eponymous fuel injector and aftermarket groups. The company’s largest customers are Ford and Volkswagen at 13% and 11% of 2020 revenue, respectively. Geographically, Europe accounted for 35% of 2020 revenue, while Asia was 34% and North America was 30%.

(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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Global stocks Shares

Marriott’s Demand Set to Rebound Further in 2022, Aided by Global Leisure and Corporate Pick-Up

that Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, the acquisition of Starwood has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.

Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages.

Future Outlook

It is expected that room growth for Marriott averaging midsingle digits over the next decade  supported by the company having around 20% of all global industry rooms under construction, well above its high-single-digit existing unit share, as of the end of 2020.

With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.

Marriott’s Demand Set to Rebound Further in 2022

Marriott’s third-quarter revenue per available room, or revPAR, improved to 74% of 2019 levels ,up from 56% last quarter ,driven by rate recovering to 96% of prepandemic marks. 

Meanwhile, Marriott’s brand advantage remains intact. Marriott’s EBITDA margins improved to 17.3% from 14.5% a year ago. It is observed that high-teens operating margins in 2030, compared with the low-double-digit prepandemic average, aided by cost efficiency offsetting wage inflation.

It is expected that leisure travel to remain robust, but we expect business travel to recover in 2022. In this vein, Marriott noted that business travel bookings have recently picked up, and that group 2022 revenue on books is down about 20% from 2019, with rooms down 23% and rate up 4%.

Financial Strength

 Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As a result, Marriott has enough liquidity to operate at zero revenue through 2022, and at second half of 2020 demand levels the company was around cash flow neutral. 

 Bulls Say  

  • Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element. 
  • Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to sustainably work from remote locations. 
  • Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.

Company Profile

Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents around 9% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.

 (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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Dividend Stocks Philosophy Shares Technical Picks

Quantitative Equities Continue to be a Drag on Janus Henderson’s Fund Flow Recovery

leaving them more dependent on market gains to increase their assets under management. With USD 419.3 billion in AUM at the end of September 2021, Janus Henderson has the size and scale necessary to be competitive in the industry and is structurally set up to hold on to assets regardless of market conditions, being somewhat diversified across its four main asset class segments–equities (two thirds of managed assets), fixed income (close to a fifth), multi-asset and alternatives (the remainder). 

During that same period, the firm’s organic growth rate averaged negative 5.1%, with a standard deviation of 2.4%, which was worse than the average of its publicly traded peers, with revenue growth and operating margins both trailing the average results for the U.S.-based asset managers. Janus Henderson’s organic growth to be in a negative 2%-4% range annually during 2021-25, with revenue growth and operating margins affected by industry fee compression and the need to spend more to enhance performance and distribution.

Financial strength

Janus Henderson entered 2021 with USD 300 million of 4.875% senior notes due in July 2025, leaving it with a debt/total capital ratio of around 6%, interest coverage of more than 50 times, and a debt/EBITDA ratio (by our calculations) of 0.4 times. The company also had a USD 200 million unsecured revolving credit facility (with a maturity date of February 2024). Under the credit facility, the company’s financing leverage ratio cannot exceed 3 times EBITDA. There were no borrowings under the credit facility at the end of September 2021. Should the firm close out the year in line with our expectations, Janus Henderson will enter 2022 with a debt/total capital ratio of around 6%, interest coverage of close to 70 times, and a debt/EBITDA ratio (by our calculations) of 0.3 times.

The company declared an initial quarterly dividend of USD 0.32 per share during the third quarter of 2017 and has since raised it to USD 0.38 per share. As for share repurchases, the company repurchased approximately 4.0 million shares for USD 100 million during 2018, another 9.4 million shares for USD 200 million during 2019, and during 2020 picked up 8.7 million shares for USD 180 million. In February 2021, Janus Henderson repurchased 8.0 million shares of common stock (which was distinct from its corporate buyback program) from Dai-ichi Life Holdings for USD 230 million. The firm has also repurchased 1.8 million shares for USD 75 million as part of its buyback program since the start of 2021.

Bulls Say’s

  • Janus Henderson is the only offshore-based global wealth manager listed on the Australian Securities Exchange. It provides investors exposure to a growing global wealth sector, with a high bias toward equity strategies.
  • Operating leverage is high, capital demands are low, and when free cash flow generation is strong investors can be rewarded with a good mix of growth and income returns. 
  • Janus Henderson carries added currency risk compared with listed Australian peers, given the primary listing is on the New York Stock Exchange and the base currency is the U.S. dollar.

Company Profile 

Janus Henderson Group provides investment management services to retail intermediary (49% of managed assets), self-directed (21%) and institutional (30%) clients under the Janus Henderson and Intech banners. At the end of September 2021, fundamental equities (56%), quantitative equities (9%), fixed-income (19%), multi-asset (13%) and alternative (3%) investment platforms constituted the company’s USD 419.3 billion in assets under management. Janus Henderson sources 56% of its managed assets from clients in North America, with customers from Europe, the Middle East, Africa and Latin America (30%) and the Asia-Pacific region (14%) accounting for the remainder. Headquartered in London, JHG is dual-listed on the New York Stock Exchange and the Australian Stock Exchange.

(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

Akamai’s Security Business Is on Fire as CDN Business Stagnates

The key to Akamai’s recent success has been the cybersecurity solutions it now offers. As the rest of its business struggles to produce revenue growth, security solutions have been growing about 30% annually and exceeded $1 billion in sales in 2020, making up one third of Akamai’s total sales. We think management is focusing on the right things and developing great products, but we fear the firm is susceptible to competitors’ CDNs.

The loss of so much business from the big Internet customers forced Akamai to look elsewhere for growth and rely less on the media business, which went from providing 58% of total revenue in 2014 to about 47% the past four years. Akamai now has a more robust web business, where it serves customers including retailers, financial services firms, travel-related companies, government agencies and others that benefit from having high-quality, interactive websites with significant traffic. Those firms also are particularly vulnerable to various hacking and security threats, which left an opportunity for Akamai to offer security products, and it is believed it will be the primary source of future growth.

Akamai’s Security Business Is on Fire as CDN Business Stagnates

Security continues growing at a rapid pace and has shown little sign of slowing down, even as it now makes up 40% of total revenue. The content delivery network, or CDN, business, which Akamai rebranded earlier this year as its Edge Technology Group, struggles to grow and is one where little opportunity for a competitive advantage exist.The most impressive aspect of Akamai to us is its ability to acquire small cybersecurity firms and integrate them into its own business.

Financial Strength 

Akamai is in excellent financial shape. At the end of 2020, it had $350 million in cash, about $750 million in marketable securities, and $1.9 billion in debt. The company typically trades with a gross debt/EBITDA ratio around 1.5. Akamai frequently makes small acquisitions, so its cash balance can frequently fluctuate. Akamai does not pay a dividend and does not intend to. It does return some cash back to shareholders via share repurchases, but the buybacks mostly just offset share dilution. 

Bulls Say 

  • Akamai is a major player in the exploding cybersecurity industry, so rapid growth there will more than offset a stagnant core CDN business. 
  • A major shift in viewing habits to Internet-based TV and video directly increases the need for content delivery networks, of which Akamai’s is second to none. 
  • The exodus of Akamai’s six Internet platform companies has stabilized, and they now represent well under 10% of sales, so they will no longer be a meaningful drag on growth.

Company Profile

Akamai operates a content delivery network, or CDN, which entails locating servers at the edges of networks so its customers, which store content on Akamai servers, can reach their own customers faster, more securely, and with better quality. Akamai has over 325,000 servers distributed over 4,000 points of presence in more than 1,000 cities worldwide. Its customers generally include media companies, which stream video content or make video games available for download, and other enterprises that run interactive or high-traffic websites, such as e-commerce firms and financial institutions. Akamai also has a significant security business, which is integrated with its core web and media businesses to protect its customers from cyber threats

 (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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Global stocks Shares

Nexstar Well Positioned to Capitalize on Political Ad Spending Growth

Though it’s slightly declining in importance, advertising remains an important source of revenue for Nexstar. Just under 44% of total 2019 revenue came from nonpolitical advertising. Over 70% of non-political advertising revenue is generated at the local level by selling ad time to area businesses, including restaurants, auto dealerships, and retailers, which have suffered during the pandemic. Because of its size and geographic reach, Nexstar also sells advertising nationally to auto manufacturers, telecom firms, fast-food restaurants, and retailers via their ad agencies. The larger scale of the firm, along with increased political ad spending, has increased the importance of elections. Hence it is expected that Nexstar will continue to benefit from political ad spending growth offsetting slower local and national ad growth.

Over the past decade, retransmission revenue has grown rapidly as a source of revenue for local television stations. For Nexstar, retrans revenue was 45% of total 2019 revenue, up from 25% in 2014. While the growth in retrans revenue has been and will continue to be a growth driver for local station owners, and it is projected that national network owners will continue to raise both network affiliation fees and reverse compensation fees, decreasing the bottom-line benefit to Nexstar.

Financial Strength 

Nexstar is more highly leveraged than it has been traditionally, it is in decent financial shape. Overall debt increased as a result of the Tribune Media acquisition. The firm had $7.5 billion in debt as of September 2021, up sharply from $3.9 billion at the end of 2018. Nexstar continues to use its free cash flow to lower its debt load. It spent over $425 million in the first nine month of 2021 to reduce its debt load, lowering its first-line net leverage to 2.14times at the end of the quarter from 3.52 times at the end of 2019. The new level is well below the covenant level of 4.25 times. Total net leverage is at 3.4 times, well below the management’s target of 4.0 times. The firm had no bond maturities due until 2024, though some of its $4.7 billion first-lien loans will come due over the next three years.

Bulls Say  

  • Nexstar can drive local ad revenue growth via its duopoly markets. 
  • The increased reach provided by the Tribune merger will help attract more national advertisers and grow political ad spending. 
  • Nexstar has the heft and reach to strike more advantageous retransmission agreements with pay television distributors. 

Company Profile

Nexstar is the largest television station owner/operator in the United States, with 197 stations in 115 markets. Of its 197 full-power stations, 158 are affiliated with the four national broadcasters: CBS (50), Fox (43), NBC (35), and ABC (30). The 2019 merger with Tribune made Nexstar the top broadcast affiliate for both Fox and CBS as well as the number-two partner for NBC and number three for ABC. The firm now has networks in 15 of the top 20 television markets and reaches 69 million television households. Nexstar also owns WGN, a nationwide pay-television network, and a 31% stake in Food Network and Cooking Channel.

 (Source: Morningstar)

General Advice Warning

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