Category: Sectors

No-Moat ABF’s Fair Value Estimate reduced to GBX 2,200

Post author By lvc-admin
Post date May 27, 2022
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Business Strategy & Outlook

Although the Associated British Foods’, or ABF’s, mass-apparel retail division– Primark–should deliver consistent growth through its expansion over the short term, supported by a reliable performance from the remaining largely commodified food divisions, the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to the no-moat rating.

Primark delivered a strong performance over the decade preceding the pandemic and to return to healthy growth rates in the short term. Its business model, which calls for low prices, high volumes, and large stores that offer an enjoyable shopping experience has proven popular with consumers and is likely to fare well in a period of significant cost of living challenges. Over the longer term, however, to see a gradual decline in like-for-like growth rates, and operating margins falling short of pre-pandemic heights. To increased competition, stemming largely from emerging digital-only players, and declining footfall on high streets as more retailers close down stores will hurt Primark’s model given the lack of an online business. These dynamics, along with the smaller store format planned as part of the expansion stand to reduce, Primark’s sales densities and consequently its operating leverage.

In its food businesses, ABF enjoys strong market positions across sugar, ingredients, and animal feed, however, a lack of differentiation for the bulk of the portfolio translates into single-digit operating margins and limited growth opportunities. Despite that, there are some pockets of growth that management is right to explore, such as specialized animal nutrition and an expansion into adjacent markets for its products, such as the alternative meat space for the yeast extracts.

The grocery unit produces food and beverage brands with little pricing power that do not occupy center-stage positions in supermarkets. Growth has been lagging the market, and the segment’s operating margin is significantly lower than that of larger, competitively advantaged consumer goods firms (10% versus midteens).

Fair value and Profit Drivers

The fair value estimate for Associated British Foods is GBX 2,200. The valuation implies a five-year top-line compounded annual growth rate of 6.5%, higher in the near term as Primark rebounds from the COVID-19 disruption. The margins to recover to pre-pandemic levels by the fiscal year 2023, but the steady-state operating margin of 8.8% does not imply an upside to historical averages. The looming competition in the mass apparel space and a gradual deterioration of Primark’s best-in-class operating leverage will impact the retail segment’s margin and limit its contribution to the group’s operating profit to 58% by 2026, consistent with the pre-pandemic share, despite its superior growth prospects. An important driver of the valuation is the assumption regarding the speed of expansion for the Primark chain. Management is targeting a total of 530 stores by September 2026, which implies a significant step up in the average number of store openings to around 30 per year starting with the fiscal year 2023, from an average of 19 over the decade leading up to the pandemic. Although the plan features smaller stores across the US and Iberia, it is overly ambitious given previous guidance misses. As per forecast of 500 stores by 2026 assumes an approximately 20% lower store and floorspace net addition, consistent with the historical under delivery. In the sugar business, the ABF to gradually step- up production to approach 3.5 million metric tons by fiscal 2026. The cost efficiencies due to higher volume production and capacity utilization will partially compensate for lower sugar prices, but the unit’s operating margin should still stay below historical highs to a more sustainable 7% level by 2026, which would translate into a normalized contribution of 8% of the group’s operating profits. In the other segments (agriculture, ingredients, and grocery), the moderate top-line growth (1%-3.5%) and marginal profitability improvements in the ingredients and agriculture segments driven by mix tailwinds as management gradually reposition the portfolio towards faster-growing, margin accretive segments such as specialty animal feed and enzymes.

Bulls Say

Primark is in the expansion phase and new store additions will likely drive earnings growth for years to come.

Given Primark’s rock-bottom prices and management’s commitment to maintaining price leadership, the retailer is well-positioned to navigate periods of high inflation and appeal to cash-strapped consumers.

ABF’s sugar segment is benefiting from Illovo’s strong profitability bedrock, the result of its growing downstream operations and strong regional and local market position.

Company Description

Associated British Foods is a diversified international retail, food, and ingredients group with 130,000 employees and operations in 50 countries across Europe, southern Africa, the Americas, Asia, and Australia. The group sells branded grocery products, grows and processes sugar, supplies farmers with crop input and animal feed, and runs the popular Primark clothing retail chain. It also supplies ingredients like bakers’ yeast, enzymes, lipids, and cereal specialties. Some 40% of sales are in the U.K., and Primark generates more than half of the firm’s operating profit.

(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.

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Tags European Market

Technology Stocks

Initiating Coverage of Ballard Power With No Moat and a $7 FVE

Post author By lvc-admin
Post date May 26, 2022
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Business Strategy and Outlook

Ballard has one of the longest histories in the fuel cell industry, with a particular focus on transportation applications. Currently, the company’s focus is on providing fuel cells into heavy-motive applications: bus, truck, rail, and marine. While each of these markets is still nascent, buses are considered the furthest along in adopting zero-emission technology. Truck is likely next in the adoption curve, with rail and marine longer dated. Given the early stage of fuel cell adoption in these respective markets, Ballard’s focus in the near term is on providing fuel cells for pilot/demonstration-type projects to show proof of concept. Given Ballard’s focus on transportation end markets, the company’s strategy faces risks from battery electric technology. This is particularly acute for the bus and light-duty truck end markets, whereas heavy-duty trucking, rail, and marine are likely to have more difficulty adopting battery electric solutions given the reduction in cargo capacity from large batteries.

The core of Ballard’s strategy is around continuing to invest in its proton-exchange membrane, or PEM, fuel cells. The company plans to invest in research and development to continue to lower the cost of fuel cells to make the technology more economic. Ballard has a goal to reduce the cost of its fuel cell module from roughly $1,000 per kilowatt today to below $300 per kilowatt by 2030. In contrast to peers, Ballard has maintained a narrow focus around its core PEM fuel cell technology. Many peers have diversified into electrolyzers and / or hydrogen production in recent years. While Ballard has not ruled out an entry into the electrolyzer market, it is unlikely it enters the hydrogen production part of the value chain. Ballard’s geographic emphasis is on North America (mainly California), Europe, and China. The company’s China efforts are largely through its Weichai joint venture, a leading diesel engine manufacturer in China. Ballard views the China market as core to its long-term growth ambitions.

Financial Strength

While Ballard lacks the financial strength of more-established companies, the company’s un-leveraged balance sheet. Ballard and the broader green hydrogen industry are still in their infancies. Ballard has largely been in a research and development phase for much of its history and operating income is projected to turn positive until later this decade. This will result in consistent cash outflows over the coming years, but the company has added to its cash balance in recent years. Ballard’s cash balance was just north of $1 billion as of December 2021. Key uses of cash include working capital, organic growth, and select acquisitions. The largest use of cash in the near term to be increasing operating expenses.

Bulls Say’s

Ballard boasts one of the longest histories in fuel cell technology.
Ballard fuel cells have among the highest use in real world applications, providing it a first-mover advantage.
The hydrogen fuel cell market is in its infancy, with robust growth projected.

Company Profile

Ballard is a world leader in proton exchange membrane fuel cell, power system development, and commercialization. The company’s principal business is the design, development, manufacture, sale and service of PEM fuel cell products for a variety of applications, focusing on power product markets of heavy-duty motive (consisting of bus, truck, rail, and marine applications), material handling, and stationary power generation. Sales are concentrated in the U.S., Europe, and China..

(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.

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Technology Stocks

Shoals’ 2022 Not as Bad as Feared, but Medium Term Faces Questions

Post author By lvc-admin
Post date May 26, 2022
No Comments on Shoals’ 2022 Not as Bad as Feared, but Medium Term Faces Questions

price of btc is going to breakout

Business Strategy and Outlook

Shoals has crafted a market-leading position within the solar electrical balance-of-system, or EBOS, market. EBOS is a lesser-known segment of solar and comprises components transferring electrical current from solar modules to an inverter. The main customers of EBOS are engineering, procurement, and construction firms building solar projects. While EBOS is relatively cheap (5% of project’s cost), it is expensive to install. Installation costs can be greater than the cost of the components. Shoals’ strategy against this backdrop is to provide solutions that reduce complexity and installation time, saving customers money.

Shoals has long been a provider of EBOS components to the utility-scale solar industry, but the introduction of its big lead assembly, or BLA, in 2017 marked an inflection point. The product introduced a new architecture for projects, which reduced the amount of wiring and eliminated the need for licensed electricians, helping lower installation costs. Shoals achieved rapid success by targeting the largest EPCs. Three customers supported approximately 40% of revenue in 2021. The company is looking to expand its market share by continuing to target EPCs but also building inroads with developers, which is expected to increase customer stickiness. Additionally, Shoals should benefit from more projects with solar and storage, which have 55% higher EBOS costs, and new products addressing a broader range of EBOS needs. Longer-term growth ambitions include expanding its international presence and entering the electric vehicle charging market. The company’s international ambitions with a wait-and-see approach. The company has been operating internationally for a few years, but non-U.S. customers accounted for negligible sales in 2021 and the international market is generally more fragmented than the U.S. The EV charging market opportunity that the company entered in 2022 is viewed constructively. The EV market is plagued by similarly high installation costs (50% of total cost is installation versus 30% for solar).

Financial Strength

Shoals’ leverage and liquidity are weaker than preferred, but operating cash flow growth is projected to improve metrics in the coming 12-24 months. The company’s leverage stands at approximately 3 times debt/EBITDA, which is the result of borrowings to pay a special dividend to equity holders prior to its IPO. Shoals’ debt profile consists primarily of a term loan due 2026 and borrowings under its revolving credit facility. Shoals is expected to prioritize paying off the amount drawn on its credit facility over the next couple of years. This debt reduction coupled with operating cash flow growth should improve its credit metrics.

Bulls Say’s

Shoals offers peer-leading margins and returns on invested capital in the solar industry.
The solar market is growing and the addition of storage further increases the addressable market.
International and EV charging markets have a chance to be sizable contributors to Shoals’ growth.

Company Profile

Shoals Technologies Group Inc is a provider of electrical balance of system or EBOS solutions for solar energy projects, primarily in the United States. EBOS encompasses components that are necessary to carry electric current produced by solar panels to an inverter. The products are sold principally to engineering, procurement and construction firms that build solar energy projects. In 2022 the company entered the electric vehicle charing market.

(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.

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Global stocks Shares

Conagra’s Brands Are Performing Well Despite Inflation and Supply Chain Challenges

Post author By lvc-admin
Post date May 26, 2022
No Comments on Conagra’s Brands Are Performing Well Despite Inflation and Supply Chain Challenges

Business Strategy & Outlook

When CEO Sean Connolly was brought in to turn around a struggling Conagra in 2015, he implemented a new brand building strategy referred to as the Conagra Way. The process calls for using data to identify product attributes that are driving growth and designing products to reflect those traits. The strategy also increases the productivity of marketing investments by shifting spend to the more efficient digital channel and to higher potential brands. In addition, the firm has significantly reshaped its portfolio inorganically, shedding non-branded or noncore businesses and acquiring brands that enhance the firm’s growth and/or profit margins. As a result, in recent years, sales have inflected from declines to growth, and from market share losses to modest gains. The pandemic, which resulted in four and a half years of incremental new buyers and saved the firm hundreds of millions of dollars in customer acquisition costs, will accelerate the benefits Conagra is reaping from these efforts, as many new consumers have been exposed to its new fare. Once the food retail market normalizes post-pandemic, the Conagra can realize 2% annual organic sales growth. In addition, Conagra has identified over $700 million in supply chain efficiencies, which should result in operating margins that exceed 18% over the long term, up from fiscal 2021’s 17.5% metric.

Despite these efforts, an enduring competitive advantage via its brand assets or entrenched retail relationships remains elusive. Conagra maintains many market-leading brands, which makes it an important partner to retailers. However, Conagra’s commitment to maintaining below-average investments in marketing (about 2.4% of revenue on average over the past three years compared with the 4.6% peer average) and research and development (0.5% of revenue compared with the 0.8% peer average) weakens the conviction that Conagra can maintain its preferred status with retailers over the next 10 years, as required for a narrow moat designation.

Financial Strengths

Conagra’s net debt/adjusted EBITDA averaged 2.7 times in the three years before the $10.9 billion Pinnacle Foods acquisition in fiscal 2019. After the deal, leverage reached 5.8 times in fiscal 2019, and the expected share repurchases and additional acquisitions will remain limited until leverage reaches 2.3 times in 2025. Over the next five years, the expected average interest coverage (EBITDA/interest expense) of 8 times, in line with the peer average. One cannot have concerns about the firm’s inability to meet its debt obligations, as cash flows are relatively stable. The model share repurchases increasing meaningfully in 2025 (assuming the absence of acquisitions), with Conagra buying back about 1%-3% of outstanding shares annually, which as a prudent use of cash when the shares trade below the assessment of intrinsic value. The firm repurchased a significant amount of shares in fiscal 2017 and 2018, but as they were trading above the estimate of intrinsic value, one cannot view the transactions as judicious uses of capital. Although Conagra will likely make acquisitions once it reduces debt, one cannot have modeled future transactions, given the uncertain timing and magnitude. Instead, the model excess cash flows being used to repurchase shares. Conagra resumed dividend growth in fiscal 2021, after foregoing increases following the Pinnacle acquisition, to focus on debt reduction. Conagra announced a further 20% increase in the quarterly dividend during fiscal 2022 to $0.3125, and the high-single-digit annual increases thereafter. Over the next 10 years, the Conagra’s payout ratio to range from mid-40% to low-50%. Finally, the firm to spend 3%-4% of revenue on capital expenditures on average each year.

Bulls Say

Conagra is utilizing a unique data-driven innovation approach, which has allowed many of its brands to gain market share.

After significant portfolio reshaping, now 64% of Conagra’s sales stem from the high growth categories of frozen foods and snacks.

Over $700 million in supply chain efficiencies and positive mix should facilitate about 100 basis points of operating margin expansion in the next 10 years to over 18%.

Company Description

Conagra Brands is a packaged food company that operates predominantly in the United States (over 90% of revenue and profits). It has a significant presence in the freezer aisle, with brands such as Marie Callender’s, Healthy Choice, Banquet, and Birds Eye. Other popular brands include Duncan Hines, Hunt’s, Slim Jim, Vlasic, Orville Redenbacher’s, Reddi-Wip, Wish-Bone and Chef Boyardee. While the majority of revenue is sold into the U.S. retail channel, 7% of fiscal 2021 sales were to the food-service channel, down from 11% in fiscal 2019 due to the pandemic.

(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.

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Technology Stocks

We Maintain Our EUR 17.50 Fair Value Estimate on Possible Takeover Offer From Siemens Energy

Post author By lvc-admin
Post date May 26, 2022
No Comments on We Maintain Our EUR 17.50 Fair Value Estimate on Possible Takeover Offer From Siemens Energy

Business Strategy & Outlook

Competitive pricing pressure among wind turbine manufacturers and cost inflation have placed a large emphasis on cost-saving programs to increase Siemens Gamesa’s profit margins, which have consistently lagged its closest competitor, Vestas. Following an operating loss in 2020 and 2021, Siemens Gamesa have once again turned to a new CEO (the third in two years) tasked with turning around the onshore equipment business through cost-cutting measures and solving the ramp up challenges of its latest 5.X onshore turbine that have caused project execution delays.

Despite the trend toward decarbonization, profiting from manufacturing turbines has proved difficult due to a combination of both industry and internal challenges. Wind turbines are the largest cost for customers and thus tend to be price sensitive. In the short term, Siemens Gamesa will turn to inflation mechanisms in customer contracts to better manage commodity risk given the significant increase in raw materials such as copper and steel. Longer term, however, an element of product differentiation is required to replicate the returns of other razor/blade models. Cost savings are limited in nature, whereas innovation has largely focused on taller towers and bigger rotors, which competitors subsequently replicate. Shorter innovation cycles can also lead to ramp up challenges as evidenced by Siemens Gamesa’s latest onshore turbine. That said, Siemens Gamesa’s offshore turbine is the most efficient in the market and the challenges in the onshore business have not filtered to their leading position in offshore.

As growth matures for onshore turbines amid regulatory changes, greater reliance is placed on Siemens Gamesa to maintain its leading position in the offshore market, which is expected to double between 2025 and 2030. Rectifying the challenges in the onshore business will be required so that Gamesa can harvest the growth in offshore to invest in product innovation and expanding capacity to satisfy demand. A shift in the product mix toward offshore will improve profitability. Improved operations may pave the way for Siemens Energy to take over the remaining 33% stake in Siemens Gamesa.

Financial Strengths

Siemens Gamesa is in a sound financial position with EUR 207 million of net debt (including lease liabilities) at the end of its 2021 financial year. The company also has access to additional funding of EUR 4.4 billion of which EUR 1.3 billion has been drawn. The Siemens Gamesa’s balance sheet allows the company to navigate the challenges of a new restructuring program and provides a cushion for another year of forecast free cash outflow. Siemens Gamesa’s target net debt/EBITDA ratio is a conservative 1.0 times. Siemens Gamesa has EUR 2.0 billion of cash and equivalents and the option to drawdown on its syndicated loan, which is sufficient to cover short-term debt maturities of EUR 382 million as well a ramp-up in capital expenditures and restructuring-related costs. However, we forecast another year of free cash outflow in fiscal 2022, and with a credit rating only a few notches above investment-grade, this limits the company’s potential to use its balance sheet to perform mergers and acquisitions to help further consolidate the industry and capital return to shareholders.

Bulls Say

Siemens Gamesa is well positioned to benefit from the structural trend toward decarbonization through its leading position in offshore turbines and global footprint, as renewables contribute more to the global energy mix.

The implementation of inflation mechanisms into contracts will improve the management of commodity risk and help turnaround profitability in the onshore business.

The hiring of a new CEO tasked within improving operations from Siemens Energy, which owns 66% of Siemens Gamesa, may pave the way for the parent company to acquire the remaining 33% stake.

Company Description

Siemens Gamesa is a leading manufacturer of onshore and offshore wind turbines. The company is the product of the merger between Siemens Wind Power and Gamesa in 2017. The firm operates in two business segments: wind turbines and services. Siemens Gamesa retained its position as the leading installer of offshore turbines in 2020. Siemens Energy (a recent spinoff from Siemens AG) owns 67% of Siemens Gamesa’s shares.

(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.

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Technology Stocks

Nexi’s Q1 Lines up With Expectations But We Lower Our Fair Value Estimate

Post author By lvc-admin
Post date May 26, 2022
No Comments on Nexi’s Q1 Lines up With Expectations But We Lower Our Fair Value Estimate

Business Strategy & Outlook

Nexi offers merchant acquiring, card issuing, and digital banking services to its clients. Through the combination and shedding of various payment assets, Nexi has created a compelling suite of offerings that are supported by durable and structural growth drivers. With its latest two large acquisitions, Nets and SIA, Nexi has also gained a wider footprint in Europe as well as stronger processing capabilities. As such, Nexi has moved from an Italian pure-play to a fully vertically integrated European payment services provider at the top of European rank tables.

Nexi still derives most of its revenue from Italy, where it holds a strong competitive position and is deeply integrated in the bank-dominated payment infrastructure. Card payment penetration, although growing, remains low in Italy, with cash transactions being the dominant form of payment. Although no one can see Italy catching up with the European average of card use anytime soon, volume growth should still be a healthy high-single-digit to low-double-digit figure, supporting both acquiring and issuing volumes as well as demand for point-of-sale terminal solutions and cards. Outside of Italy, Nexi has exposure to the Nordics, which have some of the highest card use in Europe, but also more nascent regions such as Germany and countries in Eastern and Southern Europe that offer strong organic growth opportunities. Nexi also benefits from a gradual shift from national debit schemes to international debit and credit schemes supported by Visa and Mastercard. This shift accelerating as card payments take over daily habits, which will disproportionately benefit Nexi. Nexi not only earns higher margins on international card schemes, but also has a better offering in supporting merchants and banks to switch to international schemes. Additionally, international card schemes make greater use of newer payment technologies, increasing demand for more advanced point-of-sale terminals, thereby increasing subscription-based revenue for Nexi and generating further upgrade sale cycles.

Financial Strengths

Nexi will be able to bring its net debt to EBITDA ratio down toward its medium-term target of 2.5 times by 2023. In the future, the potential large deals to be paid in shares, allowing Nexi to refinance the target’s debt at potentially lower rates, while smaller tuck-in acquisitions could be done via debt raising, if the balance sheet allows.

Bulls Say

The Italian payment market offers some of the best opportunities for payment service providers in Europe and Nexi is best-positioned to benefit from structural trends.

Consolidation of the Italian banking sector could bring further opportunities for Nexi to purchase additional bank-held merchant acquiring books.

As international card schemes become more prevalent in Italy, Nexi’s business proposition becomes increasingly valuable.

Company Description

Nexi is a payment services provider offering merchant acquiring, card issuing, and digital banking services across Europe. Nexi’s services cover the entire payment chain excluding the card scheme. It offers its acquiring and issuing services either in partnerships with banks, providing point-of-sale terminals, processing, or issuing services on their behalf or directly to merchants.

(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.

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Technology Stocks

Amadeus’ Advantaged Platform Seeing Increased Demand, Boosted by a Return of Business Travel

Post author By lvc-admin
Post date May 26, 2022
No Comments on Amadeus’ Advantaged Platform Seeing Increased Demand, Boosted by a Return of Business Travel

Business Strategy & Outlook

While Amadeus still stands to see material near-term corporate and European demand headwinds from the coronavirus and geopolitical conflict, its leadership position in global distribution systems, or GDS, to endure during the next several years, driven by its leading network of airline content and travel agency customers as well as its healthy position in software solutions for these carriers and agents. Amadeus is the largest of the three GDS operators (narrow-moat Sabre is number two, followed by privately held Travelport) that control nearly 100% of market volume.

Amadeus’ GDS enjoys a network effect (source of its narrow moat). As more supplier content (mostly airline content) is added, more travel agents use the platform; as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book and service the end customer with. The 2016 acquisition of airline IT company Navitaire and 2018 acquisition of hotel IT company TravelClick expanded Amadeus’ GDS network advantage through new customer integration, as Navitaire focuses on low-cost carriers while the company’s existing Altea division focuses on full-service carriers, and TravelClick has a midscale lodging presence versus Amadeus’ legacy hotel offering, which focuses on enterprises. Replicating a GDS platform entails aggregating and connecting content from hundreds of airlines to a platform that is also connected to travel agents, requiring significant costs and time. Still, although the GDS advantages as substantial, technology architechtures like that of eTraveli (set to be acquired by narrow-moat Booking Holdings in early 2022), enable end users to access not only GDS content but supply from competing platforms, which could take some volume from GDS operators. Also, GDS faces some risk of larger carriers and agencies direct connecting, although these relationships to be the exception rather than the rule.

Financial Strengths

While near-term industry travel demand remains below prepandemic marks, Amadeus’ balance sheet is clearer. Amadeus entered 2020 with just 1.4 times net debt/EBITDA, and it has enough liquidity for four years even at near zero demand levels. Amadeus has taken aggressive actions to shore up its liquidity profile. In March 2020, Amadeus began to cut costs and secured an additional EUR 1 billion one-year bridge loan, in addition to the undrawn EUR 1 billion revolver it already had. In April 2020, the company raised EUR 1.5 billion with a EUR 750 million equity offering (at a 5% discount to closing stock prices) and a EUR 750 million convertible note (at a strike price 40% above closing stock prices). In May 2020, Amadeus raised EUR 1 billion in debt at interest rates of 2.5%-2.9%. The banking partners to provide any additional needed funding, given Amadeus’ sizable network, switching costs, and efficient scale advantages that underpin its narrow moat. Net debt/EBITDA increased to 5.5 times in 2021, due to lower demand resulting from COVID-19, but a return to within management’s 1-1.5 times target range by 2023. Although about EUR 2.7 billion of the company’s EUR 4.3 billion in long-term debt matures over the next four years, its low leverage and stable transaction-based model in normal demand environments should not present any financial health concerns. The Amadeus will generate EUR 7 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26.

Bulls Say

The company’s GDS network hosts content from most airlines and is used by many travel agents, resulting in significant industry share. Replicating this network would involve meaningful time and costs.

The network advantage is supported by new products and technology that further integrate airlines and agents into its GDS platform. The company’s Navitaire, AirIT, and TravelClick acquisitions aid this expanding technology and integration reach.

The business model is driven by transaction volume and not pricing, leading to lower cyclical volatility.

Company Description

Among the top three operators, Amadeus’ 40%-plus market share in air global distribution system bookings is the largest in the industry. The GDS segment represents 56% of total prepandemic revenue (2019). The company has a growing IT solutions division (44% of 2019 revenue) that addresses the airline, airport, rail, hotel, and business intelligence markets. Transaction fees, which are tied to volume and not price, account for the bulk of revenue and profits.

(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.

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Technology Stocks

Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer

Post author By lvc-admin
Post date May 26, 2022
No Comments on Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer

Business Strategy and Outlook

It is considered that the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years.

Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer, which has a 10% market share following its acquisition of Pillar, previously the third-largest provider, in 2016. It is projected both companies to compete aggressively for future outsourcing contracts, which may come from the 60% of the market that is currently serviced in-house. However, around 30% of the in-house segment comprises the four major Australian banks and AMP, which have a reasonably low probability of outsourcing. The remaining 30% comprises a combination of government-owned entities and relatively small superannuation funds, which are likely to have outsourcing lead times of months or years.

Financial Strength

Link’s balance sheet is in good shape with a net debt/EBITDA ratio of around 2.6 as at Dec. 31, 2021, which is within the company’s target range of 2 to 3. From an interest coverage ratio perspective, Link has a manageable interest coverage ratio of around 14.

Bulls Say’s

It is held for, Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage.
Experts’ base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years.
The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Profile

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong.

(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.

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Link benefits from high customer switching costs and relatively low marginal costs, which underpin its narrow economic moat rating

Young woman trading stock market by touching.

Business Strategy & Outlook:

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends. The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, which sold its remaining holding in the company in 2016. It is considered the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years.

The corporate markets revenue grows at 3% per year, reflecting inflation, and assume no market share gains due to the strength of major competitor Computershare. The EBIT margins grow from 12% in fiscal 2021 to 21% by fiscal 2031 partly due to cost-cutting. Over the next decade, it is expected that an EPS CAGR, excluding amortization of acquired intangible assets, of 9%. The capital-light nature of the business model means cash conversion is expected to be strong, enabling dividends to be maintained and net debt gradually reduced, assuming no further acquisitions. Our discounted cash flow valuation assumes a weighted average cost of capital of 7.7%.

Financial Strengths:

Bulls Say:

It is expected Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage.
Our base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years.
The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Description:

(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.

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Supported by Brand Investments, Narrow-Moat Hanesbrands Should Recover From Macroeconomic Challenges

Post author By lvc-admin
Post date May 25, 2022
No Comments on Supported by Brand Investments, Narrow-Moat Hanesbrands Should Recover From Macroeconomic Challenges

Business Strategy & Outlook

Narrow-moat Hanesbrands is the market leader in basic innerwear (60% of its 2021 sales) in multiple countries. Its key innerwear brands like Hanes and Bonds (in Australia) achieves premium pricing. While the firm faces challenges from inflation, currency movement, shipping delays, and COVID-19, Hanes’ share leadership in replenishment apparel categories puts it in better shape than some competitors. In May 2021, the firm unveiled its Full Potential plan to expand global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced e-commerce, for example), and streamline its portfolio.

As part of Full Potential, Hanes intends to build on Champion’s increasing popularity in North America, Asia, and Europe. Although COVID-19 and the discontinuation of the C9 label at Target hurt sales in 2020, Champion resumed its growth path in 2021 as it and other activewear apparel have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands. Moreover, Hanes recently found a new home for C9 as an exclusive brand for wide-moat Amazon. Hanes’ management forecasts Champion will reach $3.2 billion in global sales in 2024, up from more than $2 billion last year, which as an achievable goal.

Another key strategy for Hanes is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past four years. Hanes, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. The combination of strong pricing and production efficiencies should allow Hanes to maintain operating margins around 20% for its American innerwear business despite somewhat inconsistent sales.

Financial Strengths

Hanes racked up considerable amounts of debt during its acquisition spree in 2013-18, but its balance sheet is improving. The firm closed 2022’s first quarter with about $3.35 billion in debt, but it also had nearly $400 million in cash and $1 billion available under its revolving credit facility. Hanes will have significant cash available for debt reduction over the next few years, forecasting its total debt to drop to $2.6 billion by the end of 2024. The firm to meet its goal of bringing debt/EBITDA (3.7 times at the end of 2021) below 3 times by 2024. Although Hanes suspended its share buybacks due to the pandemic, repurchases have resumed in 2022. The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. It will repurchase about $300 million in shares per year in 2022-30. Hanes, unlike many peers, did not suspend its dividend due to the virus. Its annual dividend has been set at $0.60 per share since 2017, but it will be increased in 2023 and in the years that follow. An average annual dividend payout ratio of 32% over the next decade. Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. One cannot include acquisitions in model due to uncertainty about timing, size, and profitability.

Bulls Say

Hanes’ Champion is a contender in the hot but crowded athleisure space. The brand is already well known in North America and parts of Europe, and there is significant potential in China and other underpenetrated markets.

Hanesbrands has successfully introduced brand extensions that have allowed it to expand shelf space and increase price points in the typically staid category of basic apparel.

After a review, Hanesbrands announced a new strategic plan called Full Potential to boost growth and reduce expenses, which should benefit its brand strength.

Company Description

Hanesbrands manufactures basic and athletic apparel under brands including Hanes, Champion, Playtex, Maidenform, Bali, and Bonds. The company sells wholesale to discount, midmarket, and department store retailers as well as direct to consumers. Hanesbrands is vertically integrated as it produces more than 70% of its products in company-controlled factories in more than three dozen nations. Hanesbrands distributes products in the Americas, Europe, and Asia-Pacific. The company was founded in 1901 and is based in Winston-Salem, North Carolina.

(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.

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