Category: Sectors

Categories
Technology Stocks

Carrier strives to reduce operating costs 2%-3% annually

Business Strategy and Outlook 

Carrier Global, a leading supplier of climate control and fire and security solutions, was spun off from United Technologies in April 2020. Carrier is a high-quality franchise with leading brands across most of its product portfolio. After the spinoff, Carrier increased spending on research and development, its sales organization, and capital projects to support product development and growth initiatives; this will help management accomplish its goal of mid-single-digit top-line growth over the midterm. Two of Carrier’s higher-profile growth initiatives include increasing its service attachment rate and becoming the leader in the applied HVAC market within five years. Carrier will successfully increase its service revenue, but it will be challenging to usurp Trane Technologies and Johnson Controls in the applied HVAC market.

Carrier’s HVAC segment (its largest segment at approximately 60% of sales) has the strongest long-term growth potential due to its commercial HVAC market exposure.  The commercial HVAC market will grow above GDP due to increased demand for energy-efficient and indoor air quality solutions. Residential HVAC demand remained robust in 2021-22, but there’s a cautious outlook. On the one hand, housing starts will rebound to 1.4-1.5 million units annually by 2025 after a near-term contraction in 2023-2024) and regulation changes (refrigerants and energy efficiency standards) should be a tailwind. On the other hand, the replacement cycle is maturing. Elevated investment spending, public company costs, and a challenging operating environment during 2020-21 due to the pandemic, supply chain disruptions, and cost inflation have pressured Carrier’s profit margins. However, Carrier strives to reduce operating costs 2%-3% annually. If the company can achieve its cost-cutting goal and expand its aftermarket mix, profit margins should improve, assuming healthy end-market demand and supply chains.

Financial Strength

After becoming a stand-alone entity following its April 2020 spinoff from United Technologies, Carrier now benefits from a narrowed strategic focus and complete autonomy over its capital allocation decisions. The company paid a price for its freedom; the separation left it saddled with a significant amount of net debt. However, Carrier generates significant free cash flow (about $1.7 billion annually over the last three years), and deleveraging has been a top capital allocation priority. In early 2022, Carrier completed the sale of Chubb, its service-centric fire and security business, for $2.7 billion net of taxes. Carrier expects to reduce debt by $750 million in 2022. At year-end 2021, Carrier had $9.7 billion of debt and $3.0 billion of cash on its balance sheet, which equates to a net debt/estimated 2022 EBITDA ratio of about 2. However, with the Chubb sale and Carrier’s 2022 free cash flow, the cash balance will swell to approximately $7.5 billion. Aside from paying down debt, the firm will allocate about $900 million to fund its acquisition of Toshiba’s remaining ownership stake in the Toshiba-Carrier joint venture, and management has earmarked $500 million for dividends and $1.6 billion for share repurchases in 2022. Carrier’s next maturing debt issuance isn’t until 2025, when its 2.242% $1.2 billion outstanding notes are due. Another $900 million is due in 2027, $2 billion is due in 2030, and $4.250 billion is due after 2030. Carrier’s debt maturities are well staggered, and no worries about solvency can be seen.

Bulls Say’s

  • After separating from United Technologies, Carrier is in full control of its destiny. Near-term reinvestment should boost its long-term growth prospects, and cost cutting initiatives should result in stronger profit margins. 
  • The company has significant franchise value with leading brands across most of its product portfolio. The flagship Carrier brand has demonstrable pricing power. 
  • In the wake of the coronavirus, air filtration, air-quality assessment, cold-chain solutions, and touchless access control solutions should become larger market opportunities.

Company Profile 

Carrier Global manufactures heating, ventilation, and air conditioning, refrigeration, and fire and security products. The HVAC business serves both residential and commercial markets (HVAC segment sales mix is 60% commercial and 40% residential). Carrier’s refrigeration segment consists of its transportation refrigeration, Sensitech supply chain monitoring, and commercial refrigeration businesses. The firm’s fire and security business manufactures fire detection and suppression, access controls, and intrusion detection products.

(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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Carlyle Group is one of the world’s largest alternative asset managers

Business Strategy and Outlook 

Carlyle Group has built a solid position in the alternative-asset management industry, using its reputation, broad product portfolio, investment performance track record and cadre of dedicated professionals to not only raise capital but to maintain its reputation as one of the go-to firms for institutional and high-net-worth investors looking for exposure to alternative assets. Unlike the more traditional asset managers, which have had to rely on investor inaction (driven by either good fund performance or investor inertia/uncertainty) to keep annual redemption rates low, the products offered by alternative asset managers can have lockup periods attached to them, which prevent investors from redeeming part or all of their investment for a prolonged period of time. Carlyle Group is one of the world’s largest alternative asset managers, with $376.4 billion in total assets under management, including $259.6 billion in fee-earning AUM, at the end of June 2022. The company’s portfolio is broadly diversified across business segments–private equity, which includes private equity, real estate, infrastructure and natural resources funds (accounting for 41% of fee-earning AUM and 65% of base management fees during 2021), global credit (45% and 24%) and investment solutions (14% and 11%)–and primarily serves clients in the institutional channel. With customer demand for alternatives increasing and investors in alternative assets attempting to limit the number of providers they use, larger-scale players like Carlyle Group are well positioned. 

That said, investors in the firm are betting that the company’s solid investment track record and fundraising capabilities will continue. While Carlyle Group’s ability to earn excess returns over the next 10 years, it will become increasingly difficult for the company to do so longer term, as increased competition (including from more traditional asset managers like BlackRock), continued pressure on fees, and a general maturation of the segment (from a solid period of above average growth due to shifting investor demand for alternatives) weigh on results.

Financial Strength

Carlyle Group’s business model depends heavily on having fully functioning credit and equity markets that will allow its investment funds to not only arrange financing for leveraged buyouts and/or additional debt issuances for the companies it operates but cash out of them once they’ve run their course. While the company saved itself a lot of headaches during the collapse of the credit and equity markets during the 2008-09 financial crisis by having relatively little debt on its own books, debt levels have crept up over the past 10 years. Given that asset managers like Carlyle Group have a high degree of revenue cyclicality and operating leverage and are generally asset-light, they should not maintain more than low to moderate levels of financial leverage. The company entered 2022 with $2.1 billion in longer-term debt (on a principal basis), with close to 70% of that amount coming due during 2030-50. The company also has a $1 billion revolving credit facility that expires in April 2027, with no balance outstanding at the end of June 2022. Assuming the company closes out the year in line with the projections, Carlyle Group should enter 2023 with a debt/total capital ratio of 24%, debt/EBITDA at 1.9 times, and interest coverage of more than 10 times. On the distribution front, share repurchases have been rare over the past decade, with the company repurchasing far less stock than it issued. Dividend payments, meanwhile, exceeded $4.8 billion during 2012-21 but are expected to account for only around 30% of distributable earnings annually going forward.

Bulls Say’s

  • Carlyle Group, with $259.6 billion in fee-earning AUM at the end of June 2022, is one of the go-to firms for institutional and high-net-worth investors looking for exposure to alternative assets. 
  • The company’s ever-increasing scale, diversified product offerings, long track record of investment performance, and strong client relationships position it to perform well in a variety of market conditions. 
  • Customer demand for alternatives has increased, with institutional investors in the category limiting the number of providers they use–both positives for the firm’s business model.

Company Profile 

Carlyle Group is one of the world’s largest alternative asset managers, with $376.4 billion in total assets under management, including $259.6 billion in fee-earning AUM, at the end of June 2022. The company has three core business segments: private equity, which includes private equity, real estate, infrastructure and natural resources funds (accounting for 41% of fee-earning AUM and 65% of base management fees during 2021), global credit (45% and 24%) and investment solutions (14% and 11%). The firm primarily serves institutional investors and high-net-worth individuals. Carlyle operates through 29 offices across five continents, serving close to 2,700 active carry fund investors from 95 countries.

 (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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

General Dynamics’ business jet segment primarily produces long-range wide-cabin business jets

Business Strategy & Outlook

About three-fourths of General Dynamics is a defense prime contractor and the other fourth a business jet manufacturer. Defense primes rely on defense spending for revenue, and companies with tangible growth profiles through a steady stream of contract wins, ideally to contracts that are fulfilled over decades. General Dynamic’s crown jewel of long-cycle contracts, the Columbia-class submarine, exemplifies this with planned procurement through 2042. Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense primes to deliver a lot of cash to shareholders, which is positive because there’s no substantial growth in this industry. Defense primes are implicitly a play on the defense budget, which is ultimately a function of both, a nation’s wealth and a nation’s perception of danger. As the U.S. budget is looking increasingly bloated with pandemic relief, a near-term slowdown in defense spending to flat or even negative growth, but the contractors will be able to continue growing due to sizable backlogs and think that defense budget growth is likely to return. There is substantial political uncertainty in the budget, but it will be difficult to materially decrease the defense budget due to structural geopolitical changes that make great-power conflict more salient. One of the most common budgetary compromises of the previous decade has been more nondefense spending for more

defense spending. 

General Dynamics’ business jet segment primarily produces long-range wide-cabin business jets. This market is low volume, at roughly 200 global deliveries each year and many repeat customers. New, quality, product drives demand in this segment, so the company must continuously convince customers that it has built a better aircraft. Gulfstream dominates volume in this segment, with roughly 50% market share, which leads to superior margins due to progression along the learning curve. The introduction of the G700, G800, and G400 in 2022, 2023, and 2025, respectively will be major sales drivers.

Financial Strengths

General Dynamics historically has one of the best balance sheets among defense primes, and this is proper business strategy as the company is somewhat more cyclical than peers. General Dynamics issued some debt in 2020 due to pandemic-related uncertainties, and gross debt/EBITDA stood at 2.3 times at the end of 2021. General Dynamics had a sizable debt maturity in 2021, and has a much more manageable maturity schedule over the rest of the forecast period. Over the medium term, the company will bring gross debt/EBITDA to its normal historical levels below a single turn. It makes sense for General Dynamics to generally carry a lower debt burden than peers because they have a highly cyclical business jet segment in addition to the cyclical defense prime contracting business. General Dynamics produces a substantial amount of cash flow to service any debt burden and the company would be able to access the capital markets at minimal cost if necessary.

Bulls Say

  • General Dynamics’ Gulfstream franchise has top-tier volume share and margin in the large-cabin business jet market and has successfully transitioned to the G500 and G600, and G650. Business jets are in a post pandemic cyclical upswing.
  • General Dynamics’ marine segment has decades of revenue visibility, thanks to the long-cycle nature of shipbuilding.
  • Defense prime contractors operate in a cyclical business, which could offer some protection if the U.S. enters a recession.

Company Description

General Dynamics is a defense contractor and business jet manufacturer. The firm’s segments include aerospace, combat systems, marine, and technologies. The company’s aerospace segment creates Gulfstream business jets. Combat system produces land-based combat vehicles, such as the M1 Abrams tank. The marine subsegment creates nuclear-powered submarines, among other things. The technologies segment contains two main units, an IT business that primarily serves the government market and a mission systems business that focuses on products that provide command, control, computers, intelligence, surveillance, and reconnaissance capabilities to the military.

 (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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Heineken Delivers Strong First Half of 2022, but Risks Loom

Business Strategy & Outlook

Heineken’s “green diamond” strategy, its new approach to long-term value creation, focuses on four metrics: growth, profitability, capital efficiency, and sustainability and responsibility. The newly announced Evergreen strategy targets growth and profitability. Growth targets are vague and noncommittal, but the Heineken has structural growth drivers that will allow it to generate above-average net revenue growth. Volume growth in early-stage emerging markets such as central and southern Africa, premiumization in its late-stage developing markets such as Brazil, and a limited amount of pricing should combine to drive mid-single-digit growth in the medium term. Heineken plans to extract EUR 2 billion gross in costs by 2023, primarily from reducing headcount by around 9%, at a cost of EUR 900 million in operating and capital expenditure, and it targets an EBIT margin of 17% by 2023, which is achievable and probably beatable. The 18% as a reasonable medium-term margin expectation, driven by product mix and operating leverage as volume grows in some of Heineken’s greenfield emerging markets. Some organizational change will be required, however, and embedding a culture of cost control, especially given the size of the headcount reduction, without affecting the productivity of employees as being the biggest challenge new CEO Dolf van den Brink will face. Still, there are opportunities to expand margins through footprint optimization, and process standardization and digitalization. Heineken’s returns on invested capital are structurally lower than those of Anheuser-Busch InBev, for example. The ownership of pubs in the U.K. is an example of the heavy investments Heineken has made in its growth and competitive advantages. While it’s notable that return on assets has been dropped as a performance metric in the green diamond strategy, this is mostly related to the drop in demand during COVID-19 lockdowns, and if Heineken delivers on its volume growth and margin expansion opportunities, higher returns on invested capital should follow. The mid teens ROICs in the medium term, up from about 10% now on a normalized basis.

Financial Strengths

Heineken is in solid financial health. The company increased the gearing on its balance sheet in 2012 to acquire the remaining shares of Asia Pacific Breweries. Following the acquisition, Heineken’s adjusted net debt/EBITDA ended 2012 at 3.4 times, and the firm has committed to reducing that ratio to maintain its credit ratings. Despite a spike in the net debt/EBITDA ratio caused by the COVID-19 disruptions in 2020, by 2021, despite the U.K. pubs acquisition, the company had deleverage to levels below most of its peer group, with adjusted net debt/EBITDA at 2.6 times. Even if it increases the dividend at a high-single-digit rate and initiates a share-repurchase program in the outer years, Heineken’s roughly EUR 2 billion in annual free cash flow should allow it to deleverage to net debt/EBITDA of under 2 times by 2023, which would still be well below AB InBev’s current level of roughly 4 times and in line with the 2 times is the normalized durable level in the brewing industry. Given the limited options for transformative mergers and acquisitions, Heineken is unlikely to be involved in any major transactions in the near term, but the bolt-on acquisitions of small and midsize breweries are still possible, particularly in Asia. Equity swaps and the use of stock are possibilities, as was the case in the 2010 merger with Femsa. The stated target payout ratio is 30%-35%. The firm also reduced the dividend significantly during the financial crisis in 2009. This level of payout gives the firm plenty of flexibility to make organic or acquisition investments to expand the business.

Bulls Say

  • The premium portfolio includes Heineken, the only truly global premium lager brand, Affligem, Lagunitas, and Birra Moretti. It is well positioned to capture market share through premiumization. 
  • Although it will weigh on ROIC, the acquisition of Punch Taverns means Heineken controls almost 3,000 pubs in the U.K., a competitive advantage that will give it direct feedback from consumers in a competitive market. 
  • Heineken is the global leader in cider, a category that is growing around 2.5 times faster than beer, and several key markets offer significant room for growth.

Company Description

Heineken is Western Europe’s largest beer producer, selling 231 million hectoliters in 2021, and following the Anheuser-Busch InBev acquisition of SABMiller, it is the world’s second-largest brewer. It has the leading position in many European markets, including the Netherlands, Austria, Greece, and Italy. Its flagship brand, Heineken, is the world’s leading international premium lager and has spawned several brand extensions. Its brand portfolio spans nonalcoholic, Belgian, and craft beer. Heineken is the world’s biggest cider producer.

(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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Samsung became the top supplier of DRAM in the mid-90s, and now has a 42% market share in 2020

Business Strategy & Outlook

Samsung Electronics has been a fantastic growth story as it established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, no economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands. Meanwhile, Samsung’s semiconductor business will remain the profit driver in the longer term, driven by the robust growth of data traffic. Samsung led the global semiconductor industry in terms of revenue in 2017, knocking Intel from the top spot for the first time since 1992. According to Omdia, Samsung became the top supplier of DRAM in the mid-90s, and now has a 42% market share in 2020. The company is also the global top supplier of NAND with 34% market share. Demand growth for memory has been supported by the diffusion of digital devices, such as note PCs and smartphones, over the past two decades. The new telecom standards will not only enable richer content on existing devices, but will also ignite digitalization in non-IT industries, which will continue to drive the growth in data traffic. Also, the big data trend will accelerate from artificial intelligence demand.

Owing to technological obstacles, the costs necessary to achieve higher capacity per memory are becoming much higher than the past, which has forced smaller players to withdraw from the market. Samsung will maintain its cost advantage, which stems from a better product mix, underpinned by technical advantages and increased research and development expenses.

Financial Strengths

Samsung has a very strong financial position, with net cash (including short-term financial instruments) of KRW 103 trillion by the end of December 2020.Samsung shareholders should see an increased flow of shareholder returns over the next few years. According to its new shareholder policy announced in January 2021, the company expects to spend at least KRW 9.8 trillion on dividends from 2021 to 2023, which equates to a dividend of around KRW 1,440, implying approximately a 25% dividend payout ratio. The firm retains its commitment to return 50% of free cash flow in the form of either dividends or buybacks. If earned free cash flow over the next three months exceeds KRW 9.8 trillion, the remainder would be paid as special dividends at the end of 2023.

Bulls Say

  • Samsung’s flexible-screen advantage can be leveraged into increased smartphone market share.
  • The memory manufacturing market has consolidated to three or four main players, which could stabilize the market. Demand driven by mobile devices will allow this division to make up for any declines in mobile.
  • Samsung’s stock price is inexpensive, with shares having traded at a single-digit or low-double-digit P/ E ratio for the past few years.

Company Description

Samsung Electronics is a diversified electronics conglomerate that manufactures and sells a wide range of products, including smartphones, semiconductor chips, printers, home appliances, medical equipment, and telecom network equipment. About half of its profit is generated from semiconductor business, and a further 30%-35% is generated from its mobile handset business, although these percentages vary with the fortunes of each of these businesses. It is the largest smartphone and television manufacturer in the world, which helps provide a base demand for its component businesses, such as memory chips and displays, and is also the largest manufacturer of these globally.

 (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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Megaport has a stronger focus on growing revenue and EBITDA margins rather than chasing growth at any cost

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and datacenter regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take a number of years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Cash balance of $82.5m plus access to a $25m credit facility, management is confident in achieving positive FCF. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.
  • MP1 has reported attractive trends in LTV to CAC ratio and customer churn (declining churn will also drive LTV to CAC ratio higher). 
  • Management has a stronger focus on growing revenue and EBITDA margins rather than chasing growth at any cost. 

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key Highlights:

  • FY22 results summary. Group revenue was up +40% to $109.7m, driven by growth across regions with the North American market (NAM) delivering the largest growth at +49% YoY to $57.8m. American is MP1’s single biggest contributor to NAM and accounted for 51% of group revenues in June-22, with the majority of the contracts now denominated in U.S. dollars (USD). Monthly Recurring Revenue (MRR) of $10.7m at the end of June-22 was up +43% YoY suggests solid momentum going into FY23. Revenue performance by region: North America up +49% to $57.8m; Asia Pacific up +30% to $33.5m; and Europe up +33% to $18.4m.
  • key operating metrics performance YoY – data centres up +3% to 787; Cloud On Ramps up +19% to 278; Ports up +24% to 9,545; Megaport Cloud Router (MCR) up +46% to 731; Megaport Virtual Edge (MVE) up +248% to 73; and Total Services up +26% to 27,383. 
  • Gross profit (profit after direct network cost and partner commissions) was up +62% to $68.3m, with GP margin improving +800bps to 62%. Direct network costs were up +8% YoY with 26 new data centres added to the network and capacity upgrades on intra-regional routes. Partner commissions were up +36% YoY, in line with revenue growth and expected to grow as Company builds momentum in the indirect sales channel. Normalised operating earnings (EBITDA) loss of $10.2m was +23% above FY21 loss of $13.3m, with margin improving from -17% to -9%. Operating expenses of $78.5m were up +42% YoY driven by investments in Scale Up and Scale Out projects. Management noted 4Q22 EBITDA was positive with the business starting to realise the benefits from operating leverage. The Company ended the year with cash and equivalents position of $82.5m, down from $136.3m in pcp. However, the Company remains well funded and has access to a $25m credit facility to provide additional flexibility.
  • Tightening the belt and focusing on margins. Other key items of note from the results: There is a strong focus on growing revenue and EBITDA margins in FY23, which is a positive in the current environment where investors are questioning the ability of high growth companies to deliver margin and profit growth. The group exit EBITDA margin for 4Q22 was positive – Group 5%, APAC 64%, EMEA 45% and NAM 23%. Further, with the current cash and credit facility, management is confident in achieving positive FCF. 
  • Management provided good colour around customer churn, showing a significant drop in customer churn after 2 years. Overall, MP1 has a customer churn of approx. 7% p.a. and is expected to continue to decline. 
  •  MP1 reported LTV (Lifetime Value) to CAC (Customer Acquisition Cost) ratio of 6.3x for FY22, which is below FY21 levels as MP1 invested in additional sales capabilities (indirect sales channel). Nonetheless this is an attractive LTV-CAC ratio, and, with a declining customer churn, management expects this ratio to trend higher going forward.  

Company Description:

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(Source: Banyantree)

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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Novartis reported mixed 2Q22 results, missing consensus estimates on top line with revenue of $12.78bn

Investment Thesis:

  • Relatively high barriers to entry, with a significant amount of funds deployed in R&D every year.
  • 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:

  • 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. 

Key Highlights:

  • FY22 outlook – Sandoz guidance upgraded. Assuming a continuing return to normal global healthcare systems, including prescription dynamics, and that no Sandostatin LAR generics enter in the U.S., management expects; Group sales to grow mid-single digits with Innovative Medicines (IM) sales growing mid-single-digits and Sandoz sales growing low-single-digit (vs prior forecast of being broadly in line with pcp), benefitting from return towards normal business dynamics with management anticipating solid base for growth starting FY23 driven by biosimilars (>15 biosimilar assets in pipeline), targeting $80bn originator sales in FY2030. 
  • Core operating income to grow mid-single digits with IM growing mid-to-high-single digits driven by good top-line momentum and continuation of productivity programs, and Sandoz being broadly in line with pcp (vs prior forecast of declining low-to-mid-single digit). 
  • Expenses to be broadly in line with pcp. 
  • Core tax rate of 17-17.5%.
  • Organizational model simplified – SG&A savings estimate increased to ~$1.5bn fully embedded by FY24. Management continued to simplify the organization model by integrating operations unit synergies, simplifying M&S structure (non-customer-facing) and streamlining G&A functions, increasing estimates of SG&A savings to $1.5bn (onetime restructuring costs to be 1-1.2x of the annual structure savings), fully embedded by FY24 (FY22 savings impact to be minimal as savings will be offsetting higher energy cost and inflationary pressures), with savings contributing to achieving mid-to-long-term low 40% IM core margin guidance and helping pipeline progression.
  • Capital management. The Company remained disciplined and shareholder focused in capital allocation, balancing investing in business through organic investments ($4.5bn in R&D + $0.5bn in capex) and value-creating bolt-ons ($0.9bn mainly for the Gyroscope acquisition), while returning capital to shareholders via growing annual dividend (paid $7.5bn in 1H22) and share buybacks of $5.6bn during the half, with $9.4bn still to be executed.

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.    

(Source: Banyantree)

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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Ocado Retail delivering low single digit margin a result of slower sales growth, coupled with the impact of higher utility and fuel costs

Investment Thesis:

  • The largest dedicated online grocery supermarket globally.
  • Attractive end markets, with grocery the most defensive and often the largest retail category in most regions. 
  • Ability to monetise OCDO’s expertise and IP via licensing deals with commercial consumers.  
  • OCDO’s technology can be an enabler to traditional bricks and mortar supermarkets rather than a threat given it will allow these players to defend against the threat of Amazon. 
  • Ongoing focus on R&D and innovation (e.g., entry into adjacent markets). 
  • Announcements of additional commercial partners. 
  • Corporate activity – potential takeover target. 
  • Potential move into other areas of retailing (e.g., general merchandise) via partnerships. 

Key Risks:

  • Build out of new customer fulfilment centres (CFC) underperforms.
  • The grocery segment is highly competitive with large established players and smaller technologically driven companies.
  • Margin erosion due to pricing pressure from irrational competitors
  • Ability to find talented professionals to lead the R&D / innovation program (given the Company is competing with the likes of Amazon, Apple & Google). 
  • New and improved competing technology which erodes OCDO’s IP competitive advantage. 
  • Regulatory / litigation risks. 

Key Highlights:

  • FY22 outlook. Management expects; Revenue: Ocado Retail growing low single digit reflecting the impact of the cost of living crisis in the UK on consumer behavior, UK Solutions & Logistics delivering fee growth of >30% reflecting the accelerated capacity build out in UK and cost recharges growing at least in line with Retail revenue growth as the company supports clients to build into the growing capacity, and International Solutions delivering OSP fee revenue growth of >100% with increase of live international CFCs from 4 to 12 and continued ramp in ISF volumes, and double digit growth in Kindred revenues from £10m in pcp.
  • EBITDA: Ocado Retail delivering low single digit margin a result of slower sales growth, coupled with the impact of higher utility and fuel costs, UK Solutions & Logistics delivering +50% growth reflecting increased fees due to the increasing live capacity for clients and engineering costs growing slower relative to this new capacity and International Solutions remaining flat vs pcp with rising margin contribution as revenues growth is offset by increased investments in platform development and a minimum level of engineering cost required to support new CFCs in the early stages of ramp. 
  • Total capex of £800m (30% U.K. + 50% international + 20% technology) driven by accelerating roll out of OSP worldwide. 
  • Ocado Re: Imagined – transforming the economics of OSP. The Company unveiled new “game-changing” technology, Ocado Re:Imagined, underpinning the Ocado Smart Platform (OSP) to make it the fastest, most flexible, most sustainable and most cost-effective suite of solutions for operating online grocery, and helping improve economics materially by 30-40% reduction in labor cost in CFC, increasing UPH (mature site productivity) up from 200 to >300, decreasing total cost of MHE by >15%, decreasing time to install and test MHE by -50% to 5 months and increasing share of orders delivered in <4hrs from placing by >5x. OCOD announced it remains on track for delivery starting 2H23 and is experiencing strong partner response given the new series of automatic bots and lightweight grids will allow installation of new capacity at a much faster pace, in smaller buildings and with lower capex. 
  • Strong cash position – supports significant growth plans without additional financing. Following the end of 1H22, OCDO successfully raised gross liquidity of £878m via a £578m equity placing and a £300m revolving credit facility, bringing total liquidity to around £2bn, to provide the liquidity for capex, underpinning delivery of the committed and expected CFC programme for partners over the mid-term (on track to roll out 50 modules i.e. 10 sites at an average of 5 modules each per year in the coming 4-6 years, with ~80% of this build programme already ordered) without the need for any additional financing, post which the business is expected to become cash flow positive. 

Company Description:

Ocado Group (OCDO) listed on the London Stock Exchange in July 2010 and has over 15 years of trading history. OCDO is a global leader in online grocery retailing with over 600,000 active customers. The Company’s key competitive advantage lies in the unique end-to-end operating solution for online grocery retail based on its proprietary technology and intellectual property (IP). The company has two key operating segments: (1) Retail (online grocery retailing); and (2) Ocado Solutions (licences out Company’s IP and technology to commercial partners globally).  

(Source: Banyantree)

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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Bread Financial Faces Challenges as It Looks to Resume Growth After Spinning Off Assets

Business Strategy & Outlook

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private label credit cards and buy now-pay later businesses being its only two product lines. However, Bread’s retail credit card business is under pressure. The company has historically targeted midsize retailers for its partnerships. This strategy has led to a partnership base that is weighted toward mall-based retailers, which are in decline due to increased online shopping. Many of Bread’s retail partners have already filed for bankruptcy, including the Ascena Retail Group in July 2020 and Forever 21 in 2019. Bread has also suffered defections, losing Wayfair and Meijer to Citi in 2020 and BJ’s Wholesale Club to Capital One at the start of 2022. The retail partner loss is an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

Bread must also now contend with rising competitive threats from buy now-pay later firms, which are targeting the U.S. retail market and seek to sign agreements with Bread’s partners. These firms are still a relatively small part of U.S. retail, but Bread takes the threat seriously. The company’s acquisition of the original Bread, a buy now pay later company, as well its decision to adopt its name as its own was done with the intent of accelerating the deployment of its own competing offering. As part of the spinoff of LoyaltyOne, Bread used the proceeds from the transaction to reduce its considerable debt load. This strategy favorably as Bread is heavily leveraged, especially when considering the low credit quality of its receivable portfolio, which has historically seen net charge-offs well above industry averages. More needs to be done to put Bread in a good financial position, but the spinoff and the related debt reduction are a material improvement to Bread’s balance sheet. However, this does place Bread in an awkward position should credit conditions deteriorate industry wide, as the bank is among the most credit sensitive firms that cover.

Financial Strengths

When viewed as a single consolidated company, Bread Financial is a heavily leveraged firm. Bread finished 2021 with a tangible asset to tangible equity ratio of 15.1. The company accomplished this leverage by holding its banks as subsidiaries and keeping around $2 billion of its debt at the parent level. With the spinoff of LoyaltyOne now complete there are no longer any revenue-generating assets held at the parent level, and Bread will need to reconsolidate itself as a single entity or have its subsidiary banks make regular distributions up to the parent company to support its debt. The banks themselves are well capitalized with $3.3 billion in equity and a combined common equity Tier 1 ratio of 20.1% as of the end of June 2022. However, the banks are guarantors of the parent company’s debt, and the company will likely have to rely on further distributions from the banks. The degree of leverage also restricts Bread’s flexibility to invest in its businesses and respond to competitive threats. One of the key reasons that Bread sold its Epsilon business was that the firm did not believe it had the ability to make the kind of investments necessary to support the enterprise. There is precious little room for the company to maneuver, and its debt costs have already risen. In late 2020, the company issued 7% unrated debt to do a partial paydown of its credit line, which at the time was costing the company roughly 1.9%. The debt paydown that was a part of the LoyaltyOne spinoff, and in the future, one would like to see the company continue to manage its debt levels, particularly as economic fears intensify.

Bulls Say

  • Bread Financial’s restructuring efforts have been highly successful at reducing the company’s costs. This has allowed it to adjust effectively for its smaller size and retain profitability. 
  • Many of Bread Financial’s partners rely on it for data collection and loyalty programs. Switching costs protect these partnerships from competitive threats. 
  • The company’s credit card business is well capitalized, which will help protect the firm if credit results deteriorate.

Company Description

Formed by a combination of J.C. Penney’s credit card processing unit and The Limited’s credit card bank business, Bread Financial is a provider of private label and co-branded credit cards, loyalty programs, and marketing services. The company’s most financially significant unit is its credit card business that partners with retailers to jointly market Bread’s credit cards to their customers. The company also retains minority interest in its recently spun off LoyaltyOne division, which operates the largest airline miles loyalty program in Canada and offers marketing services to grocery chains in Europe and Asia.

(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.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

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Categories
Technology Stocks

Alphabet Inc: Revenue Increased +13% to $69.7bn, Driven by Search and Cloud

Investment Thesis:

  • Commands a strong market position in online advertising and online eyeballs. 
  • Search advertising increases its share of advertising spend. 
  • Leveraged to online video streaming and advertising via YouTube. 
  • Strong balance sheet with over US$125bn in cash, which gives flexibility to invest in growth options or undertake capital management initiatives. 
  • Focus on innovation across advertising businesses, which should help to sustain growth.
  • Strong management team.
  • Value accretive acquisitions in existing and new growth areas. 
  • Recent disclosure suggests GOOGL’s Cloud business building good revenue momentum. 

Key Risks:

  • Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data. 
  • Regulatory changes which impact the way GOOGL does business (e.g., forced changes to products). 
  • Expenses such as TAC (traffic acquisition costs) increase ahead of expectations and which the company is unable to pass onto customers.
  • Deterioration in economic conditions, which would put pressure on the advertising revenue.
  • Competition from companies like Facebook Inc., Amazon etc. could put pressure on margins. 
  • Potential return from investment on new, innovative technology fails to yield adequate results.

Key Highlights:

  • Revenue increased +13% (+16% in CC) to $69.7bn, driven by Search and Cloud.
  • Cost of revenues was up +15% to $30.1bn, primarily driven by costs associated with data centres and other operations.
  • Operating expenses were up +24% to $20.1bn, reflecting increase in R&D expenses driven primarily by headcount growth, growth in Sales & Marketing expenses driven primarily by increased spending on ads & promo followed by headcount growth, and growth in G&A reflecting increases in both professional service fees and in headcount, partially offset by a decline in charges related to legal matters.
  • Operating income was up +0.5% to $19.5bn, however, margin declined -340bps to 27.9%.
  • FCF was $12.6bn and $65bn for the trailing 12 months, with the Company ending the quarter with $125bn in cash and marketable securities.
  • Google Services revenue increased +10%, with Google Search and other advertising up +14% driven by both Travel and Retail, YouTube up +5%, Network advertising up +9% driven by AdSense and Other Revenues down -1%, reflecting decline in Play, primarily driven by the fee changes and slowdown in buyer spend, which combined with +12% increase in TAC delivered operating income growth of +2% and margin decline of -300bps was 36.2%.
  • Google Cloud revenues increased +36%, driven by GCP reflecting significant growth in both infrastructure and platform services and Google Workspace driven by solid growth in both seats and average revenue per seat, which combined with increase in employee compensation expenses saw operating loss widen +45%.  
  • Capital management. The Board repurchased 231.1m aggregate shares (21.2m Class A + 209.9m Class C) for $28.5bn during 1H22 and is left with authorized $58.9bn remaining for Class A and Class C share repurchases.

Company Description:

Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Access, Calico, CapitalG, GV, Verily, Waymo, and X, as well as Internet and television services. 

(Source: Banyantree)

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