Category: Sectors

Less than 55% of Millicom customers have a 4G LTE smartphone today, but this figure is up from 30% three years ago

Post author By lvc-admin
Post date June 6, 2022
No Comments on Less than 55% of Millicom customers have a 4G LTE smartphone today, but this figure is up from 30% three years ago

Business Strategy and Outlook

After several years of restructuring, Millicom is now best thought of as a collection of investments in Latin American telecom businesses. It is likely for the firm to spend the next couple years primarily operating its businesses rather than reshaping its portfolio, allowing the firm to more clearly demonstrate its ability to generate cash flow. Millicom’s subsidiaries have provided wireless service in Guatemala, El Salvador, Honduras, Bolivia, and Paraguay since the early 1990s, giving it the largest market share in most of these countries. In addition to the wireless business, Millicom has invested heavily, both organically and through M&A, to build cable infrastructure, carving out solid market share in the fixed-line market as well—it is the internet access leader in Guatemala, Panama, Bolivia, Honduras, and Paraguay and the second largest in Colombia and El Salvador. Millicom can offer converged fixed-line and wireless services to nearly 13 million homes and businesses across a footprint that encompasses a population of about 120 million people.

Favorable market structures following recent consolidation should also benefit Millicom. In Guatemala, which is now the firm’s most important market following the buyout of minority investors, it is the clear market leader and competes almost exclusively against America Movil. Other markets with only one substantial competitor include Panama, Honduras, Nicaragua, and Bolivia. Only Colombia, where Millicom is a distant third in the wireless market, presents an especially difficult competitive situation, but the firm has made progress gaining scale recently. Wireless penetration in these markets is already high, but data services still provide significant growth opportunities. Less than 55% of Millicom customers have a 4G LTE smartphone today, but this figure is up from 30% three years ago. Broadband penetration is also low in the countries Millicom serves at around 30%. As demand for high-quality connectivity grows, it is believed, Millicom’s financial performance will improve nicely in the coming years.

Financial Strength

Millicom historically carried below-average leverage, with a net debt around 1.0-2.0 times EBITDA. However, acquisitions and the buyout of minority investors in Guatemala has caused the debt load to swell. Net debt, including lease obligations, stood at $7.8 billion, or 3.4 times EBITDA, at the end of 2021. The firm expects to complete a $750 million equity rights offering during 2022 to fund a portion of the Guatemala transaction that will bring net leverage down to 3.0 times. Management has had a net leverage target of 2.0 times EBITDA since its portfolio reshuffling began in 2018 but hasn’t come close to that mark yet. Millicom cut its dividend to $1 per share from $2.64 in early 2020 and then eliminated the pay out entirely later in the year, saving about $265 million annually. While the 2.0 target remains a long-term goal, management expects leverage to decline to only about 2.5 times EBITDA by the end of 2025, with share repurchases resuming in 2023. By experts’ calculation, this target implies the firm could repurchase $1.5 billion of its shares over the next four years, or about 60% of its current market capitalization. It is favoured the firm take a more aggressive approach to reducing leverage given the volatility of the markets in which it operates. About 55% of the consolidated debt load and lease obligations sits at the individual operating subsidiaries, with Millicom guaranteeing less than 5% of these obligations. Most subsidiaries carry modest debt loads, most below 2 times net leverage. The businesses in Paraguay and Costa Rico are exceptions, with more than 3 times net leverage. Leverage in Panama is also elevated at 2.7 times EBITDA. At the parent level, Millicom had $3.8 billion in net debt outstanding at the end of 2021. The Guatemalan business subsequently issued $900 million of debt to fund part of the minority investor buyout, freeing up cash to repay parent-company obligations. The Guatemalan operation now carries net leverage of about 1.8 times.

Bulls Say’s

Millicom holds strong wireless market share across nine Latin American countries with a combined population of nearly 120 million people and owns highquality cable networks that can provide broadband to 13 million homes and businesses in the region.
Broadband penetration remains low across the region and only about half the population owns a 4G smartphone, providing a long runway for growth.
Millicom should be able to improve its margins and cash flow as it grows its converged customer base.

Company Profile

Millicom offers wireless and fixed-line telecom services primarily in smaller, less congested markets or in less developed countries in Latin America. Countries served include Bolivia (100% owned), Honduras (67%), Nicaragua (100%), Panama (80%), El Salvador (100%), Guatemala (100% following the buyout of minority partners in 2021), Paraguay (100%), Colombia (50%), and Costa Rica (100%). The firm’s fixed-line networks reach nearly 13 million homes and businesses while its wireless networks cover about 120 million people. Increasingly, Millicom offers a converged package that may include fixed-line phone, broadband, and pay television in conjunction with wireless services. The firm hopes to spin off portions of its tower business and mobile payments operation over the next couple years.

(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.

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Dividend Stocks

Canadian Imperial Bank of Commerce Closes Costco Card Book Acquisition; Expenses Creep up in Q2

Post author By lvc-admin
Post date June 3, 2022
No Comments on Canadian Imperial Bank of Commerce Closes Costco Card Book Acquisition; Expenses Creep up in Q2

Business Strategy & Outlook:

Canadian Imperial Bank of Commerce is the fifth-largest bank in Canada by assets and one of six that collectively hold almost 90% of the nation’s banking deposits. CIBC is more Canadian-focused than some of its more international peers, although this is changing after the acquisition of Private Bancorp. The bank plans to eventually have up to 25% of revenue coming from the U.S. Despite having one of the larger domestic branch networks, CIBC’s products haven’t typically had top share in Canada, though the bank had made significant strides in multiple categories for years starting in 2011, as the bank increased share in multiple categories and increased product numbers per customer. This improvement has admittedly slowed down recently, although the bank took some incremental share again in 2021.

Overall, CIBC has improved its core operating performance over the years, and while the improvement has slowed and the bank’s expense base is rising as CIBC continues to invest in technology and other aspects of the franchise, the bank making incremental improvements over the medium term. CIBC has encountered its own issues over the years, including multibillion-dollar write-downs in the aftermath of the global financial crisis. The bank had hit its stride since 2011, improving consumer satisfaction ratings, reoptimizing branches, improving internal processes, and expanding wealth operations. The bank is also seeing improved growth from its U.S. operations, which now contribute over 20% to earnings. CIBC has the highest concentration in uninsured Canadian mortgages. While the Canadian housing market is the same as the U.S. was in 2007, it is estimate a downturn in Canada could affect CIBC more than other Canadian banks. Although, a housing downturn as more of a threat to future growth rather than a threat to capital.

Financial Strengths:

CIBC is in relatively good overall financial health. While outsize losses occurring in Canadian mortgages, CIBC does have the largest exposure here. In the event of a downturn, the bank would be able to deal with the fallout, although growth would decline as the Canadian consumer goes through a period of deleveraging. CIBC’s reported common equity Tier 1 ratio of 11.7% as of April 2022 remains satisfactory. Dividend payout shall remain close to 50% of net income. CIBC’s capital generation will continue to provide growth in its capital position, leaving room for bolt-on acquisitions, increased capital return to shareholders, or both.

Bulls Say:

CIBC has significantly improved multiple measures of core banking performance, such as customer perception surveys, promoter scores, and products per a customer. The bank is now operating at a higher level.
CIBC is more Canadian-focused than most of its peers. Its consolidated returns on tangible equity remain some of the highest in the industry.
The government has kept the Canadian market attractive by placing barriers to entry, protecting high returns, and the government will continue to attempt to keep the housing market under control, limiting any future hits to profitability.

Company Description:

Canadian Imperial Bank of Commerce is Canada’s fifth-largest bank, operating three business segments: retail and business banking, wealth management, and capital markets. It serves approximately 11 million personal banking and business customers, primarily in Canada.

(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.

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.

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Dividend Stocks

Activists Sink AGL Energy’s Demerger

Post author By lvc-admin
Post date June 3, 2022
No Comments on Activists Sink AGL Energy’s Demerger

Young serious business woman explaining her idea to colleague when they are having meeting and discussing charts and reports

Business Strategy & Outlook:
AGL is one of Australia’s largest integrated energy companies. This has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target. AGL has proposed a structural separation into two businesses; a multi-product energy retailer focusing on carbon neutrality and an electricity generator that will own AGL’s large fleet of coal fired power stations among other assets. It is expected to complete in mid-2022.

AGL’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market. AGL’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks are mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market, or NEM.

Financial Strengths:
AGL Energy is in reasonable financial health though banks are increasingly reluctant to lend to coal power stations. From 1.4 times in 2020, the forecasted net debt/EBITDA rises to 2.1 times in fiscal 2022. Funds from operations interest cover was comfortable at 12.8 times in fiscal 2021, comfortably above the 2.5 times covenant limit. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. Dividend payout ratio is 75% of EPS.

Bulls Say:
As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive.
Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds.
Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Company Description:
AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(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.

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Dividend Stocks

Remote Work Will Continue To Be A Challenge For Kilroy’s High Quality Portfolio

Post author By lvc-admin
Post date June 3, 2022
No Comments on Remote Work Will Continue To Be A Challenge For Kilroy’s High Quality Portfolio

Business Strategy & Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. The management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients. Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers.

The economic uncertainty emanating from pandemic recovery and the remote work dynamic have together created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022. The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains negative to marginally positive as of Q1 2022 and rental growth figures are disappointing especially given the inflationary environment. Having said this, it is an increasing number of companies requiring their employees to return to the office. In the long run, that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths

Kilroy Realty is in sound financial health. The company’s total debt was $4.1 billion as of the end of the first quarter in 2022, resulting in a debt/EBITDA ratio of 6.6 times. It is like to point out that the debt/EBITDA ratio should trend lower over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.70% and the weighted average maturity period was 7.0 years. The maturity schedule of the company’s debt shows that there are no major debt maturities until the end of 2024 and the maturities are adequately spread. The fact is that in an increasing interest rate environment 100% of the company’s debt is fixed-rate debt. The leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest expenses), was 3.5 times and the interest coverage ratio was 8.4 times as of the end of the first quarter of 2022. As a real estate investment trust, Kilroy Realty is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 67.0% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and payout dividends. The company is also in a comfortable position with respect to liquidity as it has a robust liquidity position of around $1.4 billion including the cash on the balance sheet and the revolving credit facility. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities.

Bulls Say

Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as the buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend.

Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle.

Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.

Company Description

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Global stocks Shares

Despite Inflationary Headwinds and Competitive Angst, Wide Moat Coca-Cola Maintains Its Dominance

Post author By lvc-admin
Post date June 3, 2022
No Comments on Despite Inflationary Headwinds and Competitive Angst, Wide Moat Coca-Cola Maintains Its Dominance

Business Strategy & Outlook

Coca-Cola’s ubiquity and brand resonance in the nonalcoholic beverage category has been going strong for over 130 years, and the structural dynamics that will ensure this persists. Despite competing in a mature industry, the firm is adequately exposed, either directly or indirectly, to growth vectors such as premium water and energy drinks. Moreover Coke will be able to continue extracting incremental value growth from the carbonated soft drink, or CSD, market. The runway for growth is supported by ample room for share gains as well as geographic tailwinds. The Coke derives more than 40% of sales from developing or emerging economies with burgeoning middle classes and low per-capita CSD consumption. The commercial drinks will become a larger portion of beverage consumption globally and see the company executing against each of its market-specific strategies.

In developed markets, where Coke has firmly established the resonance of its brands, its strategies are geared toward profit growth driven by innovation. In developing markets, where its trademarks are visible but competition is rife, differentiation and eventual migration into higher-margin offerings is key. In emerging markets where the firm is less established, it is focused on driving volume growth even at the expense of modest margin dilution. These approaches as prudent and believe the decision to cull peripheral brands (going from 400 master brands to 200) will facilitate execution. Coke’s future trajectory is not without risk, as it faces secular headwinds in terms of consumer sentiment, well-capitalized rivals, and lingering COVID-19 disruption in some international markets. Still, with a more aligned and technologically capable distribution system, digitization initiatives to drive engagement and operational efficiency, and vast financial resources, the firm is more than equipped to defend its turf. Ultimately, Coke’s overarching goal is to put drinks in more hands in more places more quickly than any competitor. This pithy synopsis represents the crux of the firm’s competitive positioning, underpinned by its cost advantage and intangible assets.

Financial Strengths

The Coca-Cola is in stellar financial health. The firm deliberately skews its capital structure toward debt, on the premise that the lower-cost financing ultimately increases returns to shareholders. While no one can necessarily agree, the bottom line is the firm should not have any problem managing its debt load, given its margin and free cash flow profile. Coke regularly generates free cash flow above $8 billion (in the high-teens to low-20s range as a percentage of sales), even amid the disruption caused by COVID-19. Even higher levels driven by improving margins and working capital initiatives. Management has made commendable strides toward top-tier receivable and payable management, and the supply chain initiatives combined with a reworked bottler system should yield modest improvements in inventory management. Moreover, Coca-Cola boasts strong coverage ratios above its peers. One of the better illustrations of Coke’s financial strength is its ability to operate one of the larger domestic commercial paper programs. Issuing commercial paper is an integral part of the company’s cash management strategy, and the fact that investors and financial institutions are consistently willing to finance the company at such low rates lends credence to the reliability of its cash flows. The firm typically issues new commercial paper once it pays off a previous maturity, and the capacity to persistently finance its operations cheaply reinforces its financial strength. Management has a long-term target net-debt level of 2-2.5 times EBITDA, which is reasonable. Leverage levels ticked up as management tapped capital markets to shore up liquidity amid the coronavirus pandemic, but the recovery in the business and the spigot of free cash have already brought leverage back within this comfortable range; while it may oscillate from time to time, it to remain manageable longer term.

Bulls Say

By volume, Coke is almost 3 times the size of its next largest competitor in the global nonalcoholic ready to-drink market, which begets scale benefits.

Despite a greater focus on marketing efficiency, its ad budget is still unparalleled and should help maintain consumer awareness and brand relevance.

The recently established platform services group should allow Coke to more effectively leverage data and improve technological capabilities across its mammoth production and go-to-market system.

Company Description

Coca-Cola is the largest nonalcoholic beverage entity in the world, owning and marketing some of the leading carbonated beverage brands, such as Coke, Fanta, and Sprite, as well as no sparkling brands, such as Minute Maid, Georgia Coffee, Costa, and Glaceau. Operationally, the firm focuses its manufacturing efforts early in the supply chain, making the concentrate (or beverage bases) for its drinks that are then processed and distributed by its network of more than 100 bottlers. Concentrate operations represent roughly 85% of the company’s unit case volume. The firm generates most of its revenue internationally, with countries like Mexico, Brazil, and Japan being key markets outside of the U.S.
(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.

Tags US Market

Technology Stocks

Xero Ltd: Continued uplift in Lifetime Value (LTV) of Subscribers

Post author By lvc-admin
Post date June 3, 2022
No Comments on Xero Ltd: Continued uplift in Lifetime Value (LTV) of Subscribers

Investment Thesis:

Competent leadership team with a proven track record of delivering strong growth (Strong top-line momentum driven by strong support of accountants and bookkeepers with annualised monthly recurring revenue increasing at CAGR 32% and strong subscriber growth with positive LTV (Lifetime Value) trends (over FY17-22, ANZ LTV grew at CAGR 34% and International LTV grew at CAGR 49%).
Solid product offering that is secure, scalable and efficient technology which is competing against competitors with technology that has legacy issues. We note that XRO’s small business platform is an ecosystem of more than 700 connected apps backed by a community of more than 50,000 users of XRO’s API developer tools. Going forward the Company could potentially increase its revenue by monetising its platform in other ways like charging third party app developers.
Potential for meaningful acquisitions to fill gaps in product capability. In our view, the Company is well positioned to make acquisitions going forward (given its balance sheet and funding status).
The Company continues to focus on cloud accounting, and we see significant upside potential in the sector given the fact that the current levels of small business cloud accounting adoption globally is estimated to be less than 20% of the total market or opportunity across English-speaking countries in which the Company operates.

Key Risks:

Decrease of migration to cloud software.
Currency headwinds due to weakening of NZ$ relative to AUD, USD and Pound.
Deteriorating sentiment if the economy and IT spending weakens.
Excessive competition from other established players like Intuit leading to loss of market share.
Inability to extract higher operational efficiencies as the Company scales up.
Issues in gaining market share especially in markets with established incumbents.

Key Highlights:

Total LTV increased +43% YoY to $10.9bn in FY22 (equating to 5-year CAGR of +34% for ANZ and +49% for International), equating to LTV/CAC (LTV/customer acquisition cost) of 6.9x (up +0.5x YoY), driven by good progress on subscriber growth, a marked improvement in average revenue per user (ARPU) of +7% YoY (+9% in CC), along with a -11bps YoY decline in monthly churn to 0.90%, which remained consistently below pre-Covid pandemic level.
Operating revenue grew +29% YoY (+30% in CC) to $1.1bn, with Core accounting revenue up +23% driven by subscriber growth (up +19% YoY to 3.3 million) and ARPU increases (driven by price increases) and Platform revenue up +113% (to account for 11% of total operating revenue) driven by growth in payments, payroll and revenues from recently acquired businesses including Planday.
Gross profit increased +31% YoY to $957.4m with margin improving +130bps to 87.3% (includes the operations of Planday), largely due to efficiency gains in customer support teams and hosting costs for cloud-based products.
Total operating expenses, inclusive of acquisition integration costs, increased +39% YoY, reflecting greater investment in product design and development and sales and marketing expenses as travel cost resumed, resulting in -32% YoY decline in operating profit to $42m.
Net loss was $9.1m vs net profit of $19.8m in FY21, impacted by a fair value revaluation gain on contingent consideration of $38.9m, a new revenue incentive with Planday management resulting in a $10.5m expense and goodwill impairment relating to the acquisition of Waddle of $20.4m.
Free cash flows declined -96% YoY to $2.1m as +8% YoY increase in operating cashflow was more than offset by +117% YoY increase in investments. XRO has $150m of undrawn committed debt facilities.
Australia Market revenue increased +26% YoY (+27% in CC) to $483.3m with 229k net subscriber additions to reach a total of 1.34 million subscribers.
New Zealand Market revenue increased by +15% YoY to $149.4m with 66k net subscriber additions to reach a total of 512k.
UK Market revenue increased +30% YoY (+30% in CC) to $291.6m with 130k net subscriber additions taking total subscribers to 850k.
North America Market revenue increased +28% YoY (+31% in CC) to $72.6m, with 54k net subscriber additions to reach a total of 339k subscribers.
Rest of World (ROW) Market revenue increased +85% YoY (+90% CC) to $100m with subscribers increasing 51k to 226k.

Company Description:

Xero Ltd (XRO) is a software as a service (SaaS) company, engaged in the provision of a platform for online accounting and business services to small businesses and their advisors. The Company operates through two operating segments: Australia and New Zealand (ANZ), and International (UK + North America + Rest of the World).

(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.

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.

Tags Top Stories

Technology Stocks

Deere Delves Into its Precision Agriculture and Sustainability Strategy at its 2022 Analyst Day

Post author By lvc-admin
Post date June 2, 2022
No Comments on Deere Delves Into its Precision Agriculture and Sustainability Strategy at its 2022 Analyst Day

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Business Strategy & Outlook

Deere offers customers an extensive portfolio of agriculture and construction products. It will continue to be the leader in the agriculture industry and one of the top players in construction. For over a century, the company has been the pre-eminent manufacturer of mission-critical agricultural equipment, which has led to its place as one of the world’s most valuable brands. Deere’s strong brand is underpinned by its high-quality, extremely durable, and efficient products. Customers in developed markets also value Deere’s ability to reduce the total cost of ownership. The company’s strategy focuses on delivering a comprehensive solution for farmers. Deere’s innovative products target each phase of the farming process, which includes field preparation, planting and seeding, applying chemicals, and harvesting. The company also embeds technology in its products, from guidance systems to seed placement and spacing and customized spraying applications. Deere is committed to expanding customer offerings and providing value-added services. Additionally, the management team will look to reduce the company’s cost structure as some markets have matured, providing an opportunity to rethink its footprint and create a leaner organization. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Deere provides, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed.

Deere has exposure to end markets with attractive tailwinds. In agriculture, the demand for corn and soybeans will be strong in the near term, largely due to robust demand from China and tight global supplies. On the construction side, the company will benefit from the $1.2 trillion infrastructure deal in the U.S. The country’s roads are in poor condition, which has led to pent-up road construction demand.

Financial Strengths

Deere maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of fiscal 2021, coming in at 0.4. Total outstanding debt, including both short- and long-term debt, was $10.4 billion. Deere’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of fiscal year-end 2021 stood at $7.2 billion on its industrial balance sheet. The comfort in Deere’s ability to tap into available lines of credit to meet any short-term needs. Deere has access to $5.7 billion in credit facilities. The Deere can generate solid free cash flow throughout the economic cycle. The company can generate over $6 billion in free cash flow in midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, the management is determined to rationalize its footprint by reducing the number of facilities in mature markets. If successful, this will put Deere on much better footing from a cost perspective, further supporting its ability to return cash to shareholders. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $38 billion in fiscal 2021, along with $38 billion in finance receivables and $829 million in cash. In the Deere enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

Higher crop prices encourage farmers to grow more crops and will lead to more farming equipment purchases, substantially boosting Deere’s revenue growth.

Deere will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand has eased, encouraging farmers to refresh their machine fleet.

Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, benefiting Deere.

Company Description

Deere is the world’s leading manufacturer of agricultural equipment, producing some of the most recognizable machines in the heavy machinery industry. The company is divided into four reportable segments: production and precision agriculture, small agriculture and turf, construction and forestry, and John Deere Capital. Its products are available through a robust dealer network, which includes over 1,900 dealer locations in North America and approximately 3,700 locations globally. John Deere Capital provides retail financing for machinery to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Deere product sales.

(Source: Morningstar)

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

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

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.

Tags Street Talks

Shares Small Cap

Rocket Remains in Strong Competitive Position, but Higher Rates Will Lead to Lower Earnings in 2022

Post author By lvc-admin
Post date June 2, 2022
No Comments on Rocket Remains in Strong Competitive Position, but Higher Rates Will Lead to Lower Earnings in 2022

price of btc is going to breakout

Business Strategy & Outlook

While Rocket Companies offers a variety of products and services, the firm is best known for its Rocket Mortgage segment, which provides Rocket with most of its revenue. The mortgage industry is fractured and highly competitive, but Rocket has distinguished itself by operating as an entirely digitally lender, originating and servicing its mortgages through its mobile app and website. Rocket has made substantial investments in automating the mortgage process and has been an industry leader in increasing loan processing speed and removing pain points for consumers. These investments along with its control over the appraisal and titling process, through its ownership of Amrock, have allowed the firm to offer an industry-leading mortgage experience to borrowers while also enjoying a cost structure advantage over its competitors. As a digital lender Rocket is able to scale its capacity for mortgage volume up or down quickly since each loan requires less manual attention. This flexibility will be needed as rising mortgage rates push mortgage origination volume well below their 2020 and 2021 highs. Rocket is particularly exposed to this trend as it is strongest in refinance activity and price sensitive first-time homebuyers. As origination activity is curtailed by higher interest rates, the Rocket’s revenue and earnings to fall from 2021, particularly as pricing in the mortgage secondary market has cooled down.

That said, through the full cycle that Rocket will continue to gain market share from other lenders. Consumers have become more comfortable with conducting their finances digitally during the pandemic, and digital lenders, like Rocket, have benefited from this tailwind. Rocket has had strong success in expanding its partner network. New partnerships with firms like Mint and Morgan Stanley, in which these firms offer Rocket’s mortgages to their customers, will help drive growth. While Rocket’s revenue and earnings will likely remain volatile, a symptom of the cyclical nature of the mortgage industry, the company’s strong competitive position and trends in consumer behavior will provide it with long-term secular growth.

Financial Strengths

Rocket operates in a highly cyclical industry, as a result its revenue and earnings have the potential to drop sharply due to economic factors completely out of its control. While Rocket does resell the mortgages it makes within days of origination, the sheer volume of mortgages that Rocket creates means that the company has billions in mortgage debt on its balance sheet at any given point in time. At the end of December, Rocket had more than $19 billion in mortgages, which were financed by equity and less than $13 billion in funding facilities. The combination of volatile revenue and substantial funding needs means that Rocket’s financial strength is an important factor to watch, particularly during slower markets. Despite this, no one can have any significant concerns about Rocket’s financial health at this time. The company has a strong balance sheet and has been able to maintain constant profitability, even during slow periods for mortgage origination. Rocket had over $2.1 billion in cash at the end of December 2021 and only $6 billion in debt not directly tied to its mortgage holdings. With net debt of roughly 1.5 times that projected 2023 EBITDA, Rocket should have more than enough financial resources to see it through a slow mortgage market, should one develop.

Bulls Say

Rocket has been steadily gaining market share in both its direct-to-consumer and partner network mortgage origination channels.

Rocket’s digital origination model gives it a cost advantage over its peers and allows it to respond rapidly to market developments.

Rocket has been able to sign major partnerships to expand its partner network. Deals with Morgan Stanley and Intuit’s Mint represent major wins for the company.

Company Description

Rocket Companies is a financial services company that was originally founded as Rock Financial in 1985 and is currently based in Detroit. Rocket Companies offers a wide array of services and products but is best known for its Rocket Mortgage business. The company’s mortgage lending operations are split between its direct-to-consumer lending, which sees borrowers accessing the company’s lending arm directly through either its mobile app or website, and its partner network where mortgage brokers and other firms use Rocket’s origination process to offer loans to their customers. The company has rapidly gained market share in recent years and is now the largest mortgage originator in the U.S. as well as the servicer for more than 2 million loans.

(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.

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.

Tags Small Caps, Street Talks

Dividend Stocks

While Inflation Runs Rampant, Pepsi’s Leading Snack and Beverage Mix Should Serve It Well

Post author By lvc-admin
Post date June 1, 2022
No Comments on While Inflation Runs Rampant, Pepsi’s Leading Snack and Beverage Mix Should Serve It Well

Business Strategy & Outlook

For many consumers, the Pepsi trademark elicits images of cola containers and ads extolling the brand’s taste superiority versus Coke. While PepsiCo is still a beverage behemoth, its business now extends beyond this industry, with Frito-Lay and Quaker products accounting for over half of sales and over 65% of profits. A diversified portfolio across snacks and beverages is the source of many of the company’s competitive advantages. Though management missteps have stymied performance in the past, the confluence of better execution and benefits inherent to its integrated business model has allowed Pepsi to reaccelerate profitable growth, and the plenty of room to run.

After years of sluggish sales growth and underinvestment, Pepsi has committed to reinvigorating its top line. To that end, it has made significant investments in manufacturing capacity (for example, production lines to meet demand for reformulated packaging), system capacity (route optimization and sales technology), and productivity (harmonization and automation). These investments as prudent and believe they will allow the company to strengthen key trademarks such as Mountain Dew and Gatorade, deepen its presence in growth markets like sub-Saharan Africa, and yield enough cost savings to reinvest and widen profits. Recent strategic pivots in the energy category (such as the Rockstar acquisition and Mountain Dew line extensions) should also underpin growth and margins.

Pepsi’s growth trajectory is not without risk, as the company faces secular headwinds such as shifts in consumer behavior. Additionally, changing go-to-market dynamics, such as online commerce that encourages real-time price comparisons and obviates the extent of Pepsi’s retail distribution advantage, allow for more nimble and aggressive competition. Still, the structural dynamics emanating from Pepsi’s scale, the cachet of its brands, and the breadth of its portfolio, which support its wide moat, should enable the company to maintain and augment its competitive positioning.

Financial Strengths

A Pepsi’s financial health as excellent. While leverage has ticked up due to recent acquisitions, the company still has a strong balance sheet with manageable debt levels and robust free cash flow generation. Strong interest coverage ratios also lend credence to the firm’s health in this regard. One cannot not foresee Pepsi having any issues meeting its contractual obligations for the foreseeable future, given the reliability of its business and its stalwart positioning across its categories. Historically, the company has regularly produced around $7 billion in free cash flow (high-single to low-double digits as a percentage of sales). Management has prioritized strategic investments across the business of late, which as prudent to aid its competitive standing over the long term. While capacity (particularly in snacking growth areas) and digital capability investments will remain elevated in 2022 and beyond, the free cash flow to normalize at or above historical levels, particularly as the company’s revenue management and supply chain digitization initiatives continue to bear fruit. Management’s guiding principle as it relates to debt levels is to maintain access to Tier 1 commercial paper. While the prerequisites for this status vary by rating agency, no one can impediments to Pepsi’s ability to continue relying on this short-duration paper, and the current leverage levels (around 2.5 times net debt/EBITDA) are appropriate for the firm. Moreover, the firm’s commercial paper access as one of the biggest testaments to its financial strength; this cheap financing should facilitate and perpetuate Pepsi’s financial flexibility. As exit the pandemic, liquidity should be of no concern to Pepsi investors–in addition to roughly $6 billion in cash at the end of fiscal 2021, the firm has undrawn credit facilities in excess of $7 billion.

Bulls Say

In still beverages—a category facing fewer secular challenges, particularly in the U.S.–Pepsi is a much more formidable competitor to Coca-Cola.

Pepsi’s global dominance in salty snacks may be underappreciated; with volume share more than 10 times that of the next-largest competitor, the firm benefits from unparalleled unit economics and go-to market optionality.

The firm’s consolidated beverage and snack distribution operations, combined with its direct store delivery capabilities, allow for better execution in merchandising.

Company Description

PepsiCo is one of the largest food and beverage companies globally. It makes, markets, and sells a slew of brands across the beverage and snack categories, including Pepsi, Mountain Dew, Gatorade, Doritos, Lays, and Ruffles. The firm uses a largely integrated go-to-market model, though it does leverage third-party bottlers, contract manufacturers, and distributors in certain markets. In addition to company-owned trademarks, Pepsi manufactures and distributes other brands through partnerships and joint ventures with companies such as Starbucks. The firm segments its operations into five primary geographies, with North America (comprising Frito-Lay North America, Quaker Foods North America, and North America beverages) constituting around 60% of consolidated revenue.

(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.

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.

Tags Top Stocks

Global stocks

Aurora Again Punishes Existing Shareholders with Massive Dilution from Latest Equity Raise

Post author By lvc-admin
Post date June 1, 2022
No Comments on Aurora Again Punishes Existing Shareholders with Massive Dilution from Latest Equity Raise

Business Strategy & Outlook

Aurora cultivates and sells cannabis predominantly in Canada but also exports it to the global medical market. Aurora considers itself a medical cannabis company first but has benefited from the legalization of recreational cannabis in Canada in 2018. Recreational use now accounts for nearly 40% of gross sales, although this share is slightly lower than peers. The Canadian medical market to grow slowly at roughly 1.5% as recreational legalization takes customers. The robust recreational growth of roughly 15%, driven by the conversion of illicit-market consumers into the legal market and new cannabis consumers.

Aurora has expanded its global medical exports, currently shipping to more than 20 countries. The global market looks lucrative, given higher realized prices and the growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Aurora. Continued growth in its medical exports has helped Aurora see volume and price growth even as its domestic market has struggled during pandemic lockdowns. The roughly 20% average annual growth through 2031. The U.S. will change federal law to recognize states’ choices on legality within their borders, unlocking the fastest-growing and largest potential cannabis market, which as per the estimate will be more than five times larger than the Canadian market. At present, Aurora would not benefit from a change in U.S. federal law on THC cannabis, as its only exposure is through hemp-derived CBD products through its May 2020 acquisition of Reliva. Aurora is one of the few Canadian producers with no standing deals with a U.S. multistate operator, although it believes it would be able to draw an attractive partner should the law change.

Unlike some of its peers, Aurora doesn’t have the financial backing of a bigger company. This forces it to rely more heavily on equity market access while its peers can rely on the deep pockets of a large partner for capital. This raises the risk of massive equity dilution to avoid running out of cash. Most recently, it issued equity at a 60% discount to the fair value estimates in May 2022.

Financial Strengths

Aurora’s financial health has been a lingering concern but is improving. At the end of its third quarter of fiscal 2022, the company had about CAD 334 million of convertible notes compared with a market capitalization of roughly CAD 700 million. The notes are due in 2024, so the company has some time. The company raised another $150 million in May 2022 by selling shares and warrants. The extra cash boosts financial health at a massive cost to existing shareholders. Aurora continues to generate cash losses. This is particularly concerning because the company has limited capital markets access and no major strategic partner backing it. However, since announcing its restructuring program, the company has significantly reduced its cash burn and positive EBITDA is nearing. Aurora’s access to debt markets is limited. Consequentially, the company has relied on equity offerings to fund its cash needs, leading to significant dilution for existing shareholders. In fact, shares roughly doubled from March 2020 to March 2021. Having sizable leverage while remaining unprofitable creates additional risk for Aurora. This creates a wide range of possible valuation outcomes for shares amid the significant risk of value destruction. With Aurora shares having fallen over the last several months along with the broader cannabis sector, any share issuances would be even more dilutive.

Bulls Say

Aurora has rationalized its production facilities and head count, significantly reducing its cash burn.

Cannabis cultivation is complicated, including challenging operational ramp-ups and optimization. Aurora’s strategic focus on its cultivation operations will help it achieve lower production costs than peers.

Aurora’s international exposure can deliver high margin sales to help its path to profitability.

Company Description

Aurora Cannabis, headquartered in Edmonton, Canada, cultivates and sells medicinal and recreational cannabis through a portfolio of brands that includes Aurora, CanniMed, Daily Special, MedReleaf, and San Rafael ’71. Although the company primarily operates in Canada, it has expanded internationally through medical cannabis exporting agreements or cultivation facilities in more than 20 countries.

Tags US Market