Category: Sectors

Fastenal has a first-mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992

Business Strategy & Outlook

Since opening its first fasteners store in 1967, Fastenal has built one of the largest industrial distribution businesses in the United States. For many years, Fastenal’s growth story was driven by its branch count, which now stands just under 1,800. While this expansive footprint is still an important component of Fastenal’s business model, other strategies–including expanding its product portfolio, its vending and inventory management services, and, most recently, its on-site program–have become increasingly important growth drivers. The benefits of Fastenal’s vending, inventory management, and on-site services are twofold: Not only do these services drive incremental revenue, they also embed Fastenal in its customers’ procurement processes, which supports higher retention rates and pricing power. Fastenal has a first-mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992 (although the on-site strategy did not become a focused strategy until the past few years), and a long growth runway for both offerings can be seen. In addition to growth through its vending and on-site initiatives, Fastenal is well positioned to benefit from customer consolidation trends.

In recent years, customers have been consolidating their maintenance, repair, and operations, or MRO, spending with large distributors to leverage their purchasing power and increase operational efficiency. With its national scale, broad product portfolio, and inventory management services, Fastenal can capitalize on this trend and take market share from smaller and less capable distributors. Because Fastenal’s sales mix is increasingly skewing more toward large national accounts, on-site programs, and more price-competitive MRO products, the company’s gross margins are likely to come under pressure. However, the combination of higher sales volume and containment of selling, general, and administrative costs provides Fastenal the opportunity to realize strong operating leverage and expand operating margins. Fastenal’s operating margin is to reach 21% by midcycle year.

Financial Strengths

Fastenal has an outstanding debt balance of approximately $390 million. It is leveraged at only 0.1 times 2021 EBITDA, which is very conservative relative to the other industrial distributors. Fastenal’s earnings provide substantial headroom to service debt obligations. During fiscal 2021, Fastenal incurred only about $10 million of interest expense and generated about $1.4 billion of EBITDA, which equates to an extremely comfortable interest coverage ratio. Even with its expansive store footprint and cyclical end markets, Fastenal has a proven ability to generate free cash flow (defined as operating cash flow less capital expenditures) throughout the cycle. Indeed, it has generated positive free cash flow every year since 2003. Given its conservative balance sheet and consistent free cash flow generation, Fastenal’s financial health is satisfactory.

Bulls Say

Vending and on-site programs should provide a long growth runway for Fastenal.
Fastenal can capitalize on its national scale, broad product portfolio, and inventory-management services to take market share from smaller and less capable distributors.
Despite serving cyclical end markets, Fastenal’s business model generates strong free cash flow throughout the cycle. Fastenal is likely to continue to use its cash flow to fund a shareholder-friendly capital allocation strategy.

Company Description

Fastenal opened its first fastener store in 1967 in Winona, Minnesota. Since then, Fastenal has greatly expanded its footprint as well as its products and services. Today, Fastenal serves its 400,000 active customers through approximately 1,760 branches, over 1,400 on-site locations, and 14 distribution centers. Since 1993, the company has added other product categories, but fasteners remain its largest category at about 30%- 35% of sales. Fastenal also offers customers supply-chain solutions, such as vending and vendor-managed inventory.

(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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Tags US Market

Technology Stocks

Lam is poised to grow faster than the overall equipment industry, as it can capture a larger share of the market with technically superior tools

Business Strategy & Outlook

Lam Research is a major vendor of semiconductor fabrication tools. The firm is the leader in dry etch, a critical step in the chip making process where material is selectively removed. Lam has a wide economic moat as a result of cost advantages and intangible assets related to equipment design. Lam’s leadership position creates scale advantages that fuel research and development spending at levels only Applied Materials and Tokyo Electron can match. At the end of 2021, Lam had an installed base of 75,000 units, up from 40,000 in 2015. This large installed base creates stickiness and offers Lam an intimate look into problems faced by chipmakers, providing valuable information it can use to implement solutions and additional capabilities in future tools. Chipmakers that have continued along the trajectory prescribed by Moore’s law have endured significant challenges in terms of cost and complexity. Equipment providers are vital to making the pursuit more economical via advanced chip manufacturing tools. Lam has benefited from the sharp rise in etch, deposition, and clean steps required as a result of major inflections, including FinFET transistors and planar to 3D NAND, that feature multiple patterning and vertical layers well suited for Lam’s advanced etch and deposition offerings.

Consequently, Lam is poised to grow faster than the overall equipment industry, as it can capture a larger share of the market with technically superior tools. The volatile nature of demand for semiconductors directly affects the cyclicality of the equipment market. Lam, along with its peers, has benefited from an increase in service revenue in recent years, which will mitigate the volatility of equipment orders. Specifically, maintenance and engineering costs and spare parts are tied into service contracts that deliver a stable revenue stream distinct from tool purchases. As traversing Moore’s law becomes increasingly difficult, the service segment will grow as chipmakers increase their reliance on field service engineers from Lam and its peers, while also helping entrench vendors’ installed base of tools at customer facilities.

Financial Strengths

Lam is in a solid financial position. As of March 27, 2022, the firm had $4.2 billion in cash and equivalents, versus $5.0 billion in long-term debt. The firm typically keeps a substantial cash position on its balance sheet, which is appropriate for chip equipment firms. During cyclical downturns, the cash cushion allows Lam to continue investing heavily in research and development in order to maintain its leading technology and competitive positions.

Bulls Say

Lam is a leader in the dry etch and deposition markets and counts major chipmakers, such as Samsung Electronics and Taiwan Semiconductor Manufacturing, as customers.
Lam has achieved superior share gains in recent years due to its strong equipment offerings in etch and deposition, combined with the 3D NAND and multiple patterning inflections that require more of those particular tools.
Demand is strong for advanced etch and deposition tools, because they help chipmakers continue down the path prescribed by Moore’s law.

Company Description

Lam Research manufactures equipment used to fabricate semiconductors. The firm is focused on the etch, deposition, and clean markets, which are key steps in the semiconductor manufacturing process, especially for 3D NAND flash storage, advanced DRAM, and leading-edge logic/ foundry chipmakers. Lam’s flagship Kiyo, Vector, and Sabre products are sold in all major geographies to key customers such as Samsung Electronics, Micron, Intel, and Taiwan Semiconductor Manufacturing.

(Source: Morningstar)

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

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Global stocks

Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy & Outlook

While COVID-19 and inflation have potential to impact near-term travel demand in many regions of the world, Marriott can be expected to expand room and revenue share in the hotel industry over the next decade. The constructive stance is driven by a favorable next-generation traveler position supported by renovated and newer brands, as Marriott has added several new brands since 2007 and renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years. Also, Marriott is having an industry-leading loyalty program, with over 160 million members (as of the end of 2021), which incentivizes third-party hotel owners to join the company’s brands. Additionally, the acquisition of Starwood (closed in September 2016) has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America. A room growth for Marriott can be seen averaging mi single digits over the next decade (above the 1.8% increase model for the U.S. industry the next 10 years), supported by the company having 18% of all global industry rooms under construction, well above its high-single-digit existing unit share, as of the end of 2021.

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 cancellation costs for owners. Cyclicality and overbuilding in the industry present risks for shareholders. Typically, U.S. lodging recoveries last five to nine years, but the upcycle ending 2019 lasted 10 years.

Financial Strengths

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 acted 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 travel demand recovered in 2021, so too did Marriott’s debt leverage, with debt/adjusted EBITDA ending the year at 4.5 times. If demand once again plummeted, Marriott has enough liquidity to operate at zero revenue through 2023. The banking partners will work to provide Marriott any additional liquidity as needed, given the company holds a brand advantage (source of its narrow moat), which will drive healthy cash flow as travel demand returns. Marriott’s debt/adjusted EBITDA is to average 2.0 times over the next five years. The company is generating over $15.0 billion in free cash flow (operating cash flow minus capital expenditures) over the next five years (2022-26), which it will use to reduce debt, fund dividends equal to around 35% of its earnings during that time (dividend payments have resumed in 2022), as well as repurchasing shares (repurchase activity has started again in 2022).

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. The constructive stance is formed by higher income occupations being the most likely industries to continue to work from remote locations.
Marriott has a high exposure to recurring managed and franchised fees, which have high switching costs and generate strong ROICs.

Company Description

Marriott operates about 1.5 million rooms across roughly 30 brands. At the end of 2021, luxury represented 10% of total rooms, while full service, limited service, and timeshares were 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)

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

Tags US Market

Dividend Stocks

QBE manages a sizable investment portfolio of about USD 27 billion as of June 30, 2022, being both policyholder and shareholder funds

Business Strategy & Outlook

QBE Insurance is an international property and casualty insurance company with around USD 20 billion of annual gross written premiums. It writes about 25% of its annual premiums in its home region of Australia and New Zealand, which accounts for more than half of the groups underwriting profit. Other key markets include North America, Europe, and Asia Pacific. QBE is predominantly focused on specialty insurance lines, but the offering is extremely wide ranging across property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health. The size and diversity of insurance is built on the back of hundreds of acquisitions made over decades. The extended period of global growth via acquisition failed to deliver the cost-synergies or scale benefits management had hoped. The strategy has rightfully shifted, and progress is being made in turning the business around. The balance sheet has been strengthened and operational efficiency improving. The way senior management has reshaped insurance portfolios, cut costs, tightened underwriting standards and increased accountability across the group looks impressive. In addition to divesting several businesses, a greater focus on returns has led to group wide improvement in attritional claims.

While reducing premiums, decisions to reduce exposure to certain areas–for example, large commercial properties, and properties in higher risk areas–has improved profitability and reduced volatility. The performance of investment markets brings another element of volatility to earnings. QBE manages a sizable investment portfolio of about USD 27 billion as of June 30, 2022, being both policyholder and shareholder funds. Around 90% is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and– to a lesser extent–equity market. The returns are to remain suppressed in the short-term but will gradually recover as global cash rates normalize.

Financial Strengths

QBE Insurance is in sound financial health. After a multi decade strategy of growth by acquisition, a much-needed period of consolidation has included the exit from Latin America, North American personal lines, a number of Asian markets where the group lacks scale, and underwriting agencies and travel insurance in Australia and New Zealand. QBE Insurance held USD 3 billion in gross debt with a debt/equity ratio of 32.4% at June 30, 2022. Debt/total capital of 24.5% is within management’s 15%-30% target. QBE’s prescribed capital amount, or PCA, multiple is 1.77 times, at the top of the group’s 1.6-1.8 times target range.

Bulls Say

Rising insurance premiums, underwriting discipline, productivity initiatives, and focus on profitable growth, to drive consistent excess returns.

The U.S. operations have significant upside potential. It is expected that years of disappointment to eventually lead to premium rates reflective of the underlying insured risks.
The strong balance sheet and positive premium pricing supporting dividend growth and the return of surplus capital to shareholders.

Company Description

QBE Insurance is an international property and casualty insurance company. It writes about 25% of its annual gross written premiums in its home region of Australia and New Zealand, which accounts for more than half of the group’s underwriting profit. Other key regions include North America and Europe. QBE Insurance offers a number of personal, commercial, and specialty lines, including property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health.

(Source: Morningstar)

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

Tags Australian Market

Dividend Stocks

Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book

Business Strategy & Outlook

Suncorp is a well-capitalized financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons, and Terri Scheer. In New Zealand, key brands include Vero, AA Insurance, and Asteron Life. At group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia. The group’s exposure to the Queensland market, where large natural peril events have been larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events.

Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounts for more than half of total lending. A smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors. A sale of the bank to ANZ Bank would see capital returned to shareholders and is pending regulatory approvals. While there are potential benefits to the bancassurance model, such as better customer insights versus stand-alone insurance peers, and better cross-selling opportunities, they have not delivered a material tangible improvement in earnings, returns, or switching costs. Selling home insurance to borrowers is the lowest hanging fruit, with recent improvements to give the group a single customer view likely to make the process smoother. Similar to its peers, Suncorp is focused on enhancing the digital offering to ensure simpler and faster quotes, claim processing, and to ensure the large insurer remains competitive on price. In response to changes in the way customers engage with their insurer, with less human contact and the expectation of being able to access services at any time, productivity improvements remain a priority.

Financial Strengths

Suncorp Group is in good financial health. As at June 30, 2022, Suncorp Insurance had a prescribed capital amount, or PCA, multiple of 1.77 times the regulatory minimum. The common equity Tier 1 ratio for the insurance business was 1.22 times post the final dividend payment, within the target range of 1.125-1.325 times the PCA, and well above the regulatory minimum of 0.6 times. The bank’s common equity Tier 1 ratio as at June 30, 2022 was 9.1%, within Suncorp’s 9% to 9.5% target range.

Suncorp targets a dividend payout of 60-80% cash earnings (excluding special dividends).

Bulls Say

Premium increases stick without an equal rise in claims and rising rates lift yields on fixed income, together lifting underlying profitability and dividends.
A benign claims environment with a lower incidence of major catastrophes would considerably boost underwriting profits.
Risk management has been improved, and productivity initiatives are expected to deliver greater cost efficiencies.

Company Description

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(Source: Morningstar)

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

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Technology Stocks

Applied’s semiconductor system and services revenue from China is about 26% of revenue

Post author By lvc-admin
Post date October 21, 2022
No Comments on Applied’s semiconductor system and services revenue from China is about 26% of revenue

Business Strategy & Outlook

Applied Materials is the top vendor of semiconductor fabrication tools. While competitors tend to specialize in a single core competency, Applied competes in almost every key equipment segment with the exception of photolithography. As a result, all major chip makers develop strong relationships with Applied that span multiple process steps of their chip production. The firm is the dominant player in the material deposition and removal areas, among others. Applied boasts an impressive global presence with an installed base of more than 43,000 tools and field service engineers stationed in nearly every leading-edge chip-manufacturing facility in the world. With semiconductor fabrication becoming increasingly complex, resulting in more process steps and new manufacturing technologies, collaboration between chipmakers and equipment providers is set to reach unprecedented levels. Applied is to leverage existing relationships and insights into future customer technology needs to take advantage of the proliferating demand for state-of-the-art chips. The company’s scale and resources allow a research and development budget in excess of $2.7 billion to serve cutting-edge technologies. Recent inflections such as 3D architectures (including 3D NAND and FinFET transistors in logic/foundry) have been enabled by more advanced tools in deposition and removal. As a result, these segments have grown faster than the broader market in recent years, and firms such as Applied have directly benefited, as they can outspend smaller chip equipment firms in R&D to develop relevant solutions and build on existing market leadership.

Beyond semiconductors, Applied is a leading supplier of manufacturing tools for flat-panel displays, including organic light-emitting diodes, or OLED, panels. The cyclical nature of the chip industry and the display market is a ubiquitous threat to equipment suppliers. However, Applied’s expansive product portfolio and large installed base will allow the firm to comfortably weather business cycles over time, and the company is to experience solid growth over the long term.

Financial Strengths

Applied Materials is in a solid financial position. At the end of fiscal 2021, the firm had $5 billion in cash and cash equivalents versus $5.45 billion in long-term debt. The firm typically keeps a substantial cash position on its balance sheet, which is appropriate for chip equipment firms. During cyclical downturns, the cash cushion allows Applied to continue investing heavily in research and development in order to maintain its leading technology and competitive positions. The firm also does share repurchases and dividends to modulate excess cash, which is positive. Specifically, Applied aims to return between 80% and 100% of free cash flow to shareholders.

Bulls Say

Applied Materials is the chip equipment industry’s standard bearer. The firm has the broadest product portfolio and offers customers the closest thing to a one-stop shop.
Applied has been streamlining operations to lower its cost structure and has reinvested some of the savings in R&D while bolstering operating margins.
Applied has benefited from the proliferation of OLED displays, which share manufacturing technologies with those used in semiconductor fabrication. As these displays have become more complex in recent years, demand for Applied’s relevant tools has risen.

Company Description

Applied Materials is the world’s largest supplier of semiconductor manufacturing equipment, providing materials engineering solutions to help make nearly every chip in the world. The firm’s systems are used in nearly every major process step with the exception of lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement, and defect-inspection scanning electron microscopes.

(Source: Morningstar)

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

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Global stocks

Costa’s International segment operates farms in Morocco and China, and earns royalty income from licensing its blueberry genetics

Business Strategy & Outlook

Costa’s strong earnings growth to continue over the near term as expansionary investment in farms both domestically and in the firm’s China and Morocco businesses begins to bear fruit. However, Costa’s customer base is highly concentrated, and its products highly commoditized, and the company has carved an economic moat required to sustainably derive economic profits. Despite the potential for short-term fluctuations, which are inherent in an industry exposed to changes in weather and climate, the Australian fruit and vegetable industry has enjoyed a consistent trajectory, growing its value at an average of 3.4% per year over the past decade. Similar industry growth over the next decade is expected, underpinned by population growth, inflationary price increases, and some per capita increases in fruit and vegetable consumption.

It is expected expect Costa can outpace industry growth and capture market share, at least in the near term. Costa is growing its Australian market share to around 20% over the next five years, from 15% currently. However, this comes at a cost. With current projects such as the Monarto facility expansion increasing its footprint in mushrooms and ongoing berry expansion, Costa’s growth activities are capital intensive. The firm’s capital expenditure has expanded from around 5% of sales in 2016 to 11% in 2021, and the remaining is in the high single digits in the near term as the firm continues to ramp up growth with new projects. Costa’s International segment operates farms in Morocco and China, and earns royalty income from licensing its blueberry genetics. The Morocco operation is principally an export business, supplying blueberries to the U.K. and continental Europe, while China berry farming sales remain predominantly local. A significant growth is expected in the international segment over the short term as Costa continues to ramp up its international facilities. While labor costs are lower in these regions, without the biosecurity regulations of Australia, international farming is more exposed to import competition.

Financial Strengths

Costa’s balance sheet is in good shape. Net debt/EBITDA lifted to 1.8 in calendar 2021 as elevated capital expenditure, including the AUD 237 million 2PH Farms acquisition, was partially offset by the AUD 185 million equity raise. Costa’s AUD 176 million equity raising in calendar 2019 has placed the firm in a much more conservative position–suitable for a firm needing to ride out short-term fluctuations, which are inherent in an industry exposed to changes in weather and climate. Costa’s fiscal 2019 net debt/EBITDA would have ballooned to over 3.6 without the raising. This is much higher than the firm’s target range of 1.5-2.0, and would breach the estimate of the firm’s covenants, it is expected to be in the vicinity of 3.5. Costa’s balance sheet is well placed to underpin a dividend payout ratio of around 60% of underlying earnings per share. Conservative management of the balance sheet is also prudent considering the capital requirements ahead of the firm. With current projects such as the Monarto facility expansion increasing its footprint in mushrooms, investment in the Guyra tomato glasshouse, continued berry expansion, and ongoing international expenditure, Costa’s growth activities are capital intensive. The firm’s growth capital expenditure has expanded from around AUD 30 million in 2016 to AUD 128 million in 2021. While growth expenditure dipped to AUD 50 million in calendar 2020 as the firm tightened growth expenditure amid COVID-19 uncertainty, this expanded to more elevated levels around AUD 80 million in calendar 2021, not including acquisitions. A near-term growth capital expenditure of above AUD 60 million as the firm continues to ramp up expansionary projects.

Bulls Say

Costa’s strong market share in key categories mitigates its high customer concentration risk
International berry expansion to China is running according to Costa’s original five-year plan, and appears set for significant growth.
Costa is well positioned to capitalize on high growth in emergent product categories, such as blackberries.

Company Description

Costa Group is the largest fresh produce company in Australia, with an estimated market share of over 15%, principally supplying fresh fruit and vegetables to the major Australian supermarkets. While supplemented by third-party growers, the firm’s products are predominantly sourced from around 5,000 planted hectares of farmland, 30 hectares of tomato glasshouse facilities, and mushroom-growing facilities across Australia. Costa also operates berry farms in Morocco and China as part of its international business.

(Source: Morningstar)

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

Tags Australian Market

Global stocks Shares

Insurance Australia Group is a general insurer with around AUD 13.5 billion of annual gross written premiums, operating in Australia and New Zealand

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy & Outlook

Insurance Australia Group is a general insurer with around AUD 13.5 billion of annual gross written premiums, operating in Australia and New Zealand. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia; and State, NZI, AMI, Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand. General insurance in Australia and New Zealand is mature, with limited organic growth opportunities. The group’s strategy is focused on enhancing the digital offering to ensure simpler and faster quotes, claim processing, and to ensure the large insurer remains competitive on price. In response to changes in the way customers engage with their insurer, productivity improvements remain a key priority. Competition across both the direct-to-consumer and the broker channels is intense. A number of large global insurers are increasingly targeting the broker channel, such as AIG, Zurich, and Chubb. Others have meanwhile leveraged already established brands by offering white labeled products, or gone direct to market with their own low-cost offering.

Large insured events occur without warning, and Insurance Australia Group lacks meaningful geographic diversification outside of Australia and New Zealand. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events. The performance of investment markets brings another element of volatility to earnings. Insurance Australia Group manages a sizable investment portfolio of about AUD 12 billion, being both policyholder and shareholder funds. The majority is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and– to a lesser extent–equity markets.

Financial Strengths

Insurance Australia Group remains in good financial health following an equity raising in November 2020. As of June 30, 2022, the company had gross debt and hybrids of about AUD 2.0 billion, representing a gearing ratio (debt and hybrids/tangible capital) of 40%, within its 30%-40% target range. As of June 30, 2022, IAG’s prescribed capital amount multiple was 1.8 times, the top-end of the group’s long-term benchmark of 1.6-1.8 times. The common equity Tier 1 multiple was 0.97 times, within the target range of 0.9-1.1 times and well above the regulatory minimum of 0.6 times. After an additional release of business interruption provisions and AUD 350 million share buyback, the common equity Tier 1 multiple is closer to 1 time. Insurance Australia Group issued Berkshire Hathaway with 90 million new shares at AUD 5.57 per share in June 2015, which gives Berkshire a 3.7% position in the group. Berkshire is limited to a maximum holding in Insurance Australia Group of 14.9% and must at least maintain its initial 3.7% stake during the term of the 10-year quota share.

Bulls Say

The firm’s underwriting discipline, productivity initiatives, and focus on profitable growth will see returns consistently return its cost of capital.
IAG has collectively removed downside risk from 32.5% of its business while retaining exposure to earnings upside via profit share arrangements
A benign claims environment with a lower incidence of major catastrophes considerably boost underwriting profits.

Company Description

Insurance Australia Group is the largest domestic general insurer by gross written premium operating in Australia and New Zealand. The key general insurance markets in which IAG operates are home and contents, motor vehicle and compulsory third-party, and short-tail commercial. IAG sells insurance under several brands, including NRMA, CGU, SGIO, SGIC, WFI, and Swann in Australia, and NZI, State, AMI, and Lumley in New Zealand.

(Source: Morningstar)

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

Tags Australian Market

Global stocks Shares

Booking has built a leading network of hotel properties and other services, which drives an increasing user base

Post author By lvc-admin
Post date October 20, 2022
No Comments on Booking has built a leading network of hotel properties and other services, which drives an increasing user base

Business Strategy & Outlook

While COVID-19, inflation, and currency concerns continue to be overhangs on Booking’s near-term travel demand, the company is exhibiting solid financial health. Further, Booking’s global online travel agency leadership position is to increase over the next decade, driven by a healthy position in Asia-Pacific, continued leadership in Europe, and an expanding presence in vacation rentals, restaurant bookings, experiences, flights, and payments, all of which are backed by leading marketing and technology scale. Booking has built a leading network (the source of its narrow moat) of hotel properties and other services, which drives an increasing user base. This network effect is continuing to expand in both developed and emerging markets, as well as vertical markets such as rentals, attractions, flights, and payments (where it looks to focus near-term investment) resulting in a full connected trip offering. In developed markets, replicating Booking’s leading network in Europe is proving costly and time consuming for key competitors, given around 60% of all hotels in the region are small boutique establishments. In emerging markets, the firm has a presence in China with its Trip.com and Meituan-Dianping partnerships, and in its own Booking.com and Agoda.com platforms, which is crucial. This expanding network positions Booking well for the increasing global shift to booking via mobile applications. Booking.com is a top-10 travel iOS application in 157 markets versus 73 for Airbnb, and 28 for Expedia, according to App Annie on Oct. 3, 2022.

Focused entry from Google, Facebook, Alibaba, Amazon, and others could double the current handful of players that have dominant scale, leading to a meaningful impact on profitability. That said, replicating Booking’s network would require significant time and expense, and most of the aforementioned operators are to deploy a metasearch model (don’t control hotel relationships) versus directly competing against Booking’s OTA model (control hotel relationships).

Financial Strengths

Booking’s financial health is extremely sound, and the company has enough liquidity to operate at anemic travel demand levels while still investing in key growth areas into 2024. Debt/adjusted EBITDA was 1.5 times in 2019, but spiked to 13.7 times in 2020, due to incremental debt raised and weaker industry demand caused by the COVID-19 outbreak. That said, the ratio quickly declined to 3.8 times in 2021 and it is to reach 1.8 times in 2022, as the company pays down debt and travel recovers as the pandemic is contained.

Although Booking suspended share repurchases in 2020-21 due to near-term demand uncertainty stemming from COVID-19, it has resumed this shareholder return activity in 2022. The company is to complete its $15 billion authorization announced in May 2019 over the next few years. It is expected Booking to continue to generate strong free cash flow (operating cash flow minus capital expenditures) totaling almost $32 billion the next five years (2022-26). In addition to repurchases, Booking is to begin paying out 35% of its income in a form of a dividend starting in 2026, at that point the company will have solidified its position in current growth areas of the industry (vacation rentals, experiences bookings, payment facilitation, flight content, emerging market regions, and mobile applications). Finally, the firm could swallow a large acquisition in the space, should one present itself, given its free cash flow generation, cash, and untapped revolver position.

Bulls Say

Outsize online travel bookings growth witnessed the past few years in emerging markets should continue over the next 10 years, given low penetration levels and increased online usage, and Booking is well positioned.
Mobile application usage is increasing rapidly, and Booking has a dominant global position, which aids the 50%-plus of room nights that comes from direct traffic.
Booking is strengthening its network effect through organic initiatives and in fast-growing markets like experiences, vacation rentals and payments, resulting in a fully connected trip.

Company Description

Booking is the world’s largest online travel agency by revenue, offering booking and payment services for hotel and alternative accommodation rooms, airline tickets, rental cars, restaurant reservations, cruises, experiences, and other vacation packages. The company operates a number of branded travels booking sites, including Booking.com, Agoda, OpenTable, and Rentalcars.com, and has expanded into travel media with the acquisitions of Kayak and Momondo. Transaction fees for online bookings account for the bulk of revenue and profits.

(Source: Morningstar)

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

Tags US Market

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Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio

Post author By lvc-admin
Post date October 19, 2022
No Comments on Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio

Business Strategy & Outlook

Endeavour is Australia’s pre-eminent omnichannel liquor retailer, operating the largest network of brick-and mortar stores throughout the country, with more than 1,600 liquor outlets across the well-known Dan Murphy’s and BWS brands. Endeavour also has substantial interests in hotels and electronic gaming machines, operating more than 12,000 gaming machines across its portfolio of more than 300 hotels, pubs, and clubs. Endeavour is one of Australia’s leading employers, with staff of more than 28,000 throughout Australia. Endeavour’s business is divided into two segments. Its retail segment is Australia’s leading omnichannel liquor retailer, while its hotels segment provides hospitality services and gambling operations. Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio, which operates several wineries, as well as bottling and packaging facilities. Products produced are supplied exclusively to Dan Murphy’s, BWS, and ALH Group in Australia and provide a source high-margin differentiation while also minimizing supply chain risks in the wine category.

Shifting consumer trends toward online shopping and convenience have led to strategic investments in online shopping platforms and delivery capabilities, such as smartphone applications for each brand and online pure play retailers Jimmy Brings and Shorty’s Liquor. Almost 9% of all Endeavour’s liquor sales are transacted online. Endeavour’s revenue is highly skewed to the retail segment, which will contribute approximately 85% of revenue over the next decade, with the balance coming from the hotels segment. The split is more evenly balanced at an EBT level due to the higher margins achieved in the hotels business, with approximately 65% of EBT derived through the retail business and 35% through the hotels business. The consumer demand for alcohol is to be relatively steady through the economic cycle, exhibiting attributes of consumer defensives. The Australian hotels market will predominantly be driven by the same factors as the off-premises retail liquor market, namely population growth and inflation.

Financial Strengths

Endeavour Group is in reasonable financial shape. Endeavour’s leverage ratio, measured as net debt/EBITDA, including lease liabilities, was approximately 3.5 at the end of June 2022. Endeavour Group’s strong market positioning and wide economic moat provide us with confidence that current gearing levels are maintainable. There’s an interest coverage—defined as reported EBITDA/interest expense—of approximately 6 times at fiscal 2023 year-end. There might not be any material increase in the level of gearing as consistent with the investment-grade credit profile Endeavour is targeting.

Bulls Say

Endeavour’s dominant retail market share of about 50% is multiples of its closest competitor and provides a source of long-term maintainable cost advantage.
Endeavour’s partnership agreements with Woolworths allow the business to leverage the scale and capabilities of Australia’s largest supermarket.
Endeavour’s wide economic moat, strong competitive positioning and strong balance sheet will underpin a maintainable and steadily growing dividend.

Company Description

An investment in wide-moat-rated Endeavour Group provides investors with exposure to one of the most well entrenched dividend-paying businesses in the Australian retail landscape. Following decades of enduring organic growth through store rollouts, Endeavour’s off-premises retail segment—with more than 1,600 retail outlets mainly across its Dan Murphy’s and BWS brands—accounts for approximately half of all off-premises retail liquor sales within Australia. Endeavour’s immense scale in the off-premises retail segment is unrivaled within Australia. Indeed, Endeavour’s sales are almost three times larger than its nearest retail competitor, Coles.

(Source: Morningstar)

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

Tags Australian Market