Category: Sectors

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.

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

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)

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

CBA remains in a strong capital position after returning ~$13bn to shareholders via dividends and buy-backs, absorbing a significant increase in Weighted Assets

Investment Thesis:

  • Trades at a 2.3x Price to Book, and dividend yield of 4.2%, however the stock trades at a premium to its peer group. 
  • Improving macroeconomic environment which may see favourable higher interest rate hikes.
  • Post Covid-19 expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears).
  • Potential pressure on net interest margins as competition intensifies with other major banks.
  • Sector leading return on tangible equity.
  • A well-diversified corporate book.
  • Improving CET1 ratio, which may in due course provide opportunity to undertake capital management initiatives.

Key Risks:

  • Intense competition for loans, as overall market growth rate moderates. 
  • Trades at a premium to peer group, with high competition potentially eroding its ROE.
  • Major banks, including CBA, are growing below system growth (i.e. losing market share). 
  • Increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits and wholesale funding (increased funding costs).
  • Regulatory and compliance risk
  • Australian housing property crash. 

Key Highlights:

  • Statutory NPAT of $9,673m, was up +9%, whilst Cash NPAT of $9,595m, was up +11%, driven by volume growth in core businesses (Home lending was up +7.4%, Household deposits was up +13.2%, Business lending was up +13.6%, and Business deposits was up +15.1%), sound credit quality and lower provisions related to uncertainties relating to Covid-19.
  • Pre-provision profit of $13,190m (excluding one-off items), was up +3%.
  • Net interest margin of 1.9%, is down 18bps, due to large increase in low yielding liquid assets and lower home loan margins.
  • Operating expenses of $11,190m was down -1.5% on lower remediation costs and productivity benefits, partly offset by increased staff costs.
  • Loan impairment expense declined $911m to a $357m benefit, due to lower Covid-19 overlays partly offset by higher forward-looking adjustments for emerging risks.
  • CBA remains in a strong capital position after returning ~$13bn to shareholders via dividends and buy-backs, absorbing a significant increase in Weighted Assets associated with Interest Rate Risk in the Banking book. Common Equity Tier 1 capital ratio of 11.5% (Level 2, APRA) was down 160bps (or 18.6% on an internationally comparable basis).
  • The Board declared a dividend of $2.10 for 2H22, which brings the total FY22 dividend $3.85, fully franked, up +10% or $0.35cps on the prior year. The final dividend pay-out was ~68% of cash earnings or ~75% after normalising for long run loan loss rates. Management reiterated that the Bank continues to target a full year pay-out ratio of 70-80% of cash NPAT and an interim pay-out ratio of ~70% of cash NPAT.

Company Description:

Commonwealth Bank of Australia (CBA) is one of the major Australian Banks. Its key segments are retail, business and institutional banking, wealth management, New Zealand and Bankwest. Across these core segments, the bank provides services in retail, corporate and general banking, international financing, institutional banking, stock broking and funds management.

(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 Shares

RMD Delivered Another Solid FY22 and Quarterly Results

Investment Thesis:

  • Global leader in a significantly under-penetrated sleep apnea market. 
  • High barriers to entry in establishing global distribution channels. 
  • Strong R&D program ensuring RMD remains ahead of competitors.
  • Momentum in new mask releases. 
  • Bolt-on acquisitions to supplement organic growth.
  • Leveraged to a falling Australian dollar. 

Key Risks:

  • Disruptive technology leading to better patient compliance.
  • Product recall leading to reputational damage.
  • Competitive threats leading to market share loss.
  • Disappointing growth (company and industry specific).
  • Adverse currency movements (AUD, EUR, USD).
  • RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation.

Key Highlights:

  • 4Q22 group revenue of $915m was up +4% YoY (or up +8% in constant currency), driven by Americas Devices (up +11%) and Americas Masks & Other (up +13%). Revenue growth was driven by demand and competitor’s ongoing product recall. RMD did not drive any incremental revenue from Covid-19 related demand during the quarter versus the $20m benefit in the prior year quarter. Excluding the impact of Covid-19 related demand in the prior year, revenue increased by +10% on a constant currency basis. Rest of the World (RoW) revenue was a drag on group performance over the quarter (negatively impacted by currency), with RoW Devices down -10% YoY and RoW Masks & Other down -4% YoY.
  • Operating gross profit margin increased by 50bps to 57.8% in the June quarter, driven by improvement in average selling prices (ASP) in a positive product mix (higher margin high acuity patients), which was partially offset by higher freight and manufacturing costs, negative geographic mix and unfavourable foreign currency movements.
  • SG&A expenses for the fourth quarter increased by +7% or in constant currency terms increased by +11% over the June quarter, driven predominantly by increases in employee-related costs and T&E expenses. R&D expenses for the quarter increased by 7% or in constant currency terms increased by 11%.
  • Operating profit (EBIT) for the June quarter increased by +4% to $271.5m, driven by revenue growth and gross profit margin improvement, partially offset by higher operating expenses. Effective tax rate for the June quarter was 17.6% versus 21.5% in the prior year quarter.
  • NPAT for the quarter increased by +10% to $219.2m and diluted earnings per share for the quarter of $1.49 was also up +10% YoY. 
  • RMD ended the fourth quarter with a cash balance of $274m. As at June-30, RMD had $780m in gross debt and $500m in net debt. As at June-30, RMD had approximately $1.4bn available for drawdown under their revolver facility.

Company Description:

ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio). 

(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

QBE Insurance: The Board Declared an Interim Dividend of A11 cps in the pcp, and Reflects a Pay-out Ratio of 57%

Investment Thesis:

  • On valuation grounds, QBE trades in-line with fair value.
  • Solid FY23 guidance.
  • New CEO announced a fresh perspective and potential rebasing of earnings. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. 
  • Solid global reinsurance program should insulate earnings from catastrophe claims.
  • Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio).
  • Committed to the share buyback program.
  • Undertook a simplification process and sold non-core operations.

Key Risks:

  • Prolonged period of pricing pressures.
  • Adverse CAT claims.
  • Ongoing prolonged period low interest rates and volatility in credit spreads which affects QBE’s predominately defensive portfolio. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. However, at the same time, as it underwrites across the globe, the business it is more difficult to forecast and analyse claims and pricing environment as well as reinsurance.
  • Undesirable investment returns below management guidance.
  • Prolonged poor performances in Asia.

Key Highlights:

  • Relative to the pcp, in US$ and on a statutory basis: gross written premium (GWP) of $11,552m was up from $10,203m, whilst net earned premium of US$6,789m was up from $6,571m. Adjusted GWP of $11,609m was driven by Group growth of +18% on a constant currency basis, or 13% excluding Crop. QBE saw ongoing growth across all divisions, with North America, International and Australia Pacific, up +24%, +19% and +6% respectively. QBE saw average renewal premium rate increases of +8.1% (North America, +10.4%, International, +7.0%, Australia Pacific, +9.1%), versus 9.7% in 1H21.
  • Combined operating ratio (ex risk-free rate) of 94.1% versus 93.3% in the pcp. On an adjusted basis, QBE’s combined operating ratio of 92.9% versus 93.3% in the pcp reflected higher rate increases and premium growth, lower net catastrophe costs and improvement in acquisition costs.
  • QBE achieved a poor total investment loss of $(840) m or (3.0) %, compared with return of $58m or 0.2% for the prior period, mainly as a result of unrealised losses associated with the significant increase in bond yields during the period.
  • According to management, “adjusting for the impact of changes in risk-free rates on fixed income securities, the total investment return was $14m or +0.1% for the half, a decrease from 0.7% in the prior period. In fixed income, the core yield from the portfolio was almost fully offset by adverse credit spread marks, and within risk assets, the returns from infrastructure and unlisted property were largely offset by unrealised losses on equities and enhanced fixed Income”.
  • NPAT of $151m was down from $441m, whilst adjusted net cash profit after tax of $169m was weaker than the $463m in the pcp.
  • Probability of adequacy of 91.7% remains robust (versus 92.3% in the pcp).
  • The Board declared an interim dividend of A9cps, down from A11cps in the pcp, and reflects a pay-out ratio of 57%.

Company Description:

QBE Insurance Group Ltd (QBE) is a global general insurer that underwrites commercial and personal policies across North America, Australia and New Zealand, Europe and emerging markets. QBE’s Equator Re segment is its captive reinsurer, providing reinsurance protection to the entire Group’s operating divisions.

(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
Technology Stocks

Telstra Corporation (TLS) provides telecommunications and information products and services

Investment Thesis:

  • Solid FY23 guidance.
  • Solid dividend yield. 
  • Despite intense competition, subscriber growth numbers remain solid. 
  • In the long-term, the introduction of 5G provides potential growth, however, to monitor the ROIC from the capex spend. 
  • TLS still commands a strong market position and has the ability to invest in growth technologies and areas (e.g., Telstra Ventures) which could provide room for growth.
  • Industry consolidation leading to improved pricing behavior by competitors. 

Key Risks:

  • Further cuts to dividends.
  • Further deterioration in the core mobile and fixed business.  
  • Management fails to deliver on cost-out targets and asset monetisation. 
  • Any increase in churn, particularly in its Mobile segment – worse than expected decrease in average revenue per users (or any price war with competitors).
  • Any network disruptions/outages.
  • More competition in its Mobile segment. Merger of TPG Telecom and Vodafone Australia creates a better positioned (financially and resource wise) competitor
  • Quicker than expected deterioration in margins for its Fixed segment.
  • Risk of cost blowout in upgrading network and infrastructure to 5G.

Key Highlights:

  • FY23 guidance consistent with previous guidance. Total Income of $23.0bn to $25.0bn.
  • Underlying EBITDA of $7.8bn to $8.0bn.
  •  Capex of $3.5bn to $3.7bn. 
  •  Free cash flow after lease payments (FCFalA) of $2.6bn to $3.1bn. 
  •  On underlying EBITDA, guidance is provided within TLS’ previous FY23 ambition range, plus a contribution from Digicel Pacific, which is included in all FY23 measures. 
  • Capex guidance includes ~$350m of strategic investments in inter-city fibre and for the Viasat contract, and ~$150m for Digicel Pacific.
  • Key Highlights by Product. Underlying EBITDA of $7,251m was up +8.4%. Relative to the pcp: Mobile. EBITDA of $3,997m, was up +21.2%. The mobiles business performed strongly with $700m EBITDA growth (which equates to an +21.2% uplift), 2.9% postpaid handheld ARPU growth and 6.4% mobile services revenue growth. The product line saw 155,000 net retail postpaid handheld services added.
  •  Fixed – Consumer & Small Business. EBITDA of $55m, was down -60.4% and according to management “continued to be impacted by the tail end of the nbn migration, however there is confidence that EBITDA has bottomed. While retail bundles reduced by 87,000, bundle and standalone data ARPU increased by 2.4%”. 
  •  Fixed – Enterprise. EBITDA of $660m, was up +2.3%. Enterprise returned to growth at both the income and EBITDA level. Fixed Enterprise EBITDA increased 2.3%, with NAS EBITDA growth of $152m offsetting declines in data access and connectivity. 
  • Fixed – Active Wholesale. EBITDA of $159m, was down -31.2%.
  • International. EBITDA of $387m, was up +15.2%. 
  •  InfraCo Fixed. EBITDA of $1,655m, was down -1.1%. Income was $2.4bn, with core access revenue up 3.1% including nbn recurring receipts up 3.3%. 
  • Amplitel. EBITDA of $294m, was down -2.0%. According to management “Amplitel was established as a standalone business with sale of a non-controlling 49% interest delivering net cash proceeds after transaction costs of $2.8bn. Amplitel revenue increased by 8.9%”. 
  • Other (Miscellaneous & Telstra Health). EBITDA of $44m, was down from $68m in the pcp. Telstra Health had a strong FY22 with revenue up 51% to $243m (which encompasses Medical Director and Power Health acquisitions.

Company Description:

Telstra Corporation (TLS) provides telecommunications and information products and services. The company’s key services are the provision of telephone lines, national local and long distance, and international telephone calls, mobile telecommunications, data, internet and on-line. Its key segments are Mobile, Fixed, Data & IP, Foxtel, Network applications and services and Media.

(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

Landstar’s immense network of third-party carriers and owner-operators should remain highly valuable to shippers

Business Strategy and Outlook 

Landstar ranks among the largest third-party logistics providers in the highly fragmented $90 billion domestic asset-light truck brokerage space. Since Landstar doesn’t own tractors, only a fleet of trailers, it has much lower operating leverage than pure asset-based truckload carriers. Thus, it enjoys a variable cost structure with relatively low capital intensity that generates solid capital returns–more than 30% on average over the past five years. Moreover, as one of the largest providers, Landstar has built a vast network of shippers, asset-based truckload carriers, and independent sales agents that support a wide economic moat. Landstar’s trucking capacity is unusual for an asset-light broker because it relies in part on captive owner-operators (which the firm refers to as business capacity owners), in addition to unaffiliated third-party carriers, to haul freight. BCOs represent roughly half of revenue, haul exclusively for Landstar, and most operate fewer than five trucks. The firm pays BCOs a fixed percentage of revenue, which reduces its gross-margin percentage (net revenue/gross revenue) variability relative to peers like C.H. Robinson and Echo Global Logistics. It also specializes in odd-size freight (around one third of sales represents unsized/flatbed business) and irregular routes–factors that bestow incremental competitive differentiation. Additionally, rather than using a captive salesforce, Landstar contracts with a vast network of independent, commission-based sales agents.

Landstar’s immense network of third-party carriers and owner-operators should remain highly valuable to shippers. This is because shippers desire efficient access to the small carrier base throughout the cycle and the broader trucking industry will probably continue to face periodic growth constraints due to the limited driver pool, including the impact of intensifying regulation. Overall, the highway brokerage market to grow at a faster clip, than the combined for-hire trucking and intermodal markets, as large 3PLs continue to process more for-hire truckload and less-than-truckload freight.

Financial Strength

Landstar’s capital structure to be healthy and sustainable. The balance sheet is strong, with more than $290 million in cash and short-term investments at the end of 2020. The company is not highly leveraged, with a very reasonable debt/total capitalization ratio near 20% (including capital leases used to fund trailing equipment), in line with the five-year average. Debt/EBITDA was less than 1 times for 2020. Landstar enjoys a history of solid free cash flow generation, averaging 5.5% of total gross revenue over the past five years (through 2020). The free cash flow to average roughly the same percentage of revenue over the forecast horizon, though it will probably be higher in 2021, given the robust operating backdrop. Cash flow should be more than sufficient to fund share repurchases, regular dividends, and small opportunistic acquisitions.

Bulls Say’s

  • Landstar’s vast network of third-party truckload carriers creates a robust value proposition for shippers, particularly during periods of tight supply. The firm is also one of the largest-capacity providers for specialty flatbed shipping; this has proved to be no small advantage. 
  • Landstar has a long history of excellent execution and impressive profitability throughout the freight cycle. 
  • Landstar’s asset-light operating model has generated average returns on capital in excess of 30% over the past five years, well above returns generated by most traditional asset-intensive carriers.

Company Profile 

Landstar System is an agent-based asset-light third-party logistics provider focused on over-the-road truck transportation (92% of revenue). It also offers intermodal (3%) and global air and ocean forwarding (3%). The remainder of its revenue stems from warehousing services and premiums from insurance programs offered to captive owner-operators.

(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
Technology Stocks

Best Buy leverages its network of 20,000 Geek Squad agents, increases touchpoints with customers

20025825 - closeup image of businessman drawing 3d graphics

Business Strategy and Outlook 

Best Buy is taking adequate steps to shore up its competitive position in an intensely competitive consumer electronics space. As the industry emerges from the shadow of the coronavirus (and steps into the quagmire of elevated inflation and softening consumer spending), it has become clear that how people shop has permanently changed–with customers demanding seamless omnichannel access to favourite brands, quick fulfilment across channels, and tech solutions to more problems than ever before. As a result, Best Buy’s strategic positioning continues to resonate, with the firm leveraging its physical footprint for fulfilment and post-sale services, emphasizing its differentiated service offering, and experimenting with newer store formats, as the “one size fits all” retail model across trade areas appears antiquated. With more than one third of sales coming through digital channels in calendar 2021, the firm’s recent supply chain and e-commerce investments ($2.7 billion over the last five years, some 74% of total capital expenditures) look prescient. Next-day delivery now covers 99% of U.S. zip codes (up from 80% from pre-pandemic), allowing the firm to compete on more level ground against e-commerce competitors, like wide-moat Amazon–as buy-online-pick-up-in-store, or BOPIS) volumes, at 40% of Best Buy’s e-commerce sales, remain more challenging for online-only stores to replicate.

Further, there can be a positive view of the firm’s Totaltech program, with more than 4.5 million members receiving unlimited home tech support, VIP access to phone and chat teams, free delivery and standard installation, members-only pricing, and free extended warranties on Best Buy purchases. Through the program, Best Buy leverages its network of 20,000 Geek Squad agents, increases touchpoints with customers, and positions itself better to earn the first shot at servicing customer category needs. Finally, Best Buy Health remains intriguing, with lower price elasticity and auspicious tailwinds from an insurer pay model. However, competition in the space remains rife, as a number of larger firms with healthcare aspirations (Google, Amazon, Apple) have invested in the space.

Financial Strength

Best Buy’s financial strength is sound, with the firm maintaining a modest net debt position and an investment-grade credit rating. With leverage well under 1 turn (0.3 debt/EBITDA at fiscal 2022 year-end), strong EBIT interest coverage (122 times), and no meaningful maturities until 2028, A very little financial risk for the firm may be in the near to medium term. Access to a $1.25 billion credit facility adds a further degree of insulation. Consistent with historical patterns, Best Buy is to prioritize growth capital expenditures, strategic acquisitions, dividends, and share repurchases with its free cash flow to sales (averaging 3.9% of sales annually over the next five years). Best Buy pays an attractive dividend, with the forecast calling for meaningful expansion through 2032, calling for a low-40% payout ratio. Share repurchases are to average a low-single-digit percentage of shares outstanding through 2032, with the model calling for total shareholder returns of $9. billion through fiscal 2027

Bulls Say’s

  • With digital sales volumes projected to equilibrate at roughly double pre-COVID-19 levels, Best Buy should better compete for online volumes that it historically ceded to online competitors. 
  • Improving route densities should strengthen the margin profile of small parcel e-commerce sales, with 35% of store “hubs” now accounting for 70% of shipfrom-store volume. 
  • The Best Buy Totaltech program should increase touchpoints with the firm’s best customers, increasing spending and frequency relative to pre-program behaviour.

Company Profile 

With $51.8 billion in fiscal 2022 sales, Best Buy is the largest pure-play consumer electronics retailer in the U.S., with roughly 10.6% share of the aggregate market and north of 40% share of offline sales, CTA industry, and Euromonitor data. The firm generates the bulk of its sales in-store, with mobile phones and tablets, computers, and appliances representing its three largest categories. Recent investments in e-commerce fulfilment, accelerated by the COVID-19 pandemic, have seen the U.S. e-commerce channel roughly double from pre pandemic levels, with management estimating that it will represent a mid-30% proportion of sales moving forward.

(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
Technology Stocks

BMW well placed to leverage from its BEV models making it attractive for ESG investors.

Investment Thesis:

  • Among the most recognized luxury car brands in the world, with approximately 10% market share in the premium market.
  • Growth in electric vehicles penetration provides an opportunity. 
  • Undemanding valuation and attractive dividend yield.
  • Potential for further consolidations or partnerships/JVs in the industry.
  • Key large investors provide some stability to overall share registry – Stefan Quandt (25.8%) and Susanne Klatten (19.2%).
  • BMW’s Financial Segment (new vehicle finance or leasing) provides a key competitive advantage for the Company in times of traditional lenders (e.g. banks) drying up liquidity. 

Key Risks:

  • Macroeconomic conditions (moderating global growth and its impact on demand), in particular demand significantly falls in China.
  • Competition and potential pricing pressure in luxury brands’ segment.
  • Electric vehicle strategy is not without risk and competition is likely to be high.
  • Potential impacts from Brexit and U.S. trade talks in earnings and supply chain disruption
  • Value destructive acquisition(s).
  • Substantial investors (with also board representation) mean capital management initiatives such as share buybacks are never likely to be considered despite the strategy offering attractive returns for the broader shareholder base.

Key Highlights:

  • FY22 outlook. Management expects; (1) Automotive segment EBIT margin to be 7-9% with decline in deliveries partially offset by positive price and mix effects and the continued development of the used car markets, and ROCE to be 14-19%. (2) Motorcycles segment EBIT margin to be 8-10% driven by slight increase in deliveries, and ROCE to be 19-24%. (3) Financial Services segment ROE to be 17-20% (vs prior forecast of 14-17%) primarily due to good performance in the used car markets, with the segment already recognising appropriate levels of provisions/allowances to cover residual value and credit risks. (4) Deliveries to slightly decline y/y as business conditions continue to remain difficult in 2H22 with ongoing supply bottlenecks (particularly for semiconductors), the war in Ukraine and interruptions in supply chains being headwinds. However, the percentage of electrified vehicles to still increase significantly with sales of fully electric vehicles more than doubling y/y. 
  • 1H22 results summary. Compared to pcp: Revenues climbed +19.1% to €65.912bn, despite total vehicle deliveries falling -19.8% to 1.16m (still expanded its leading position in the global premium segment), driven by full consolidation of the Chinese subsidiary BBA. 
  • EBT rose +65.9% to reach an all-time high of €16.156bn with margin improving +690bps to 24.5%, driven by tailwind of € 7.7bn from the revaluation of previously held BBA shares at fair market value, partially offset by +23.3% increase in cost of sales and +14.3% increase in R&D costs.
  •  NPAT increased +73.6% to €13.232bn. 
  • Capex increased +71.4% to €2.929bn due to upfront expenditures for the ramp-up of e-mobility and investments at BBA. 
  • 1H22 segment results. Compared to pcp: Automotive revenues rose +18.8% to €56.7bn, benefiting from positive pricing, product mix effects and growth in aftersales business which combined with +23.1% increase in cost of sales (headwinds from full consolidation, rising raw material and energy prices and higher R&D costs) delivered -22% decline in EBIT to €4.83bn with margin declining -450bps to 8.5%. FCF increased +58.5% to €7.77bn driven by acquisition of BBA’s liquid funds with management targeting FY22 FCF of at least €10bn.
  •  Financial Services delivered EBT growth of +2.3% to €1.981bn as -20.8% decline in new contracts with retail customers amid limited availability of new cars and intense competition in the financial services sector was more than offset by increased financing volume per vehicle.
  • Motorcycles revenue increased +2.6% to €1.663bn despite sales volume remaining flat y/y, however, EBIT declined -17.3% to €235m with margin down -340bps to 14.1%.

Company Description:

Bayerische Motoren Werke AG (BMW) is a leading manufacturer and retailer of luxury cars and motorcycles globally. The Company is increasingly focused on producing electric vehicles, with the group selling more than 140,000 electrified vehicles during 2018.  BMW Group brands include BMW, Mini and Rolls-Royce. 

(Source: Banyantree)

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