Category: Sectors

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Dividend Stocks

CME Stands to Benefit From Rising Interest Rates as Volatility Returns to Its Markets

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Business Strategy & Outlook

CME has suffered from little to no revenue growth more recently as all its futures complexes reported lower trading volume in 2021 than in 2019, with the notable exception being its equity futures platform, which remains well above prepandemic levels. The most significant headwind for the company has been the impact that low short-term interest rates has had on its interest rate complex, which is its largest source of revenue. When interest rates are expected to stay low there is less need for interest rate hedging and less incentive for speculation, creating a drag on CME’s trading volume. With interest rates now rising, though, this drag has been removed and the company’s results have improved so far in 2022. After a couple years of meager revenue growth, CME enjoying more favorable market conditions in the near term. 

CME has benefited in the past from increased retail interest in equity markets. Equity markets saw a surge in trading volume in 2020, with equity derivative products seeing a larger and more maintained increase. CME’s equity index futures business produced impressive performance as a result. The expected revenue from CME’s equity derivatives to partially normalize over time as retail interest in equity markets fades. That said, the rise of $0 commissions, changes in investor behavior, and the availability of futures on retail brokerage platforms will provide a permanent tailwind to CME’s equity business, so one cannot foresee a full retracement. Additionally, as global commodity markets remain volatile, CME’s energy and agricultural futures to see continued interest. Beyond 2022, CME should see steadier growth in revenue and earnings. CME has a dominant position in many of the contracts that trade in its exchange and is well diversified across multiple product lines. In the long term, the anticipate that the company will continue to benefit from secular growth in the need to hedge commodity, energy, and interest rate exposure. CME also has a history of generating incremental growth through the introduction of new futures contracts, like the micro-E-mini S&P 500 contract and bitcoin futures.

Financial Strengths 

CME Group has a strong balance sheet that would serve as a buffer if a market disruption occurs The balance sheet also provides the company with the flexibility needed to invest more capital into organic investments or acquisitions if it chooses to do so. At the end of 2021, the company had equity of $27 billion against $3.4 billion in debt. The company’s balance sheet is managed conservatively, with a targeted EBITDA to debt ratio of 1 time and a firm goal to keep $700 million in cash on hand at any given time. CME is well above this goal, with more than 2.8 billion on hand at the end of 2021, giving it a rock-solid balance sheet. As a clearinghouse, CME is obligated to cover the losses of its clearinghouse members in the event of a default. However, CME’s share of potential losses as a clearinghouse is capped at $250 million and the company’s balance sheet has more than sufficient liquidity to cover the potential credit risk that comes from the firm’s clearinghouse activities. In recent years, CME has returned most of its operating cash flow in the form of dividend payments. The company does this through a combination of a regular quarterly dividend and a special discretionary distribution it typically makes once per year. The company to maintain its regular dividend for the foreseeable future but note that the size of the special dividend can fluctuate from year to year based on the company’s result for the year and what cash it has on hand. Should the company make another major acquisition, like the purchase of NEX, the discretionary portion of CME’s dividend to shrink or be eliminated outright.

Bulls Say

  • CME has assembled a diverse set of derivative products in interest rates, equities, commodities, metals, and foreign currency. Weakness in one product is often offset by strength in another. 
  • CME has been able drive trading volume growth by successfully introducing new futures contracts, like the micro-E-mini-S&P 500 and Bitcoin futures. 
  • CME stands to be a beneficiary of rising rates as increased volatility drives more trading volume in its interest rate futures contracts.

Company Description

Based in Chicago, CME Group operates exchanges giving investors, suppliers, and businesses the ability to trade futures and derivatives based on interest rates, equity indexes, foreign currencies, energy, metals, and commodities. The CME was founded in 1898 and in 2002 completed its initial public offering. Since then, CME Group has consolidated parts of the industry by merging with crosstown rival, CBOT Holdings in 2007 before acquiring Nymex Holdings in 2008 and NEX in 2018. In addition, the company has a 27% stake in S&P/Dow Jones Indices LLC, making the Chicago Mercantile Exchange the exclusive venue to trade and clear S&P futures contracts. Through CME’s acquisition of NEX in 2018 it has also expanded into cash foreign exchange, fixed income trading, and collateral optimization.

(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
Global stocks Shares

Hannover, a Rare Moat in Reinsurance

Business Strategy & Outlook

Hannover Re is a property and casualty, and life and health reinsurer with property and casualty contributing a little over two thirds of the business’ profits to shareholders. Hannover Re has a slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving the deep expertise in niche areas. While this may sound a bit woolly, is that some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. To conceptualize this through lenses of decision-making and responsibility. Whereas in other reinsurance firms, underwriters may need to defer back to a head of risk or perhaps even the c-suit, underwriters at Hannover Re have the authority, experience, and expertise to make and take those decisions more directly. With more of these decisions being made closer to the front line this leads to better standards of underwriting. Furthermore, as per anticipate this leads to stronger client relationships. Because underwriters are client-facing and thus renewals a reiterative negotiation, with Hannover Re’s underwriters in the position to directly negotiate and discuss client needs without the need for constant deferral, clients feel and are more connected to Hannover Re and this drives stronger retention rates. As stronger retention drives lower commission and acquisition costs. 

In addition to the culture of excellence in underwriting with a proven reputation for expertise in specialist lines, Hannover Re benefits from an expense advantage and these two benefits are aligned. For example, with deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies. As the business has the institutional capacity to absorb this internally with regard to its frontline, coupled with the lower levels of internal referrals outlined, Hannover Re supports more premium per employee than other comparable. The outcome of this is tangible with the business benefiting from at least a 100-basis-point expense ratio advantage.

Financial Strengths 

The Hannover Re has a relatively decent balance sheet. Leverage is quite low with debt standing at around EUR 3.4 billion. That stands in contrast to equity owned by shareholders of EUR 10.9 billion. Admittedly, of that EUR 2.3 billion is attributable to gains on securities classified as available for sale. One has already touched on where Hannover’s balance sheet is weakest with the largest part of Hannover’s market risk attributable to default and spread risk. As dig a bit deeper, one can see that this relates to Hannover’s allocation to credit. Of the EUR 14.2 billion held in corporate bonds, EUR 7.8 billion is held around investment-grade. The shape of the government and semi-government bond portfolios is much more appealing. Hannover has also substantially increased its allocation to equities. Goodwill is however nice and low. Overall, this is a balance sheet that has room for quite a bit of improvement. First and foremost, the allocation to equities very opportunistic. This does not fit in with the typical corporate culture at Hannover Re. The quality of the credit portfolio is also a little light. But in the main this is a business that is not highly leveraged and is very financially disciplined.

Bulls Say

  • Hannover Re has a strong culture of expertise and experience in specialist underwriting. 
  • Hannover Re is a cost leader with one of the lowest proportional amounts spent on administrative expenses. 
  • Hannover Re focuses on organic growth rather than acquisitions. This not only comes through in its lean structure and lower expenses, but also in its approach to capital management and returning capital to shareholders.

Company Description

Hannover Re is a German-based reinsurance company with a strong reputation in writing specialist lines of reinsurance and also a low-cost operating model. The business and its management team are highly disciplined, rarely ever making an acquisition and favoring a strategy of specials over a commitment to a buyback when looking to return excess capital to shareholders. The business to be innovative in finding alternative and unearthed profit sources.

(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
Small Cap

As Shares Fall Amid Fiscal Fourth-Quarter Struggles, Canopy Pushes back EBITDA Profitability to 2024

Business Strategy & Outlook:
Canopy Growth grows and sells cannabis products primarily in Canada, which accounts for roughly 50% of sales. Non-THC product sales account for about 30%. Canadian recreational accounts for roughly 60% of cannabis sales. Although the medical market to shrink as consumers turn to the recreational market, it is forecasted more than 10% average annual growth for the entire Canadian market through 2030, driven by the conversion of black-market consumers into the legal market and new cannabis consumers. Canopy also exports medical cannabis globally. The global market looks lucrative, given higher prices and growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Canopy. Partially offsetting the global markets’ potential for Canadian producers are threats of future production from countries with cheaper labor— the single largest cost. However, many Canadian companies have pulled back expansion plans given ongoing cash burn. It is forecasted around 15% average annual growth through 2030.

Canopy has a standing deal to acquire Acreage Holdings, a U.S. multistate operator, immediately upon federal legalization. Canopy might paid a good price and acquired an attractive option for an accelerated entry into the U.S. Canopy also owns 27% of U.S. multistate operator Terrascend on a fully diluted basis. These U.S. assets look far more attractive than the continued challenges in the Canadian market. The U.S. market is murky, with some states legalizing recreational or medical cannabis while it remains illegal federally. The federal law shall be changed to recognize states’ choices on legality within their borders, which would trigger Canopy’s deals. Constellation Brands owns 38.6% of Canopy with additional securities that could push ownership to 55.8%. The investment is viewed as supportive of developing branded cannabis consumer products while also providing a funding backstop and foothold into the U.S. non-THC market.

Financial Strengths:
On one hand, Canopy Growth’s debt remains relatively low. At the end of the fourth quarter of fiscal 2022, the company had about CAD 1.5 billion of debt compared with a market capitalization of roughly CAD 2.5 billion. On the other hand, the company continues to burn cash, which pressures its financial health. However, management has been focused on reducing capital spending and rightsizing its overhead, minimizing the need for further outside capital. The company shall generate positive adjusted EBITDA in fiscal 2025 and positive free cash flow in fiscal 2026. The company’s target of positive adjusted EBITDA in fiscal 2024 looks possible in the latter half of the year, but the anticipated losses for the sum of the year. In the latter years of the 10-year forecast, the company will generate enough positive free cash flow to reduce its debt. Benefiting its financial health, Canopy has generally relied on equity to fund acquisitions and expansion. The company’s first major debt raise occurred as recently as its first quarter of fiscal 2019. The company will continue to rely on equity to fund capital needs, which is typical for growth companies such as Canopy to help alleviate potential pressure on its financial health. Constellation Brands as a major strategic investor also adds a stabilizing presence to Canopy’s financial health.

Bulls Say:
Canopy Growth’s deal to acquire Acreage Holdings immediately upon U.S. federal legalization provides exposure to the largest potential cannabis market in the world.
Canopy Growth’s ownership of 27% of Terrascend gives it further optionality for the U.S. THC market.
The investment by Constellation Brands and partnerships with Martha Stewart and Snoop Dogg provide potential expansion opportunities into infused products and topicals. If successful, Constellation Brands may increase its ownership or try to acquire Canopy.

Company Description:
Canopy Growth, headquartered in Smiths Falls, Canada, cultivates and sells medicinal and recreational cannabis, and hemp, through a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow. Although it primarily operates in Canada, Canopy has distribution and production licenses in more than a dozen countries to drive expansion in global medical cannabis and also holds an option to acquire Acreage Holdings upon U.S. federal cannabis legalization.

(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

The Special Cash Dividend Won’t Have Material Negative Impact on JD’s Financial Position

Business Strategy & Outlook:   

JD.com has emerged as a leading disruptive force in China’s retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share has increased from 21% in 2016 to 27% in 2020 on our estimate. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model. JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. JD is the largest retailer in China by revenue. Among listed Chinese peers, JD’s net product revenue in 2020 was two to three times higher than for Suning, the second-largest listed retailer. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. The increase in mix from higher-margin third-party platform business and efficiency of scale will also help lift margins. 

In the medium term, company expects to see the investment into community group purchase and JD logistics, and the higher mix of lower-margin supermarket category will hold back some of the margin gains. Starting in April 2017, the logistics business became an independent business unit that opens its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply chain management, integrated warehouse, and delivery services to penetrate into less developed areas. As the logistics business gains scale and reaches higher capacity utilization, the company expects to see gross profit margin improvement. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.

Financial Strengths:  

JD has low balance sheet risk as it had a net cash position of CNY 172 billion as of Dec. 31, 2021. JD.com had a net cash position of CNY 135 billion at the end of 2020. It continued to generate positive free cash flow to the firm, at CNY 8.1 billion from 2017 to 2020, but became negative CNY 38 billion in 2021 primarily due to a higher-than-previous increase in short-term investments of CNY 106 billion and increase in new business investment (new business operating loss widened by CNY 6 billion year on year). JD has not paid recurring dividends and will pay a special dividend of USD 2 billion in June 2022. The company thinks the special cash dividend will not have material negative impact on JD’s financial position. JD.com has invested heavily in fulfilment infrastructure, technology, and new businesses such as community group purchasing in recent years, leading to concerns about its free cash flow profile and margin improvement story. Company thinks management will place more emphasis on growing revenue per user, expansion into lower-tier cities and the businesses’ profitability amid weak macroeconomics and repeated COVID-19 resurgence. Therefore, JD would not invest in new areas as aggressively as before, so it is expected that JD will be able to maintain positive non-GAAP net margin versus being unprofitable before. Its financial strength should improve in future. Most of the initial investments in the third-party logistics business have been carried out, and utilization of the warehouses has picked up. Its technology team is already in place, without the need to add substantial headcount. JD is stringent in evaluating the level of investment versus the return of the investment in the group-buying business and new retail, given a consistently profitable business model has not been established in the market. JD has already retreated from many regions for the community group purchase business due to unsatisfying unit economics.

Bulls Say: 

  • JD.com’s nationwide distribution network and fulfilment capacity will be extremely difficult for competitors to replicate.
  •  As its first-party business gains scale, cost advantage will lead to lower sourcing costs and higher margin. 
  • JD is now the largest supermarket in China, the high frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.

Company Description:  

JD.com is China’s second-largest e-commerce company after Alibaba in terms of gross merchandise volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses.

(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
Global stocks

New CEO Will Take the Helm for Allegion in July 2022

Business Strategy & Outlook:   

Allegion, a global leader in security products and solutions, was spun off from Ingersoll-Rand in December 2013. No longer forced to compete for capital from a conglomerate parent, Allegion is now able to employ a more robust acquisition strategy to expand its scale, technological capabilities, and product portfolio. At over 70% of sales and 80% of segment profitability, Allegion’s Americas segment is the firm’s largest and strongest business, with a leading position in locks, exit devices, and door controls. The Americas business has been the key driver of Allegion’s stable, industry-leading profitability, which is a testament to the firm’s market position and pricing power. We expect the Americas business to post mid-to-high single-digit organic growth after the coronavirus-fueled downturn in 2020-21 as the segment capitalizes on increased retrofit and upgrade spending across commercial and residential end markets that is drive by the convergence of electronics and mechanical security solutions, elevated U.S. residential construction, and strategic acquisitions. The segment’s already strong profit margins should benefit from a mix-shift to higher-priced electronics products and operating leverage on increased volumes, partially offset by structurally lower profit margins from the acquired access technologies business.

 We believe that the company’s international businesses are subscale, which factors into the segment’s weak margin performance relative to Allegion’s strong Americas segment; however, the company is working diligently to keep strengthening these businesses through restructuring, channel development, and strategic acquisitions that build scale and expand the company product portfolio. These initiatives appear to be working as the international segment reported record profitability in fiscal 2021 (11% adjusted operating margin). We expect international segment profitability will continue to improve as these initiatives take hold. Like the Americas segment, this segment should also benefit from the convergence of electronic and mechanical security technology

Financial Strengths:  

As part of the spinoff transaction in 2013, Allegion paid a $1.3 billion one-time dividend to Ingersoll-Rand. Allegion issued a commensurate amount of debt in 2013 to fund the dividend to its former parent. Since then, Allegion’s gross debt/EBITDA leverage ratio has improved to approximately 2.0 currently (based on our estimate of 2022 adjusted EBITDA). Management continues to target an investment-grade rating on its debt going forward. Allegion has approximately $1.4 billion of outstanding debt, which consists of approximately $250 million outstanding on the company’s term facility, $400 million of 3.2% senior notes due in 2024, $400 million of 3.55% senior notes due in 2027, and $400 million of 3.5% senior notes due in 2029. In 2021, Allegion incurred about $50 million of net interest expense and generated approximately $618 million of adjusted EBITDA, which equates to a comfortable EBITDA coverage ratio of about 12 times. We think Allegion’s use of leverage is reasonable, and the company’s free cash flow generation should comfortably support its debt service requirements and future capital allocation decisions. Given the firm’s reasonable use of leverage and consistent free cash flow generation, we believe Allegion’s financial health is satisfactory.

Bulls Say: 

  • Allegion’s strong market position and pricing power in North America should continue to support the firm’s stable, industry-leading profitability. 
  • The convergence of electronic and mechanical security products and increased infrastructure spending should drive sales growth and margin expansion opportunities. 
  • Allegion generates strong free cash flow and is a balanced capital allocator. The company can continue to use its free cash flow to increase its dividend, repurchase shares, and make value-accretive acquisitions and invest in lead-edge technology ventures.

Company Description:  

Allegion is a global security products company with a portfolio of leading brands, such as Schlage, von Duprin, and LCN. The Ireland-domiciled company was created via a spinoff transaction from Ingersoll-Rand in December 2013. In fiscal 2021, Allegion generated 68% of sales in the United States. The company mainly competes with Swedish-based Assa Abloy AB and Switzerland-based Dormakaba.

(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
Global stocks

Opportunities from Solid Brand Demand Supports Mid-Single-Digit Sales Growth at Constellation Brand

Business Strategy & Outlook:   

While Constellation Brands historically made its bones as a winery and distillery, we now view the firm as one of the most stellar brewers across our global coverage. After parlaying AB InBev’s antitrust quandary (allowing it to acquire Mexican brewer Grupo Modelo) into exclusive U.S. ownership rights to brands like Corona and Modelo, we see the firm’s overall Mexican beer portfolio as auspiciously situated at the confluence of unwavering secular and demographic trends. With an enviable growth profile and best of breed margins, we have confidence that the beer business can thrive even amid an evolving industry landscape. The increase in political, social, and cultural clout of the Hispanic population in the U.S. is widely expected to continue, which augurs well for Constellation’s intangible assets. The firm is not resting on its laurels, however, as it continues to expand its addressable market by widening the gamut of categories in which it competes. One of the primary avenues through which it is seeking to do this is innovation, with line extensions like Corona Refresca being a quintessential illustration. Management is looking for 25% of its growth outlook to be driven by innovation, a mark we think is achievable given the broad resonance of its trademarks. Another avenue is through acquisition, currently embodied by its controlling stake in Canopy Growth. Even as the outlook for cannabis in the U.S. remains uncertain, we remain sanguine on the optionality that this investment affords. 

The firm’s wine and spirits business should offer some stability, after the divestiture of lower-quality brands, allowing Constellation to place more intentionality behind its “high growth, high margin” long-term strategy. However, in our opinion, the remaining brands (such as Meiomi, Kim Crawford, Svedka vodka, and High West craft whiskey) will still face rife competition. Constellation’s foray into explosive-growth categories like hard seltzer have demanded nontrivial investment, given the competitive intensity and brand equity already built up by the incumbents. Nevertheless, we believe the experience of the management team will allow the firm to navigate these risks.

Financial Strengths:  

Constellation Brands’ financial health looks sound to us, and is markedly improved from the precarious positions of the past. Management’s internally calculated leverage ratio (based on adjusted EBITDA) rose to 5 times in order to fund its 2013 acquisition of the perpetual rights to the Mexican beer portfolio, and after steadily reducing it over the next four years, leverage rose again to over 4 times in order to fund the second-round Canopy investment. Nevertheless, we see levels declining to 3.4 by the end of fiscal 2022, thanks to the firm’s robust cash flow, and the prior redemption notes with near-term maturities. Constellation has spun off healthy free cash flow in the low-20s as a proportion of sales on average over the past three years. This is quite the feat when juxtaposed with its hefty capital outlays to solidify and expand its production capacity in Mexico. Capital expenditures have averaged roughly 11% since it purchased the Mexican beer business, versus the 5%-7% that is typical across our brewing coverage. We expect a couple more years of elevation as management makes capital investment to make up for its failed Mexicali expansion, after which normalization (combined with improving margins and working capital management) should support free cash flow for reinvestment and cash returns to shareholders. Given the Canopy investment, management has indicated it plans to avoid transformative acquisitions, but with leverage now at more comfortable levels, we expect cash flow will primarily be deployed toward capacity, share buybacks, and its dividend (instituted in fiscal 2016). There is ample liquidity to fund its operations; in addition to its cash flow and over $200 million in cash as of February 2022, it has access to a $2 billion revolving credit facility.

Bulls Say: 

  • Constellation Brands essentially monopolizes the U. S. market for Mexican beer imports, which augurs well for its positioning given the country’s large Hispanic population. 
  • The ability to parlay the Corona trademarks into different categories is a testament to the broad resonance of the brand and is evidenced by robust initial consumer takeaway of Corona Hard Seltzer. 
  • As we get more clarity regarding what the contours of cannabis legalization will look like in the U.S., the Canopy investment could yield significant upside.

Company Description:  

Constellation Brands is the largest multi-category alcohol supplier in the U.S. The business is anchored by a portfolio of Mexican beer trademarks, including Corona and Modelo, for which it acquired exclusive and perpetual U.S. ownership from AB InBev. The latter had to divest these rights due to antitrust mandates as it consummated its 2013 acquisition of dominant Mexican brewer, Grupo Modelo. Constellation’s wine/spirits business has recently transitioned, divesting several lower-margin assets, including myriad wine brands and its Ballast Point craft beer brand. The firm imports most products after manufacturing them abroad, going to market through independent wholesalers. It owns 36% of Canopy Growth, a leading provider of medicinal and recreational cannabis products

(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

TLC is targeting payout ratio of 70-90% of NPAT excluding significant items and dividends are expected to be fully franked

Investment Thesis:

  • Trading below blended valuation.  
  • Strong market position – one of the largest retail distribution operations in Australia (over 7,000 points of distribution).
  • Exclusive and long-dated lottery licenses. 
  • Growth in digital channels to drive earnings and margin expansion – given digital enjoys economies of scale and does not pay commissions on sales.   
  • Defensive, high-quality earnings with low capital investments (high free cash flow) and resilience during economic downturns – infrastructure like qualities. 
  • Looking to acquire new licenses (e.g., Western Australia) and expansion overseas. 

Key Risks:

  • Increased competition from new operators leading to competitive bidding on new or renewals of existing licenses.
  • Covid-19 related impact should the virus and any associated lockdowns re-emerge (particularly for Keno).
  • Deterioration of the Australian economy will likely see discretionary spend impacted.
  • Loss of exclusivity (additional operators are given licenses) or key licenses.
  • Changes in the regulatory environment. 

Key Highlights:

  • The segment’s products range from instant scratch products to lifechanging prizes offered by Powerball. The Company operates under different brands in different states and offers 10 games – 7 core base games and 3 jackpotting games. 
  • The lottery industry is regulated at the individual state level and hence games are state specific.
  • TLC does operate national games – such as Powerball, Monday & Wednesday Lotto, Saturday Lotto, Oz Lotto and Set for Life – which are collectively operated under a contractual relationship between lottery operators.
  •  TLC operates Keno across most states in Australia – NSW, VIC, QLD, SA and ACT – and is provided to licensed venues such as hotels, clubs, casinos, TABs and online. Licenses in Tasmania, Western Australia and the Northern Territory are held by other operators however they utilise TLC’s Keno systems.
  • Upside from digital and strong portfolio of games to deliver solid medium to long-term growth.
  • Management expects top line growth for the business to be high single digit over the medium term (has been higher as well in recent periods), with upside coming from Oz Lotto game change and looking for a higher share of consumer gambling wallet.
  • International acquisition is on the cards but there aren’t too many options which suit management criteria – they want long tenure (license terms) and control (core competency of management is developing good games to be deployed over a period)
  • TLC is targeting payout ratio of 70-90% of NPAT excluding significant items and dividends are expected to be fully franked given earnings are all generated from Australia

Company Description:

The Lottery Corp (TLC) is Australia’s leading lottery operator with a portfolio of long dated, exclusive lottery licenses.  The Lottery Business (TLC) operates two segments: (1) Lotteries – holds exclusive, long-dated licenses to operate in all states of Australia except Western Australia and has a distribution network of over 3,800 outlets. (2) Keno – provides Keno products to venues in NSW, QLD, VIC, SA and the ACT. Keno is available in over 3,400 venues. As of Feb-22, the Company had 742 employees. 

(Source: Banyantree)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Global stocks

Thomson Reuter’s Focus on Streamlining Its Business Sets the Stage for Strong EBITDA Growth

Business Strategy & Outlook:   

For most of the 2010s, Thomson Reuters was a laggard relative to its information services peers, in our view. Since deciding to spin off its Refinitiv financial and risk operations to London-based LSE Group, we believe the firm has gained more focus. Some of its past offerings have been clunky, and we believe efforts to streamline its business should lead to meaningful margin expansion and higher retention in the years ahead. We view Thomson Reuters’ legal offerings as the firm’s crown jewel. The company’s Westlaw offering serves as an important research service for lawyers. Thomson Reuters’ main competitor in the space is RELX’s LexisNexis, but given the critical nature of the information being sought, many law firms subscribe to both services. 

The firm’s other two main businesses are its corporate and tax and accounting segments. We believe these three units will constitute the core of Thomson Reuters’ operations going forward, as the other two segments are news, which operates with razor-thin margins, and print, which is in runoff. The new Thomson Reuters is poised to operate as more of an operating company and less of a holding company, the merits of which we appreciate. The firm should be able to double down on industry-leading software like Westlaw in the legal segment and Checkpoint in tax and accounting, leveraging a customer base that includes the Big Four global accounting firms and virtually all the top 100 U.S. legal and accounting firms in some capacity. In our view, the stickiness of the firm’s products in legal and accounting (which overlap almost completely with corporate) should help Reuters navigate a piecemeal pivot to cloud software, or SaaS offerings, with minimal attrition

Financial Strengths:  

At the end of 2021, the company had a net debt/EBITDA ratio (the value of debt obligations outstanding less cash and equivalents divided by adjusted EBITDA) of 1.6 times, a substantial improvement from 2016, when debt stood at about 2.5 times EBITDA. Total debt outstanding was $3.7 billion with $0.8 billion in cash. The firm has no maturities until November 2023. We expect that over time, Thomson Reuters will reduce its stake in LSE Group and use its proceeds for activities that better align with the firm’s strategy. Thomson Reuters has the ability to sell to cover tax gains, but after that, it can begin to sell batches of LSE Group stock. We expect the firm to look for acquisition opportunities. Notably, its government business is a fast grower and the firm could enhance its government offerings with acquisitions. We believe the firm has ample capacity to pursue acquisitions.

Bulls Say: 

  • The pivot to a software-intensive model could lower customer acquisition costs, allowing the firm to drive growth through previously inaccessible small and midsize legal and tax firms. 
  • Increasing regulatory complexity and requirements for a library of previous years of regulations increase barriers to entry, reduce competition, and strengthen advantages in the legal and tax and accounting segments. 
  • A renewed focus and new management following the Refinitiv divestment could see margins improve, driving profitability.

Company Description:  

Thomson Reuters is the result of the $17.6 billion megamerger of Canada’s Thomson and the United Kingdom’s Reuters Group in 2008 and the 2018 carve-out of its finance and risk business, Refinitiv, in which it holds a 45% stake. In 2019, the company agreed to exchange its 45% stake in Refinitiv for a 15% stake in LSE, which closed in early 2021. Since the divestiture, the company is more concentrated on selling its flagship legal data and software, Westlaw, and its tax accounting software, Onesource. Reuters sees roughly 80% of revenue and 70% of expenses attributed to the United States, while the remainder (largely through the global print and Reuters News segments) is distributed across Latin America, Europe, the Middle East, Africa, and Asia-Pacific. 

(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
Shares Small Cap

The investment managers segment has performed well, and net inflows in the near term are anticipated

Business Strategy and Outlook

SEI Investments consists of four main segments: private banks, investment advisors, institutional investors, and investment managers. A minority interest in value equity manager LSV Asset Management generates about 20% of its pretax income. The firm’s investment advisors, institutional investors, and investment managers segments have been strong drivers of earnings and have strong operating margins, while private banks has been a thorn in SEI’s side, with disappointing revenue growth and operating margins. 

SEI’s private banks business primarily provides investment-processing outsourcing services for banks and trusts. Beginning in 2005, SEI began developing a new feature-rich platform known as Wealth Platform to replace its 30-year-old Trust 3000. It initially focused on the U.K. market then the U.S., mostly on converting Trust 3000 clients to Wealth Platform. SEI has faced some client losses but also some wins, such as Regions Financial and more recently Canadian Imperial Bank of Commerce’s U.S. business. It is projected for the company to have, low- to mid-single-digit revenue growth and the eventual retirement of SEI’s legacy platform to improve margins over the long term. In addition, as amortization of its platform rolls off, operating margins should improve faster than EBITDA margins. 

The investment advisors segment offers investment management services to registered investment advisors, financial planners, and life insurance agents. SEI has been able to offset lower-fee offerings, such as ETFs, with other products, such as tax-efficient portfolios, but fees have been range-bound. One positive for SEI is that the RIA and broker/dealer channels are generally the faster-growing advisor channels. The institutional investors segment provides outsourcing services for chief investment officers, and it is likely, it will continue to face strong competition. Though outflows due to pension risk transfers may slow, it is alleged pressure on the firm’s endowment client base. The investment managers segment has performed well, and net inflows in the near term are anticipated. LSV continues to be very profitable but has been bleeding assets due to underperformance and value investing falling out favor.

Financial Strength

SEI’s financial health is sound in analysts’ view. As of December 2021, SEI had minimal debt ($40 million on a revolver) and except during the financial crisis, it has had little to no debt over the past 10 years. In addition, SEI has over $800 million in cash. SEI has a long record of increasing its dividend each year, and share repurchases continue to boost EPS growth. SEI’s average diluted share count has decreased at a 3% CAGR from 2016 to 2021. During the financial crisis, SEI weathered the storm reasonably well except for losses from structured investment vehicles related to money market funds. Given the severity of the crisis and the lessons learned, a repeat of these losses is very unlikely, in experts’ opinion. Because of SEI’s historical focus on organic growth, it is likely for SEI to continue to increase its dividend and share repurchases concurrent with free cash flow generation.

Bulls Say’s

  • Margin expansion in SEI’s private banks segment is plausible and could significantly increase the firm’s earnings power. 
  • SEI’s investment advisors segment should benefit from the continued growth of fee-based advisors. 
  • SEI’s client relationships tend to be sticky and last many years because of contract terms and switching costs from process disruption.

Company Profile 

SEI Investments provides investment processing, management, and operations services to financial institutions, asset managers, asset owners, and financial advisors in four material segments: private banks, investment advisors, institutional investors, and investment managers. SEI also has a minority interest in LSV Asset Management, a value equity asset manager with about $99 billion in assets under management. As of Dec. 21, SEI (including LSV) manages, administers, or advises on over $1.3 trillion in assets. 

(Source: MorningStar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Dividend Stocks

PPG’s products usually on the lower end of the value chain

Business Strategy and Outlook

PPG Industries is a globally diversified producer of paints and coatings. The company is the world’s largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG’s products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on growing its coatings and specialty product offerings and expanding into emerging regions, as exemplified by the Comex acquisition. 

PPG is organized into two segments, performance coatings and industrial coatings. Performance coatings (60% of sales) supplies architectural, aerospace, and protective coatings that are generally sold after the manufacturing of the underlying good. Architectural coatings make up roughly half of the segment, with PPG’s products usually on the lower end of the value chain. Recently, PPG announced it has expanded its partnership with Home Depot. This expansion should increase the firm’s exposure to the architectural market in North America. The industrial coatings segment (40% of sales) supplies coatings used in auto, packaging, metals, and industrial equipment manufacturing. The company generates more than $15 billion in sales each year, growing at GDP-like rates. 

To supplement growth, the company has been a serial acquirer of relatively small bolt-on businesses. It typically looks for coatings technologies that it doesn’t currently have, with the intent to scale the production of that new offering across its facilities worldwide. The global coatings industry is highly fragmented, which should keep this strategy viable for the foreseeable future. That said, normally acquisition-dependent strategies due to the heightened risk of shareholder value destruction are disliked.

Financial Strength

It is held PPG has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. Given PPG’s acquisitive strategy, liquidity is an important metric to monitor. PPG has managed its leverage well, keeping net debt/EBITDA below 2.5 over the last 10 years. While management has no explicit long-term leverage targets, it is alleged the firm will maintain an investment-grade rating on its debt. PPG has roughly $6 billion of outstanding debt with staggered maturities through 2044. PPG has ample liquidity, with over $1 billion of cash on hand and no outstanding borrowings on a $2.2 billion credit facility. PPG has a history of strong free cash flow generation, and it is held, the firm will maintain its sound capital structure.

Bulls Say’s

  • The company operates in a diverse range of end markets, leading to stable earnings even during industry-specific slowdowns. 
  • Consolidation has characterized the coating industry during the past decade, and PPG can capture additional share as consolidation continues. 
  • PPG’s expanded partnership with Home Depot increases its professional paint line at the retailer. This strategy could increase PPG’s market share in the professional paint market.

Company Profile 

PPG is a global producer of coatings. The company is the world’s largest producer of coatings after the purchase of selected Akzo Nobel assets. PPG’s products are sold to a wide variety of end users, including the automotive, aerospace, construction, and industrial markets. The company has a footprint in many regions around the globe, with less than half of sales coming from North America in recent years. PPG is focused on its coatings and specialty products and expansion into emerging regions, as exemplified by the Comex acquisition. 

(Source: MorningStar)

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