Category: Sectors

Mandiant Services and Solutions Expected to Be in Demand Amid Heightened Threat Environment

Post author By lvc-admin
Post date June 15, 2022
No Comments on Mandiant Services and Solutions Expected to Be in Demand Amid Heightened Threat Environment

Business Strategy and Outlook

Cybersecurity pure-play Mandiant (formerly FireEye) sells subscriptions and services to protect customers from threats and resolve security breaches. Mandiant is considered a pre-eminent provider of professional consulting services for incident response, security assessments and updates, managed security, and training. Its software-as-a-service solutions include continuous security validation, managed defense, threat intelligence and automated defense. It is expected, robust demand for Mandiant’s services and subscriptions due to a persistent cybersecurity talent dearth and cybercriminals continually evolving their threats, causing organizations to seek the assistance of experts. By selling off its products division in October 2021, it is believed that Mandiant is making the prudent decision to focus on its world-class incident response, threat intelligence, and security validation offerings. Tough competition from other leading cybersecurity players’ holistic security platforms and spry best-of-breed upstarts hindered its legacy products’ success. Being independent of its former product division could enhance its technology partner relationships and improve threat intelligence and customer engagements.

It is believed the vast creation of data plus the increased use of software-as-a-service applications and cloud-based ecosystems will continuously drive up the quantity and complexity of cyberthreats. Mandiant’s security experts stay ahead of threat trends via in-depth research. Those insights cause organizations to demand support or potentially outsource their security to Mandiant to manage. With a lack of security talent in the marketplace, It is expected, firms to increase their usage of external threat assessments, security validation, and automated response solutions while looking toward experts, such as Mandiant, when internal teams are overwhelmed.

Financial Strength

Mandiant is in mediocre financial shape, with an improving free cash flow profile and its cash balance outweighing its convertible note obligations. At the end of 2020, FireEye, Inc. (which included both Mandiant plus FireEye products) had $1.3 billion in cash and equivalents and $960 million in total debt made up of convertible notes. Mandiant sold its FireEye products division for $1.2 billion in October 2021, which is expected the sale to help fuel internal investments and potential shareholder returns. The company has never paid, nor has any intention to pay, a dividend. Its share count rose from 142 million shares in 2014 to 229 million in 2020, but a share dilution is expected to temper in the next few years. As part of selling its products division, Mandiant announced a $500 million share repurchase program. Besides the acquisitions of Verodin for $250 million in 2019, iSight Partners for $275 million in 2016, and Mandiant (when the company was FireEye) for over $1 billion in 2013, which were partly funded with cash, most of FireEye’s funds have been used for operating expenses. FireEye has made some small acquisitions, which is presumed will continue. The cash deployment is to remain focused on operating costs, but for the firm to drive operating leverage as it matures

Bulls Say’s

With a skills gap in cybersecurity, customers may prefer to outsource security to Mandiant’s managed services.
Mandiant’s security experts provide customers with a unique selling proposition for breach response and security posture assessments, and the expertise could become relied upon by customers.
Heightened threat environments and digital transformations may make organizations uneasy regarding security, driving up demand for Mandiant’s security posture validation.

Company Profile

Mandiant (formally FireEye,) is a pure-play cybersecurity firm that focuses on incident response, threat intelligence, automated response, and managed security. Mandiant’s security experts can be used on demand or customers can outsource their security to Mandiant. The California-based company sells security solutions worldwide, and sold its FireEye products division in October 2021.

(Source: MorningStar)

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

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

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Tags Street Talks

Global stocks

Oracle’s Q4 Beats Expectations but Outlook Doesn’t Surprise; Shares Fairly Valued

Post author By lvc-admin
Post date June 15, 2022
No Comments on Oracle’s Q4 Beats Expectations but Outlook Doesn’t Surprise; Shares Fairly Valued

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy and Outlook

Oracle is a best-in-breed provider of on-premises relational database technologies and enterprise resource planning, or ERP, software and is one of the most profitable companies in the software industry. However, growth has been lacking as more customers shift their workloads to the cloud, bypassing Oracle’s solutions. Despite Oracle’s cloud migration efforts, cloud competition will likely provide headwinds for Oracle. In turn, moat rating for Oracle is narrow, coupled with a negative moat trend rating. Oracle’s business is centred around its relational database which stores a treasure trove of data that is the lifeblood of many enterprises. Oracle’s software offerings leverage this database as its backend, while Oracle’s servicing and hardware businesses support these database tasks. Oracle remains a best-of-breed provider of on-premises databases and software, and customers face very high switching costs if they look to migrate elsewhere. However, the company is not being on the forefront of recent software trends, and new and potential customers appear to be looking past Oracle for their database needs. Database preferences are far wider today due to the sheer number of ways to manipulate data, and the different data storage practices this necessitates. In turn, Oracle is losing database market share to new database types that may be better suited to the cloud.

Additionally, the transition to the cloud is prompting enterprises to change software vendors away from all-in-one ERP systems to application specific that are best of breed. In response, Oracle is banking on its second-generation cloud to not only cater to its traditional enterprise workloads, like supporting databases, but also general use workloads. However, Oracle’s cloud as sub-scale to Amazon and others and it is doubted Oracle can close this gap soon. Oracle should still be successful in moving a significant amount of its traditional on-premises workloads to Oracle cloud. However, migrating all of its customers is not such a sure thing, as cloud-first software vendors have been able to take meaningful share from legacy Oracle customers.

Financial Strength

Oracle can be considered to be in healthy financial standing. As of fiscal 2020, Oracle had $43 billion in cash and equivalents versus $72 billion in debt. However, Oracle should generate robust free cash flow in the years ahead to settle these debt obligations over time. Oracle will have the capital to increase its total annual dividends to $1.28 in fiscal 2025 from $0.96 in fiscal 2020, as the company continues to make share repurchases and acquisitions. However, the magnitude of acquisitions will moderate as the company comes off of its buildout of its second-generation cloud product and has stressed their recent preference to build new capabilities in house. In terms of capital expenditures, Oracle will spend an average of $1.6 million per year over the next five years, as the company

Bulls Say’s

Oracle’s relational database should be able to post strong growth as customers continue to depend on its quality features, such as data partitioning which brings incomparable load balancing efficiency.
Oracle’s autonomous database and IaaS was built with ease of use in mind, which could bring a significant base of first-time Oracle users to the company, strengthening top line results.
Oracle’s stake in TikTok Global and cloud services to TikTok’s U.S. operations should add a significant boost to Oracle’s top line and attract more “general use” cloud customers.

Company Profile

Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.

(Source: MorningStar)

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

Tags US Market

Technology Stocks

Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks

Young woman trading stock market by touching.

Business Strategy and Outlook

Palo Alto Networks established its cybersecurity leadership by its next-generation firewall appliance altering the requirements of this essential piece of networking security. Its portfolio has expanded outside of network security into areas such as cloud security and solutions to help automate security operations. Palo Alto’s nascent threat-prevention solutions will provide robust growth along with a significantly improved margin profile as customers remain locked into its ecosystem. The complexity of an entity’s threat management increases as the quantity of data and traffic being generated off-premises grows. Network security can be attacked from various angles, and that security will remain a top concern for all enterprises and governments, which bodes well for Palo Alto and its peers. Security point solutions were traditionally purchased to combat the latest threats, and IT teams had to manage various vendors’ products simultaneously, which leads us to believe that IT teams are clamouring for security consolidation to manage disparate solutions. Palo Alto has established security platforms, made up of various products needed, for network security, cloud security, and operations. These platforms alleviate toolset management burden and alert fatigue, and Palo Alto gains threat insights from its vast customer base, which in turn improves its threat protection efficacy. It is believed the ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand.

Palo Alto will continue to outpace its security peers by focusing on providing solutions in areas like cloud security and automation. Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks. Although Palo Alto will remain acquisitive and dedicated to organic innovation, it is believed that significant operating leverage will be gained throughout the coming decade as recurring subscription and support revenue streams flow from its expansive customer base.

Financial Strength

Palo Alto is financially stable and should generate strong cash flow as it expands its operating margin profile. The company has historically operated at a loss (excluding fiscal 2012), and it is expected to turn profitable by fiscal 2023 on a GAAP basis. Large operating expenditures, including an outsize sales and marketing budget, fuelled Palo Alto’s land-and-expand strategy, and the company is to gain operating leverage throughout the 2020s. Palo Alto ended fiscal 2021 with $2.9 billion in cash and cash equivalents and total debt of $3.2 billion in 2023 and 2025 convertible senior notes. The $1.7 billion 2023 notes mature in June 2023 and have a 0.75% fixed interest rate per year paid semi-annually, while the $2.0 billion of notes that mature June 2025 have a 0.375% interest rate paid semi-annually. Palo Alto issued note hedges for both maturity dates to alleviate potential earnings per share dilution. The company announced a $1.0 billion share-repurchase authorization in February 2019, which was increased to $1.7 billion the following year with an expiration at the end of 2021, and has subsequently extended the program. Palo Alto completed its previous $1.0 billion share-repurchase program in the second quarter of fiscal 2019. The company also completed an accelerated share-repurchase program of $1 billion in fiscal 2020 (announced February 2020), in addition to its normal repurchase program. It is expected that Palo Alto will continue to use share buybacks to return capital to shareholders, and will not pursue any dividend payouts. Palo Alto will continue to focus its cash expenditures on operating costs and potential acquisitions that bolster its security platform within the cloud-based security solutions arena.

Bulls Say’s

Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers.

Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and Palo Alto is typically on the short list of potential vendors.

The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

Company Profile

Palo Alto Networks is a pure-play cybersecurity vendor that sells security appliances, subscriptions, and support into enterprises, government entities, and service providers. The company’s product portfolio includes firewall appliances, virtual firewalls, endpoint protection, cloud security, and cybersecurity analytics. The Santa Clara, California, firm was established in 2005 and sells its products worldwide.

(Source: MorningStar)

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

Tags Recommendations

Dividend Stocks

No-Moat Dick’s Sporting Goods Posted Great Results, but Competitive and Economic Threats Remain

Post author By lvc-admin
Post date June 15, 2022
No Comments on No-Moat Dick’s Sporting Goods Posted Great Results, but Competitive and Economic Threats Remain

Business Strategy & Outlook

The no-moat Dick’s Sporting Goods lacks an edge as sporting goods are sold through an increasing number of channels. Although its sales have soared during the pandemic, the impact is temporary, as growth in sporting goods retail has generally been minimal due to external competition. According to IBISWorld, sporting goods retail sales experienced average annual growth of just 1.3% in the five years before the pandemic. Dick’s competitors include e-commerce operators (such as wide-moat Amazon), mass retailers (such as wide-moat Walmart), specialty stores (narrow-moat Lululemon, Foot Locker, Bass Pro Shops/Cabela’s), and branded stores and owned e-commerce from major vendors. As an example of the latter, narrow-moat Adidas’ direct-to-consumer business constituted 39% of its 2021 sales, up from 25% in 2015. Further, the COVID-19 crisis has accelerated manufacturers’ direct-to-consumer efforts, as evidenced by Foot Locker’s acknowledgement that wide-moat Nike will reduce shipments to the firm. No one can believe Dick’s market position is strong enough to prevent vendors from offering their merchandise in alternate channels. Its compound average yearly sales growth of 3% over the next decade, at the lower end of projected U.S. activewear growth of 3%-5%. Dick’s recent profitability has greatly improved, but one cannot think the gains can hold. The firm recorded a 16.5% operating margin in 2021, but this as anomalous. In 2013, Dick’s forecast its operating margin would increase to 10.5% by 2017 from 9.0% in 2012, but its actual operating margins were only in the midsingle digits in the years before the pandemic. The 2021 operating margin was the peak level and expect its operating margins will trend downward over time due to a lack of pricing power. Ultimately, one cannot think the firm needs such a large store base (about 860 stores) especially as its e-commerce has risen during the pandemic (21% of sales in 2021, up from 16% in 2019). The Dick’s investments in new full-line and specialty stores have failed to attract enough new customers.

Financial Strengths

The Dick’s is in excellent financial shape. To conserve cash while stores were temporarily closed during the pandemic, Dick’s furloughed employees, cut its planned capital expenditures, reduced salaries, and suspended its share repurchases. In April 2020, it shored up its liquidity further by completing a $575 million convertible bond offering at an interest rate of 3.25% (matures in 2025). Then, in early 2022, the firm issued $1.5 billion in bonds, with half carrying a 3.15% interest rate and maturing in 2032 and the other half carrying a 4.1% interest rate and maturing in 2052. After this offering, Dick’s ended April 2022 with $2.25 billion in cash and equivalents, long-term debt of $1.9 billion, and about $1.6 billion in available borrowing capacity under its revolver. The firm may retire the convertible debt when it becomes callable in 2023. The Dick’s will produce significant free cash flow, which it will return to shareholders as dividends and share repurchases after the crisis has passed. The Dick’s will generate $8 billion in free cash flow to equity over the next decade and will use this cash to repurchase about $5.5 billion in stock and issue about $2.6 billion in dividends. Dick’s suspended repurchases during the pandemic, but then spent nearly $1.2 billion on repurchases in 2021, its largest amount in any year by far. Unfortunately, the average price paid was $109 per share, which was possibly inefficient at well above fair value estimates and historical price levels. For comparison, due to the large share price increase, Dick’s consumed about $400 million in cash in buybacks in 2019 but repurchased more shares than it did in 2021. The annual capital expenditures will average about $450 million (3.5% of sales) over the next five years as Dick’s opens a few stores per year, invests in e-commerce, and renovates existing locations.

Bulls Say

Dick’s is the largest pure sporting goods chain in the U.S. It has a large loyalty program that is integrated with that of Nike. Dicks has a strong business in high school and youth sports.

Dick’s is replacing hunting with women’s activewear and other apparel in some stores. Popular activewear probably has better margin and growth prospects than hunting.

Dick’s has adapted well to a market that has changed during the pandemic. Its digital sales skyrocketed to about $2.6 billion in sales in 2021 (21% of total), up from about $1.4 billion in 2019 (16% of total).

Company Description

Dick’s Sporting Goods retails athletic apparel, footwear, and equipment for sports. Dick’s operates digital platforms, about 730 stores under its namesake brand (including outlet stores), and about 130 specialty stores under the Golf Galaxy, Public Lands, and Field & Stream names. Dick’s carries private-label merchandise and national brands such as Nike, The North Face, Under Armour, Callaway Golf, and TaylorMade. Based in the Pittsburgh area, Dick’s was founded in 1948 by the father of current executive chairman and controlling shareholder Edward Stack.

(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 Recommendations

Technology Stocks

Guidewire Extends Its Streak of Solid Results; FVE Decreased to $120

Post author By lvc-admin
Post date June 15, 2022
No Comments on Guidewire Extends Its Streak of Solid Results; FVE Decreased to $120

LONDON, UNITED KINGDOM: Analysts work on the trading floor at Goldman Sachs in London, 22 March 2004. AFP PHOTO / ODD ANDERSEN (Photo credit should read ODD ANDERSEN/AFP via Getty Images)

Business Strategy & Outlook

Guidewire is reaping the benefits of years of groundwork in the form of convincing property and casualty, or P&C, insurers to upgrade their aging core legacy systems to Guidewire’s solutions. The company has used a modern software platform to disrupt a sleepy industry that has been underserved by legacy software vendors, and there is still a long runway for additional growth for Guidewire. Guidewire as executing a classic land-and-expand strategy. The company started with the most critical piece, ClaimCenter, which is customer facing and handles claims processing, and then organically layered in BillingCenter and PolicyCenter within the next several years. Today, Guidewire has a broad software suite that covers all areas of an insurer’s needs and offers a wide variety of add-on solutions. Importantly, the company acquired ISCS to land a lower- and middle-tier SaaS offering.

By any objective measure, Guidewire has become the leading provider of core software to the P&C insurance industry. The company already covers 25% of direct written premiums, or DWPs, and it wins more deals per year than its largest competitors combined. Just as the company nudged the industry to modernize, it will be at the forefront as it now leads a wide array of the largest insurers into the SaaS age with InsuranceSuite Cloud and other cloud-based solutions. Indeed, results were uneven throughout 2019 because of accelerating SaaS adoption, but Guidewire has turned the corner and results are expected to be more predictable in future. Guidewire is anticipated to win more than its share of new clients, especially at the larger end of the market. From there the company is projected to upsell additional lines of insurance business and add on features. Momentum is on the company’s side after capturing many critical Tier 1 insurer mandates, as the industry can no longer wait or afford to maintain legacy systems built in the 1950s in some instances.

Financial Strengths

Guidewire has a standard level of financial strength. Revenue is growing rapidly on an organic basis, and non-GAAP margins are positive and expanding. Continued penetration into Tier 1 and 2 core solutions, with conversions and new bookings of InsuranceSuite Cloud, and the cross-selling of data-driven and digital add-ons will drive consistent midteens annual revenue growth over the next five years. As of July 31, Guidewire had $1.1 billion in cash offset by $344 million in debt, resulting in a net cash position of $776 million. The $344 million in debt represents convertible notes due in 2025, which is not considered as problematic, given the company’s cash balance and expected free cash flow generation leading up to the debt maturity date, and the likelihood it converts into equity rather than is repaid. GAAP Operating margin was negative in fiscal 2021, but is expected to gradually improve over time as a result of easing pressure from accounting treatment for two larger transactions in fiscal 2017 and 2018, and the maturation of the business model transition to subscriptions.

On a non-GAAP basis, margin contraction is modelled in fiscal 2022, followed by several hundred basis points of margin improvement each year over the next five years, driven by scale. Guidewire does not pay a dividend, does not regularly repurchase shares although it did recently begin doing so, and generally makes small acquisitions. The company completed two larger acquisitions in the context of its deal history, with deals of $154 million in fiscal 2017 and $130 million in fiscal 2018. Since its 2012 IPO, Guidewire has completed a handful of acquisitions for approximately $500 million in aggregate. The company is expected to occasionally make small, feature-driven acquisitions. Management is expected to initiate a dividend in the foreseeable future.

Bulls Say

Guidewire is the clear leader seeking to modernize a large and underserved P&C insurance market that is ripe for modernization.

Guidewire is investing in R&D and acquiring companies to add new solutions and features to its existing platform, as there is room to at least quadruple revenue within its existing clients.

Some friction is being removed from the sales process, as insurers are recognizing the need to modernize and the sales conversation is easier with as many live Tier 1 and 2 customers as Guidewire has.

Company Description

Guidewire Software provides software solutions for property and casualty insurers. Flagship product InsuranceSuite is an on-premises system of record and comprises ClaimCenter, a claims management system; PolicyCenter, a policy management system including policy definitions, quotas, issuance, maintenance, and renewal; and BillingCenter, for billing management, payment plans, and agent commissions. The company also offers InsuranceNow, a cloud-based offering, as well as a variety of other add-on applications.

(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

Small Cap

Corporate Action: Vote in favor of Ardent Leisure’s Proposed Sale of Main Event and Capital Return

Post author By lvc-admin
Post date June 15, 2022
No Comments on Corporate Action: Vote in favor of Ardent Leisure’s Proposed Sale of Main Event and Capital Return

Business Strategy & Outlook:

Ardent Leisure’s fundamentals is moderated by the wider macroeconomic factors that influence its operations and the current restructuring efforts to restore earnings after the recent upheavals. Of greater concern is the near-term impact of the coronavirus on Ardent’s operations and its financial position, especially theme parks. But cost-cutting and government assistance measures have provided relief. RedBird’s USD 80 million investment in June 2020 for an initial 24.2% preferred equity interest in Main Event secures the U.S. family entertainment chain’s funding position. Furthermore, RedBird has the option to acquire an additional 26.8% interest at a future date, with the valuation to be based upon 9.0 times EBITDA at the time of exercising the option, subject to a minimum equity floor price. However, the Australian theme parks remain challenged. While the facilities have emerged from their forced shutdown in March 2020, the lingering impact of the pandemic is likely to constrain free cash flow.

Beyond the current coronavirus crisis, Ardent Leisure possesses solid leisure and entertainment assets that all operate in intensely competitive markets. These assets compete for the leisure dollars of consumers who are spoilt with alternatives, especially in this online digital world, where most traditional entertainment activities can now be enjoyed in a virtual setting. Furthermore, most of the group’s businesses are relatively capital-intensive, particularly as Main Event expands its venue footprint and as Ardent strives to keep up with competing leisure options and stay fresh in consumers’ minds. The situation is exacerbated by cyclical factors, with consumer discretionary spending highly leveraged to swings in general economic conditions. The agreed sale of Main Event, announced in April 2022, was struck at a good price and the proceeds will lead to a healthy distribution to shareholders. However, it will leave the group with just the loss-making theme parks unit.

Financial Strengths:

Ardent has AUD 119 million of net debt on the balance sheet, as at the end of December 2021. This comfortable position with AUD 93 million in available liquidity for Main Event is mainly thanks to Redbird’s USD 80 million (AUD 100 million) capital injection into the U.S. business, in return for a 24.2% preferred equity stake. The Queensland government’s recent tourism-friendly three-year AUD 64 million loan package (plus AUD 3 million grant) also means the Australian theme parks unit now has AUD 18 million of available liquidity.

Bulls Say:

Main Event Entertainment adds growth appeal to Ardent Leisure, as it accelerates expansion into the United States family leisure market.
All of Ardent Leisure’s operating businesses enjoy solid market positioning.
Ardent Leisure’s balance sheet is solid and bolstered by a string of recent asset divestments and refinancing.

Company Description:

Ardent Leisure is an owner and operator of leisure assets. Its theme park operations are situated in Australia, including Dreamworld and WhiteWater World on the Gold Coast. The group also runs Main Event, a growing portfolio of family entertainment operations in the United States, offering bowling, arcade and various other leisure activities. The agreed sale of Main Event, announced in April 2022, was struck at a good price and the proceeds will lead to a healthy distribution to shareholders. However, it will leave the group with just the loss-making theme parks unit.

(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

Shares Small Cap

Air New Zealand Poised to Thrive As Borders Reopen

Post author By lvc-admin
Post date June 15, 2022
No Comments on Air New Zealand Poised to Thrive As Borders Reopen

Business Strategy & Outlook:

The COVID-19 pandemic has wreaked havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Air New Zealand’s wings. Stringent New Zealand entry requirements for international arrivals have decimated passenger revenues, and despite aggressive cost cuts, and operating deleverage to lead to an after-tax loss in fiscal 2022. Nevertheless, Air New Zealand remains well-positioned to participate in the recovery as skies gradually reopen. New Zealand’s strict policies during the COVID-19 pandemic have effectively eliminated community transmission, and continued international travel restrictions will lead to a boon in domestic tourism. Air New Zealand typically enjoys around 80% market share, to recover to pre-COVID levels by the beginning of fiscal 2023. The international recovery is expected, where the airline derives the majority of revenue, to be more gradual.

Air New Zealand’s international business remains effectively grounded. While there is room for optimism amid potential travel bubbles and continuing vaccine rollout, and as Air New Zealand has permanently condensed its wide-body fleet, a full recovery to pre-COVID-19 levels of flying in its long-haul business. Air New Zealand’s loyalty program, Airpoints, to some extent cushion earnings volatility in the flying business. Despite a lack of flying activity, the expected loyalty business to be profitable. Airpoints is essentially a capital-light business attached to a capital-intensive flying business. Consumers want to earn loyalty points when they fly, and status benefits are important for corporate passengers. The program generates earnings from the sale of points to partners–notably credit card companies, but also travel-related businesses such as hotels and rental car companies. This offers more ways to redeem and earn points, attracting more customers, which in turn attracts new partners–a network effect but not enough to warrant a moat for the group.

Financial Strengths:

Despite near-term earnings pressure, Air New Zealand will be able to weather the storm, particularly following the NZD 2.2 billion recapitalisation in fiscal 2022–including an equity raise of NZD 1.25 billion. While raising capital at nearly half the updated fair value estimate is dilutive from a valuation standpoint, the equitable structure of a renounceable rights offer includes most shareholders, meaning investors need not be diluted. The airline is aggressively cutting costs in the short term, including delaying and cancelling NZD 700 million in capital expenditure, suspending dividends, and significant staffing reductions. Fiscal 2021 labour costs were nearly 40% lower than fiscal 2019 levels. Air New Zealand canceled payment of its first-half fiscal 2020 dividend, withholding around NZD 123 million at its disposal, and declared no final dividend. The firm paid no dividends in fiscal 2021, while the government funding agreement is in place, and dividends are not expected until fiscal 2026, as recovering earnings are first used to deleverage the balance sheet. Monthly cash burn was largely been stemmed in the second half of fiscal 2021, but returned at a rate of NZD 51 million in the first half of fiscal 2022 as lockdowns re-emerged–down from around NZD 96 million in the first half. Following the recapitalisation, the airline has around NZD 1.8 billion in pro forma liquidity as at March 25, 2022.

Bulls Say:

As the largest airline in the New Zealand domestic market, new entrants would likely struggle to build Air New Zealand’s scale and route frequency to attract corporate customers.
Air New Zealand’s earnings are highly leveraged to improving macroeconomic conditions and unrestricted air travel.
Limited cases of COVID-19 community transmission in New Zealand should benefit Air New Zealand’s domestic business

Company Description:

Air New Zealand, majority owned by the New Zealand Government, provides air passenger and cargo transport services within New Zealand, as well as to and from Australia, the South-West Pacific, Asia, North America, the United Kingdom, and South America. Air New Zealand also encompasses business units providing engineering and ground handling services. Air New Zealand dominates the local market, with around 80% market share, although the majority of revenue is derived from international and trans-Tasman activity.

(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 Small Caps, Street Talks

Shares Small Cap

Reducing Scotts’ FVE to $130 on Lowered Near-Term Outlook; Shares Remain Undervalued

Post author By lvc-admin
Post date June 14, 2022
No Comments on Reducing Scotts’ FVE to $130 on Lowered Near-Term Outlook; Shares Remain Undervalued

Business Strategy and Outlook

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products aimed at helping consumers grow and maintain their lawns. The U.S. consumer segment, which consists of lawn and gardening products, generated 65% of total revenue in fiscal 2021. Scotts has generated healthy margins on its products through effective branding, which allows it to maintain favourable product positioning and shelf space in the largest mass-market and home improvement retailers. Scotts has also been able to charge a premium over competitors because of its strong brand equity. While actual product differentiation in the industry is limited, consumers have been willing to pay up for Scotts’ products.

Future demand for gardening products will depend on growth in the housing industry. We expect housing starts to average a little over 1.5 million per year through 2030. While housing starts alone should increase demand for gardening products, we see some secular trends that will offset the growth. Living-preference shifts to smaller lots and urban centers should result in less need for gardening products. Additionally, a greater proportion of gardening products will be sold online. Currently, the vast majority of sales occur at brick-and-mortar retail. Even if Scotts increases its online sales presence, it may lose some pricing power as many products in the gardening industry shift away from brick-and-mortar retailers to online platforms, where Scotts will likely face more low-priced competition. The Hawthorne segment, which includes indoor gardening, hydroponics, and lighting equipment, contributed a little under 30% of revenue in fiscal 2021. Its growth is closely tied to the legalization of cannabis in the U.S., as its products are frequently used by licensed growers. Recent acquisitions in the business should position Scotts to take advantage of growing demand from states where cannabis has been recently legalized. The majority of U.S. consumer sales typically come from Home Depot and Lowe’s. However, this should decline as a percentage of companywide revenue as the Hawthorne segment grows.

Financial Strength

Scotts Miracle-Gro currently has elevated leverage. As of March 31, we calculate net debt/adjusted EBITDA was nearly 5 times, well above with management’s long-term target leverage of 3.5 times. However, the company built up inventory in both the U.S. consumer and Hawthorne businesses in anticipation of improving volumes in the second half of the fiscal year. As the company works down its inventory and uses the cash to repay debt, we see no issues with its current financial position. Further, as the Hawthorne business recovers from the current industry oversupply, we expect EBITDA growth will resume and leverage ratios will fall back to management’s targets. Over the last five years, dividends grew at an average mid-single-digit rate. Management has indicated that it intends to continue raising the dividend, and Scotts should have the free cash flow to do so.

Bulls Say’s

U.S. household formation growth will drive demand for gardening products. As the market leader in consumer gardening products, Scotts will benefit from the secular housing trend.
Consumer behaviour has changed as a result of COVID-19, with more consumers engaging in gardening as an activity. As the largest player in the consumer gardening market, Scotts will benefit from this change.
The emerging cannabis industry represents a lucrative opportunity for Scotts, which is well positioned to capture this segment of the market.

Company Profile

Scotts Miracle-Gro is the largest provider of gardening and lawncare products in the United States. The majority of the company’s sales are to large retailers that include Home Depot, Lowe’s, and Walmart. Scotts Miracle-Gro can sell its products at a higher price point than its competition because of a well-recognized portfolio of brands that include Miracle-Gro, Roundup, Ortho, Tomcat, and Scotts. Scotts is also the leading supplier of cannabis-growing equipment in North America through its Hawthorne business.

(Source: MorningStar)

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

Tags Recommendations, Small Caps

Global stocks

Dufry Should Benefit from Travel Recovery in 2022 Despite Geopolitical Uncertainty

Post author By lvc-admin
Post date June 14, 2022
No Comments on Dufry Should Benefit from Travel Recovery in 2022 Despite Geopolitical Uncertainty

investment stockbroker risk analysis using multiple devices. Financial analysis using phone app and laptop. Market trading profit.

Business Strategy and Outlook

As a leading player in travel retail and a leading concession operator in airport retail with around 20% market share, more than double that of its next biggest peer, Dufry is well positioned to benefit from increasing global travel flows. Over the years, Dufry has played the role of consolidator in a globally fragmented industry, allowing it to achieve purchasing scale, breadth of store formats and product offer, and geographical diversification. We contend that airports capture the bulk of value in airport retail through concession fees of about 30%, owing to ownership of unique real estate assets. Nonetheless, we believe that Dufry, as the most efficient retail operator in over 400 locations globally, benefits from a purchasing scale that not many competitors or airports can match as a stand-alone entity (the global airport industry is rather fragmented and 70% publicly controlled, hindering consolidation). Dufry should thus be well positioned to withstand concession inflation pressure and consolidate the industry as weaker operators exit the market, which should increase its bargaining power in the long term. Dufry also provides value for suppliers (many of them fast-moving consumer goods companies and luxury brands) by giving exposure to an attractive high-growth distribution channel with brand-building opportunities to an affluent, captive audience.

We believe Dufry should be able to expand by about 3%-4% annually over the 10-year forecast period (from prepandemic levels) through a mix of organic growth (driven by increasing passenger numbers) and new concessions (gained organically or through consolidation). We expect operating margins (excluding acquisition-related amortization) to be broadly stable, with gross margin efficiencies and scale offset by airport concession inflation, both effects moderating over time.

Financial Strength

Dufry had around CHF 2.2 billion in available liquidity at the end of December 2021, which should be sufficient for many months under management’s assumption of CHF 20 million monthly cash burn with revenue 40% lower than 2019 levels and CHF 10 million monthly cash burn with revenue down 35% against 2019 levels. We assume revenue in 2021 to be 21% lower than that reached in 2019. Covenant testing has been delayed until 2023 with a threshold of 5 times net debt/adjusted operating cash flow. We expect the company to be in compliance with covenants as travel picks up. It is believed the liquidity risk for the company can be considered low

Bulls Say’s

Dufry is well positioned to benefit from increasing passenger flows, which have historically grown faster than global GDP.
Investment in digital initiatives, such as “reserve online, collect at the airport,” could increase spending per passenger, as actual airport buying may be currently limited by the time constraints.
Dufry has room to expand its business into new geographies (Asia) and new business areas (downtown duty-free, duty-free on cruise ships)

Company Profile

Dufry is the world’s largest duty-free shop operator and leader in travel retail. It commands about 12%-13% share in a fragmented global travel retail market, including around 20% in airport retail (more than double that of the next biggest competitor), through its presence in 65 countries and about 420 locations globally; airports make up over 80% of the company’s total revenue. Dufry’s main markets are Europe (45% of revenue), Americas (about 45% revenue each), and Asia, the Middle East, and Australia.

(Source: MorningStar)

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

Tags European Market

Global stocks

Maintaining CHF 620 Fair Value Estimate for Narrow-Moat Lonza; Shares Undervalued

Post author By lvc-admin
Post date June 14, 2022
No Comments on Maintaining CHF 620 Fair Value Estimate for Narrow-Moat Lonza; Shares Undervalued

Business Strategy & Outlook:

Lonza Group has been a dominant player in the contract development and manufacturing space for decades. The company thinks the outlook for Lonza looks bright, especially as drug manufacturing becomes more complex with biologics and cell and gene therapies playing larger roles in the overall mix. Lonza’s 2021 CHF 4.2 billion divestment of its former specialty ingredients business to Bain Capital and Cinven as positive since it allows for an increased focus on further expanding its biopharma contract manufacturing business. Lonza’s specialty ingredients customers were large consumer goods and industrials players, which had significant bargaining power. As a result, this segment had lower margins and shorter contracts of one to three years compared with its lengthy contracts for its biopharma manufacturing business.

Lonza maintains an extensive network of partnerships with pharmaceutical and biotechnology firms that leverage its expertise and scale to optimize drug production and avoid the risks of in-house manufacturing. Company anticipates outsourcing penetration will continue to incrementally increase, driven by the complexities of biologic manufacturing. Only one-third of pharmaceutical manufacturing is currently conducted in-house while two-thirds are outsourced. Additionally, the customer relationships in Lonza’s contract manufacturing segment are sticky and long-lasting, as drug companies tend to stick with trusted suppliers with good track records of regulatory compliance. Biopharma customers are likely to continue outsourcing manufacturing in order to benefit from access to flexible capacity and manufacturing improvements.

Financial Strengths:

Lonza is in fair financial health, and company expects the business to continue providing a steady stream of cash. The company has historically utilized debt, particularly for acquisitions. The company ended 2017 with CHF 3.8 billion in debt after acquiring Capsugel with a mix of debt and equity. Since then, the company has steadily deleveraged. It is expected that the company will be able to meet its financial obligations with its free cash flow. Lonza also divested its specialty ingredients business in July 2021 for CHF 4.2 billion. Management is using the proceeds from the divestment to further improve its biopharma manufacturing capabilities. The management team has a continued record of returning cash to shareholders in the form of dividends, with a dividend of CHF 3.00 paid in 2021. The payout ratio as a percentage of adjusted earnings per share has varied between 20% and 40% over the last few years, depending on cash needed for capital expenditures. The payout ratio has trended down in recent years due to increased investment in new manufacturing capabilities. Due to the business’ strong cash flow, the management will maintain its dividend policy and utilize cash for dividend payments, debt paydown, internal investment, and opportunistic deals.

Bulls Say:

The pharma biotech and nutrition segment are a sticky business with long-term contracts and high switching costs for its customers.
As drug portfolios are increasingly made up of complex drugs like biologics and emerging therapies, Lonza’s biopharma customers will be more reliant on outsourced manufacturing.
With its global scale, Lonza is less dependent on any one customer or drug, which allows it to better absorb surprising late-stage failures or drops in demand

Company Description:

Lonza Group is a contract development and manufacturing organization, or CDMO. It operates under four segments: small molecules, biologics, cell & gene, and capsules & health ingredients. Lonza derives its revenue primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing services throughout the entire lifecycle of a product from drug research to commercial supply. The majority of Lonza’s customers are pharmaceutical and biotechnology companies, academic institutions, and government research organizations.

(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