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Funds Funds

Perpetual Smaller Companies Fund

Our Opinion

Highly competent PM

The PM, Jack Collopy has extensive experience and track record as an analyst and fund manager, with 21 years industry experience and 19 years with Perpetual. Mr. Collopy is supported by the wider Perpetual team of analysts, including deputy PM of the Fund Alex Patten. 

Constant rotation/changes at the PM level are a disappointment

 The constant rotation/changes at the PM or co-PM level in the last three years, for the Fund is a disappointment – we note that Mr. Collopy had transition to oversee other Perpetual strategies, leaving then co-PM Mr. Nathan Hughes to oversee the Fund. Mr. Hughes has since transitioned to become PM of Perpetual’s Ethical SRI Fund as of April 2019 (taking over from Mr. Collopy for that Fund). The Fund is now managed by Mr. Collopy with Alex Patten as deputy PM, who we think highly of, and have strong credentials and long investment experience. However, a period of stability at the PM level would give us more comfort before upgrading our recommendation.

Well-resourced investment team

Whilst the team managing the Fund is on the smaller end (relative to peers), the PMs of the Fund is able to tap into the expertise of the wider Perpetual investment team. The investment team is headed by Paul Skamvougeras, Head of Equities, and comprises a large and experienced team of Portfolio Managers (5), head of proprietary research (1), Deputy Portfolio Managers (3), Analysts (6) and the Responsible Investments team (2). Each Portfolio Manager is supported by the team of analysts and back-up procedures are shared throughout the large team. Jack Collopy is the Portfolio Manager of the Perpetual Smaller Companies Fund, with Alex Patten the Deputy Portfolio Manager. As such, ultimate investment responsibility rests with them. Mr. Collopy and Mr. Patten report directly to Paul Skamvougeras.

Solid investment process backed by bottom-up research 

The investment process is a bottom-up selection approach focused on quality and valuation, driven by research and engagement with management, which we think is particularly valuable in valuing smaller companies.

Downside Risks

Australian economic conditions deteriorate. 

The Portfolio Manager/analysts miss-calculate their bottom-up valuation.

Departure of key PM Jack Collopy or Deputy PM Alex Patten.

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

Novartis AG(NOVN)

  • Recent and upcoming divestments will streamline the business and provide increased focus to deliver shareholder returns. 
  • Recent product launches indicate solid sales momentum, with near-term product pipeline potentially providing further upside.  
  • Selective bolt-on acquisitions to supplement organic growth. 
  • Operating efficiency focuses to further support earnings growth.
  • As the new management team improves Company culture, investors are less likely to ascribe a discount to the stock based on legacy issues.  

Key Risks

We see the following key risks to investment thesis:

  • Recently launched products fail to deliver sales growth as expected by the market.
  • New product pipeline fails to yield “blockbuster” products or delays in bringing key products to market.
  • R&D programs do not yield new long-term ideas.
  • Increased competition (pricing pressure & innovative products) from new entrants or existing players.  
  • Value destructive M&A.
  • Regulatory / litigation risks.

Management’s outlook

Assuming a continuation of the return to normal global healthcare systems including prescription dynamics particularly oncology in 2H21, and that no Gilenya and Sandostatin LAR generics enter in FY21 in the US, management anticipates (in cc); (1) FY21 net sales to grow low to mid-single digit, with Innovative Medicines to grow mid-single digit and Sandoz to decline low to mid-single digit, and core operating income to grow mid-single digit (ahead of sales), with Innovative Medicines growing mid to high-single digit, ahead of sales, and Sandoz declining low to mid-teens. (2) 2H21 net sales growth to accelerate from 3% in 1H21 to mid-single digit, as the Company continues to return to normal prescribing behaviors, as well as further Sandoz stabilization, and core operating income growth to be high-single digit, driven by higher sales and ongoing productivity programs partly offset by increased investments in growth drivers and pipeline.

Company Description  

Novartis AG (NOVN) is an innovative healthcare company headquartered in Basel, Switzerland, with approximately 125,000 employees. In 2017, the Group reported net sales of US$49.1bn, while R&D throughout the Group amounted to approximately US$9.0bn. The Company sells its products in approximately 155 countries. The group has two segments which it reports on: (1) Innovative Medicines (Oncology / Pharmaceutical), and (2) Sandoz generics division.    

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

Grainger recovered its stronger sales growth but margin constraints have emerged in 2021.

investment stockbroker risk analysis using multiple devices. Financial analysis using phone app and laptop. Market trading profit.

The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. 

As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 287 in 2020 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. 

To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019). Grainger continues to expand its endless assortment strategy, but we’re skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. 

Financial Strength

As of the second quarter of 2021, Grainger had $2.4 billion of debt outstanding, which net of $547 million of cash represents a leverage ratio of less than 1.1 times our 2021 EBITDA estimate. Grainger’s outstanding debt consists of $500 million of 1.85% senior notes due in 2025, $1 billion of 4.6% senior notes due in 2045, $400 million of 3.75% senior notes due in 2046, and $400 million of 4.2% senior notes due in 2047. Grainger has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow every year since 2000, and its free cash flow generation tends to spike during downturns because of reduced working capital requirements. Given the firm’s reasonable use of leverage and consistent free cash flow generation, we believe Grainger’s financial health is satisfactory.

Bull Says

  • With a more sensible, transparent pricing model, Grainger should continue to gain share with existing customers and win higher-margin midsize accounts.
  • As a large distributor with national scale and inventory management services, Grainger is well positioned to take share from smaller regional and local distributors as customers consolidate their MRO spending.
  • Grainger operates a shareholder-friendly capital allocation strategy; it has increased its dividend for 49 consecutive years and has reduced its diluted average share count by over 40% over the last 20 years.

Company Profile

W.W. Grainger (NYSE: GWW) distributes 1.5 million of maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves approximately 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 400 global branches. In recent years, Grainger has invested in its e-commerce capabilities and is the 11th-largest e-retailer in North America.

(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

Federal Realty Outperforms Our Expectations and Raises both 2021 and 2022 Guidance in Q2

 Re-leasing spreads continue to be strong despite the pandemic, seeing rents on leases signed during the quarter increase 7.5% with leases to new tenants up 10.2% over the prior rent. Second quarter rent collection improved to 94% compared with 90% in the first quarter and improved to 98% compared with 96% if rent abatement and rent deferral agreements are included. Improving rent collection drove same-store net operating income growth of 39.4% in the quarter, ahead of our 28.1% estimate in the second quarter. 

As a result, funds from operations came in at $1.41 for the quarter, above of our estimate of $1.25 in the quarter and well above the $0.77 figure reported in the second quarter of 2020 but still below the $1.60 level reported in the second quarter of 2019. The strong second-quarter results led to management significantly increasing its FFO guidance. Management raised its 2021 FFO guidance by $0.49 at the midpoint to a new range of $5.05-$5.15, which is slightly ahead of our current $5.02.

Additionally, management also raised their guidance for 2022 FFO by 25 cents at the midpoint to a new range of $5.30-$5.50. While the increase is encouraging, the updated range is still below our current $5.96 estimate for 2022. However, REITs rarely give FFO guidance for the next year this far out and, given the high level of uncertainty that still exists in retail, we suspect that management is being conservative with its 2022 estimates.

Company Profile 

Federal Realty Investment Trust is a shopping center-focused retail real estate investment trust that owns high-quality properties in eight of the largest metropolitan markets. Its portfolio includes an interest in 101 properties, which includes 23.4 million square feet of retail space and over 2,600 multifamily units. Federal’s retail portfolio includes grocery-anchored centers, superregional centers, power centers, and mixed-use urban centers. Federal Realty has focused on owning assets in highly desirable areas with significant growth, and as a result, the average population density and average median household income are higher for its portfolio than for any other retail REIT.

(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

Taiwan Semiconductor Manufacturing Co.( TSMC)

JAPÓN BOLSA:KMA06. TOKIO (JAPÓN), 03/01/2018.- Un grupo de mujeres usan kimono durante la ceremonia de apertura de la Bolsa de Tokio de Japan Exchange Group, Inc. de la primera sesión comercial de Año Nuevo en 2018 en la Bolsa de Tokio, en Tokio, (Japón) hoy, jueves 4 de enero de 2018. EFE/KIMIMASA MAYAMA
  • Market leading position and room for further consolidation. TSMC’s significant expenditure on R&D should help it maintain this leadership position.
  • TSMC is leading the race in developing the new age of semiconductor chips such as Logic Technology, with thinner wafers being developed every year.
  • High barriers to entry – significant level of capital and know-how required to start a semiconductor business.
  • Independent and pure-play focus on manufacturing without marketing or branding of product eliminates conflict of interest with customers.

Key Risks

We identify the following key risks to investment thesis:

  • Moderating global economic growth, especially in the U.S. and China.
  • Trade tensions between the U.S. and China.
  • Operational risks such as suboptimal manufacturing quality of products e.g. Fab14B photo incident.
  • Softening smartphone sales and production. There may be a time-lag before the layout of 5G and AI materialize into sales for TSMC, e.g. regulatory restrictions.
  • Increasing commodity prices and difficulty for TSMC to improve margins. 
  • Unfavorable exchange rate movements between NT$ and currencies used in transactions (however, TSMC utilizes hedging strategies to manage this risk).

Management Outlook:

Forecasting strong demand for industry-leading 5nm and 7nm technologies, driven by all four growth platforms (smartphone, HPC, IoT and Automotive-related applications), anticipating 3Q21 revenue of US$14.6-14.9bn, and gross profit margin of 49.5-51.5% and operating profit margin of 38.5-40.5% (based on the exchange rate assumption of 1 US dollar to 27.9 NT dollars). Mr. C. C. Wei (CEO) noted, “For FY21, we now forecast the overall semiconductor market excluding memory to grow about 17%, while foundry industry growth is forecast to be about 20%, and remain confident we can outperform the foundry revenue growth and grow above 20% in 2021 in US$…we now expect our long-term revenue CAGR from 2020 to 2025 to be near the high end of our 10-15% CAGR range in US$…however, in the near term, we continue to observe both short-term imbalances in the supply chain driven by the need to ensure supply security as well as a structural increase in long-term demand, and while the short-term imbalance may or may not persist, we expect our capacity to remain tied throughout the year and into 2022, fuelled by strong demand for our industry-leading advanced and special technologies.”

Company Description  

Taiwan Semiconductor Manufacturing Company Limited (TSMC), together with its subsidiaries, engages in manufacturing, selling, packaging, testing, and computer-aided design of integrated circuits and other semiconductor devices. Based in Taiwan, the company manufactures masks and electronic spare parts; researches, develops, designs, manufactures, sells, packages, and tests colour filters; and offers customer and engineering support services. TSMC is the largest semiconductor manufacturing foundry in the world.

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

Wide-Moat MercadoLibre Continued to Ride latin America’s E-Commerce Wave in Q2

Mercado Libre reported 94% revenue growth in the quarter, well above the 66% Factset consensus estimate. This result was impressive considering it faced unfavorable currency movement (currency-neutral revenue rose 103%) and last year’s 61% growth at the beginning of the pandemic.

 In its commerce business, the firm recorded gross merchandise value and items sold growth of 39% (46% currency-neutral) and 37%, respectively, above our full-year estimates of 35% growth for both. In fintech, total payment volume soared 72% against our 53% full-year forecast. Thus, while the comparisons will get more difficult in upcoming quarters, we now think the firm is likely to eclipse our 58% revenue forecast for the year.

Indeed, its operating expenses increased 79% from last year on ongoing investments in fulfillment and delivery speed, marketing, customer acquisition, and loyalty. Even so, MercadoLibre recorded a second-quarter operating margin of 9.8%, well above our full-year 3.6% estimate.

Company Profile 

Founded in 1999, MercadoLibre’s commerce segment (representing 64% of net revenue in 2020) includes online marketplaces in more than a dozen Latin American countries, display and paid search advertising capabilities (MercadoClics), online store management services (MercadoShops), and third-party logistics solutions (MercadoEnvios). Its fintech segment includes an online/offline payment-processing platform (MercadoPago), mobile wallet platform, credit solutions for buyers/sellers, and asset management offerings (Mercado Fondo). The company derives more than 95% of its revenue from Brazil, Argentina, and Mexico.

(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

Jacobs Engineering Group Inc. (NYSE: J) after Strong Fiscal Q3 Raises FVE. To $141

Checking Stock market data information graph on screen

he fair value increase reflects the firm’s outperformance, an improved near-term outlook, and time value of money, partially offset by the implementation of a probability weighted change in the U.S. statutory tax rate in our model.

Jacobs’ net revenue was up 10.6% from the prior-year period. Critical mission solutions increased its revenue 0.6% year over year. People & places solutions net revenue grew 1.4%. Lastly, PA Consulting delivered stellar 36% year-over year revenue growth. The firm’s adjusted operating margin expanded by 170 basis points from the prior-year period, with improvement across all business lines.

Management increased its outlook for full-year fiscal 2021 and now expects adjusted EBITDA in the range of $1,210- $1,275 million (up from $1,200-$1,270 million) and adjusted EPS in the range of $6.15-$6.35 (up from $6.00-$6.30). Furthermore, management is optimistic that the company can deliver double-digit adjusted EBITDA growth over the medium term. 

Company’s Future Outlook

We believe the company is poised to capitalize on multiple favorable secular drivers, including infrastructure modernization, space exploration, intelligence analytics, energy transition, supply chain investments (particularly in the semiconductor and life sciences end markets), and the 5G build out. We also think Jacobs is well-positioned to benefit from a likely infrastructure plan in the U.S., given the firm’s strong position in areas such as water and transportation infrastructure.

Company Profile

Jacobs Engineering Group Inc. (NYSE: J) is a global provider of engineering, design, procurement, construction, and maintenance services as well as cyber engineering and security solutions. The firm serves industrial, commercial, and government clients in a wide variety of sectors including water, transportation, healthcare, technology, and chemicals. Jacobs Engineering employs approximately 55,000 workers. The company generated $13.6 billion in revenue and $970 million in adjusted operating income in fiscal 2020.

 (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
ETFs ETFs

Vanguard Australian Shares ETF (ASX: VAS)

Vanguard Australian Shares ETF (ASX: VAS) is an appealing and efficient alternative for investors seeking exposure to the broader Australian equities market. The strategy’s cost-value balance, in particular, is unrivalled. At 0.10 percent per year, it is one of the most affordable exchange-traded funds that provide diversified domestic equities exposure. Vanguard Australian Shares ETF seeks to provide broad Australian share market exposure in a passively managed, tax-efficient vehicle. To achieve that goal, the strategy uses an index-replication approach to track the S&P/ASX 300 Accumulation Index. The fund’s large size brings economies of scale to the effort and allows Vanguard to invest in virtually all the securities that make up the index. Security weightings are approximately the same proportion as the index’s weightings.
However, the portfolio will deviate from the index when the managers believe that such deviations are necessary to minimize transaction costs. Such strategies have helped keep annual tracking error as low as 0.20% and annual turnover below 2%. So, while the passive approach means the strategy is unlikely to depart far from the index, it offers a low-cost and reliable way to get Australian share market exposure. 		 
Vanguard Australian Shares ETF aims to track the S&P/ASX 300 Accumulation Index, a free-float-adjusted, market-cap-weighted index. It is one of Australia’s best-known stock market benchmarks and covers about 85% of Australian equity market capitalization. While the S&P/ASX 300 Index is dominated by giant- and large-cap companies, the fund has exposure to small caps, with an approximate weighting of 7.5%. The portfolio is top-heavy, with about 29% of the index in the top five companies.
The concentration in banks skews the fund’s sector weightings, with financial services forming around 26% of the portfolio. The basic-materials sector also looms large, but its dominance declined as the mining boom waned. Basic materials peaked around 31% of the portfolio in 2008 but shrank to around 18% by March 2020, while energy fell from around 8% to around 4% during the same period. Some sectors that are prominent on the global stage are underrepresented in the Australian market. Technology and to a lesser extent healthcare (thanks to the share price rise of CSL) combined make up around 17% of the index–a lower proportion than equivalent US and European indexes.		 
Company’s Performance outlook
Vanguard Australian Shares ETF (ASX: VAS) has rewarded investors well over time ahead of an average category peer. Given its exposure to small caps, which have underperformed large caps in the last 10 years, the strategy has modestly underperformed category index, S&P ASX 200 Index. On the other hand, the category relative outperformance has been led by the strategy’s higher market-cap exposure than an average category peer. More recently, when COVID-19 wrecked the market in the first quarter of 2020, Vanguard ceded 20.3% in line with the broader market sell-off and more than the category average. But the rebound was equally strong with 34.4% that ended the year for the strategy at just 20 basis points lower than its peers. In terms of risk-adjusted returns, Vanguard has delivered middling performance over long haul.		 

(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

Micron’s Dividend Initiation Makes Sense Based on Healthier DRAM Fundamentals (NASDAQ: MU)

The cyclicality of the memory industry often led to bouts of weak performance that could threaten the financial health of suppliers such as Micron, thus putting potential dividends at risk. However, management now believes

Micron is enjoying strong and sustainable secular demand across a variety of end markets as well as slowing industry supply growth due to consolidation, slowing of Moore’s Law, and an increasing focus on maximizing ROICs. Specifically, Micron has aligned its capital expenditure plans with stable memory bit supply market share targets while tactically adjusting utilization and holding higher levels of inventory during weaker demand periods. We agree with this thesis that Micron and its memory peers are better equipped to maintain healthy investment levels during downturns as well as a quarterly dividend.

Net capital expenditure as a percentage of revenue is now expected to be in the mid-30s versus low-30s previously. Overall, we think Micron’s DRAM business is well-positioned to generate cross-cycle excess ROICs, thanks to a more consolidated market.

Company’s Future Outlook

Our fair value estimate for Micron remains $90 per share, and we think shares look modestly undervalued at current levels. Management also updated its capital allocation plan. While the firm continues to target the return of 50% of cross cycle free cash flow, Micron will now pay a dividend that it intends to grow in addition to a more opportunistic approach to share repurchases In contrast, Micron’s NAND business is likely to continue to face more severe swings in profitability. Given that DRAM accounts for over 70% of Micron’s revenue, we expect the firm will be able to sufficiently fund its dividend.

Company Profile

Micron historically focused on designing and manufacturing DRAM for PCs and servers. The firm then expanded into the NAND flash memory market. It increased its DRAM scale with the purchase of Elpida (completed in mid-2013) and Inotera (completed in December 2016). The firm’s DRAM and NAND products tailored to PCs, data centers, Smartphone, game consoles, automotives, and other computing devices.

 (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

Despite rising labour costs, UPS is poised for strong growth in 2021