Category: Sectors

Okta Remains Attractive Even as We Lower Our Long-Term Profitability Assumptions; FVE to $193

Post author By lvc-admin
Post date June 23, 2022
No Comments on Okta Remains Attractive Even as We Lower Our Long-Term Profitability Assumptions; FVE to $193

Business Strategy & Outlook

Enabling access management and protecting networks from malicious actors based upon identity credentials are cornerstones of cybersecurity, and the dissipation of a distinct security perimeter could make security teams further rely on user-based cybersecurity. Okta’s cloud-based identity access solutions upended the prevailing methodology of protecting users and providing access to digital resources based upon on-premises products. Okta’s innovative solutions for user access and security will provide it with a durable presence, and strong revenue growth is forecasted alongside significant margin expansion.

Okta addresses two primary markets through its workforce identity and customer identity products. Workforce identity affords protection and allows access for a customer’s employees, contractors, and partners, while customer identity is for enabling a customer’s customers. Okta melded these two distinct markets within its identity cloud, and has a robust integration network that simplifies identity access and security protocols for the applications its customers rely on. Okta’s solutions are anticipated to be in high demand due to entities desiring a seamless experience for its employees and customers when accessing requested applications, while also ensuring that networks are protected. Always-connected distributed workforces are increasingly using more cloud-based resources, which amplifies the complexity of cybersecurity. Okta’s network of application integrations provide it with a unique selling proposition in that entities can holistically provide identity access across their cloud-based and on-premises applications in a manageable fashion. Alongside a rapidly expanding customer base and gaining more clients with larger deals, Okta is migrating upstream to land more enterprise clients and expanding internationally. The company has become a favorable partner with large system integrators, which are expected to help its growth plan with large customers undergoing digital transformation and market expansion efforts.

Financial Strengths

Okta is a financially sound company that is expected to generate strong free cash flow while expanding its operating margin profile. The company has historically operated at a loss, and Okta can become profitable by fiscal 2026 on an adjusted basis. Okta’s financial plan is viewed in line with a land-and-expand strategy, whereby Okta initially has elevated sales and marketing to gain a customer cohort before expanding its revenue per customer while lowering its operating costs per customer (on a revenue percentage basis). Okta can benefit from cross-selling and up-selling tangential products while developing a stickier customer base by further penetrating the enterprise and government markets. At the end of fiscal 2022, Okta had $2.5 billion in cash and cash equivalents, $16 million of 2023 convertible senior notes, and $1.8 billion of 2025 and 2026 convertible senior notes. The 2023 notes have a 0.25% fixed interest rate per year and have an initial conversion price of about $48.26. The 2025 notes have a 0.125% fixed interest rate per year and have an initial conversion price of about $188.71. The 2026 notes have a 0.375% fixed interest rate per year with an initial conversion price around $236.80. Okta uses note hedges, warrants, and capped calls to alleviate the effects of senior notes converting.

Bulls Say

Okta’s novel cloud-based approach for identity access management should continue to attract new customers while margin expansion comes from prolific revenue growth outpacing expenses.

The independence of its integration network can make Okta a favorable choice for customers using resources across public clouds, private clouds, and on-premises.

As Okta moves upstream, it can land higher-value deals with larger, stickier customers. Additionally, ample cross-selling and up-selling opportunities exist between Okta’s workforce identity and customer identity products.

Company Description

Okta sells solutions for identity and access management. Its workforce offerings contain products to protect and enable employees, contractors, and partners, while customer identity and access products securely enable an organizations’ customers to use applications. Okta’s software solutions are cloud-delivered, and its integration network gives customers security protection and access across a wide variety of applications that are critical to business and government needs. The California-based company went public in 2017.

(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.

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.

Tags Top Stories

Technology Stocks

Alibaba Cloud Continues To Be The Leader In Terms Of Market Share In China And Stands To Benefit From Digitization Of Industries

Investment Thesis:

Strong existing consumer base (1.31 billion global active transacting users as of FY22) which is continuing to grow strongly.
Growing incremental market share in China’s e-commerce pie which is being captured by strategic vertical expansions.
International expansion across both developed and emerging markets.
Supportive long-term macroeconomic tailwinds in real wage growth, healthier balance sheets, and accessible consumer credit.
Potential corporate activity.
Reliable and competent management team.

Key Risks:

Expansion into new verticals disappoints management and market expectations.
Increasing competition impacts BABA growth rates and key trading metrics (e.g. daily active users).
Contracting margins as entry into offline-retail markets is met with fierce competition from incumbents (e.g., Tencent-backed Meituan in food delivery).
Key person risk – Jack Ma has been the face of BABA and retirement from the board may be viewed as negative.
Geopolitical tensions hurt trade relations between China and key partners.
Significant data breach or increase rules/regulations around consumer data privacy leading to increased costs.
Regulatory risks (Chinese government imposing restrictions or additional tax burdens on companies like BABA and antitrust policies).

Key highlights:

BABA reported mixed FY22 results with revenue of RMB853.1bn, beating consensus estimate of RMB850.2bn, however, diluted EPS of RMB2.84 was well below expectations of RMB26.3.
Though year-on-year (y/y) revenue growth moderated during the year with the segment earning revenue (after inter-segment elimination) of RMB74,568m, up +23% y/y
The segment delivered its first profitable year, with adjusted EBITA of RMB1,146m compared to a loss of RMB2,251m in pcp.
The Company repurchased ~60m of ADSs for $9.6bn during the year and the Board authorized an increase of share repurchase program by +66.7% to $25bn with 2.7bn ADSs (21.4bn ordinary shares) remaining outstanding.
The combined AACs (after deduplication) of consumer-facing businesses in China reached a historic milestone of over 1 billion during the year, up +13% y/y
Revenue increased +19% to RMB853,062m, primarily driven by +18% growth in China commerce, +23% increase in Cloud and International commerce increasing +25%. Adjusted EBITA, a non- GAAP measurement, declined -23% to RMB130,397m.
Net cash provided by operating activities declined -38% to RMB142,759m and FCF was RMB98,874m, a decline of -43%.

Company Description:

Alibaba Group Holding Ltd is a multinational Chinese retailer, specializing in e-commerce, infrastructure, and internet content services through its numerous subsidiaries. Additionally, the Company also owns a 33% equity stake in Ant Financial (now formally known as Alipay) which offers payment and financial services for consumers that operate on Alibaba platforms. The Company’s businesses consist of core commerce, cloud computing, mobile media and entertainment, and other innovation initiatives. Through investee affiliates, it also participates in the logistics and local services sectors.

(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.

Tags Top Stories

Technology Stocks

Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications

Post author By lvc-admin
Post date June 23, 2022
No Comments on Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications

Business Strategy & Outlook

The Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications. While the firm is a smaller player than other competitors in the components market under our coverage, it has aligned its portfolio toward secular themes of safety, efficiency, and connectivity to pursue growth. The Littelfuse’s best organic growth opportunities will come from vehicle electrification; battery electric vehicles require five times the circuit protection content of an internal combustion counterpart, and charging infrastructure presents a lucrative opportunity for the firm’s growing power semiconductor business.

Littelfuse’s passive components are small and inexpensive, yet vitally important to the safe and continuous function of mission-critical systems in end applications. Circuit protection products safeguard against electrostatic discharge and overcurrent to prevent component failure and/or fire in cars, power grids, data centers, and manufacturing plants. Even though individual parts like fuses and relays don’t carry a hefty price tag, the Littelfuse’s application expertise helps the firm stave off commoditization and creates sticky customer relationships. The Littelfuse will keep selling more content into ever-electrifying end products, especially as applications like cars and industrial equipment moves into higher voltages. Higher voltages and new applications like wind and solar power offer a greater electrical protection content opportunity and new selling opportunities for the firm’s emerging silicon carbide technology. The Littelfuse’s organic growth to benefit from ample cross-selling between its relatively new semiconductor customers (largely acquired through its IXYS deal in 2018) and its electrical protection customers. Meanwhile, the Littelfuse to continue acquiring in line with the consolidating electronic components industry, as management aims to achieve half of its long-term top-line growth target of 10%-14% inorganically.

Financial Strengths

The Littelfuse is in good financial shape. As of Jan. 1, 2022, the firm held $637 million in total debt and $478 million in cash on hand. The firm to satisfy its financial obligations with ease. Littelfuse has no more than $150 million coming due in a single year through 2026, and the firm averaged $226 million in free cash flow from 2017 to 2021. As per forecast firm to average $471 million in free cash flow per year over the explicit forecast. Littelfuse’s debt/adjusted EBITDA ratio of 1.29 times at the end of 2021 places it solidly at the low end of management’s long-term range of 1 times-2.5 times. The firm to remain leveraged, using debt to supplement free cash flow in funding future M&A opportunities. The Littelfuse is trending toward more frequent acquisitions of larger sizes in order to fulfill its 5%-7% inorganic growth target off of a higher revenue base. Following the use of cash on hand to fund the 2021 acquisitions of Hartland Controls and Carling Technologies, the next acquisition to involve Littelfuse incurring additional leverage. Even so, the firm to maintain its regular dividend and continue share repurchases.

Bulls Say

Secular trends toward renewable energy and electric vehicles should boost demand for Littelfuse’s products.

Littelfuse has a foot in the door of the emerging silicon carbide semiconductor market, which could fuel future rapid growth for the firm.

Littelfuse’s sticky customer relationships have helped it earn excess returns on invested capital even in the face of cyclical downturns like in 2019 and 2020.

Company Description

Littelfuse is a primary provider of circuit protection products (such as fuses and relays) into the transportation, industrial, telecommunications, and consumer electronics end markets. The firm is also increasing its power semiconductor business, where it predominantly serves industrial end markets and is breaking into electric vehicle charging infrastructure. Littelfuse has 17,000 global employees.

(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.

Tags Street Talks

Technology Stocks

Fortinet keeps customers locked into its ecosystem via holistic security management across any location

Post author By lvc-admin
Post date June 23, 2022
No Comments on Fortinet keeps customers locked into its ecosystem via holistic security management across any location

Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

Business Strategy and Outlook

Fortinet is a leading cybersecurity company that has amassed an extensive customer base because of its solutions’ high performance relative to price as well as its broad product offerings covering various security concerns. The company developed a centralized cybersecurity management plane and is at the forefront of networking and security converging with its secure software-defined wide-area networking offerings. Fortinet sells security appliances and subscriptions as well as technical and professional services. It has established customer switching costs alongside its network effect and has a nice runway for growth through its holistic approach to network and cloud cybersecurity. As organizations expand their networking footprint beyond on-premises data centres, Fortinet keeps customers locked into its ecosystem via holistic security management across any location. The vast creation of data and the dispersed nature of network traffic due to hybrid environments, software-as-a-service applications, and remote access needs create a larger threat surface. Attacks are becoming more masqueraded and serpentine, which drives up the complications associated with cybersecurity management and threat prevention. Fortinet gleans threat insights from its massive customer base, which keeps it at the forefront of security requirements. Compounded by a dearth of cybersecurity talent, the consolidated security platforms, like Fortinet’s Security Fabric, will remain in high demand, as customers prefer to add capabilities via subscriptions over managing disparate software and hardware vendors.

The company has a build-versus-buy mentality, with a penchant for making custom processors. While this strategy has helped establish its name within the perimeters of localized networks, it is expected Fortinet to supplement its engineering prowess with inorganic growth in areas like cloud-based security, machine learning, and automated threat responses. Hence, these high-growth areas can help drive new product growth on top of a considerable base of durable services and support income.

Financial Strength

Fortinet is a financially sound company that will continue to generate strong cash flow. At the end of 2021, Fortinet’s deferred revenue of $3.5 billion is a strong indication of predictable revenue streams and should help insulate the company from any IT spending downturns. Fortinet had $3.0 billion in cash and equivalents and $1 billion of debt at the end of 2021. The company has never paid a dividend, but used over $2 billion to repurchase shares between 2017 and 2021, and it is expected Fortinet will continue repurchasing shares. Beyond returning capital, the cash outflows are to be focused on research and development alongside sales and marketing efforts and with some smaller tuck-in acquisitions to be completed for areas such as cloud-based security and analytics.

Bulls Say’s

A growing enterprise customer base and nascent technologies like software-defined networking and 5G create sizable revenue growth potential for Fortinet.

The firm’s consolidated cybersecurity platform could be enticing for customers attempting to decrease the quantity of vendors, which would drive more revenue per customer for Fortinet.

With no end to cybersecurity threats, Fortinet’s products should remain in high demand from SMBs, government entities, service providers, and enterprises

Company Profile

Fortinet is a cybersecurity vendor that sells products, support, and services to small and midsize businesses, enterprises, and government entities. Its products include unified threat management appliances, firewalls, network security, and its security platform, Security Fabric. Services revenue is primarily from FortiGuard security subscriptions and FortiCare technical support. At the end of 2021, products were 38% of revenue and services were 62% of sales. The California-based company sells products worldwide.

(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.

Tags Street Talks

Technology Stocks

NextDC’s total recurring revenue, will trend higher over time as its network ecosystem matures

Post author By lvc-admin
Post date June 23, 2022
No Comments on NextDC’s total recurring revenue, will trend higher over time as its network ecosystem matures

Business Strategy & Outlook

NextDC is well placed to benefit from industry megatrends, including the growing adoption of cloud computing, the Internet of Things, and artificial intelligence, leading to exponential growth in data creation. The NextDC will materially expand its capacity over the 10-year forecast period in order to meet growing demand for data center services.

The COVID-19 pandemic has accelerated the digital transformation of many businesses and expedited demand for co-location data centers. Large numbers of employees have transitioned to remote working arrangements leading to a greater reliance on digital technologies such as video conferencing and cloud-based platforms and reducing the need to store servers at a centralized location. Beyond the COVID-19 pandemic, remote working levels to remain elevated above prepandemic levels resulting in continued demand for digital technologies and potentially less need for physical office space. This shift has increased demand for data centers and hybrid and multi cloud data storage solutions, which are supported by co-location data centers like NextDC. Hybrid solutions that combine traditional infrastructure with cloud storage can improve business outcomes through reduced latency and costs, increased security and resilience, and the flexibility to connect to multiple clouds based on business needs. These solutions provide greater flexibility and allow businesses to scale their data storage capacity based on workflow. The interconnection services to become increasingly important for NextDC as more businesses transition to hybrid cloud storage models. As at fiscal 2021, interconnection revenue contributed 8% of NextDC’s total recurring revenue, and this will trend higher over time as its network ecosystem matures.

Financial Strengths

NextDC is in sound financial health. The company raised AUD 862 million in fiscal 2020 via an institutional placement and share purchase plan. Proceeds from the equity raising will be used to fund the development of a third Sydney data center and further capacity expansion at its existing and new sites. The gearing, measured as net debt/EBITDA, to deteriorate to above 3.6 times in fiscal 2023 as NextDC continues to invest heavily in portfolio expansion, before recovering from fiscal 2024 as capacity utilization improves. The NextDC will invest about AUD 4.0 billion during the 10 years to fiscal 2031 to grow total power capacity at a CAGR of 16%. The NextDC will only consider paying dividends when it has accrued sufficient franking credits, otherwise the capital would be better spent on investments or repaying debt.

Bulls Say

NextDC is well placed to benefit from industry megatrends including the growing adoption of cloud computing, the Internet of Things and artificial intelligence leading, to exponential growth in data creation.

The shift to cloud-based services increases the need for enterprises to connect to numerous cloud providers and the connection is fastest, safest and most efficient in a co-located data center.

The COVID-19 pandemic has accelerated the digital transformation of many businesses and led to increased demand for cloud-based services that require data centers.

Company Description

NextDC is an Australia data center developer and operator with a focus on co-location and interconnection among enterprise and government customers, global cloud and information and communications technology, or ICT, providers, and telecommunication networks. NextDC provides physical space, cooling, power, and security services and offers optional technical and project management support. The company’s tenants house their servers within the data center and can connect to each other via physical and virtual connections.

(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.

Tags Top Stocks

Global stocks

Lululemon will need to introduce new fabrics and technology to hold its popularity

Post author By lvc-admin
Post date June 23, 2022
No Comments on Lululemon will need to introduce new fabrics and technology to hold its popularity

Business Strategy and Outlook

With a narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its core categories, the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. The narrow-moat rating is based on Lululemon’s intangible brand asset. The “Power of Three x2” five-year plan laid out at Lululemon’s April 2022 investor event as sound. The firm’s three priorities are product innovation, e-commerce, and international expansion. The product innovation is critical as many competitors, including no-moat Gap’s Athleta, sell women’s leggings of similar quality. Thus, Lululemon will need to introduce new fabrics and technology to hold its popularity in this critical category. The firm also plans to add to its assortment in men’s (24.6% of 2021 sales) and expand its nascent athletic footwear line. These categories fit the Lululemon brand, they also bring it in direct competition with athletic apparel firms like wide-moat Nike.

Boosted by the pandemic, Lululemon’s e-commerce will become increasingly important. There should be a 21% growth for the channel in 2022 and expect e-commerce sales will permanently exceed store revenue by 2024. Lululemon’s e-commerce should benefit from investments in digital capabilities (such as buy online, pick up in store), new product, and an expanding loyalty program. Its e-commerce operating margins at 44% in the long term, rising digital sales should lift its overall profitability. There is an opportunity for Lululemon to expand outside of North America. Sales outside the region accounted for just 15% of total in 2021 but have been growing more than 30% per year. Lululemon is building its brand overseas and has a large opportunity for new stores and larger online sales in China, the second-largest activewear market. The 2031 sales outside of North America will approach $4.2 billion (up from $957 million in 2021) and account for 23% of total sales.

Financial Strength

Lululemon is in exceptional financial shape. Lululemon is the rare apparel firm that developed a multibillion-dollar brand without long-term debt. The firm closed April 2022 with $649 million in cash and an undrawn $400 million revolving credit facility. Lululemon will generate significant free cash flow for stock buybacks. The firm’s free cash flow to equity has grown rapidly over the past six years (to $1 billion in 2021 from $154 million in 2015), allowing it to repurchase about $1.8 billion in shares in that period. It will generate about $6.9 billion in free cash flow to equity over the next five years and use most of it for buybacks. However, Lululemon may reduce shareholder value by repurchasing shares above the fair value estimate. The firm could easily afford to issue dividends but has not done so and will not do it in the future too. Lululemon’s capital expenditures are at an annual average of 6.2% of sales over the next decade. Its capital expenditures as a percentage of sales are relatively high for a firm in its industry as it operates its own stores. Most of its capital expenditures are for remodelling and relocation of stores and opening new stores. Lululemon will open about 370 stores over the next decade. The firm is also investing heavily in its digital capabilities.

Bulls Say’s

Lululemon’s online sales increased to $2.8 billion in 2021 from less than $100 million in 2010. It is estimated its e-commerce operating margin at roughly 44%, about 20 percentage points better than its store margin.

Lululemon has a big opportunity in greater China, where the firm operates fewer than 100 stores. China is the second-largest athletic apparel market in the world and has high growth.

Lululemon is often credited with the development of “athleisure”, which is a major change in how people dress and continues to thrive.

Company Profile

Lululemon Athletica Inc. designs, distributes, and markets athletic apparel, footwear, and accessories for women, men, and girls. Lululemon offers pants, shorts, tops, and jackets for both leisure and athletic activities such as yoga and running. The company also sells fitness accessories, such as bags, yoga mats, and equipment. Lululemon sells its products through more than 570 company-owned stores in 17 countries, e-commerce, outlets, and wholesale accounts. The company was founded in 1998 and is based in Vancouver, Canada.

(Source: MorningStar)

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

Tags US Market

Shares Small Cap

Ventia has built trust to deliver highly sensitive and complex projects across its sectors

Post author By lvc-admin
Post date June 23, 2022
No Comments on Ventia has built trust to deliver highly sensitive and complex projects across its sectors

Business Strategy & Outlook

Ventia is a leading infrastructure maintenance services provider in Australia and New Zealand. Through developing strategic relationships and a focus on safety, Ventia has built trust to deliver highly sensitive and complex projects across its sectors. Revenue has a visible stability with 70%-80% of Ventia’s next 12 months of revenue historically supported by work in hand. Work in hand as at July 2021 stood at AUD 15.5 billion. Approximately 85% of revenue comes from Australia with over 13,000 employees at around 350 sites. The 15% balance comes from New Zealand where over 2,000 workers are employed at approximately 50 sites. Ventia also relies upon an additional workforce of around 20,000 subcontractors. With access to such a large workforce, Ventia can leverage a deep pool of talent across Australia and New Zealand. And the subcontractor base allows for flexible staffing, enabling Ventia to scale the workforce up and down on short notice, and provides wide geographical coverage. This plays into Ventia’s capital-light business model with capital expenditure typically less than 1% of total revenue.

Ventia is structured across four sectors including defense & social infrastructure; infrastructure services; telecommunications; and transport. Its capabilities span the full asset lifecycle including operations and maintenance, facilities management, minor capital works, environmental services, and other solutions. In Australia, Ventia services 50% of the private motorways and tunnels, and over 70% of defence sites. In New Zealand, it provides services to over 90% of the electricity transmission network. Ventia is also the number one telecommunications infrastructure services provider in both Australia and New Zealand. Ventia has long-term relationships with a diverse range of public and private sector clients. In 2020, it did work for more than 60 public sector clients at federal, state, and local levels, and 65 private sector clients ranging from medium-size domestic organizations to large national and global corporates.

Financial Strengths

With net debt excluding lease liabilities of AUD 563 million at December 2021, Ventia is in reasonable financial health. Net debt/(net debt plus equity) is high at 59%, but this skewed by Ventia’s capital-light operating model which limits assets on balance sheet. Debt is comfortably serviced with EBIT/interest expense in fiscal 2021 of 7.0 times. The net debt/EBITDA of around 1.6 in 2021, falling to sub-1.0 levels by 2023, all else equal. Ventia boasts robust operating and free cash flows. On a pro forma basis before interest and tax, three-year average operating cash flow to 2020 was AUD 195 million and three-year average free cash flow was AUD 150 million. As per forecast solid free cash flows in the foreseeable future, growing to over AUD 200 million by 2025, which should comfortably support Ventia’s targeted dividend payout ratio of between 60% and 80% of underlying NPATA.

Bulls Say

The maintenance services market is expected to grow strongly, supported by the fair winds of population growth, rising outsourcing rates, and increasingly stringent environmental regulation.

Ventia has long-term relationships with a diverse range of public and private sector clients and has maintained many client relationships for decades across its sectors.

Ventia’s client contracts are relatively long in duration with the average contract term at inception over five years. Most contain some form of embedded price escalation.

Company Description

While Ventia is not the largest player with an estimated 7.5% share of addressable markets, it is a leading infrastructure maintenance services provider in Australia and New Zealand. Its capabilities span the full asset lifecycle including operations and maintenance, facilities management, minor capital works, environmental services, and other solutions. And its business model is favorably capital-light via flexing of a large contractor base complementing a deep pool of talented employees. Ventia has long-term relationships with a diverse range of public and private sector clients with many client relationships maintained for decades. Contracts are favorably long with an average five-year duration at inception and most containing some form of embedded price escalation.

(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.

Tags Recommendations, Small Caps

Global stocks

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique

Post author By lvc-admin
Post date June 23, 2022
No Comments on The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique

Stock market information

Business Strategy & Outlook

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, the top-line growth for Fresenius to be toward the top of that range after a very weak 2021 and even higher earnings growth compounded annually during the next five years, as the firm wrings out more efficiencies and repurchases shares.

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius’ experience operating over 4,100 dialysis clinics around the globe (about 1,000 more than the next-largest player, DaVita) gives it insights into caregiver and patient needs to inform service offerings and product innovation. Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius’ technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only 9% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius’ top product customers. With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It recently purchased NxStage Medical for home hemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.

Financial Strengths

Fresenius maintains a manageable balance sheet, despite its high lease-related obligations and capital-allocation strategy that includes acquisitions and significant returns to stakeholders. The company receives investment-grade ratings from the three major U.S. rating agencies, which should help it access the debt markets for any necessary refinancing. As of September 2021, Fresenius owed EUR 9 billion in debt and had lease obligations around EUR 5 billion. On a net debt/EBITDA basis, leverage stood at roughly 3 times, which appears manageable and in line with the firm’s previous long-term goal of 2.5-3.0 times, which excluded lease obligations. After generating over EUR 3 billion of free cash flow in 2020 including government aid, free cash flow looks likely to decline to about EUR 1.5 billion before rising to about EUR 2.0 billion by 2026. No one can believe the firm will face any significant refinancing risks during the next five years even as it continues to push cash out to stakeholders and pursue acquisitions. While acquisitions remain difficult to predict, the company pays a dividend to shareholders (EUR 0.4 billion in 2020) and makes distributions to noncontrolling interests (EUR 0.4 billion in 2020). It also repurchased EUR 0.4 billion in shares in 2020, and the more repurchases going forward. With those expected outflows to stakeholders and significant debt maturities coming due in the foreseeable future, Fresenius may be an active debt issuer going forward.

Bulls Say

Diversified by geography and business mix, Fresenius should be able to benefit from ongoing growth in treating ESRD patients worldwide once the pandemic recedes.

Increasing at-home treatment rates could raise demand for the company’s at-home systems and boost how long patients can continue to work and stay on commercial insurance plans, which can positively affect the company’s profitability.

Through its venture capital arm, Fresenius is investing in new ways to treat ESRD patients, aside from more traditional dialysis tools, which should help keep it at the forefront of this market.

Company Description

Fresenius Medical Care is the largest dialysis company in the world, treating about 345,000 patients from over 4,100 clinics across the globe as of September 2021. In addition to providing dialysis services, the firm is a leading supplier of dialysis products, including machines, dialyzers, and concentrates. Fresenius accounts for about 35% of the global dialysis products market and benefits from being the world’s only fully integrated dialysis business. Services account for roughly 80% of firmwide revenue, including care coordination and ancillary operations, while products account for the other roughly 20%. Products typically enjoy a higher margin, making them a strong contributor to the bottom line.

(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.

Tags European Market

Technology Stocks

Cellnex to finance future acquisitions with a combination of rights issues and new debt, as it has done in the past

Post author By lvc-admin
Post date June 23, 2022
No Comments on Cellnex to finance future acquisitions with a combination of rights issues and new debt, as it has done in the past

Business Strategy & Outlook

Cellnex is the only pure independent tower firm of large scale in Europe (Inwit and Vantage are not independent, as they are controlled by mobile network operators). Cellnex’s strategy is to acquire European wireless tower portfolios from MNOs and then lease the towers back to those MNOs while adding other tenants to take advantage of the towers’ operating leverage. MNOs find value in Cellnex’s proposition as they can monetize towers at good valuations and use the proceeds to reduce debt. Transactions are structured as sale and leasebacks and provide Cellnex with long-term revenue and cash flow visibility underpinned by its contracts (10- to 25-year durations), which include annual rent escalators often tied to inflation.

When Cellnex acquires a tower portfolio, the MNO signs a long-term contract with Cellnex and becomes an “anchor tenant” on the towers. Contracts, known as master service agreements, allow Cellnex to move anchor tenants between towers, which lets it realize efficiencies (decommission redundant towers, build new towers with two tenants instead of one, or avoid unnecessary land lease costs) and improve returns on invested capital. Cellnex’s strategic priority is to own at least two tower portfolios in each of the markets where it operates, as having several portfolios allows for more efficiencies. The company owns at least two portfolios in each of France, Spain, Italy, Portugal, Switzerland, Poland, and the United Kingdom. The Cellnex will keep acquiring towers in Europe, with a focus in Germany, Scandinavia, or Austria, regions where it currently owns none or only one tower portfolio. Cellnex has reached a scale of almost 100,000 towers since its inception in 2015 by acquiring towers from operators like Telefonica, Iliad, Bouygues, Altice, and CK Hutchison, among others. Deals are usually structured as asset deals, so they typically come with fewer integration burdens, which is positive for an acquisitive company like Cellnex. The Cellnex to finance future acquisitions with a combination of rights issues and new debt, as it has done in the past.

Financial Strengths

As of December 2021, Cellnex had EUR 11.7 billion in net debt excluding leases, which implies a net debt/EBITDA (after leases) ratio of around 5.5 times at the end of 2022. Although this ratio may seem elevated, it is reasonable, as tower companies can manage high leverage due to long-term contractual revenue and high cash flow visibility linked to inflation. Cellnex’s leverage is also in line with other peers in the sector, such as American Tower and Inwit. As the European tower industry consolidates and fewer M&A opportunities are available, we expect the firm to steadily reduce leverage. Of Cellnex’s debt, 80% is fixed-rate, providing protection against interest-rate increases. Cellnex’s debt is nonrecourse, which means the debt is associated with the assets but not to the company (the issuer can seize the collateral—towers—but cannot go after the firm for additional compensation).

Bulls Say

Cellnex provides high cash flow visibility to investors, with inflation protection and growth optionality coming from new tenants. It is also protected against COVID-19 headwinds as critical infrastructure is still needed in lockdown times.

Cellnex has the opportunity for more M&A deals. Tower portfolios in Germany, Scandinavia, or Austria could be acquired, which could enhance operating leverage and drive better returns on capital.

Cellnex is well hedged against inflation risk and interest-rate increases through its inflation-linked contracts and fixed-rate debt.

Company Description

Cellnex owns and operates almost 100,000 wireless towers in Europe, resulting from continued M&A activity since its IPO in 2015. It has acquired towers from several European mobile network operator, including Telefonica, Iliad, CK Hutchison, Bouygues, and Altice. Cellnex is present in more than 10 European countries as of December 2021, including France, Italy, Spain, Poland, the U.K., Switzerland, and Portugal. Cellnex’s strategy is to acquire portfolios from MNOs and lease the towers back to them through long-term contracts, which provide high cash flow visibility and inflation protection.

(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.

Tags Top Stocks

Technology Stocks

SAP has further entrenched itself in X data with its acquisition of Qualtrics

Post author By lvc-admin
Post date June 22, 2022
No Comments on SAP has further entrenched itself in X data with its acquisition of Qualtrics

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Business Strategy and Outlook

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP Central Component software such that by 2030 all of its ERP customers will need to shift to a cloud solution. This vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP’s transition of on-premises users to the cloud, which leads to believe its negative trend could be prolonged. ERP is not SAP’s only offering. The company offers software in its so-called intelligent spending category, which includes Ariba and Concur, which cater to procurement and travel and expense reporting. While ERP and intelligent spending software caters to operational data–otherwise known as O data–SAP also provides solutions around X data, or experience data. SAP has further entrenched itself in X data with its acquisition of Qualtrics experience management software. But, regardless of which type of data is flowing through SAP software, this data can be stored in SAP’s database offering, HANA, which is the only database compatible with SAP’s cloud ERP, S/4HANA (unlike on-premises ERP’s former database interoperability).

Despite SAP’s efforts to nurture high attach rates among offerings amid the vulnerable transition to the cloud, such as via database lock-in, this is only ruffling more feathers among its customers that have adapted to the new norm of mix-and-match technology, which the cloud has enabled. Such lock-in attempts are influential in SAP’s consistently declining net promoter score. Moreover, SAP’s efforts to add to its ecosystem in the hopes of more effortless user experience have proved to be anything but accretive, as its acquisition of Qualtrics has shown. SAP announced plans to spin off the company only two years after it was acquired.

Financial Strength

AP has been acquisitive over the last decade as it has built out its ERP offerings. Despite this, SAP has maintained healthy leverage ratios and continues to do so with 2019 net debt/EBITDA close to 2. This figure includes the EUR 7 billion of debt SAP issued in December 2018 to finance the Qualtrics acquisition, leaving it with outstanding long-term debt of roughly EUR 14 billion and EUR 7 billion in cash and marketable securities at the end of the fiscal 2020 third quarter. The Qualtrics acquisition has stretched SAP’s leverage ratio slightly beyond its normal levels over the last decade and may limit the company’s ability to make transformative acquisitions in the near future. It can be foreseen SAP is still having the ability to make tuck-in acquisitions, and with free cash flow of at least EUR 3 billion expected in 2020 and 2021, but SAP is not having any troubles covering its financial obligations.

Bulls Say’s

SAP should be able to migrate the majority of its on-premises ERP customers to S/4HANA while continuing to add hefty net new customers to the platform.

As more customers transition to the cloud, SAP should be able to extract significant more lifetime value per customer, adding to its top line.

SAP should see significant margin expansion as a result of improving scale in its cloud offerings.

Company Profile

Founded in 1972 by former IBM employees, SAP provides database technology and enterprise resource planning software to enterprises around the world. Across more than 180 countries, the company serves 440,000 customers, approximately 80% of which are small to medium-size enterprises.

(Source: MorningStar)

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

Tags Recommendations