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Dividend Stocks

Mizuho expanded its overseas business quite rapidly in the first half of the past decade

Business Strategy & Outlook

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and to remain so. A long-running deflationary environment in the country led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 56% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms’ business models. Mizuho expanded its overseas business quite rapidly in the first half of the past decade, with overseas loans rising from 12.6% of total loans in March 2011 to 29.4% by March 2016. Mizuho has since moderated the overseas growth in order to better manage risks and conserve capital, and overseas loans comprised 33.8% of total loans as of March 2022. Compared with its Japanese megabank rivals, which have taken control of local banks in the U.S. or Southeast Asia, Mizuho’s only such investment overseas is a 15% stake in Vietnam’s Vietcombank and a 7.5% stake in Vietnamese digital-payment firm M-Service. Almost all of its overseas operations are done through the main Mizuho entities (Mizuho Bank, Mizuho Trust, and Mizuho Securities). Mizuho also lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management alone for future returns. The need for massive expense reductions is thus even more important for Mizuho’s future profitability than it is for its two megabank rivals. However, the lack of existing businesses could ironically help Mizuho adapt more flexibly than its rivals if digitalization increasingly disrupts businesses such as credit card payments.

Financial Strengths

As of September 2022, Mizuho Financial Group’s common equity Tier 1 capital ratio was 11.4%, slightly below the average for global systemically important banks. Mizuho’s density of risk-weighted assets to total assets is also lower than that of many other G-SIBs, particularly those headquartered in the U.S., and its ratio of Tier 1 capital to total leverage exposure of 4.22% is well below the G-SIB average of around 6.0%. This presents a constraint on Mizuho’s ability to increase profits by expanding balance sheet size. Instead, the group has no choice but to improve efficiency with the current size of assets, or preferably with a smaller balance sheet. Mizuho’s liquidity coverage ratio of 126% compares with the G-SIB average of 134%. The LCR does not fully distinguish between currencies, and while Japanese banks’ yen liquidity is very strong, they depend on access to U.S. dollar funding for their large amount of U.S. dollar assets. Foreign-currency deposits of USD 227 billion covered 77% of Mizuho’s nonyen loans of USD 296 billion as of September 2022. For the remainder, Mizuho has issued large bonds in U.S. dollars and euros through the holding company, as well as bonds in CNY and AUD through Mizuho Bank.

Bulls Say

  • Mizuho has outlined aggressive cost-cutting plans that could surprise market expectations to the upside.
  • After years of system troubles and long delays in integrating its predecessor banks, Mizuho has left expectations at such a low level that there is room for upside surprise as long as the group just performs reasonably well.
  • Mizuho’s lack of a strong consumer finance or credit card business could ironically help it adapt more flexibly to disruptive innovation in this area.

Company Description

Mizuho Financial Group is roughly tied with megabank peer Sumitomo Mitsui Financial Group for the status as Japan’s second largest bank after Mitsubishi UFJ Financial Group. As of March 2021, Mizuho’s market share of domestic loans was 6.9%, compared with 7.0% for SMFG and 8.3% for MUFG. In Japan, Mizuho has more of a corporate focus than SMFG, which has a larger retail business. Its overseas weighting is slightly smaller than that of MUFG. Unlike its two Japanese megabank peers that own foreign banks outright or hold non controlling stakes in local banks overseas, Mizuho expanded in recent years beyond its traditional Japanese borrowers, mainly through its core banking and securities units, focusing on the financing needs of global multinational corporations.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Technology Stocks

Elastic’s strong net retention rate—close to 130%—is evidence of the upselling strategy’s success

Business Strategy & Outlook

Elastic’s prospects in the full-stack monitoring, security, and search markets looks positive. The firm’s products benefit from secular tailwinds driving an accelerating increase in data for enterprises to secure, search through, and monitor. The firm’s sticky product portfolio, broad swath of products that enable clients to conduct a variety of mission-critical tasks, and increased penetration in the enterprise market have enabled Elastic to form a narrow economic moat around its business. As the volume of data increases, so does its impact on an enterprise’s decisions. More data brings greater complexity, nefarious activity, and search-oriented use cases. This increase in data, and the corresponding complexity, is driven by an uptick in cloud migrations and digital transformations. These secular trends enable a long runway for growth for Elastic. Elastic’s products are critical for its clients as they allow them to gather insights, detect and triage nefarious activity, and improve their IT stack efficiency. While Elastic is well entrenched in search, full-stack monitoring and analysis and security are the key growth verticals for the firm. Elastic has plenty of greenfield opportunities to exploit in these two verticals in the near to medium term. To this end, the firm has been investing heavily in its sales and research divisions, a strategy that is sound. In addition, with different use cases enabled by its three end markets, Elastic has a big cross-selling opportunity ahead of it.

As Elastic lands and expands its customer base, the benefits of the cross-selling opportunity at play. As a client adopts a multiproduct offering, Elastic’s entrenchment in that client’s ecosystem increases. This entrenchment subsequently results in a higher client lifetime value. The firm’s strong net retention rate—close to 130%—is evidence of the upselling strategy’s success. With the ability to consistently add new customers and subsequently upsell them, Elastic has strong long-term growth prospects.

Financial Strengths

Elastic’s financial position is healthy. Elastic ended fiscal 2022 with more than $860 million in cash and cash equivalents. While the firm has since taken on debt of more than $500 million recently, Elastic’s cash generation over the forecast will far outstrip its commitments over the same period. Elastic is to generate strong free cash flow margins, increasing its operating leverage while driving its top line forward. This trend is typical within the high-growth software space as investments in sales and research in the near term reap rewards in terms of durable cash flows in the later years. There’s no material change in Elastic’s capital structure. The firm is to raise capital by either issuing more equity or taking advantage of low interest rates and issuing debt.

Bulls Say

  • Elastic has strong secular tailwinds as the FSMA and security markets are expected to grow rapidly.
  • Elastic’s multi prong product strategy, including its search, security, and FSMA offerings, can offer different points of entry into potential clients’ IT ecosystems.
  • Elastic is competing in markets that are filled with greenfield opportunities.

Company Description

Elastic is a software company based in Mountain View, California, focusing on search-adjacent products. Its search engine allows it to process both structured and unstructured data while gleaning insights from that data. The firm’s primary focus is on enterprise search, observability, and security.

(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

Home Depot should continue to capture sales growth, bolstered by an aging housing stock

Business Strategy & Outlook

Home Depot is the world’s largest home improvement retailer, on track to deliver $157 billion in revenue in 2022. It continues to benefit from healthy long-term housing dynamics and improvements in its merchandising and distribution network. The firm earns a wide economic moat rating due to its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying the modest margin expansion forecast. Its flexible distribution network will help elevate the firm’s brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above pre pandemic levels longer term, despite inflationary pressures. Home Depot should continue to capture sales growth, bolstered by an aging housing stock, a shortage in home inventory, and rising home prices, even when lapping robust COVID-19 demand. Other internal catalysts for topline growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (through the acquisition of HD Supply). 

Expansion of newer categories (like textiles from the Company Store acquisition) as well as existing ones (such as appliances) could also drive demand. Perpetual improvements in the omnichannel experience should support the firm’s competitive position, even as existing-home sales and turnover become more volatile. The commitment to better merchandising and an efficient supply chain has led the firm to achieve operating margins and adjusted returns on invested capital, including goodwill, of 15.2% and 34.9%, respectively, in 2021 (both quantitative peaks). Additionally, Home Depot’s focus on cross-selling products in both its DIY and its maintenance, repair, and operations channel should support stable pricing and volatility in the sales base, helping achieve further operating margin lift, with the metric remaining above 15% on average over the next decade.

Financial Strengths

Since the beginning of the pandemic, Home Depot has had no concerns tapping the credit markets. The company raised $5 billion in long-term debt in March 2020 to ensure it could weather COVID-19 without disruption, and raised another roughly $3 billion in the fourth quarter of 2020 to help facilitate the acquisition of HD Supply. In 2021, Home Depot issued another $3 billion in debt. This led the firm to end fiscal 2021 with a total debt load of around $40 billion and a debt/capital ratio of 1.04. There aren’t any concerns about near-term cash constraints as forward debt maturities are staggered, with just $1.2 billion of short and long-term debt maturing in the next 12 months (from Oct. 30, 2022). Moreover, EBIT is forecast to cover interest expense 15 times at the end of 2022. Strong free cash flow to equity that has averaged about 10% of sales over the past five years supports higher leverage, and the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s $25 billion in net property, plant, and equipment provides an asset base to secure more debt if necessary. Given Home Depot’s ability to generate tremendous free cash flow to equity, the management has no problem facilitating dividend payments and remaining near its long-term dividend payout ratio target of 55%. Given the outsize performance despite COVID-19, share repurchases will continue, with the new $15 billion share repurchase program authorized in August 2022.

Bulls Say

  • Home Depot’s focus on distribution and merchandising should increase productivity and grow domestic share in a stable housing market, helping stimulate sales and protect margins. 
  • The company has returned $67 billion to its shareholders through dividends and share buybacks over the past five years, above 20% of its market cap. Home Depot would be returning another $90 billion to shareholders over the next five years. 
  • The addressable MRO market is around $100 billion, and Interline and HD Supply make up a low-double-digit share, leaving meaningful upside up for grabs.

Company Description

Home Depot is the world’s largest home improvement specialty retailer, operating more than 2,300 warehouse-format stores offering more than 30,000 products in store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals. The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations business, which has been expanded through the tie-up with HD Supply (2020). The addition of the Company Store brought textile exposure to Home Depot’s lineup.

(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

Mizuho expanded its overseas business quite rapidly in the first half of the past decade

Business Strategy & Outlook

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.9% share of domestic loans and 8.5% share of deposits as of March 2022. In Japan, the environment for banks has been tough for years and to remain so. A long-running deflationary environment in the country led to persistently low demand for loans, with the loan/deposit ratio having declined from 74% in 2000 to around 56% at present. The debt/equity ratio for Japan’s approximately 1 million business corporations declined from more than 2 times prior to the late 1990s to a reasonably healthy 0.66 times in 2019 as borrowers prioritized paying down existing debt rather than taking out new loans for investment, but credit costs may increase moderately in the coming years after many corporations increased their borrowing in 2020 and as the pandemic affected some firms’ business models. Mizuho expanded its overseas business quite rapidly in the first half of the past decade, with overseas loans rising from 12.6% of total loans in March 2011 to 29.4% by March 2016. Mizuho has since moderated the overseas growth in order to better manage risks and conserve capital, and overseas loans comprised 33.8% of total loans as of March 2022. Compared with its Japanese megabank rivals, which have taken control of local banks in the U.S. or Southeast Asia, Mizuho’s only such investment overseas is a 15% stake in Vietnam’s Vietcombank and a 7.5% stake in Vietnamese digital-payment firm M-Service. Almost all of its overseas operations are done through the main Mizuho entities (Mizuho Bank, Mizuho Trust, and Mizuho Securities). Mizuho also lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management alone for future returns. The need for massive expense reductions is thus even more important for Mizuho’s future profitability than it is for its two megabank rivals. However, the lack of existing businesses could ironically help Mizuho adapt more flexibly than its rivals if digitalization increasingly disrupts businesses such as credit card payments.

Financial Strengths

As of September 2022, Mizuho Financial Group’s common equity Tier 1 capital ratio was 11.4%, slightly below the average for global systemically important banks. Mizuho’s density of risk-weighted assets to total assets is also lower than that of many other G-SIBs, particularly those headquartered in the U.S., and its ratio of Tier 1 capital to total leverage exposure of 4.22% is well below the G-SIB average of around 6.0%. This presents a constraint on Mizuho’s ability to increase profits by expanding balance sheet size. Instead, the group has no choice but to improve efficiency with the current size of assets, or preferably with a smaller balance sheet. Mizuho’s liquidity coverage ratio of 126% compares with the G-SIB average of 134%. The LCR does not fully distinguish between currencies, and while Japanese banks’ yen liquidity is very strong, they depend on access to U.S. dollar funding for their large amount of U.S. dollar assets. Foreign-currency deposits of USD 227 billion covered 77% of Mizuho’s nonyen loans of USD 296 billion as of September 2022. For the remainder, Mizuho has issued large bonds in U.S. dollars and euros through the holding company, as well as bonds in CNY and AUD through Mizuho Bank.

Bulls Say

  • Mizuho has outlined aggressive cost-cutting plans that could surprise market expectations to the upside.
  • After years of system troubles and long delays in integrating its predecessor banks, Mizuho has left expectations at such a low level that there is room for upside surprise as long as the group just performs reasonably well.
  • Mizuho’s lack of a strong consumer finance or credit card business could ironically help it adapt more flexibly to disruptive innovation in this area.

Company Description

Mizuho Financial Group is roughly tied with megabank peer Sumitomo Mitsui Financial Group for the status as Japan’s second largest bank after Mitsubishi UFJ Financial Group. As of March 2021, Mizuho’s market share of domestic loans was 6.9%, compared with 7.0% for SMFG and 8.3% for MUFG. In Japan, Mizuho has more of a corporate focus than SMFG, which has a larger retail business. Its overseas weighting is slightly smaller than that of MUFG. Unlike its two Japanese megabank peers that own foreign banks outright or hold non controlling stakes in local banks overseas, Mizuho expanded in recent years beyond its traditional Japanese borrowers, mainly through its core banking and securities units, focusing on the financing needs of global multinational corporations.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Technology Stocks

Pact Group (PGH) reported disappointing FY22 results, despite the Company seeing increasing demand for recycled content

Investment Thesis

  • Solid market share in Australia and growing presence in Asia. Hence provides attractive exposure to both developed and emerging markets’ growth. 
  • Valuation is fair on the forward estimates. 
  • Management appears to be less focused on acquired growth going forward, which means there is a less of a chance for the Company to make a value destructive acquisition. 
  • Reinstatement of the dividend is positive and highlights management’s confidence in future earnings growth. 
  • Focusing on sustainable packaging in an environmentally friendly market.

Key Risks

  • Competitive pressures leading to further margin erosion. 
  • Input cost pressures which the company is unable to pass on to customers. 
  • Deterioration in economic conditions in Australia and Asia. 
  • Emerging markets risk. 
  • Poor acquisitions or not achieving synergy targets as PGH moves to reduce its dependency on packaging for food, dairy, and beverage clients to more high growth sectors such as healthcare.
  • Adverse currency movements (purchased raw materials in U.S. dollars)

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenue of $1,838m was up +4%, driven by solid demand for sustainable packaging and recycled products. 
  • FY22 underlying EBIT was in line with guidance provided at 1H22. However, underlying EBIT of $156m, was down -15%, with EBIT from Packaging & Sustainability of $110m, up +5% more than offset by declines in Material Handling & Pooling underlying EBIT of $50m, down -8%, and Contract Manufacturing underlying EBIT, which saw a loss of -$4m (versus $24m in the pcp).
  • Underlying NPAT of $70m was down -25% largely due to the absence of one-off revenue in the Contract Manufacturing segment recorded in FY21. Reporting NPAT of $12m was significantly down – 86%. 
  • The Board declared a final dividend of 1.5cps, franked to 65%, which brings FY22 total dividend to 5cps, down -55% and equates to a payout ratio of 25% of underlying NPAT.
  • PGH acquired Synergy Packaging for ~$20m which adds to sustainable health and beauty packaging. 
  • PGH began operations at Circular Plastics Australia (PET) recycling facility in Albury-Wodonga with international food grade certification in place and producing recycled resin for joint venture partners. 
  • PGH maintained gearing of 2.7x, within its target range, with net debt at $561m, $24m lower than pcp, and operating cash conversion of $253m.

Company Description

Pact Group Holdings Ltd (PGH) was established by Raphael Geminder in 2002 (Mr. Geminder remains a major shareholder with ~44% and is the brother-in-law of Anthony Pratt, Chairman of competitor Visy). Pact has operations throughout Australia, New Zealand and Asia and conceives, designs, and manufactures packaging (plastic resin and steel) for many products in the food (especially dairy and beverage), chemical, agricultural, industrial and other sectors.

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

PPT will not be raising equity to fund any portion of the cash consideration

Investment Thesis

  • Trades below valuation and represents >10% upside to current share price. 
  • PPT is a diversified business with earnings derived from trustee services, financial advice and funds management. 
  • PPT has an opportunity to increase FUM via its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity, whilst PPT continues to maintain FUM in Australia equities which is near maximum capacity. This equates to flattish earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds). 
  • Retail and institutional inflow of funds is expected to be solid especially from positive compulsory superannuation trend and flow from Perpetual Private. 
  • Potential for Perpetual Private to drive growth in funds under management and funds under advice. 
  • Cost improvements in Perpetual Private and Corporate Trust.

Key Risks

  • Any significant underperformance across funds. 
  • Significant key man risk around key management or investment management personnel.
  • Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation. 
  • Average base management fee (bps) per annum (excluding performance fee) continues to be stable at ~70 bps but there are risks to the downside from pressures on fees. 
  • More regulation and compliance costs associated with the provision of financial advice and Perpetual Private. 
  • Exposure to industry funds which are building in-house capabilities (~15-20% of total PPT funds under management).

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • The company entered into a binding Scheme Implementation Deed to acquire 100% of shares in Pendal Group, targeted to be implemented by late CY22/early CY23 and Pendal shareholders receiving 1 PPT share for every 7.50 Pendal shares plus $1.976 cash/Pendal share (implying an offer price of $6.54/Pendal share), with acquisition expected.
  • Realise $60m of annual pre-tax synergies within the first two years and deliver double digit EPS accretion for PPT in the 12 months post implementation, with one-off costs to achieve synergies of $110m phased with majority incurred over 18 months and other transaction costs of $40m.
  • Create greater scale with $1.4bn in revenue and ~$456m in UPBT driven by increased economies of scale, and combined AUM of >$201bn, covering Global, US, UK, European and Australian equities, Multi Asset and Cash and Fixed Income strategies, significantly improving market position and brand recognition.
  • Expanded team with employees across 16 locations around the globe and enhanced global distribution network. Management expects to fund the cash component of the offer totalling $757m via a new debt facility, which will also re-finance Perpetual’s existing debt facility and include undrawn headroom for liquidity management purposes and expects pro forma leverage to be ~1.7x gross debt/pro forma EBITDA (~1.3x Net Debt/pro forma EBITDA) with de-leveraging occurring in year 3 post-implementation given the strong cash flow generation of the combined businesses with a clear pathway to 1.2x Gross Debt/pro forma EBITDA (~0.8x Net Debt)
  • The Board declared a fully franked final dividend of 97cps, resulting in a total dividend for the full year of 209cps, an increase of +16% y/y, representing a payout ratio of 80%, in line with company’s payout range of 60-90% UPAT on an annualised basis. 
  • ROE improved +44bps y/y to 16.2%

Company Description

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core segments in (1) Perpetual Investments which is one of Australia’s largest investment managers; (2) Perpetual Private which is one of Australia’s premier high net worth advice business; and (3) Perpetual Corporate Trust which provides trustee services. PPT manages ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as at 30 June 2021).

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

PTM saw FY22 revenue decline -26.4% yy to $232.8m primarily due to -6.1% yy decline in fee revenue

Investment Thesis

  • Trades on an attractive dividend yield. 
  • PTM is in a position to attract net inflows as value-oriented strategies may make a sustained comeback. 
  • There’s further pressure on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becomes more of the norm). 
  • Change in management or investment management team. 
  • Industry consolidation could benefit PTM (potential M&A target). 

Key Risks

  • Any significant outperformance across funds. 
  • Kerr Neilson’s departure from the Board could be disruptive. 
  • Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation. 
  • There are earnings risks to the downside from pressures on fees. 
  • Emergence of industry funds who are building in-house capabilities. 
  • PTM’s investment style becomes out of favour. 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Total revenue declined -26.4% y/y to $232.8m, as fee revenue decreased -6.1% y/y to $252.7m, with -7.2% y/y decline in management fees (excluding performance fees) amid -8.5% y/y decline in average FUM to $21.4bn, partially offset by +67.5% y/y increase in performance fees to $6.7m, primarily from absolute return mandates and Asia strategy driven largely by the benefit of downside protection provided by short positions, and the company incurred $20.4m unrealised losses on seed investments vs $46.7m profit in pcp.
  • Expenses increased +4.7% y/y to $86.1m, primarily driven by +3.9% y/y increase in staff costs reflecting increase in share-based payment expenses due to additional deferred equity granted to employees, and +16.7% increase in business development expenses which included the launch of the Platinum Investment Bond product (and its direct-to-market proposition) and associated new campaigns, the growth in social media advertising, and third-party distribution costs.
  • Underlying NPAT, which excludes gains and losses on seed investments (net of tax), declined -10.9% y/y to $118.2m.
  • FUM declined -22.6% y/y to $18.2bn, driven by negative investment performance of $2.2bn, net fund outflows of $2.2bn and the net distribution paid to investors of $0.9bn. 
  • The Board declared fully franked final dividend of 7cps, down -42% y/y, equating to ~9.8% annualized yield, taking full year dividend to fully franked 17cps, down -29% y/y. 
  • The Board extended its on-market share buyback for upto 10% of issued share capital for further period of upto 12-months, commencing from 4th October 2022, intending to buy shares should the Board determine that PTM’s share price is trading at a significant discount to its underlying value. 

Company Description

Platinum Asset Management (PTM) is an ASX-listed, Australian based fund manager which specializes in investing in international equities. PTM currently manages ~A$18.2bn.

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

A2M delivered a solid FY22 result which was ahead of consensus expectations

Investment Thesis

  • Management appears to be working through the inventory issues which have impacted the Company in the recent past.
  • Potential to win market share in Australia and China.
  • Growing consumer demand for health and well-being globally.
  • Demand growth in China for premium infant formula products.
  • Expansion into new priority markets, aided by the capabilities of Fonterra.
  • US expansion provides new markets + opportunities.
  • Key patents provide a barrier to entry.
  • Takeover target – the Company was the subject of a takeover bid in 2015.

Key Risks

  • Management fails to meet its revised FY21 guidance. 
  • Chinese demand is underperforming market expectations. 
  • Disruption to A2 milk supply. 
  • Increased competition, including private labels & competitors developing products or branding that erode the differentiation of A2M branded products from other dairy products.
  • Expiration of A2M’s intellectual property rights may weaken or be infringed by competitors.  Withdrawal of A2M product from international markets due to market share loss or lack of market penetration.

Key Highlights

  • FY22 results highlights. Relative to the pcp: 
  • Group net revenue was up +19.8% YoY to $1,443.7m, driven by solid growth in IMF (up +11.9% YoY) and the inclusion of MVM. Excluding MVM, group revenue was up +11.2% YoY. The Company also made good progress on rebalancing inventory in the 2H22 vs 1H22. China & Other Asia revenue was up +24.5% YoY on the back of strong execution in China, strong China label IMF consumer demand, pricing benefits and positive movement in forex. 
  • Gross profit was up +30.2% to $663.5m, with % GM up +370 bps to 46.0% versus pcp given the cycling of stock write-downs in pcp, higher pricing, lower trade spends and favourable forex. Partially by higher raw materials and logistics costs. 
  • Strong top line growth and gross margin improvement drove FY22 EBITDA higher by +59% to $196.2m. EBITDA margin expanded by +330bps, driven by margin expansion in both ANZ (up +590bps) and China & Other Asia (up +700 bps). Marketing costs of $230.0m were up +36.3% YoY to support A2M’s China strategy execution. 
  • NPAT (including non-controlling interest) was up +42.3% YoY to $114.7m and EPS of 16.5cps was up +51.8%. 
  • Balance sheet is solid with a net cash position of $816.5m.
  • On-market share buyback. On the back of improving market conditions and strong operating performance, the Board announced a capital return of $150m via an on-market share buyback. It is expected to start at the end of September and be carried out over next 12-months.

Company Description

The a2 Milk Company Limited (A2M) sells a2 brand milk and related products. The company owns intellectual property that enables the identification of cattle for the production of A1 protein free milk products. It also sources and supplies a2 brand milk in Australia, the UK and the US, exports a2 brand milk to China, and distributes and markets a2 brand milk and a2 Platinum brand infant nutrition products in Australia, New Zealand, and China.

(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

Intuit has launched matchmaking systems, for both its small-business and consumer customers

Business Strategy & Outlook

Intuit is the giant behind U.S. small-business accounting software QuickBooks and do-it-yourself U.S. tax software TurboTax. With TurboTax and QuickBooks online sales having eclipsed their respective desktop sales, Intuit has now transitioned into a cloud-first company. Consequently, this has enabled Intuit to leverage customer data to streamline the user experience across disparate products and to natively market its offerings, in turn supporting switching costs and a network effect, which already is the backbones of Intuit’s wide moat. Over the past several years, Intuit has continued to innovate. It has realized the insecurity customers have in accomplishing the consequential tasks of tax filing or business accounting on software alone. In turn, for both its small-business and consumer customers, Intuit has launched matchmaking systems. In accounting, that means matching small businesses with accountants, and in tax, that means adding a human review to the filing process. Both matchmaking mechanisms pose meaningful opportunities ahead, in the form of increased customer retention on both sides and getting exposure to the assisted tax market. Now that Intuit is starting to reap the benefits of playing matchmaker, next up is to take big bets on QuickBooks complements, such as creating an omnichannel sales platform for small businesses. While these buildouts will take time, such direction is a good one to keep propelling the QuickBooks network effect as customers continue to demand all-in-one software to run their businesses.

Intuit’s business is not immune to risk, which lies particularly in IRS tax-filing regulation as well as the risk of new entrants in the small-business accounting space. Still, such risks would only gradually chip away at Intuit’s accounting and tax dominance, given the force of its network effect and its financial health equipping Intuit with the ability to turn the tides.

Financial Strengths

Intuit is in good financial health considering its net cash cushion of $1.8 billion as of fiscal 2021 and debt/EBITDA of 0.7 times as of fiscal 2021. This leaves Intuit able to meet the future capital expenditures, acquisitions, repurchases, and dividends needed to uphold the business and keep shareholders happy. Specifically, capital expenditure is to remain near 1.3% of revenue over the next five years. Additionally, dividends are to increase year to year over the next five years by approximately $0.60 per share per year from 2022 to 2026. The company will continue to make acquisitions, averaging to roughly $100 million per year from fiscal 2023 to fiscal 2026, after $12 billion in acquisitions in fiscal 2022 from purchasing Mailchimp.

Bulls Say

  • Intuit’s tax revenue should climb at a healthy rate as the company’s solutions intersect with the assisted tax-filing base.
  • QuickBooks should continue to see revenue growth from Intuit’s growing ecosystem capabilities.
  • Operating expenses should decrease as a percentage of revenue as the company realizes synergies between links among once disparate offerings and benefits from scale.

Company Description

Intuit is a provider of small-business accounting software (QuickBooks), personal tax solutions (TurboTax), and professional tax offerings (Lacerte). Founded in the mid-1980s, Intuit controls the majority of U.S. market share for small-business accounting and DIY tax-filing software.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Technology Stocks

Marvell is the leader in DPUs and PAM-4 optics and the clear second in enterprise and cloud Ethernet

Business Strategy & Outlook

Marvell Technology has emerged as a strong competitor in the networking chip market following a multiyear business shift to acquisitions, divestitures, and organic development to focus on high-growth cloud, 5G, and automotive markets. Between data processing units, or DPUs, optical interconnect, and Ethernet solutions, Marvell has one of the broadest networking silicon portfolios in the world, and it is primed to steal market share from incumbent Broadcom with bleeding-edge technology. Marvell has exited its low-margin legacy markets of consumer hard disk drives and Wi-Fi chipsets to focus on its networking portfolio and used the acquisitions of Cavium, Avera, Aquantia, Inphi, and Innovium to expand out of its enterprise market niche into the rapidly growing data center and 5G markets. Marvell is the leader in DPUs and PAM-4 optics and the clear second in enterprise and cloud Ethernet. Marvell will use a hefty research and development budget to keep up with heavyweights like Nvidia, Intel, and Broadcom and set up top-line growth over the next 10 years, but it is less certain about its ability to earn excess returns on its investment while doing so. The firm hasn’t carved out an economic moat yet and are waiting to see it prove an ability to achieve growth and margin expansion organically.

Marvell’s recent financial history has been choppy as a result of CEO Matt Murphy’s aggressive overhaul of the business’ focus. The reorganization is squarely in the firm’s rearview mirror now and forecast midteens sales growth and immense margin expansion over the next 10 years. The trends toward disaggregated networks and merchant silicon, as well as 5G and data center build outs, will be secular tailwinds for Marvell. The combination of 2021 acquisitions Inphi and Innovium under Marvell’s umbrella will create a dangerous combination to Broadcom in the high-performance switching arena and enable share gains. Marvell has the right portfolio to invest aggressively in organic growth, but don’t rule out further acquisitions to bolster its competitiveness and enter adjacent markets.

Financial Strengths

Marvell to focus on deleveraging with its free cash flow, though there are no more acquisitions. As of Jan. 29, 2022, the firm carried $614 million in cash and $4.5 billion in total debt—largely taken on to acquire Inphi. Despite taking on significant debt in fiscal 2022, Marvell closed the fiscal year within its debt-to-adjusted EBITDA target range, at 1.6 times. Marvell is to stay leveraged but to pay down debt as it matures. The firm’s free cash flow generation to ramp up toward $2 billion a year by fiscal 2026, up from $650 million in fiscal 2021, as it exacts material operating leverage with top-line growth. Marvell will prioritize maintaining its dividend and won’t have to deleverage to fund maturing notes. Marvell also has a $750 million revolver available if it encounters a sudden liquidity crunch.

Bulls Say

  • Marvell has best-of-breed data processing units and optical interconnect products that should allow it to benefit from the rapidly growing cloud and 5G markets.
  • The combination of Inphi and Innovium under the Marvell umbrella could give it a technological advantage to Broadcom in high-performance networking.
  • Marvell to exact significant operating leverage as it incorporates acquisitions and adds volume to the top line.

Company Description

Marvell Technology is a leading fabless chipmaker focused on networking and storage applications. Marvell serves the data center, carrier, enterprise, automotive, and consumer end markets with processors, optical interconnections, application-specific integrated circuits (ASICs), and merchant silicon for Ethernet applications. The firm is an active acquirer, with five large acquisitions since 2017 helping it pivot out of legacy consumer applications to focus on the cloud and 5G markets.

(Source: Morningstar)

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