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Dividend Stocks

BAC’s asset quality remains strong and efficiencies in costs should help self-fund new investments in tech and marketing which should help gain market share

Investment Thesis:

  • Attractive valuation versus the price target. 
  • Leveraged to the improving economic conditions and activity in the U.S. 
  • Efficiency gains at the expense line exceeds market expectations. 
  • Significant leverage to the yield curve steepening in the U.S.
  • Cost out program to support earnings over the long-term. 
  • Revenue growth driven by consumer and business. 
  • Credit quality is very strong, with further reserve releases possible.  
  • Capital position is well above requirement level and management’s desired buffer, which opens up capital management initiatives.  

Key Risks:

  • Further decline in net interest margins from low yields and U.S. Fed interest rate cuts.
  • Intense competition to loan growth.
  • Subdued economic growth or a shallow/deep recession.
  • Funding pressures for deposits and wholesale funding. 
  • Political and regulatory changes affecting the banking legislation.
  • Credit risk with potential default of mortgages, personal and business loans and credit cards.
  • Efficiency gains disappoint relative to market expectations.

Key Highlights:

  • 2Q22 result summary.  Revenue (net of interest expense) increased +6% y/y to$22.7bn, with Net interest income (NII) up +22% y/y to $12.4bn (yield up +25bps to 1.86%), driven by higher interest rates, lower premium amortization and loan growth, and non-interest income down -9% y/y to $10.2bn, driven by lower investment banking fees, mark-to-market losses related to leveraged finance positions and lower service charges due to non-sufficient funds and overdraft policy changes, partially offset by higher sales and trading revenues.  
  • Non-interest expense increased +2% y/y (flat qoq) to $15.3bn and included $425m recognized for certain regulatory matters.
  •  Net income of $6.2bn, declined -32% y/y as pcp benefited by positive tax adjustment from revaluation of U.K. deferred tax assets of $2bn and $2.2bn in credit reserves releases, with Consumer Banking decreasing -5% y/y to $2.9bn, Global Banking decreasing -38% y/y to $1.5bn, Global Markets increasing +12% y/y to $1bn and Global Wealth & Investment Management increasing +16% y/y to $1.2bn.
  • Average loan and lease balances up +12% y/y to $1.0 trillion led by strong commercial loan growth as well as higher consumer balances and average deposits up +7% y/y to $2.0 trillion.
  • CET1 declined -100bps y/y (up +10bps qoq) to 10.5%, however, remains well above 2Q minimum requirement of 9.5% and +10bps above expected minimum required on October 1, with management expecting to build some additional buffer on top of that in 3Q.
  • Shareholder returns of $2.7bn ($1.7bn in dividends and $1bn in repurchases).
  • NII outlook. Assuming forward curve (as on July 15) materializing (asset sensitivity on a spot basis to a 100bps rate hike would be $5.8bn), modest growth in loans and deposits and deposit betas reflecting disciplined pricing, management expects net interest income in 3Q22 to increase by $900m-1bn qoq, further growing at a faster pace on a sequential basis in 4Q22, which combined with combined with expense discipline should boost the bottom line. 
  • Strong asset quality. Asset quality continued to remain strong with net charge-offs declining -4% y/y to $571m resulting in a net charge-off ratio of 23bps (down -4bps y/y), however, bank took a provision for credit losses of $523m (vs release of $1621m in pcp) amid loan growth and builds for a dampened macroeconomic outlook in the future. Though a slowdown in economy/recession brings risks of worsening credit profile, the BAC’s loan portfolio remains solid and carries less inherent risk compared to prior downturns, with lower concentration in the consumer portfolio (down -22% vs 4Q09), less exposure to unsecured consumer credit (down -48% vs 4Q09) and home equity loans (down -82% vs 4Q09), and 92% of commercial loan book either investment-grade or secured with Fed’s stress test indicating significantly lower credit losses expected in a severe downturn (5.2% vs 6.9% in 2013) and the bank holding much higher liquidity with global liquidity sources having increased 5x over 4Q09.

Company Description:

       Bank of America (BAC) is one of the largest banks in the U.S., serving consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and 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
Technology Stocks

Smith & Nephew’s smaller user base means the firm could find itself locked out of more hospitals and healthcare systems in the future

85215903 - attractive businessman using mobile phone while having lunch

Business Strategy and Outlook 

Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopaedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopaedic competitors, it has punched above its weight in terms of introducing meaningful innovation with its pioneering hip resurfacing implant and knee replacements with Verilast technology, which it contends can last for 30 years. These are significant improvements that exceed the evolutionary innovation typically seen in orthopaedics. Nevertheless, as the competitive set consolidates, Smith & Nephew’s position as a midsize competitor leaves it vulnerable as the hospital customer base seeks to reduce vendors to save costs. The firm’s market share–about 10% of hips and knees–translates into a tenuous position. Share shifts in this market are glacial at best, thanks to significant switching costs, and new technology does not necessarily overcome those switching costs. Smith & Nephew’s strong show of meaningful innovation translated into a mere 200-basis-point gain in share over the past decade. This showdown between technical innovation and the stickiness of surgeon preference underscores how difficult it is to induce practitioners to switch. This dynamic and Smith & Nephew’s smaller user base mean the firm could find itself locked out of more hospitals and healthcare systems in the future.

The firm has been aggressively pivoting to reduce its reliance on large-joint replacement with the acquisition of ArthroCare for its arthroscopy and sports medicine presence, concerted efforts to penetrate emerging markets, and the new additions of Osiris Therapeutics for its regenerative products and Leaf Healthcare’s pressure sore-monitoring system. The jury is still out on whether this is enough to allow Smith & Nephew to compete effectively against competitors that continue to grow larger and remain independent. As the market moves gradually toward more vendor consolidation, Smith & Nephew can eventually pair up with a larger rival, such as Stryker or Johnson & Johnson, in order to better compete.

Financial Strength

Thus far, there is a little to get nervous about Smith & Nephew’s financial flexibility. While the firm has periodically made acquisitions, it has also generated enough cash to deleverage in relatively quick fashion. For example, following the acquisitions of Osiris in 2019, debt/EBITDA rose to just over 4 times, but has moderated since then. Smith & Nephew can easily meet its interest obligations many times over. Prior to the pandemic, the firm consistently held net debt/EBITDA around 1 time. As compared with other med tech firms, Smith & Nephew issued debt in 2020 to enhance its cash cushion in the face of uncertainty. With procedure volume resuming, it is expected the firm to end the year with net debt/EBITDA around 2.3 times and for further deleveraging in the ensuing years. This still leaves plenty of flexibility for management to leverage up, if management decides to further round out Smith & Nephew’s portfolio in adjacent areas to its core markets. At this point, the firm can fund ongoing operations and support its intention to make regular share repurchases with its cash flow, but it may use debt financing for more large acquisition.

Bulls Say’s

  • Smith & Nephew participates in the fast-growing sports medicine arena thanks to its extensive arthroscopy portfolio. 
  • A strong arthroscopy presence in ambulatory surgical centres leaves Smith & Nephew well positioned to expand its large joint footprint in that setting. 
  • Smith & Nephew has been building out its presence in emerging markets. Considering the obstacles in developed markets that keep it from transforming into a top-tier player, S&N may enjoy greater upside in developing markets.

Company Profile 

Smith & Nephew designs, manufactures, and markets orthopaedic devices, sports medicine and arthroscopic technologies, and wound-care solutions. Roughly 42% of the U.K.-based firm’s revenue comes from orthopaedic products, and another 30% is sports medicine and ENT. The remaining 28% of revenue is from the advanced wound therapy segment. Roughly half of Smith & Nephew’s total revenue comes from the United States, just over 30% is from other developed markets, and emerging markets account for the remainder.

(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

KLA Tencor has built its leading technical expertise and extensive knowledge base into a wide economic moat

Business Strategy and Outlook 

KLA dominates the process diagnostic and control segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As customers continue pursuing Moore’s Law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools. These tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability. KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

With a 50%-plus share in the PDC market and installed base of 48,000 tools, KLA-Tencor has built its leading technical expertise and extensive knowledge base into a wide economic moat. These competitive advantages have allowed the firm to maintain its technological edge through a large research and development budget and close relationships with customers to identify future needs in the PDC space. The firm is not immune to the cyclicality of the semiconductor equipment market and thus may face bouts of low capital expenditures due to prolonged process nodes and increased tool reuse. However, KLA has been able to charge a premium for its specialized products, as competitors’ offerings are generally not as advanced. This allows the firm to handle cyclical troughs fairly well for a company that operates in the chip equipment industry. KLA is well positioned for the long-term, as chipmakers will require more advanced PDC tools to go with fabrication technologies featuring smaller circuit sizes, new materials, and more process steps. For example, EUV lithography, which is being deployed at process nodes 7-nanometer and below, requires new PDC tools to help validate and maintain the new technology. This endeavour requires a large research and development budget that only firms such as KLA can provide. The firm’s acquisition of Orbotech provides solid diversification into the flat panel display and printed-control board markets, though these tools are slightly margin-dilutive relative to KLA’s core offerings.

Financial Strength

Historically, KLA-Tencor has maintained excess cash over its debt balance. However, with the leveraged recapitalization in 2015, the company went to a net debt position for the first time. At the end of fiscal 2022, KLA reported $2.7 billion in cash, cash equivalents, and marketable securities versus $6.6 billion in long-term debt. While the firm has been able to generate sufficient cash to service the outstanding debt and maintain healthy R&D investments, one can remain vigilant for signs that KLA is unable to appropriately accomplish either requirement. During cyclical downturns, typically prefer to see equipment providers have a healthy cash cushion.

Bulls Say’s

  • KLA is the leader in a highly profitable segment. PDC tools lower production costs and maximize productivity for chipmakers, making them a crucial part of the semiconductor manufacturing process.
  • KLA has the most extensive data and knowledge base in the PDC market, which it has gained through years of industry leadership, making it difficult for competitors to catch up. 
  • By focusing on PDC, KLA has carved a leadership position in this increasingly important subsegment of the equipment market.

Company Profile 

LA designs and manufactures yield-management and process-monitoring diagnostic and control systems for the semiconductor manufacturing industry. The systems are used to analyse the manufacturing process at various steps in a semiconductor’s development. The firm’s laser-scanning products are used for wafer qualification, process monitoring, and equipment monitoring. KLA also provides inspection tools and systems for optical metrology and e-beam metrology.

(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

EQIX posted strong 2Q22 results, with revenue of $1.817bn and net income of $216m

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Investment Thesis

  • By considering the quality of the business, EQIX is trading at fair valuation (from the perspective of trading multiples, dividend yield and the DCF valuation).
  • Attractive long-term outlook in global digitization and data requirements of companies, with 5G and cloud computing as key drivers.
  • Businesses moving away from on-premise centers towards colocation and cloud networks.
  • Diversified client base and revenue stream minimizes contractual risk.
  • Opportunity for future market share expansion via potential acquisitions. 

Key Risks

  • Increases to operating expenses – particularly electricity costs. However, the contracts between Equinix and its customers provide for rights and protection clauses to permit the Company to pass on electricity cost increases that exceed 5%.
  • Rising technology and acceptance of cloud-based services may incentivise businesses to fully leverage cloud infrastructure rather than connecting with IBX data centers. However, management has downplayed these concerns, stating that there must still be direct interconnection between Cloud and businesses within the data centers.
  • Newer IBX data centers have twice the cooling needs as old centers. Potential power limitations could force the company to have a lower utilization rate of its cabinets.  
  • Increased competition in the industry from the likes of Google, Apple, Microsoft and Digital Realty Trust, and the possibility of formation of strong strategic alliances amongst competitors 
  • EQIX is subject to exchange rate risk due to the company’s diverse geographical scale of operations. However, the company hedges many of these exposures. 
  • REIT classification mandates a minimum of 90% of taxable income paid to shareholders. This may hinder EQIX’s ability to increase its cash via retained earnings and could render the company’s balance sheet inflexible.

Key Highlights 

  • For FY22 total revenues of $7.259-7.299bn, up +9-10% y/y (+10-11% normalized and in CC), an increase of $65m vs prior guidance offset by a $102m FX impact, adjusted EBITDA of $3.323-3.353bn with margin of 46%, an increase of $33mvs prior guidance excluding integration costs ($30m integration costs) offset by a $49m FX impact, AFFO of $2.636-2.666bn, up +8-9% y/y (+8-10% normalized and in CC) and an increase of $33m vs prior guidance offset by a $42m FX impact, AFFO per share of $28.77-29.10, up +6-7% y/y (+8-9% normalized and in CC), total capex of $2.313-2.563bn with recurring capex of $180-190m, and cash dividend of $1,132m (up +10% y/y) equating to DPS of $12.4 (up +8% y/y). 
  • For 3Q22 revenues of $1.827-1.847bn, up +1-2% qoq, adjusted EBITDA of $831-851m, and recurring capex of $42-52m. 
  •  Revenue increased +10% y/y to $1.817bn (vs guidance of $1.809-1.829bn), with America is up +11% y/y (+9% normalized in CC), EMEA up +11% y/y (and in normalized CC) and APAC up +5% y/y (+11% normalized in CC). 
  • Adjusted EBITDA increased +8% y/y to $860m (vs guidance of $828-848m) with margin of 47.3%, with Americas growing +15% y/y (+14% normalized in CC) with margin of 45.3% (up +190bps y/y), EMEA growing +13% y/y (+12% normalized in CC) with margin of 49.3% (up +50bps y/y), while APAC declined -10% y/y (-5% normalized in CC) with margin of 48.8% (down -770bps y/y).
  • Net Income increased +217% y/y to $216m, primarily due to strong operating performance and a favorable tax settlement and AFFO increased +9% y/y to $691m.
  • Capex was $495m (~55% of expansion cabinets in metros that generate >$100m of annual revenues), including recurring capex of $35, down -23% y/y and at lower end of guidance range of $33-43m.  

Company Description

Equinix is a leading company in internet connection and data centers. It is the global market leader in the colocation data center industry, providing data services and platforms for over 9800 companies across 24 countries. This allows companies to connect to their online ecosystem and meet their interconnection needs for their business operations. EQIX also offers additional solutions such as the Equinix Cloud Exchange Fabric to connect data centers to cloud networks, and the recently introduced Equinix SmartKey to offer encryption protection for the data security management of companies.

(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

NFLX reported positive 2Q22 results, which despite missing top-line consensus forecast

Investment Thesis

  • Trades on multiples which are susceptible to de-rating should growth rates miss expectations.
  • An increase and escalation of intense competition by rivals such as Walt Disney (Disney+) and Apple Inc (Apple TV+). 
  • NFLX is transitioning from solely content distribution to content creation which presents execution risk.
  • Significant existing user base, which is continuing to grow strongly, particularly in the international market.  
  • Competitive positioning globally, as a market leader not only in the industry but starting to carve a leading position against cable television.  
  • International expansion opportunities across emerging markets as well as solidified position in established markets (US). 
  • Exclusive contracts with best producers including Sony Entertainment, Warner Bros and Universal Pictures.   
  • Growing demand for Netflix exclusives.
  • Flexibility to pick up content driven away by TV to customize viewing according to user tastes and preferences. 

Key Risks

  • High valuation and trading multiples which are susceptible to de-rating should growth rates miss expectations.
  • Escalation of intense competition and streaming wars, especially with Walt Disney (DIS) who own a strong content portfolio covering Disney, Pixar, Marvel, Star Wars, and National Geographic brands and sports streaming service ESPN+.  DIS also holds a majority stake in Hulu, which is an online streaming service provider.
  • Execution risks around content creation versus content distribution.
  • Increasing competition based on price or exclusive content contracts.
  • Investment into original content creation fails to live up to the success of exclusive contract deals of existing content. 
  • Bandwidth issues in emerging economies posing difficulties in penetrating these markets.
  • The long-term and fixed cost nature of content commitments hinder NFLX’s operating flexibility.

Key Highlights 

  • Sheds subscribers for second quarter in a row. After more than a decade of uninterrupted growth, NFLX has been suffering a drop in subscriber numbers in FY22, ending 2Q22 with 220.67m, down -97,000 vs prior quarter (vs management’s forecast of 2m decline), as the Company continues to suffer from the pull forward in demand from the pandemic. The management’s strategy to roll out a cheaper, ad-supported membership scheduled to start in FY23 would not only help reduce churn rate (according to Antenna research NFLX’s churn rates have climbed to 3.3% from 2.4% historically) and help lure new customers especially as tough macro-economic conditions are prompting consumer budget cuts, but also help in profit growth by attracting premium CPMs from brand advertisers by leveraging combination of very engaged audience and high quality content, with a crackdown on password-sharing (NFLX estimates that more than 100m households are currently sharing another one’s account) further boosting subscriber numbers.
  • Cashflow profile improving. Cashflow profile continued to improve with net cash from operations in 2Q of $103m (vs outflow of $64m in pcp) and FCF of $13m (vs outflow of $175m in pcp) as transformation of the content model from licensed second run content to mostly Netflix originals (60% of net content assets on balance sheet are now Netflix-produced) continues to bear fruits with the Company now through the most cash-intensive part of the transition, resulting in cash content spend-to-content amortization expense ratio declining from FY19’s peak of 1.6x (along with peak negative FCF of $3.3bn) to 1.4x in FY21 and expected to be 1.2-1.3x in FY22 (resulting in FCF of ~$1bn) with further decline going forward leading to substantial growth in y/y FCF in FY23.

Company Description

Netflix Inc is an American company operating a global entertainment streaming service, which provides subscription video on demand to movies and television episodes over the Internet. The Company operates in three different segments, Domestic Streaming (US market comprising almost half of the business), International Streaming and Domestic DVD (1% of revenue). These businesses generate membership fees as well as revenues from DVD by mail. Netflix provides its services in over 190 countries with over 150 million members, distributing user focused content that fits consumer tastes and preferences.

(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

Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health

Business Strategy and Outlook 

As a new public company, Bausch & Lomb will be primarily focused on ramping up research and development to become more competitive in its key markets of contact lens and solution, eyecare surgery, and ophthalmic pharmaceuticals. Bausch & Lomb faced underinvestment as a subsidiary of Bausch Health, partly due to the high debt load of Bausch Health since the collapse of the historical Valeant business, which drew both financial resources and time from senior leadership. With Joe Papa moving to Bausch & Lomb as CEO, the company will have a leadership team that is already very familiar with the business, both areas of strength and product lines that may require more investment. While the near-term results are sure to be lumpy as Bausch finds its footing as public company and incurs short-term separation costs, the business should achieve consistent profitability in the longer term—justifying the narrow economic moat rating—and even if growth continues to trail peers, the returns on invested capital to remain at a decent level, further evidence of underlying business strength.

Bausch’s research and development efforts to focus initially on the contact lens, cataract equipment, and intraocular lens markets. The contact lens business is a market that requires consistently high rates of investment, and Bausch recently entered the daily silicone hydrogel sub-market with the launch of its premium Infuse lens. This lens will be further expanded for toric and presbyopia patients within the next few years. In the surgical space, Bausch trails market-leader Alcon with an approximate 20% share in cataract and vitrectomy (compared with Alcon’s 50%), and the company is overdue for a launch of a new phacoemulsification system, as well. A new phaco launch within five years, which should provide a boost to growth and profits considering the high-margin nature of newer systems. Bausch currently does not have much of a presence in premium intraocular lenses, and also it will be a main research focus for Bausch as the company attempts to play catch up with its peers.

Financial Strength

Bausch & Lomb has adequate financial strength. Following the spinoff from Bausch Health, the company will hold about $2.5 billion of debt with an additional $500 million on a revolver, and the firm will have debt/EBITDA leverage of about 2.9 times. While this is higher than the initial post-spinoff leverage target of 2.5 times, current leverage is reasonable, and the company will work to somewhat reduce leverage over the next few years from free cash flow, it will average over $500 million per year through the five-year explicit forecast period. Interest coverage ratios remain high, as well. The operating income to exceed 2.5 times interest costs for the foreseeable future, and the interest coverage to rise over time. On the other hand, though, some risk related to rising interest rates, which may increase interest expense over time, considering that Bausch’s $2.5 billion term loan is a floating debt instrument. Still, on balance, it  does not show that Bausch faces material financial risk, and the firm would be able to handle any marginal increases in debt service costs

Bulls Say’s

  • As a standalone public firm, Bausch & Lomb will have the necessary financial flexibility to make investments for the longer term, and patient investors could be rewarded. 
  • Bausch & Lomb stands to benefit from several secular trends in eyecare: an increasing prevalence of myopia, demand for better eye care from a growing middle class in emerging markets, and an aging population. 
  • Investors’ worry about Bausch & Lomb’s potential exposure to Bausch Health debts is misplaced, as the firm now operates as a separate legal entity and therefore should be valued as an independent company.

Company Profile 

Bausch & Lomb, headquartered in Laval, Quebec, Canada, is the fourth-largest vision care company by sales in the United States and the market leader in consumer vision care in India and China. The firm, which was previously a subsidiary under parent company Bausch Health, was spun off to become a public company once again in May 2022. The firm reports in three segments—vision care and consumer (60% of revenue), surgical (20%), and ophthalmic pharmaceuticals (20%). The company is geographically diversified, with 48% of revenue in the Americas, 30% from EMEA, and 22% from Asia-Pacific 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

Suncorp Group Ltd: Dividend Pay-Out Ratio of 60-80% of Cash Earnings, Remains Unchanged

Investment Thesis:

  • Reasonable valuations – SUN currently trades on a 2-yr forward PE-multiple of 11.6x and a fully franked yield of 6.5%. 
  • Company reaffirmed FY23 targets and a solid FY23 outlook.
  • APRA allows advanced accreditation for SUN’s Bank resulting in capital relief.
  • Better than expected margin outcome in banking and general insurance (GI).
  • Positive industry changes from the Royal Commission recommendations. 
  • Continual strong credit quality for its Bank and Wealth segment whilst maintaining net interest margins.

Key Risks:

  • Greater than expected competition in lines of insurance affecting pricing, unit growth, and risk management.
  • Continuing elevated natural catastrophe occurrences such as the NSW bushfires, which will use up reinsurance and impact SUN’s earnings.
  • Not achieving key targets for FY21 such as the rollout of the Company’s technology and digital platforms.
  • Weaker than expected investment yields.
  • Lower net interest margins or higher provisions than expected.
  • Increased levels of claims.

Key Highlights:

  • Cash return on equity above the through-the-cycle cost of equity.
  • Dividend pay-out ratio of 60% to 80% of cash earnings, remains unchanged.
  • General Insurance. Underlying ITR of 10 – 12% by FY23.
  • Banking. Cost-to-income ratio of Banking ~50% by end of FY23. SUN’s management also provided FY23 Outlook, expecting: (i) GWP growth expected to be in the mid to high single digits; (ii) Price increases to reflect increasing reinsurance and natural hazards costs and inflationary environment; (iii) Unwind of mark-to-market investment losses to grow yield and support UITR; (iv) Prior year reserve releases expected to moderate; (v) Transitory capital impacts to unwind.
  • FY22 Results Highlights. Relative to the pcp: (1) Group net profit after tax of $681m, down 34.1% impacted by volatile investment markets and elevated natural hazard costs. (2) The Board declared a fully franked final ordinary dividend of 17cps, bringing total fully franked ordinary dividends for FY22 to 40cps, and represents a full year dividend payout of 75% of cash earnings and within SUN’s target payout ratio range of 60% to 80%.
  • Results highlighted by division. Profit after tax of $697m, was down -40.2%, whilst cash earnings of $673m was down -36.7%, due to weaker performance across all segments, especially in Insurance Australia. Relative to the pcp:
  • Insurance Australia. Profit after tax of $174m, was down -68.2% due to intense natural hazard season and volatile financial markets. Net incurred claims of $5,328m was +3.1% higher whilst insurance trading result of $464m was -28.0% down despite gross written premium (excluding Emergency Services Levies) of $9,384m, was up +9.2%.
  • SUN Banking. Profit after tax of $368m, was down -12.2%. Net interest margin fell 14bps to 1.93%. Home lending, up $4.1bn or 9.0%. Cost to income ratio of 59.0% was up 190bps, due to one-off unrealised mark-to-market losses and an increase in strategic investment. Normalising for these factors, the ratio reduces to 57.5%. SUN Bank maintained strong capital, funding and liquidity metrics (CET1 capital ratio of 9.08% remained within the target operating range of 9.00% to 9.50%).
  • SUN NZ. Profit after tax of $155m, was down -22.5%. General Insurance profit after tax was NZ$150m, down 15.3%. GWP increased 14.1% driven by strong growth across all product classes via unit growth and GWP increased 14.1% driven by strong growth across all product classes via unit growth and targeted pricing increases to offset inflationary pressures on claims. Net incurred claims rising bond yields and volatility in equity markets. Operating expenses were up 7.2% to NZ$504m, supporting growth across the business.

Company Description:

Suncorp Group Ltd (SUN) provides general insurance, banking, life insurance, and superannuation products and related services to the retail, corporate, and commercial sectors in Australia and New Zealand. The company operates through Personal Insurance, Commercial Insurance, General Insurance New Zealand, and Banking segments.

(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

WFC is a diversified, community-based financial services company with $1.9tn in assets, making it the world’s second largest bank

20025825 - closeup image of businessman drawing 3d graphics

Investment Thesis

  • Cost out program to support earnings over the long-term. 
  • End to the U.S. Federal Reserve capital-imposed restrictions. 
  • End to various investigations and inquiries.
  • Revenue growth driven by consumer and business. 
  • Credit quality remains solid. 
  • Positive changes to the regulatory environment. 
  • New CEO and organization structure could bring about a positive and sustainable growth trajectory for the bank. 
  • Improving ROTCE (aiming to hit 10% near-term & 15% over the long-term). 

Key Risks

  • Declining net interest margins from low yields and Fed cuts.
  • Lack of future management direction with no permanent CEO installed. 
  • Intense competition to loan growth.
  • Funding pressures for deposits and wholesale funding. 
  • Political and regulatory changes affecting the banking legislation.
  • Credit risk with potential default of mortgages, personal and business loans and credit cards.
  • Legal fees associated with ongoing investigations into wealth management, wholesale banking and community lending.

Key Highlights

  • Net interest income increased +16% y/y, primarily due to the impact of higher interest rates, higher loan balances (average loans up +8% y/y), lower mortgage-backed securities premium amortization, and a decrease in long-term debt, partially offset by lower interest income from Paycheck Protection Program (PPP) loans and loans purchased from securitization. 
  • Non-interest income decreased -40% y/y, primarily driven by lower results in affiliated venture capital and private equity businesses, including impairments driven by market conditions; a decline in mortgage banking income driven by lower originations and gain on sale margins, as well as lower gains from the re-securitization of loans purchased from securitization pools; the impact of divestitures; and lower investment banking fees, partially offset by improved results in Markets business.
  • Non-interest expense decreased -3% y/y, with personnel expense down predominantly reflecting divestitures, lower revenue-related compensation, as well as the impact of efficiency initiatives and non-personnel expense decrease reflecting divestitures and lower consultant spend, partially offset by higher operating losses primarily driven by an increase in litigation accruals and higher customer remediation expense predominantly for a variety of historical matters. 
  • Provision for credit losses was $580m (vs release of $1260m and $787m in 2Q21 and 1Q22, respectively) and included a $235m increase in the allowance for credit losses due to loan growth. 
  • Average loans grew +8% y/y (+3% qoq) amid increases in both commercial and consumer portfolios with average loan yields increasing +19bps y/y (+27bps qoq) reflecting the benefit of higher rates, and average deposits increased +1% y/y with growth in Consumer Banking and Lending offsetting declines across other operating segments with average deposit cost increasing by +1bps over y/y and qoq to 4bps, driven by higher deposit costs in Corporate and Investment Banking. 

Company Description

Wells Fargo & Company (WFC) is a diversified, community-based financial services company with $1.9tn in assets, making it the world’s second largest bank by market capitalization and the fourth largest bank in the U.S. by total assets. The company was founded in 1852 and provides banking, investment and mortgage products and services, as well as consumer and commercial finance, through 7,800 locations, more than 13,000 ATMs, the internet and mobile banking. The company operates under three segments; Community Banking, Wholesale Banking and Wealth & Investment 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

CNH Industrial Posts Solid Second-Quarter Results, Despite Supply Headwinds

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

Business Strategy & Outlook

CNH Industrial provides customers an extensive product portfolio of off-highway products. The CNH will continue to be a top-two player in the agriculture industry. For generations, the company’s agriculture equipment has garnered intense brand loyalty among farmers. Customers value CNH Industrial’s high-quality and strong performing products, in addition to its robust dealer network. In developed markets, CNH Industrial helps customers reduce the total cost of ownership through improved fuel efficiency, limited machine down-time and consistent parts availability. The company’s off-highway strategy manufactures agriculture and construction equipment. CNH addresses the agriculture market with three brands: Case IH (targets large grain farmers) and New Holland (serves small grain, livestock farmers) make full lines of agriculture equipment, while Steyr is mainly a tractor manufacturer. The agriculture business is well positioned to compete with peers, but the construction business will need to optimize its dealer network, product portfolio and manufacturing operations to be competitive.

 In early 2022, CNH spun off its on-highway business. The commercial vehicles and powertrain businesses will be owned by the Iveco Group. This decision was a prudent move for shareholders. With the demerger, management will now shift its focus to the more profitable, off-highway business. As a strong number-two player in agriculture markets, the CNH maintains its market share over smaller local and regional competitors with its full line of agriculture machinery. In addition, the company’s high exposure to agriculture markets will bode well, as demand for new machinery will remain robust in the near term. CNH Industrial has exposure to end markets that have attractive tailwinds. In agriculture, demand for crops will be strong in the near term, largely due to robust demand from China and tight global supplies. In construction, the increased infrastructure spending in the U.S. will be a benefit in the near term.

Financial Strengths

CNH Industrial maintains a sound balance sheet. Outstanding industrial debt (excluding Iveco Group) at the end of 2021 stood at $9.2 billion. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total finance arm debt came in at $15.9 billion in 2021, along with $19.4 billion in finance receivables and over $800 million in cash. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at $4.3 billion on its industrial balance sheet. The comfort in CNH Industrial’s ability to tap into available lines of credit to meet any short-term needs. The company has access to $3.9 billion in credit facilities. CNH Industrial maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects. They think CNH Industrial can generate solid free cash flow throughout the economic cycle. The company can generate over $1 billion in free cash flow in mid cycle year, supporting its ability to return free cash flow to shareholders, mostly through dividends. Additionally, the management is determined to rationalize its product portfolio and manufacturing operations. The company is working to reduce a significant portion of its products in the construction business, refocusing their efforts on higher volume models. This will allow CNH Industrial to run leaner in its manufacturing operations. If successful, this will put CNH Industrial on much better footing from a cost perspective, further supporting its ability to return cash to shareholders.

Bulls Say

  • Higher crop prices increase farmers’ profitability, allowing them to purchase new agriculture equipment, which substantially boosts CNH Industrial’s revenue growth. 
  • CNH Industrial will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand have eased, encouraging farmers to refresh their machine fleet. 
  • CNH improves the construction business by optimizing the product portfolio and dealer network. Additionally, increased infrastructure spending in the U.S. and emerging markets leads to more construction equipment purchases.

Company Description

CNH Industrial is a global manufacturer of heavy machinery, with a range of products including agricultural and construction equipment. One of its most recognizable brands, Case IH, has served farmers for generations. Its products are available through a robust dealer network, which includes over 3,600 dealer and distribution locations globally. CNH Industrial’s finance arm provides retail financing for equipment to its customers, in addition to wholesale financing for dealers; which increases the likelihood of product sales.

(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

Aurizon Holdings Ltd operates an integrated heavy haul freight railway in Australia

Investment Thesis

  • Undemanding valuation relative to the market. 
  • Higher (and stabilizing) commodity prices should translate into improving volumes. 
  • Better than expected performance on the cost out. 
  • Attractive dividend yield 
  • Mostly defensive earnings backed by contracts, providing stability in shareholder returns.
  • The Company does have long-term plans to reduce exposure to coal. 
  • Divestment of ECR at an attractive valuation. 

Key Risks

  • Significant decline in commodity prices leading to mine closures or reduced volumes from customers. Any potential declines in iron ore prices.
  • Structural decline in some commodities (e.g., coal). 
  • High costs impacting margins.
  • Contract repricing resulting in longer term revenue loss.
  • Pricing pressure to increase.
  • Potential cuts to dividends given the elevated payout ratio.
  • Weather related impacts. 
  • Divestment of ECR business is not completed at a valuation in line with market expectations. 

Key Highlights

  • Revenue of $3,075m was +2% higher. 
  • Underlying EBITDA of $1,468m, -1% lower. FY22 earnings were driven by: (i) Network business achieved EBITDA of $801m, a -6% decline, due to lower volumes, lower historical or catch-up revenue from the Wiggins Island Rail Project (WIRP) and lower Goonyella to Abbot Point Expansion (GAPE) fees. (ii) Bulk business EBITDA declined -7% to $130m, on lower volumes caused by major flooding events, Covid-19 related disruptions and customer-specific reductions in production. (iii) Coal EBITDA was up +1% to $541m due to the benefits of cost management, higher CPI favorably impacting contract rates and higher revenue yield, despite above rail coal tonnes being down by 4%.
  • Underlying EBIT of $875m, down -3%. 
  • Underlying NPAT was $525m, down -2%, while Statutory NPAT declined -15% to $513m, primarily due to one-off benefits recorded in FY2021 (tax benefit from the sale of interest in Aquila) and transaction costs for the acquisition of One Rail Australia (ORA) incurred in FY2022.
  • Return On Invested Capital (ROIC) of 10.3% down by 0.4ppt. 
  • Free cash flow increased +13% to $664m.
  • The Board declared a fully franked final dividend of 10.9cps, which represents 75% payout ratio of underlying NPAT and brings total dividend for FY22 to 21.4cps, down -26%.

Company Description

Aurizon Holdings Ltd (AZJ) operates an integrated heavy haul freight railway in Australia. It transports various commodities, such as mining, agricultural, industrial and retail products; and retail goods and groceries across small and big towns and cities, as well as coal and iron ore. The Company also operates and manages the Central Queensland Coal Network that consists of approximately 2,670 kilometers of track network; and provides various specialist services in rail design, engineering, construction, management, and maintenance, as well as offers supply chain solutions. In addition, it transports bulk freight for customers in the resources, manufacturing, and primary industries sectors. The Company was formerly known as QR National Limited and changed its name to Aurizon Holdings Limited in December 2012. AZJ is headquartered in Brisbane, Australia.

(Source: Banyantree)

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