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Global stocks

Aviva Is Shifting the Focus of Its Business

Business Strategy & Outlook

As a good middle-of-the-road insurer Aviva has had its fair share of problems over the years. As with many previously poorly run companies, these issues have stretched across leverage, controls, turnover and likely relatedly, its sprawling business portfolio. While prior leadership teams tried to get a handle on this business, up until now none have really done so. The attribute this to a focus on growth and innovation, without a focus on strong capital management and discipline. Mark Wilson’s tenure was characterized by the Friends Life acquisition, the digital garage and his appointment at BlackRock. It felt like Maurice Tulloch would tilt the business more toward general insurance but it is likely that the business’ problems became too much for him. Present CEO Amanda Blanc is now set on making things right and has divested noncore assets, promising now to focus on the U.K., Ireland, and Canada.

Aviva is not a highly differentiated business and does not have a strong strategy. As a middle of the road business one can think reinvestment is critical. Two of its three objectives have been achieved in and those are focus and financial strength. However, what to see is how Blanc will transform the remaining assets into a collection of units that are better than they are and perhaps approaching market-leading. From what this is about investing in exceptional customer service and it’s hard to imagine anyone disputing that need. All too often that falls by the wayside in this segment of financial services. However, there is no disputing that excellent customer service has tangible and financial benefits. It leads to lower customer turnover and lower acquisition costs both in terms of volume and margin. Lastly, this is largely a long-term savings business so accretive investment in Aviva Investors will be crucial.

Financial Strengths

The Aviva has a weak balance sheet. Aviva’s debt is a little over half of its shareholders’ equity. Most of this is core structural borrowings that are held by the center. Pleasingly, management has decided to appease investors with a near GBP 2.0 billion debt reduction in 2021 and a further GBP 1.0 billion debt reduction program over the coming years. This debt reduction plan has been assisted by the GBP 7.5 billion raised from the eight business sales. This has provided management with plenty of room to commence a GBP 1.0 billion buyback on top of the deleveraging. The net of these actions should substantially improve the business’ leveraged position. The interim dividend for 2021 was increased to GBX 7.35 per share and the total dividend for the year will be GBX 22.0. This means a final of GBX 14.7 per share for full-year 2021. Guidance is for a dividend of GBX 31.5 for full results of 2022.

Bulls Say

  • Aviva’s new CEO is still making good strides to focus, transform, and simplify the business.
  • Leverage has been an issue, and this is a primary focus of the new management team.
  • Targeted capital remittance plans provide a nice buffer for further buybacks or business reinvestment.

Company Description

Aviva is a multiline insurer headquartered in the United Kingdom. It traces its roots back to the late 1700s with the establishment of the Hand-in-Hand Fire Office, a mutual insurer of loss from fire. This mutual, along with many other entities acquired and established over the years, was purchased by Commercial Union in 1905. In the late 1990s, Commercial Union and General Accident merged to form Commercial General Union, or CGU. A few years later CGU and Norwich Union merged and later rebranded as Aviva. Aviva acquired Friends Life in 2015. Aviva has been through quick successions of leadership in recent years. Mark Wilson served as CEO in the five years between 2013 and 2018. Then Maurice Tulloch took over and led up to July 2020. Amanda Blanc has led since then.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks

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

Business Strategy and Outlook

Coca-Cola’s ubiquity and brand resonance in the non-alcoholic 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, it is believed 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. It is estimated Coke derives more than 40% of sales from developing or emerging economies with burgeoning middle classes and low per-capita CSD consumption. It is expected 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 are prudent and it is believed 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. It is believed this pithy synopsis represents the crux of the firm’s competitive positioning, underpinned by its cost advantage and intangible assets.

Financial Strength

It is believed 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. However, it is not necessary, 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. There are 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 believed to be 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, expecting it to remain manageable longer term.

Bulls Say’s

  • By volume, Coke is almost 3 times the size of its nextlargest competitor in the global non-alcoholic readyto-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 Profile 

Coca-Cola is the largest non-alcoholic beverage entity in the world, owning and marketing some of the leading carbonated beverage brands, such as Coke, Fanta, and Sprite, as well as nonsparkling 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 is not liable for any unintentional errors in the document.The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Narrow-Moat Adidas Is Dealing with the Pandemic and Other Challenges, but Its Brand Power Remains

Business Strategy and Outlook Adidas is a leader in athletic and “athleisure” apparel with a narrow-moat rating based on an intangible brand asset. While sales declined in 2020 due to COVID-19 and the recovery has been rocky, Adidas is poised to meet many of the goals of its five-year Own the Game plan. For example, its e-commerce, now available in nearly 60 countries, generated EUR 3.9 billion in sales in 2021, accounting for 19% of its total. Adidas expects its e-commerce to rise to EUR 8 billion-EUR 9 billion in 2025, which is achievable. Further, the firm’s new sportswear offerings and plans to improve its position in key categories like running and outdoor will be successful. However, because of heavy competition and pandemic-related disruption, the estimates are below or at the low end of Adidas’ five-year targets of compound average sales growth of 8%-10%, average net income growth of 16%-18%, and 2025 gross and operating margins of 53%-55% and12%-14%, respectively.

There is a continuing growth for Adidas in North America, which accounted for 24% of 2021 sales. Although impacted by the pandemic and supply issues, the firm has overcome weakness in U.S. physical retail in the last few years by introducing innovative and fashionable products. It is believed it has gained North America market share through fashion products and performance-sports innovations, and these products will allow it to maintain share even if the recent athleisure and retro trends, which have helped the brand, cool off. Although it has recently had difficulties in the country, it is believed that Adidas has a strong opportunity in the athletic apparel market in China, now the second-largest in the world after the U.S. The firm’s sponsorship of international football (soccer) puts it in position to benefit from heavy investment in the sport in China. Its sales in Greater China will rise to EUR 6.1 billion in 2025 from EUR 4.6 billion in 2021.

Financial Strength

 Adidas is in good financial shape coming out of the COVID-19 crisis. After having paid down EUR 600 million in debt in 2021 and closing its EUR 2.1 billion Reebok sale, it closed March 2022 in a net cash position with EUR 3.1 billion in cash and EUR 2.5 billion in long-term debt. Adidas recently closed its revolving credit facility with a state-owned bank in Germany and replaced it with a EUR 1.5 billion facility with a group of banks. Unlike the prior facility, this new credit line allows the firm to pay its typical annual dividend. The firm does have significant commitments for marketing and overhead operating expenses which totalled EUR 2.5 billion and EUR 6.3 billion, respectively, in 2021. Adidas has a publicly stated target ratio of net debt/EBITDA of less than 2.0 and has been well below this level for at least a decade. Adidas will return significant cash to shareholders. In 2021, the firm generated EUR 2.4 billion in free cash flow/equity (11% of sales), repurchased about EUR 1 billion worth of stock, and paid about EUR 600 million in dividends. Adidas will generate about EUR 12.5 billion in cumulative free cash flow/equity over the next five years and use this to issue EUR 3.7 billion in dividends and repurchase EUR 7.1 billion in shares. It is believed that an average dividend payout ratio of 32% in this period, within the stated target range of 30% to 50%. However, it is believed Adidas reduces shareholder value if it repurchases shares above the fair value estimate, as has typically been the case over the past few years.

Bulls Say’s

  • Adidas’ e-commerce gives the company greater control over its brand and pricing. The firm has increased its digital capabilities and cut wholesale accounts. Adidas’ e-commerce sales were nearly EUR 4 billion in 2021, or about 19% of total sales. 
  • Adidas’ partnerships with celebrities like Beyonce provide an edge over other athletic apparel firms. The firm has greatly expanded its Yeezy brand with no apparent loss of consumer interest. 
  • Adidas has about 15% market share in China, the fastest-growing athletic apparel market, and will benefit from the growth of athletics in the country.

Company Profile 

Adidas designs, develops, produces, and markets athletic and leisure apparel, footwear, accessories, and sports equipment. Under its eponymous brand, it produces apparel for competitive athletics, casual activewear, and casual fashion. Its fashion brands include Yeezy, Ivy Park, and Y-3. Adidas sells its products in more than 160 countries through more than 2,100 owned retail stores, 15,000 mono-branded franchise stores, 150,000 wholesale doors, and more than 50 e-commerce sites. The company was founded in 1949 in Germany.

(Source: MorningStar)

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

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

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

Categories
Dividend Stocks

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 an estimated 65% of profits. A diversified portfolio across snacks and beverages is considered 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 there is 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 are considered 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, 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 

Pepsi’s financial health is considered 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. Pepsi is not forecasted to have 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 is considered 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, free cash flow is expected 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, there are no impediments to Pepsi’s ability to continue relying on this short-duration paper, and current leverage levels (around 2.5 times net debt/EBITDA) are considered appropriate for the firm. Moreover, the firm’s commercial paper access is viewed as one of the biggest testaments to its financial strength; this cheap financing should facilitate and perpetuate Pepsi’s financial flexibility. As the pandemic ends, 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.

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

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

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

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

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

Categories
Shares Small Cap

Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in greenfield materials recovery, waste treatment, and EfW projects

Business Strategy and Outlook

It is a favourable Cleanaway’s strategy, which seeks to maintain its leading position in commercial and industrial, or C&I, and municipal waste collections and to continue to improve its moat profile by investing in midstream materials recovery assets and, where possible, in downstream disposal assets. Cleanaway’s is the leading player in C&I and municipal waste with around 140,000 C&I customers and some 90 municipal council waste collection contracts. The economics of the waste management industry are overwhelmingly local in nature. Cleanaway’s strong presence in all of Australia’s state capital cities is aimed at local market dominance. This local market dominance in turn delivers route density that better spreads fixed costs–an imperative for profit generation in waste collection. 

Cleanaway is a relative latecomer to disposal, biological treatment, and midstream materials recovery with global players waste management competitors Veolia and Suez possessing high-quality disposal assets Cleanaway cannot replicate. An exit from the Australian market by either player would be the only route to materially increasing disposal earnings. As such, the sale of the Lucas Heights Landfill by Suez to Cleanaway–the result of the Veolia-Suez merger–is a rare windfall. It is hopeful about Cleanaway’s growth into materials recovery which feature more favourable economics than waste collection. Under its “BluePrint 2030” capital allocation strategy, the group will continue to focus investment in materials recovery and energy from waste, or EfW. Since fiscal 2016, Cleanaway has invested in excess of AUD 100 million in greenfield materials recovery, waste treatment, and EfW projects. The recent purchase of the materials recovery assets of SKM Recycling represents a further step toward Cleanaway’s goal of moving further into the industries midstream. 

Further diversifying Cleanaway away from waste collection is the acquisition of Toxfree in late fiscal 2018, skewing Cleanaway’s earnings stream away from collections, the most competitive segment of the waste management value chain.

Financial Strength

Cleanaway debt-funded its acquisition of key Australian post-collection assets from Suez. Leverage–defined as net debt/EBITDA excluding IFRS-16 lease liabilities–sits at 2.24 times at the end of the first half of fiscal 2022, up from 1.0 times at fiscal 2021 year-end. Nonetheless, significant headroom to Cleanaway’s leverage covenant on existing debt facilities–calibrated at 3.0 times–exists. Therefore, balance sheet flexibility exists should further acquisition opportunities arise. It is comforting with Cleanaway’s balance sheet amid COVID-19 induced turbulence. Specifically, Cleanaway’s liquidity position is more than ample to secure the business’ operations without external financing through the medium-term. With minimal debt maturities over the fiscal 2021–fiscal 2024 period, Cleanaway’s sources of cash— those being cash at bank, undrawn debt and operating cash flow–are more than sufficient to fund Cleanaway’s ongoing operations over said period. Cleanaway’s earnings exhibit little volatility through the economic cycle. As a result, its conservatively positioned balance sheet provides ample flexibility for further capital allocation to materials recovery and waste disposal assets —whether bolt-on or greenfield–under Cleanaway’s BluePrint 2030 strategy. Return of capital to shareholders could be considered in the absence of suitable mid- or downstream waste asset investment opportunities.

Bulls Say’s

  • Cleanaway is benefiting from industry consolidation. 
  • Municipal waste contracts provide relatively stable cash flows through the economic cycle. 
  • Capital allocation improved markedly under outgoing CEO Vik Bansal’s guidance.

Company Profile 

Cleanaway Waste Management is Australia’s largest waste management business with a national footprint spanning collection, midstream waste processing, treatment, and valorisation, and downstream waste disposal. Cleanaway is active in municipal and commercial and industrial, or C&I, waste stream segments and in nonhazardous and hazardous liquid waste and medical waste streams following the acquisition of Toxfree in fiscal 2018. While Cleanaway is allocating greater capital to midstream waste processing and treatment, earnings remain skewed toward waste collection. Cleanaway is particularly strong in C&I and municipal waste collection with strong market share in all large Australian metro waste collection markets. 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Shares Small Cap

Sky Conducts Due Diligence on Mediaworks Advertising Businesses

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

Business Strategy & Outlook:   

Sky is the monopoly set-top-box based pay-TV services provider in New Zealand, with a satellite distribution platform covering the whole country. It has a grip on key content (particularly sports), and its big subscriber base was relatively sticky until fiscal 2015, given limited home entertainment options. However, Sky’s core content aggregation, bundled-channel distribution, and recurring-subscription-revenue business model is now coming under enormous pressure. Internet-facilitated over-the-top distribution technology is spawning various new players offering subscription on demand streaming services. 

Importantly, emerging competition will continue to affect Sky Network Television’s high-margin, high free cash flow business model. Competition for content from players such as telecommunications companies, Netflix, Amazon, Apple, Google, HBO, and ESPN is likely to put pressure on content costs, while marketing expenses may also increase in response. This is the reason Sky is in the midst of a transition to a multiplatform subscription entertainment provider, with the rejuvenated management especially focused on investing in content and its subscription video on demand business. To make matters worse, the mayhem caused by COVID-19 is directly affecting sporting events, over which Sky has substantial broadcast rights. With these events severely disrupted by the virus, inventory of live sports on Sky will increasingly be compromised, albeit there is corresponding cost relief. Despite these challenges, with a declining capital expenditure profile (another benefit of pivoting to a streaming-centric model) and the May 2020 capital raising, Sky has a sound financial footing to execute the transformation program.

Financial Strengths: 

As at the end of December 2021, Sky had a cash holding of NZD 74 million on the balance sheet and effectively no debt. There is also an undrawn NZD 200 million facility (maturing July 2023). This provides ample firepower for Sky to continue its transformation from a set-top-box, legacy pay TV company to a hybrid satellite-streaming entity.

Bulls Say:  

  • Sky Network Television is a monopoly provider in the New Zealand pay-TV market, with a substantial subscriber base and scale.
  • The company currently has a stranglehold on all the key content with consumer appeal, especially in the sports genre and on an exclusive basis.
  • It enjoys a strong financial position augmented by solid free cash generation, allowing management to good dividends while reinvesting in content, new services, and technology.

Company Description: 

Sky Network Television is the only satellite pay-TV provider in New Zealand, and distributes local and overseas content to its customers through a digital satellite network. It generates subscription and content revenue from these customers. This business is augmented by a free-to-air television channel (Prime) and defensive forays into other distribution channels such as online video-on-demand and online access to live sports.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Engie is well Positioned to Benefit from the Power Prices Rally

Business Strategy & Outlook:   

Engie is one of the three largest integrated international European utilities, along with Enel and Iberdrola. Under the tenure of previous CEO Isabelle Kocher, the firm sold EUR 16.5 billion of mostly commodity-exposed assets– E&P, LNG, and coal plants–to focus on regulated, renewables, and client-facing businesses. This strategy lowered the weight of activities that typically have volatile cash flows and no economic moats. However, Kocher was blamed for the lack of visibility of the client-facing businesses. After she was ousted by the board in early 2020, the firm shifted its strategy to reduce the weight of these activities and sell stakes in noncore businesses. That drove the sale of Engie’s 32.05% stake in Suez to Veolia at an attractive price and of its multi-technical subsidiary Equans to Bouygues for EUR 7.1 billion. The latter is part of an EUR 11 billion disposal plan by 2023.

Engie will increase annual investments in renewables from 3 GW to 4 GW between 2022 and 2025 and 6 GW beyond. Regulated gas networks, mostly in France, account for around one third of the group’s EBIT. Contracted assets comprise thermal power plants in emerging markets, especially the Middle East and Latin America, with purchased power agreements, or PPAs, securing returns on capital. Remaining merchant exposure is made up of gas plants across Europe, Belgian nuclear plants and French hydropower assets. Gas plants are well positioned as the share of intermittent renewables increase. Nuclear and hydropower provide exposure to European power prices although Belgian nuclear plants will be shut by 2025. Taking that into account, the valuation sensitivity to EUR 1 change in power prices is EUR 0.16 per share, 1% of the fair value estimate. With net debt/EBITDA of 2.4 times, Engie has one of the lowest leverages in the sector. Still, the 2019 dividend of EUR 0.8 was canceled because of pressure from the French government, which has 34% of the voting rights, and the coronavirus impact. Still, the dividend was reinstated in 2020 and the 2021 dividend of EUR 0.85 is above the precut level. A projected 2021-26 dividend CAGR of 5% based on a 69% average payout ratio.

Financial Strengths:  

Net debt/EBITDA will average 2 times through 2026. Economic net debt including pension and nuclear provisions amounted to EUR 38.3 billion at end-2021, implying a leverage ratio of 3.6. The economic net debt to decrease to EUR 37.1 billion through 2026. Thanks to the EBITDA increase, economic net debt/EBITDA will decrease to 3.2 in 2026, averaging 3.1 between 2021 and 2026, comfortably below the company’s upper ceiling of 4. After the COVID-19-driven cancellation of the 2019 dividend of EUR 0.80 per share, Engie paid a EUR 0.53 dividend on its 2020 earnings implying a 75% payout. For 2021 results, the company will pay a dividend of EUR 0.85, implying a 70% payout in line with the 65%-75% guidance range over 2021-23. Between 2022 and 2026, the adjusted payout ratio to get a progressive dividend. All in all, the forecasts point to a 2026 dividend of EUR 1.08 involving a 5% CAGR by then. Ninety-one percent of debt was fixed-rate at the end of 2021. Meanwhile, 83% of the company’s debt was denominated in euros, 11% in U.S. dollars, and the balance in Brazilian real.

Bulls Say: 

  • Engie’s strategic shift announced in July 2020 should be value-accretive as evidenced by the sale of its stake in Suez and of Equans.
  • In the long run, the group could convert its gas assets into hydrogen assets.
  • The group is well positioned to benefit from rising power prices in Europe thanks to its French hydro dams.

Company Description: 

Engie is a global energy firm formed by the 2008 merger of Gaz de France and Suez and the acquisition of International Power in 2012. It changed its name to Engie from GDF Suez in 2015. The company operates Europe’s largest gas pipeline network, including the French system, and a global fleet of power plants with 63 net GW of capacity. Engie also operates a diverse suite of other energy businesses.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks Shares

Narrow-Moat Nordstrom’s Brand Advantage Provides Stability in a Tumultuous Market

Business Strategy & Outlook

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While the company was unprofitable in 2020 because of the COVID-19 crisis, its profitability returned in 2021, and its brand intangible asset is intact. Despite a rocky couple of years, the Nordstrom’s full-price and Rack off-price stores have competitive advantages over other apparel retailers. The Nordstrom is responding well to changes in its market. The company has about 100 full-price stores, with nearly all of them in desirable Class A malls (sales per square foot above $500) or major urban centers. This as an advantage, as some lower-tier malls are unlikely to survive. Moreover, Nordstrom has a presence in discount retail with Rack (about 250 stores) and significant e-commerce (42% of its sales in 2021). Still, the firm’s full-price business is vulnerable to weakening physical retail, and Rack competes with firms like no-moat Poshmark and narrow-moats TJX and Ross.

Nordstrom unveiled a new strategic plan, Closer to You, in early 2021 that emphasizes e-commerce, growth in key cities (through Local and other initiatives), and a broader off-price offering. Among the merchandising changes, Nordstrom intends to increase its private-label sales (to 20% of sales from 10% now) and greatly expand the number of items offered through partnerships (to 30% from 5% now). The firm set medium-term targets of annual revenue of $16 billion-$18 billion, operating margins above 6%, annual operating cash flow of more than $1 billion, and returns on invested capital in the low teens. As per forecast Nordstrom will consistently generate more than $1 billion in operating cash flow, achieve ROICs in the teens, and reach $16 billion in annual revenue in 2023. However, while they will trend higher, the operating margins will fall marginally shy of 6% in the long run due to intense competition, but this could change if some of the new initiatives are more successful than expected.

Financial Strengths 

The Nordstrom is in good financial shape and will overcome the virus-related downturn in its business. The firm closed April 2022 with nearly $500 million in cash and $800 million available on its revolving credit facility. Although it also had $2.9 billion in long-term debt, most of this debt does not mature until after 2025. Nordstrom’s net debt/EBITDA was a reasonable 2.5 times at the end of 2021. Nordstrom generated $200 million in free cash flow to equity in 2021, but this amount to rise through reductions in operating expenses, working capital management, and moderate capital expenditures. The annual average of about $830 million in free cash flow to equity over the next decade. As Nordstrom’s results have improved, it has resumed cash returns to shareholders through dividends and share repurchases (after suspending them during the pandemic). Over the next decade, buybacks of about $350 million per year and an average dividend payout ratio of 22%. Nordstrom’s capital expenditures were quite elevated prior to 2020. Its store count has increased from 292 at the end of 2014 to nearly 360 today as more than 60 Rack stores have opened since 2014 and the company has expanded into Canada and New York City. Nordstrom has estimated its total investment in Canada and New York at $1.1 billion for 2014-19. The Nordstrom’s yearly capital expenditures will average about $660 million (4% of revenue) over the next decade, well below 2019’s $935 million (6% of revenue).

Bulls Say

  • Nordstrom’s online sales exceeded $6 billion in 2021, making it one of the largest e-commerce firms in the U.S. 
  • As an operator of both an upscale department store and a discount chain, Nordstrom can reach a broader customer base than many competitors. Moreover, the availability of upscale brands at Rack provides an advantage over other discounters. 
  • Nordstrom serves an affluent customer base in its full line stores, which separates it from the many midlevel retailers in malls, and may allow it to overcome the effects of inflation on consumer spending.

Company Description

Nordstrom is a fashion retailer that operates approximately 100 department stores in the U.S. and Canada and approximately 250 off-price Nordstrom Rack stores. The company also operates both full- and off-price e-commerce sites. Nordstrom’s largest merchandise categories are women’s apparel (28% of 2021 sales), shoes (25% of 2021 sales), men’s apparel (14% of 2021 sales) and women’s accessories (14% of 2021 sales). Nordstrom, which traces its history to a shoe store opened in Seattle in 1901, continues to be partially owned and managed by members of the Nordstrom family.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Bouygues Raises Dividend to EUR 1.80 After Stable 2021

Business Strategy & Outlook:   

Bouygues is a conglomerate with a disparate number of businesses. In its construction segment Bouygues develops big infrastructure projects such as motorways, rails, power plants, and tunnels, among other things. Despite having small margins, the construction business is usually more resilient to the cycle as infrastructure spending tends to be less affected by recessions than residential construction. Bouygues’ cost structure is highly variable so when difficult times come it can adjust its cost base rapidly (although this also prevents it from benefiting from operating leverage in times of high demand). Both Bouygues Construction and Inmobilier (residential construction) have high exposure to France, as a significant portion of their business comes from there. olas, which provides raw materials like asphalt and concrete for road construction, is also relatively stable during the cycle as it is exposed infrastructure investment. In 2018 Colas increased its exposure to North America by acquiring Miller McAsphalt, engaged in road construction and bitumen distribution in Canada.

Bouygues is also the owner of TF1 and Bouygues Telecom. TF1 is one of the main media groups in France and owns several TV channels. As traditional TV advertising is in continuous decline, TF1 set up Unify in 2016, which encompasses several web pages in France that earn money through advertising. Bouygues Telecom is one of the main four telecom operators in France, with traditionally a larger presence in the mobile market, though it has been catching up in broadband in recent years. Bouygues Telecom’s business struggled in the first half of the 2010s as competitor Iliad launched Free, its mobile service. Bouygues saw its telecom EBITDA margins decline sharply as its main exposure was in the mobile segment. Since 2015, Bouygues Telecom turned around by expanding its presence and gaining market share in the fixed market, which has increased its margins, making it a more resilient player.

Financial Strengths: 

As of December 2021 Bouygues had around EUR 600 million in net debt, which represents a 0.2 times net debt (excluding leases) to trailing EBITDA ratio.Bouygues keeps low levels of leverage given its cyclical nature and small profit margins in many divisions. Bouygues has approximately EUR 3.7 billion in gross debt maturing in the next five years, however, maturities are evenly spread and it is not expected that the company will have any problem in repaying or refinancing its obligations. After the acquisition of Equans, which is expected to be completed in the second half of 2022, it is estimated that net debt/EBITDA could increase from around 0.2 times to the 1.0-1.5 times range. Although net debt should still be in a manageable range going forward, Bouygues’ conservatively managed balance sheet given & the cyclical nature of the business, shows some deleveraging is likely after the deal completion, which is expected in the second half of 2022

Bulls Say: 

  • Bouygues Telecom’s turnaround is an example of the company’s ability to deliver on its promises. This business should win some market share in the years to come. 
  • The construction business enjoys a good reputation worldwide, which will keep the backlog at a good level and big projects coming in. 
  • Bouygues has low financial leverage, which makes the company resilient during cycle troughs and allows it to maintain a stable dividend payment.

Company Description:  

Bouygues is a French conglomerate made up of a disparate range of assets: a construction business, a TV business, and a telecom business. It is one of the biggest construction companies in France and Europe with construction sales of around EUR 25 billion-EUR 30 billion and one of the four telecom operators in France, with both mobile and fixed operations and EUR 6 billion in revenue. It is also the owner of TF1, one of the main media and TV companies in France.

(Source: Morning Star)

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

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

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

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

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

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

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

Categories
Dividend Stocks

SL Green’s $3 billion megaproject One Vanderbilt was completed amidst the pandemic and has already achieved high occupancy rates

Business Strategy & Outlook:

SL Green Realty is a real estate investment trust engaged in the acquisition, development, repositioning, ownership, and management of commercial real estate properties, principally office properties. Most of the companies’ properties are in the Manhattan area. The company held interests in approximately 35 million SF, which includes ownership interests in 26.7 million SF in Manhattan buildings and 7.2 million SF securing debt and preferred equity investments. The strategy of the company is to maintain a high-quality portfolio of buildings in desirable locations and focus on creating value through new developments, capital recycling, and joint venture investments. As an instance, SL Green’s $3 billion megaproject One Vanderbilt was completed amidst the pandemic and has already achieved high occupancy rates. The economic uncertainty emanating from pandemic recovery and the remote work dynamic have created a challenging environment for office owners. Employees are still hesitant in returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rate for office spaces in Manhattan was recorded at 21% in first-quarter 2022, which is roughly 1000 basis points higher than pre-pandemic levels. On the supply side, approximately 17 million SF of office space, which amounts to around 4% of the total inventory is currently under construction in Manhattan and would be added to the market in upcoming years. It is expected this additional supply to further pressure fundamentals in the market. The Manhattan net absorption rate remains negative as of first-quarter 2022 and rental growth figures are disappointing especially given the highly inflationary environment.

Having said this, it is seen that an increasing number of companies requiring their employees to return to the office. In the long run, it is believed 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:
SL Green has relatively more debt compared with other office REITs especially after considering its share of debt in unconsolidated joint ventures. The firm owns a majority of its properties through unconsolidated JVs and these properties are significantly more leveraged than the firm’s balance sheet. However, the unconsolidated JV debt is secured by the portfolio assets and have limited recourse to the parent company. The company’s share of debt which also includes its share of unconsolidated JV debt was $9.9 billion as of the end of first-quarter 2022, resulting in a debt/EBITDA ratio of 13.1 times. The current debt/EBITDA ratio is also high because of a lower base in the current challenging environment. The figure should come down slightly over the next few years as fundamentals recover and EBITDA sees healthy growth. Having said this, it is believed that SL Green’s higher leverage implies a higher financial risk for the firm. The weighted average interest rate on the company’s debt was 3.11% and the debt maturity schedule shows that the maturities are adequately spread. Approximately 77% of the total debt is fixed-rate debt with the other 23% being floating rate debt. The debt service coverage ratio which is a ratio of EBITDA divided by interest and principal payments was 2.2 times as of the end of first-quarter 2022. The fixed-charge coverage ratio which is a ratio of EBITDA are divided by all fixed expenses (including interest) was 1.9 times as of the end of first-quarter 2022. The debt and fixed-charge coverage ratios are 3.8 times and 2.9 times, respectively, if considering only the consolidated figures. As a REIT, SL Green 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 70% for the year 2021. This shows the firm is generating sufficient cash to cover its fixed expenses and payout dividend.

Bulls Say:

SL Green’s midtown focus allows it to access one of the most vibrant business districts in the world. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend.
The development pipeline of the company is poised to drive significant net operating income growth for SL Green
SL Green attracts the highest-quality tenants with the deepest pockets, greatly reducing risk across its portfolio.

Company Description:
SL Green is one of the largest Manhattan property owner and landlord, with interest in around 35 million square feet of wholly owned and joint venture office space. The company has additional property exposure through its limited portfolio of well-located retail space. It operates as a real estate investment trust.

(Source: Morning Star)

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