Category: Sectors

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Technology Stocks

Seagate will try to create new growth opportunities through its module-like Lyve platform, which layers software onto multiple drives

Business Strategy and Outlook 

Seagate is a leading designer and manufacturer of hard disk drives used for data storage in consumer and enterprise applications. Seagate is successfully transitioning its portfolio to focus on mass-capacity drives for cloud providers and enterprises as consumer applications for legacy HDDs switch to faster flash-based solid-state drives. There is a continued demand for mass-capacity drives over the next five years as enterprises look to capture more data and use a multi tier storage approach, implementing both mass-capacity HDDs and smaller enterprise-grade SSDs as complements in data centres. Seagate has consistently driven costs down for its mass-capacity HDDs by advancing to larger capacities, and it will continue to do so by leveraging new technologies like heat-assisted magnetic recording. Mass-capacity HDD demand is to offset declines in consumer HDDs over the next five years, but Seagate’s drives doesn’t allow it to establish an economic moat. The HDDs are commodity like even at the enterprise level, with Seagate and Western Digital matching each other’s technological roadmaps and competing with one another for volume, preventing both from earning pricing power. In periods of tight supply and favourable pricing, the firm can earn excess returns on invested capital, but when the market hits oversupply, pricing falls, bringing Seagate’s economic profits with it.

Seagate will focus on expanding to new capacities for its enterprise drives while implementing new technologies like heat-assisted magnetic recording that will help it drive costs down and expand margins. Still, technological advancements like these will be matched by rivals and won’t shield Seagate from cyclical market downturns. Longer term, there will be demand for mass-capacity drives to slow as the cost gap with enterprise SSDs narrows further. Seagate will try to create new growth opportunities through its module-like Lyve platform, which layers software onto multiple drives, but isn’t large enough to offset a secular decline in HDD sales.

Financial Strength

Seagate to focus on generating free cash flow to finance its obligations and send capital back to shareholders. As of the end of fiscal 2022, Seagate carried $5.6 billion in gross debt and $600 million in cash. The firm is to fulfil its obligations with its free cash flow, an average of $1.6 billion in free cash flow annually through fiscal 2027, and Seagate has less than $600 million in principal due annually over the same period. If Seagate were to run into a liquidity or cash flow crunch, it has $1.5 billion available under its revolving credit facility. After paying its obligations, Seagate will focus on sending the remainder of its cash flow back to shareholders in the form of its consistent dividend and repurchase program. Seagate aims to increase its dividend by 3% annually and send 70% of free cash flow back to shareholders, inclusive of its dividend and repurchases.

Bulls Say’s

  • There is strong demand for Seagate’s nearline drives which will power mid-single-digit top-line growth in the short term as enterprises look to store the growing amount of data they generate. 
  • Advancements to larger capacities and new technologies like HAMR to modestly expand Seagate’s midcycle gross margin. 
  • Seagate has maintained a trailing 12-month dividend yield above 3% every fiscal year since 2016, making it a leader among the technology coverage.

Company Profile 

Seagate is a leading supplier of hard disk drives for data storage to the enterprise and consumer markets. It forms a practical duopoly in the market with its chief rival, Western Digital; they are both vertically integrated.

(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

Swiss Re has a history of overly aggressive expansion and typically too much leverage

Business Strategy & Outlook

Swiss Re has a history of overly aggressive expansion and typically too much leverage. The first example of this can be seen in the acquisition of General Electric Insurance Solutions in the earlier part of the new millennium. This was financed through a combination of debt and share issuance, a historic and largest Swiss Re acquisition in that period. Furthermore, Swiss Re continued down a path of building out its reinsurance securitization offering, structuring pools of credit, mortality and natural catastrophe risk. This did not work out well because the Swiss Re increased correlation and dependence and when financial markets fell so did the value of these securities. Swiss Re’s leverage position and problems with its securitization program led the business to complete a capital raise and take on Berkshire as a preferential terms investor.

This investment built on a previously established relationship where Berkshire reinsured substantially all of Swiss Re’s yearly renewable-term United States mortality book, another area where Swiss Re had run into difficulties. The latest round has been aggressive expansion for commercial insurance and this came back to bite the business. What one can see now is a business that is still overleveraged and one where the levels of debt do need to be addressed. However, from an operational perspective one can see a company that is focusing on building a cleaner and more traditional reinsurance business, one that focuses on underwriting and shifts away from reliance on investment returns to fund unprofitable long-tailed lines of underwriting. A turnaround in corporate solutions starting to come to fruition and the nascent stronger move into more specialist lines of business and find the management team to be a lot more disciplined. However, one would like to see the business reign in its buybacks and concentrate more on building out the long-term profitability of this business.

Financial Strengths

Swiss Re does not have a particularly strong balance sheet. It would help the business immensely if management chose to pay down more debt. Swiss Re has around $11.2 billion of debt. The majority of this is long term, and the most substantial portions don’t mature for a few years. The shape of the debt isn’t well balanced, with the vast majority issued as subordinated. This means there are some pockets of very high interest rates and this is reflected in the broader group’s interest. Swiss Re pays an annual dividend that it intends to grow annually in line with long-term earnings growth and maintain the prior year’s dividend as a minimum level. The business also actions buybacks, though given the macro uncertainty it would be prudent if the business held off over the next few years from doing this.

Bulls Say

  • Swiss Re looks to be on the cusp of producing consistent results in the long term under the performing commercial insurance division. 
  • One can believe the quality of Swiss Re’s investment portfolio is high. 
  • Swiss Re pays a good dividend.

Company Description

Swiss Re was established in 1863 in Zurich. Since then, the business appears to have cycled through quite a few strategies. Namely in the early part of the millennium Swiss Re took on an investment banker who eventually led the business. Over the next 10 years CEO Jacques Aigrain built Swiss Re’s financial solutions into a powerhouse and helped the company complete its first securitization, finalized in 2005 for credit reinsurance. This division became a leader for Swiss Re but then disaster struck during the global financial crisis. Swiss Re mothballed this unit and approved a CHF 5 billion capital raise. Now the business concentrates more fundamentally on property and casualty, life and health reinsurance. Swiss Re also has a good commercial insurance offering named corporate solutions.

(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

SL Green Reported Lackluster Results in Q2; Reducing FVE to $64 Per Share

Business Strategy & Outlook

SL Green Realty is a real estate investment trust engaged in the acquisition, development, repositioning, ownership, and management of commercial real estate properties, principally office properties. Most of the companies’ properties are in the Manhattan area. The company held interests in approximately 35 million SF, which includes ownership interests in 26.7 million SF in Manhattan buildings and 7.2 million SF securing debt and preferred equity investments. The strategy of the company is to maintain a high-quality portfolio of buildings in desirable locations and focus on creating value through new developments, capital recycling, and joint venture investments. As an instance, SL Green’s $3 billion megaproject One Vanderbilt was completed amidst the pandemic and has already achieved high occupancy rates. The economic uncertainty emanating from pandemic recovery and the remote work dynamic have created a challenging environment for office owners. 

Employees are still hesitant in returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rate for office spaces in Manhattan was recorded at 21% in first-quarter 2022, which is roughly 1000 basis points higher than pre-pandemic levels. On the supply side, approximately 17 million SF of office space, which amounts to around 4% of the total inventory, is currently under construction in Manhattan and would be added to the market in upcoming years. This additional supply to further pressure fundamentals in the market. The Manhattan net absorption rate remains negative as of first-quarter 2022 and rental growth figures are disappointing especially given the highly inflationary environment. Having said this, an increasing number of companies require their employees to return to the office. In the long run, one can believe that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths

SL Green has relatively more debt compared with other office REITs especially after considering its share of debt in unconsolidated joint ventures. The firm owns a majority of its properties through unconsolidated JVs and these properties are significantly more leveraged than the firm’s balance sheet. However, the unconsolidated JV debt is secured by the portfolio assets and has limited recourse to the parent company. The company’s share of debt which also includes its share of unconsolidated JV debt was $9.9 billion as of the end of first-quarter 2022, resulting in a debt/EBITDA ratio of 13.1 times. The current debt/EBITDA ratio is also high because of a lower base in the current challenging environment. The figure should come down slightly over the next few years as fundamentals recover and EBITDA sees healthy growth. Having said this, SL Green’s higher leverage implies a higher financial risk for the firm. The weighted average interest rate on the company’s debt was 3.11% and the debt maturity schedule shows that the maturities are adequately spread. Approximately 77% of the total debt is fixed-rate debt with the other 23% being floating rate debt. The debt service coverage ratio which is a ratio of EBITDA divided by interest and principal payments was 2.2 times as of the end of first-quarter 2022. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest) was 1.9 times as of the end of first-quarter 2022. The debt and fixed-charge coverage ratios are 3.8 times and 2.9 times, respectively, if one can consider only consolidated figures. As a REIT, SL Green is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 70% for the year 2021. This shows the firm is generating sufficient cash to cover its fixed expenses and payout dividend.

Bulls Say

  • SL Green’s midtown focus allows it to access one of the most vibrant business districts in the world. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • The development pipeline of the company is poised to drive significant net operating income growth for SL Green 
  • SL Green attracts the highest-quality tenants with the deepest pockets, greatly reducing risk across its portfolio.

Company Description

SL Green is one of the largest Manhattan property owners and landlords, with interest in around 35 million square feet of wholly owned and joint venture office space. The company has additional property exposure through its limited portfolio of well-located retail space. It operates as a real estate investment trust.

(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
ETFs ETFs

Vanguard Australian Shares index ETF: offers potential long-term capital growth along with dividend income and franking credits

Investment Objective

Vanguard Australian Shares Index ETF seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses and tax.

Investment Strategy and Investment Return Objective

The Vanguard Australian Shares Index ETF seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses, and tax. The S&P/ASX 300 Index was not created by, and is not managed by, a related body corporate of Vanguard. The Fund meets its investment objective by holding all of the securities in the S&P/ASX 300 Index (at most times) allowing for individual security weightings to vary marginally from the Index from time to time. The Fund may invest in securities that have been removed from or are expected to be included in the Index.

Portfolio Performance

About Fund:

The ETF provides low cost, broadly diversified exposure to Australian companies and property trusts listed on the Australian Securities Exchange. It also offers potential long-term capital growth along with dividend income and franking credits.

(Source: Vanguard, investmentcentre)

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

Burberry and its leather goods and apparel peers could make existing customers buy more through product innovation

Business Strategy and Outlook 

Burberry Group has transformed from an essentially licensed/wholesale business model with inconsistent regional product and brand presentation into a strong monobrand luxury player with a consistent message, good control over distribution, and a global presence. Burberry is the category leader in its trench coat business, enabling it to generate high operating margins in this category through scale and pricing power. It benefits from a high degree of control over distribution, which allows it to correct operational mistakes more quickly, showcase the brand at key locations in global capitals, avoid excessive discounting, and retain stronger negotiating clout with wholesale partners. Although prior-year retail expansion and rent inflation have weighed on margins, Burberry has built an excellent global platform from which to execute. As space expansion is essentially flat and new demand comes from existing stores and online platforms, operating margins and cash flows should be boosted.

Burberry was one of the first in the market to invest in digital front and back-office systems. It aggregates customer data across channels and regions, which helps it target marketing campaigns better and can act as an input in product development and merchandising. While demand for luxury products is linked to GDP growth and an increasing number of wealthy and middle-class people, Burberry and its leather goods and apparel peers could make existing customers buy more through product innovation. In the long run, growth should come from China, consumption should be supported by growing employment in high-wage sectors.

Financial Strength

Like many of its luxury peers, Burberry is in a strong financial position with net cash of GBP 1.2 billion as of the end of March 2022. Burberry is strongly positioned to weather the COVID-19-related crisis and potential demand slowdown through high inflation. Burberry is a cash-generative business and has historically funded growth investments from operating cash flows. Burberry will continue doing so and be able to reward shareholders through dividend and buybacks.

Bulls Say’s

  • Over the past 10 years, Burberry has built a strong global brand with control over its supply chain, distribution, and marketing. It also substantially reduced discounting, which should support the brand’s luxury image.
  • New designer collections have been positively received (full-price comparable sales up by double digits on 2019 level), which should boost performance once pandemic restrictions are removed. 
  • Cash flow margins should improve through operating expenditure leverage and capital expenditure reduction, as the brand returns to growth off the same store base.

Company Profile 

Burberry, a British luxury monobrand, which is more than 160 years old, is best known for its outerwear and signature plaid. It has a global presence with 29% of revenue generated in Europe, 46% in Asia, and 25% in North America. The Chinese are Burberry’s most important customers, accounting for more than 30% of sales. Apparel contributes about 63% of 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 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

Wipro’s Profitability Bottoms Out in Q1 as Pipeline Stronger Than Ever

Business Strategy & Outlook:    

Wipro is a leading global IT services provider with the typical menu of offerings, from software implementation to digital transformation consulting to servicing entire business operations teams. Wipro merits a narrow economic moat rating, similar to many of its peers, as it benefits from switching costs and intangible assets, although it is benefiting from a cost advantage. While the company will likely struggle amid the COVID-19 pandemic, its stable moat trend will stay secure. Forays into the higher-value realm of industrial engineering will help ensure that Wipro does not miss out on substantial growth trends in the overall IT services industry. In many regards, there’s uncanny resemblance between Wipro and its Indian IT services competitors, Infosys and TCS, such as in its offerings, offshore leverage mix (near 75%), or attrition rates (near 15%). However, Wipro has pockets of solutions where it distinguishes itself. For instance, its robotic process automation services are considered to rank above all other peers according to several sources, including Forrester Research. 

Wipro isn’t unusual for being an IT services provider with switching costs and intangible assets. These are founded on the intense disruption that customers would experience when changing their IT services provider as well as Wipro’s specialized knowledge of the industry verticals it caters to and the distinct knowledge of its customers’ web of IT piping. But besides these two moat sources, Wipro benefits more from a cost advantage (only allotted to Indian IT services companies) based on its labor arbitrage model. While benefits from such a cost advantage will diminish over time as the gap between Indian wage growth and GDP growth in primary markets narrows, Wipro’s moat is secure as the company’s foray into higher-value offerings and increasingly automated solutions offsets this trend.

Financial Strengths:  

Wipro’s financial health is in good shape. Wipro\ had INR 350 billion in cash and cash equivalents as of March 2021 with debt totaling INR 83 billion. Wipro’s cash cushion will remain healthy, as free cash flow is expected to grow to INR 118 billion by fiscal 2026. This should allow for continued share buybacks and acquisitions. Share buybacks, forecasted over the next five years will average INR 50 billion each year. The forecasted acquisitions over the next four years following fiscal 2022 will average INR 9 billion each year. While the forecasted dividend increases over the near term, Wipro will have more than enough of a cash cushion to undergo any dividend raises as desired without needing to take on debt.

Bulls Say: 

  • Wipro could benefit from greater margin expansion than expected as more automated tech solutions decrease the variable costs associated with each incremental sale.
  • Wipro should profit from a wave of demand for more flexible IT infrastructures following the COVID-19 pandemic, as more companies seek to be prepared for similar events. 
  • As European firms become more comfortable with outsourcing their IT workloads offshore, Wipro should expand its market share in the growing geography.

Company Description: 

Wipro is a leading global IT services provider, with 175,000 employees. Based in Bengaluru, this India IT services firm leverages its offshore outsourcing model to derive over half of its revenue (57%) from North America. The company offers traditional IT services offerings: consulting, managed services, and cloud infrastructure services as well as business process outsourcing as a service.

(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

Ageas is lacking clear direction and a proven strategy

Business Strategy and Outlook 

Ageas is lacking clear direction and a proven strategy. Ageas is present in Belgium, U.K., continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business’ asset management, you are essentially left with a business that has six divisions. Insurance is a complex set of products and the historical approach has been one of diversification. However, it can be seen within primary insurers and in particular multilines, with increasing diversification these businesses can lack specific expertise and master none. This approach to diversification is highly important in the reinsurance business. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. It can be found within this and in particular in smaller multilines, is this diversification leads to a dilution of expertise and thus reduces firms’ dominance in their chosen fields.

This strategy of greater diversification unwinds. For example, Prudential has been separated into three distinct geographical businesses that focus purely on life insurance products that are most relevant in each of these locales. Given the strength of the management team and dominance of the respective primary product in each of these regions, in the long term this strategy will not be one that prevails. Aegon is a company that has long-lost the investment community on its strategic direction and rationale. This business is now focusing on just three markets and has also started to trim its portfolio to one that focusses on the accumulation side. Aviva is another business that suffered from the diversification cloud. However, it is now only focusing on three end-markets with force; this has been well received via shareholder distributions. Ageas is to take a similar stand.

Financial Strength

Ageas has quite a high amount of debt on its balance sheet relative to the amount of capital that shareholders own. While the interest Ageas pays on this debt is quite low, the fluctuation of the value in the RNPI and the high value of associates means the quality of Ageas’ balance sheet isn’t high. Furthermore, cash seems to be a little low and Ageas management have discussed either a buyback or eyeing more mergers and acquisitions. Buybacks unless the business is looking to buy into more of its existing partnerships within its Asian operations. Ageas runs its own reinsurance division is not likeable. This is only for its nonlife sales and the rationale provided by management is this diversification frees up capital for investment and distributions to shareholders. Ageas doesn’t have deep expertise here, and while the lines in nonlife that it underwrites are standard, it would be much more sensible to leave this to the experts and focus on what it knows. This would provide more comfort in anticipation of an extreme event, so that Ageas’ balance sheet was fully equipped to handle it. The majority of Ageas’ financial investments are held in government debt. However, there is around EUR 4.1 billion in available for-sale unrealised gains. Then there are the nearly EUR 13.4 billion in loans, a little over EUR 10.8 billion is unsecured. It doesn’t appear to be a particularly tidy, secure or strong balance sheet.

Bulls Say’s

  • It can be sensed that operationally this is not such a bad business. However, with the scant disclosures on operations there’s a little way of knowing. 
  • In Asia Ageas seems to go from strength to strength. Now it is investing more here though, it is hesitant on Chinese reinsurance allocation. 
  • By and large a decent looking fixed-income portfolio. However, it is less keen on the level of unsecured loans.

Company Profile 

Ageas is a life and nonlife insurance company that derives most of its income from life and savings, mostly from Belgium and is headquartered in Brussels. Ageas is essentially the result of the failed bid for ABN Amro by Banco Santander; Fortis; Royal Bank of Scotland. The capital requirements placed on these banks as a result of the acquisition combined with severe write-downs on its collateralised debt obligations in the case of Fortis left the business requiring capital. Understandably, a less successful capital raising that took place the GLOBAL financial crisis wasn’t enough and the bank, Fortis, had to be sold and nationalised. What remained was Fortis Insurance, which in 2010 was renamed to Ageas.

 (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
Global stocks

Wolters’ legacy print business, which is declining at a high-single-digit rate each year, has proved to be a drag on the overall business

Business Strategy and Outlook 

Wolters Kluwer has over the past decade or so undergone a wholesale reorganization of its business, taking it from being the leading print publisher of professional information materials to being one of the largest players in the potentially much larger digital information services space. This change has come at a cost, however, with the company spending over EUR 2 billion on net acquisitions over the period in order to position itself better in the digital information services market. Wolters’ legacy print business, which is declining at a high-single-digit rate each year, has proved to be a drag on the overall business, with organic revenue growth improving to 4.3% in 2019, the highest level in over a decade, while the proportion of print revenue fell to a new low of 9% in 2020.

The inflection point for Wolters Kluwer has now been reached, with print revenue now at a single-digit contribution to group revenue, down from 52% in 2004. With print revenue now posing less of a drag on the group, and the company’s more scalable elements gaining traction with clients, the organic revenue growth should increase linearly, albeit modestly from here. Recurring revenue across the group has also increased materially and currently stands at 80% of total revenue for 2020, increasing the stability and predictability of the underlying revenue base. These factors have also resulted in material improvements in operating margins across key verticals. Examples of this can be seen in core products such as UpToDate in the clinical solutions business, which is currently growing at double-digit rates, driving operating margins in the health business to all-time highs. As the company moves up the value chain in the information services it offers to clients, further enhancement to margins across a variety of business activities is eminently possible. However, there are inherent risks in Wolters’ strategy, as the company has moved from a print publishing business with relatively few competitive pressures to a digital information business in which it must keep innovating to stay ahead of existing and new competitors.

Financial Strength

Wolters Kluwer’s net debt/EBITDA ratio is 1.9 times, very much at the lower end of its historical range and comfortably below its 2.5 times long-term target. This is broadly in line with the industry average and it would be considered reasonable, particularly given the relative stability in the company’s revenue base. Wolters is broadly diversified (by geography and business lines) and has made significant progress increasing its recurring revenue streams, which now stand at 80% of total revenue. The company’s debt maturities are long-term-weighted, with only around 20% of its total debt maturing in the next two years. Wolters primarily returns its excess capital to shareholders via a progressive dividend policy, with a payout ratio averaging close to 50% over the past decade. Given the lack of large acquisitions and the strong cash flow, the company has also been active in buying back shares over the past few years.

Bulls Say’s

  • Wolters serves professionals in highly specialized niches, in which it generally holds a number-one or number-two market position. 
  • Digital is more scalable than physical distribution, so the mix shift toward software solutions will help the firm to reduce expenses and expand margins. 
  • Wolters serves numerous niches where there are few reputable alternatives, and pricing tends to be more rational among the major players as a result.

Company Profile 

Wolters Kluwer is a Europe-listed global information services company. It operates across four distinct business segments serving a wide array of clients: health (26% of 2020 sales), tax and accounting (31%), legal and regulatory (23%), and governance, risk, and compliance (20%). Within these divisions, Wolters aims to be the industry leader in a variety of niche, higher-value services

 (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
Global stocks Shares

Biogen has strong human genetic validation for its neurology pipeline

Business Strategy and Outlook 

Biogen’s specialty-market-focused drug portfolio and novel, neurology-focused pipeline create a wide economic moat. Biogen’s strategy has its roots in the 2003 merger of Biogen (multiple sclerosis drug Avonex) and Idec (cancer drug Rituxan). While Rituxan is succumbing to biosimilar competition, Biogen is expanding its neurology portfolio beyond MS, including blockbuster neuromuscular disease drug Spinraza and several promising drugs behind Aduhelm in Alzheimer’s disease. n MS, Avonex and longer-acting Plegridy still generate nearly $2 billion in annual sales and remain the leading MS interferon drugs. Biogen’s MS antibody Tysabri also sees $2 billion in annual sales due to its high efficacy. Oral MS drug Tecfidera peaked above $4 billion in sales in 2019, but U.S. generics drastically cut into sales in 2021 after entry in 2020. The new oral therapy Vumerity offers improved GI tolerability but will only partly offset this headwind. While pricing power and demand for Biogen’s injectable MS portfolio are eroding in the face of new competition, Biogen receives substantial royalties on the biggest new competitor, Roche’s Ocrevus, which helps offset pressure on older MS drugs.

Outside of MS, Biogen has strong human genetic validation for its neurology pipeline. Spinal muscular atrophy drug Spinraza (partnered with Ionis) is a $2 billion drug, although competition from Novartis (gene therapy Zolgensma) and Roche (oral drug Evrysdi) are beginning to erode sales. While Aduhelm was approved in the U.S. in June 2021, skepticism surrounding the launch and lack of Medicare coverage have made the drug a commercial failure. That said, Biogen and Eisai’s lecanemab (data fall 2022) could have more definitive data. While there is significant uncertainty surrounding Biogen’s Alzheimer’s pipeline, the market also underestimates Biogen’s remaining pipeline, which includes a continuing partnership with Ionis (including tau-targeting Alzheimer’s drug BIIB080) and drug candidates to treat conditions including stroke, depression, Parkinson’s, pain, and ALS.

Financial Strength

Biogen’s year-end 2021 cash and marketable securities balance ($4.7 billion) and free cash flow will help fund future repurchases and allow the firm flexibility on future acquisitions. Most maturities for Biogen’s $7.3 billion in long-term debt are well into the future, with only $1 billion in debt due before 2025. Historically, Biogen has focused on returning excess cash to shareholders via buybacks, but its limited acquisition and collaboration record is strong and more tuck-in acquisitions going forward. Of the $15 billion in free cash flow generated in 2006-15, Biogen spent the vast majority of this cash on repurchases, with an average repurchase price over 2006-15 of $87 per share.

Bulls Say’s

  • Biogen leads the $20 billion global MS market with Avonex, Plegridy, Tysabri, and Tecfidera, and the launch of Vumerity partly protects Tecfidera sales from generic headwinds in the U.S. 
  • Biogen receives royalties and profit share from Roche on MS drug Ocrevus and cancer therapies Rituxan and Gazyva, boosting Biogen’s profitability. 
  • Biogen’s neurology portfolio outside of MS, including Spinraza in SMA, should help diversify revenue and boost sales growth.

Company Profile 

Biogen and Idec merged in 2003, combining forces to market Biogen’s multiple sclerosis drug Avonex and Idec’s cancer drug Rituxan. Today, Rituxan and next-generation antibody Gazyva are marketed via a collaboration with Roche. Biogen also markets novel MS drugs Plegridy, Tysabri, Tecfidera, and Vumerity. In Japan, Biogen’s MS portfolio is co-promoted by Eisai. Hemophilia therapies Eloctate and Alprolix (partnered with SOBI) were spun off as part of Bioverativ in 2017. Biogen has several drug candidates in phase 3 trials in neurology and neurodegenerative diseases and has launched Spinraza with partner Ionis. Aduhelm was approved as the firm’s first Alzheimer’s disease therapy in June 2021.

 (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

ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace

Business Strategy and Outlook

ASML is the leader in photolithography equipment for semiconductor manufacturers. It is to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography and the uncertainty concerning the long-term extent of EUV insertion has sufficiently diminished to justify a wide moat rating. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. A photomask is a flat, transparent quartz plate containing the microscopic circuit pattern. The latest technological advances in this field allow chipmakers to pursue Moore’s law and continually increase the number of transistors on the same area of silicon. Lithography tools account for a significant portion of chipmakers’ capital expenditures, with EUV platforms exceeding $150 million in price. ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace, while competitors like Nikon and Canon do not have the scale or resources to compete at the cutting-edge. Traditional immersion lithography approached its limits years ago, and chip makers adopted non litho workarounds, such as multiple patterning that uses advanced etch and deposition tools from other equipment firms.

To continue pursuing Moore’s law, chipmakers will require EUV lithography tools. EUV uses lower-wavelength light (13.5-nm versus 193-nm for current immersion tools) and simplifies the process flow (3 to 6 times cycle time reduction as a result of fewer steps and 15% to 50% cost reduction compared with multiple patterning schemes). The top three customers of the firm (Intel, Samsung, and Taiwan Semiconductor) committed to help fund a portion of research and development for EUV technologies and acquired an aggregate 23% minority equity stake in ASML in 2012 (though these stakes have come down over time). EUV industrialization in high-volume semiconductor production is now a reality, with the technology having been implemented for a few process steps at certain 7-nanometer process nodes at TSMC and Samsung and more meaningfully in each foundry’s 5-nm process technologies.

Financial Strength

ASML has a strong financial position. At the end of 2021, the company had EUR 7.6 billion in cash, cash equivalents, and short-term investments and EUR 4.1 billion in long-term debt on its balance sheet. This debt position is not an issue given ASML’s typical cash generation. The firm typically holds a significant cash position, which is appropriate given the cyclical nature of the semiconductor equipment industry. During downturns, the cash cushion allows ASML to continue investing heavily in research and development in order to maintain its cutting-edge technology position. This is especially critical in the highly arcane wafer fabrication equipment market, where companies that failed to stay at the technological forefront have seen their competitive positions erode in the past, though ASML’s dominance in lithography is unlikely to be challenged by Nikon or Canon. ASML generally returns excess cash to shareholders via annual dividend payments and share buybacks. At the end of 2021, ASML doubled its annual dividend to EUR 5.50. In July 2021, the firm announced a new share buyback program for 2021 to 2023 of up to EUR 9 billion.

Bulls Say’s

  • ASML is the market leader in photolithography, an integral part of chip manufacturing, and is pioneering EUV lithography for the next wave of Moore’s law. 
  • The extensive technical expertise needed to develop lithography tools, which are highly complex and play a critical role in enabling Moore’s law, serves as a major barrier to entry. 
  • ASML has focused on operational efficiency in recent years to improve profitability throughout the industry cycle.

Company Profile 

Founded in 1984 and based in the Netherlands, ASML is the leader in photolithography systems used in the manufacturing of semiconductors. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. The latest technological advances in this segment allow chipmakers to continually increase the number of transistors on the same area of silicon, with lithography historically representing a meaningful portion of the cost of making cutting-edge chips. Chipmakers require next-generation EUV lithography tools from ASML to continue past the 5-nanometer process node. ASML’s products are used at every major semiconductor manufacturer, including Intel, Samsung, and TSMC.

(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.