Category: Sectors

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Global stocks

Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance

Business Strategy & Outlook

Cleanaway’s strategy is positive, which seeks to maintain its leading position in commercial and industrial, or C&I, and municipal waste collections and to continue to improve its moat profile by investing in midstream materials recovery assets and, where possible, in downstream disposal assets. Cleanaway’s is the leading player in C&I and municipal waste with around 140,000 C&I customers and some 90 municipal council waste collection contracts. The economics of the waste management industry are overwhelmingly local in nature. Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance. This local market dominance in turn delivers route density that better spreads fixed costs—an imperative for-profit generation in waste collection. Cleanaway is a relative latecomer to disposal, biological treatment, and midstream materials recovery with global players waste management competitors Veolia and Suez possessing high-quality disposal assets Cleanaway cannot replicate. An exit from the Australian market by either player would be the only route to materially increasing disposal earnings.

As such, the sale of the Lucas Heights Landfill by Suez to Cleanaway–the result of the Veolia-Suez merger–is a rare windfall. Cleanaway’s growth into materials recovery is optimistic which feature more favourable economics than waste collection. Under its “Blueprint 2030” capital allocation strategy, the group will continue to focus investment in materials recovery and energy from waste, or EfW. Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in greenfield materials recovery, waste treatment, and EfW projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industry’s midstream. Further diversifying Cleanaway away from waste collections, the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.

Financial Strengths

Cleanaway debt-funded its acquisition of key Australian post-collection assets from Suez. Leverage–defined as net debt/EBITDA excluding IFRS-16 lease liabilities–sits at 2.78 times at the end of fiscal 2022, up from 1.0 times at fiscal 2021 year-end. Nonetheless, significant headroom to Cleanaway’s leverage covenant on existing debt facilities–calibrated at 3.0 times–exists. Therefore, balance sheet flexibility exists should further acquisition opportunities arise. Cleanaway’s balance sheet amid COVID-19 induced turbulence is comfortable. Specifically, Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021–fiscal 2024 period, Cleanaway’s sources of cash— those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations over said period. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or greenfield–under Cleanaway’s Blueprint 2030 strategy. Return of capital to shareholders could be considered in the absence of suitable mid- or downstream waste asset investment opportunities.

Bulls Say

  • Cleanaway is benefiting from industry consolidation.
  • Municipal waste contracts provide relatively stable cash flows through the economic cycle.
  • Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.

Company Description

Cleanaway Waste Management is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment, and valorisation, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I,

waste stream segments and in non-hazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection markets.

(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

ASX’s Elevated Cost Growth Unlikely to Be Sustained

Business Strategy & Outlook

The ASX to deliver a low-single-digit EPS compound annual growth rate over the next decade, with the wide economic moat protecting strong margins and enabling returns on invested capital to exceed the weighted average cost of capital. The capital-light business model and a lack of desire to undertake acquisitions should enable strong cash conversion, a 90% dividend payout ratio, and a debt-free balance sheet. The yield nature of the stock means the share price to be largely driven by bond market movements and central bank interest rates. One cannot expect competition to materially undermine earnings, despite the evolving regulatory and competitive landscape. One can expect long-term growth in market value to underpin EPS growth. The relatively reliable nature of earnings influences the medium fair value uncertainty rating. The ASX has long been protected by two significant barriers to competition through regulation and network effects. The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome. In March 2016, the government reiterated its desire for competition in cash equities clearing, which constitutes just 7% of ASX group revenue, but not in cash equities settlements, which make up a further 6% of group revenue. However, a government report found that even if competition were allowed in cash equities clearing, competitors are unlikely to emerge, as the regulatory requirement to maintain operations and regulatory capital in Australia reduce potential synergies for overseas clearinghouses. There are currently no proposals to introduce competition in derivatives clearing, ASX’s largest business (comprising around a third of group revenue), with obstacles such as cross-margining acting as a barrier to competition.

Financial Strengths

ASX is in good financial health due to its dominant Australian securities exchange, high margins, and capital-light business model. The company is debt-free and has been for many years, a situation to continue for the foreseeable future. The wide economic moat has protected consistently strong and stable EBIT margins of around 70% over the past decade, and as per forecast an average EBIT margin of around 65% over the next five years. Although revenue is vulnerable to market declines to some degree, the large margins limit leverage at an EPS level. A lack of capital requirements enables a dividend payout ratio of 90%, which one can expect to continue for the foreseeable future. ASX lacks an appetite for acquisitions, which is not a bad thing in one opinion. The company seeks to drive growth organically through product innovation and cost efficiencies. One cannot expect this strategy to change. ASX has a simple, maintainable capital structure comprising solely ordinary equity. Shares on issue have been reasonably stable for the past decade, with capital expenditures funded from cash flow. ASX also records participant balances on its balance sheet, which represents cash deposits that clearing participants are required to make to satisfy margin requirements on outstanding positions. This cash is invested in cash, as well as various money market instruments.

Bulls Say

  • Long-term earnings growth is underpinned by growth in the value of the stock market and protected by a wide economic moat. However, in the short term, earnings can be affected by market weakness, although EPS fell just 7% during the global financial crisis. 
  • ASX has a wide economic moat underpinned by network effects and regulation. This competitive advantage to protect EBIT margins of around 65% over the next decade and a low-single digit EPS CAGR. 
  • ASX is financially robust with a good balance sheet, strong cash flow, and tight cost control.

Company Description

ASX is the largest securities exchange in Australia with an effective monopoly in listing, trading, clearing, and settlement of Australian cash equities, debt securities, investment funds, and derivatives. Other activities include the technology services, enforcing exchange rules, and exchange-related data. The ASX demutualized and listed on its own exchange in 1998 and subsequently acquired the Sydney Futures Exchange in 2006.

(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

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021

Business Strategy & Outlook

Amcor is a global plastics packaging behemoth, with global sales of USD 12.5 billion in fiscal 2021. Amcor’s operations span over 40 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets. Amcor has focused its portfolio on segments within flexible and rigid thermoplastics that feature attractive returns, largely underpinned by significant merger and acquisition, or M&A, activity. To this end, Amcor has completed 25 acquisitions since 2010 and is pushing forward with its largest transaction to date, making an all-scrip offer in August 2018 for leading U.S. flexibles player Bemis Co. 

Amcor divested its Australasian fiber, glass, and aluminum beverage can packaging businesses in conjunction with its North American fiber-packaging distribution business in December 2013, in order to focus solely on plastics. The focusing the portfolio on segments requiring more complex, greater value-add manufacturers that attract higher margins is entirely appropriate. In the longer term, the Amcor’s returns and moat benefit greatest from the scale in resin procurement that the enlarged group enjoys as a scale player in each of its geographies. The plastics industry remains a significantly fragmented industry in spite of the efforts of Amcor and other large regionally and globally active players to roll up the industry. Thus, resin procurement advantages for players with regional scale are both material and long-lasting, particularly in light of the mature nature of markets that the plastics industry sells into, where demand is derived from household consumption. Therefore, Amcor’s strategy positively and the key driver of returns on invested capital, or ROICs, have averaged 10.8% over fiscal 2016-20, comparing favorably with the weighted average cost of capital, or WACC, estimated at 7.9%. In the future, this advantage is to bolster Amcor’s positive ROIC-WACC spread, with ROICs expected to average 11% over fiscal 2021-25.

Financial Strengths

Amcor maintains substantial financial leverage but the defensive nature of packaging markets provides scope for relatively high gearing. Leverage–defined as net debt/EBITDA before IFRS-16 lease liabilities–stood at 2.7 times at fiscal 2022 year-end. With a free cash flow forecast of USD 1.2 billion in fiscal 2023, one commends Amcor’s freshly announced USD 400 million share buyback. Upon completion of the buyback, the leverage to remain at 2.7 times at fiscal 2023 year-end. In considering the use of leverage, Amcor aims to retain investment-grade credit ratings with credit ratings agencies S&P and Moody’s. Amcor speaks to a long-term leverage range of 2.25 – 2.75 times as sufficient to maintain its current credit ratings. However, net debt/EBITDA stood at 2.9 times at fiscal 2021 half year-end following the completion of the Bemis acquisition in fiscal 2020. Leverage is anticipated to recede as Bemis cost synergies are realized medium-term. Nonetheless, Amcor is comfortable running its balance temporarily above 2.75 times, noting that both S&P and Moody’s could downgrade Amcor one further notch and its debt would still retain a desired investment-grade designation. Given the highly defensive nature of Amcor’s business, this threshold for downgrade by the ratings agencies is likely in the range of 3.5 times to 4.0 times net debt/EBITDA. With leverage even under the bear case scenario–where Amcor’s volumes contract by circa 0.5% over the fiscal 2021 and fiscal 2022 period–leverage peaks at 2.8 times in fiscal 2025. Therefore, with Amcor not at risk of breaching its internal leverage targets, one can be confident that a breach of debt covenants in the current environment is highly unlikely.

Bulls Say

  • Amcor’s efforts to focus its portfolio toward more complex, greater value-added categories will lead to consistently higher margins. 
  • Exposure to emerging markets, with rapidly rising per capita incomes, helps offset Amcor’s mature demand from developed markets. 
  • Completion of the Bemis deal significantly augments Amcor’s existing flexibles portfolio, while adding additional scale in resin procurement.

Company Description

Amcor is a global plastics packaging behemoth, with global sales of USD 14.5 billion in fiscal 2022 following the acquisition of Bemis in 2019. Amcor’s operations span over 40 countries globally and include significant emerging-market exposure equating to circa 20% of sales. Amcor’s capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets.

(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
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)

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