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Dividend Stocks

Williams-Sonoma could deliver an average adjusted return on invested capital

Business Strategy and Outlook

Williams-Sonoma has carved out a solid position in the $750 billion global home category and the $80 billion U.S. B2B industry. It has historically launched most of its brands organically in underserved segments and its brand intangible asset has been the supporting factor in its top- and bottom-line growth. Its ability to drive repeat business relies on customer loyalty and smart marketing and merchandising and the firm has access to some of the best analytics in retail. This should help Williams-Sonoma outperform its competitors and grow its market share, aided by new category expansions. 

In recent years, Williams-Sonoma has set its sights on expanding its total addressable market outside of furniture and home furnishings, via B2B and marketplace efforts, categories with robust end markets that remain fragmented. These white-space business lines, along with faster growth from both franchise and the e-commerce channels (which accounted for 66% of 2021 sales) should help Williams-Sonoma near its $10 billion sales goal by 2024. 

Furthermore, the aforementioned categories have the ability to deliver better operating margins than the historical brick-and-mortar business (which is on track to decrease its store base by 25% between 2020 and 2025), allowing mix to offer a natural lift to profitability. Such efforts, along with lower costs from an improved supply chain (when COVID-19 constraints subside), better distribution network (from direct sourcing and furniture delivery operations), as well as higher productivity of its store fleet (as underperforming locations close and older leases are renegotiated) should allow for operating margins that are consistently at a midteens rate. Despite a solid competitive edge, it is not alleged that the company is insulated from the proliferation of e-commerce peers such as no-moat Wayfair pushing harder into the home furnishing space, bounding upside potential. Even with robust competition in the category, it is held narrow-moat Williams-Sonoma could deliver an average adjusted return on invested capital, including goodwill, averaging 30% over analysts’ forecast, well ahead of analysts’ 9% weighted average cost of capital estimate.

Financial Strength

Williams-Sonoma is in fine financial health, with plenty of cash on hand, ending its first quarter with $325 million on its balance sheet. Given the strong free cash flow it has been able to generate, it is unprobeable the firm will have to tap the equity or credit markets for liquidity anytime soon, and there is currently no long-term debt outstanding, liberating excess cash flow for a return to shareholders. Over the past five fiscal years, the company has produced cumulative free cash flow of $3.4 billion. Williams-Sonoma’s cash requirements are primarily for inventory, property, plant, and equipment, advertising and marketing, technology, share repurchases, and dividends, which is likely to mostly be funded by cash generated from operations. Free cash flow to equity has averaged about 10% of revenue during the past five years, which is likely to be decent for a company that can produce somewhat volatile results that are closely tied to the performance of the housing market. The company resumed share repurchases in the fourth quarter of 2020, and the board authorized a $1.5 billion share buyback program in March 2022, which should facilitate continued buybacks ahead (in fiscal 2021 the company repurchased $899 million in shares, well ahead of any other year in the past decade). Additionally, it pays a dividend of $0.78 per quarter, representing a payout that was raised 10% in March 2022, illustrating the board’s confidence in the strength of the underlying business. Over the next decade, it is projected, the firm to average 7%-8% EPS growth (increasing modestly faster than sales), bolstered by continued top-line growth, a favorable sales mix shift, and stringent cost controls. Williams-Sonoma is positioned to earn an average of around $1.1 billion in free cash flow (cash from operations minus capital expenditures) over the next five years.

Bulls Say’s

  • Less discretionary categories such as cookware and small appliances offer some resiliency amid macroeconomic cyclicality. Registries in categories such as wedding and baby offer a steady source of customers. 
  • The firm opened company-owned stores abroad in Australia in 2013 and has since expanded to the U.K. International opportunities (owned and franchised) could provide location and sales growth and elevated brand awareness. 
  • Around two thirds (or more) of sales has stemmed from the e-commerce channel in recent years, which helps minimize store expenses and maximize operating margins.

Company Profile 

With a wide retail and direct-to-consumer presence, Williams-Sonoma is a leader in the $300 billion domestic home category, focused on expanding its exposure in the B2B, marketplace, and franchise areas. Namesake Williams-Sonoma (175 stores) offers high-end cooking essentials, while Pottery Barn (188) provides casual home accessories. Brand extensions include Pottery Barn Kids (52) and PBteen. West Elm (121) is an emerging concept for young professionals, and Rejuvenation (9) offers lighting and house parts. Williams-Sonoma also has a business-to-business team that supports projects that range from residential to large-scale commercial. 

(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

Kilroy Realty Corp: Vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022

Business Strategy and Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. It is also greeted, management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients.

Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers. 

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

Financial Strength

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

Bulls Say’s

  • Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as wit is alleged that buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle. 
  • Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.

Company Profile 

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust. 

(Source: MorningStar)

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

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

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

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

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

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

Agilent Turns in Solid Fiscal Q2 Despite China Lockdown; Shares Still Mildly Rich

Business Strategy & Outlook

After its spin-out from Hewlett Packard in 1999 and its divestiture of the electronic measurement

business (Keysight Technologies) in November 2014, Agilent focuses on providing tools to analyze the

structural properties of various chemicals, molecules, and cells. Agilent is one of the leading providers of chromatography and mass spectrometry tools, which have applications in a variety of end markets,

including the healthcare, chemical, energy, food, and environmental fields. While healthcare-related

applications, including clinical diagnostics, remain Agilent’s largest end market, Agilent generates about

half of its sales from nonhealthcare fields. Agilent’s strategy revolves around placing analytical instruments and informatics with relevant customers and then providing related services and consumables such as chromatography columns and sample preparation tools, which account for the rest of Agilent’s sales. About half of Agilent’s sales recur naturally. However, even instrument sales can be relatively sticky at the end of the instrument’s life cycle, especially in the highly regulated pharmaceutical end market (about 35% of Agilent’s sales) and some of its other applications where intensive, time-consuming training is required to master the scientific analysis. Agilent aims to increase its exposure to these sticky customer relationships. Overall, the top-tier positions in most end markets, innovation, marketing operations, and ongoing cost controls should help Agilent grow revenue in the midsingle digits compounded annually and boost margins overall during the five-year forecast period. Overall, the double-digit earnings growth from Agilent, organically and with some share repurchases. While internal growth opportunities look solid, acquisitions should continue to boost its bottom-line growth prospects, as well.

Fair value and Profit Drivers

The rising fair value estimate to $115 per share from $107 to account primarily for cash flows generated in the past couple quarters and slightly higher profit expectations for 2022. The fair value implies a multiple of approximately 23 times fiscal 2022 expected earnings. After strong growth in the high teens on the top line and over 30% on the bottom line in fiscal 2021, Agilent’s growth trajectory to return to more normalized levels. Specifically, from fiscal 2021 to 2026, the expected 6% compound annual revenue growth, or within management’s 5% to 7% core revenue growth target. By end market from fiscal 2021 to 2026, Agilent’s growth to be led by biopharmaceuticals with 9% overall growth expected on strong biologic-related sales and solid growth in small molecules. The expect low- to mid-single-digit growth rates in Agilent’s other applied markets. On the bottom line, the adjusted EPS will rise roughly 11% compounded annually from fiscal 2021 to 2026, or well above sales growth primarily on margin expansion and share repurchases. The cost-control efforts to continue with the potential to improve margins primarily through expanding gross margins and control of the SG&A line. The expect share repurchase activities to account for about 200 basis points of Agilent’s annualized earnings growth prospects through 2026.

Bulls Say

  • Agilent’s innovation engine and cost control efforts have been on display through strong growth and margin expansion since spinning out its electronic measurement business Keysight in November 2014.
  • As a well-established leader in many of its core markets, regulatory concerns and customer familiarity with Agilent’s instrumentation and services can make market share gains for competitors difficult.
  • Agilent continues to increase its exposure to the sticky biopharmaceutical end market, including recent acquisitions in the emerging cell analysis field.

Company Description

Originally spun out of Hewlett-Packard in 1999, Agilent has evolved into a leading life sciences and diagnostics firm. Today, Agilent’s measurement technologies serve a broad base of customers with its three operating segments: life science and applied tools (45% of fiscal 2021 sales), cross lab (35% of sales consisting of consumables and services related to its life science and applied tools), and diagnostics and genomics (20%). Over half of its sales are generated from the biopharmaceutical, chemical, and energy end markets, but it also supports clinical lab, environmental, forensics, food, academic, and government-related organizations. The company is geographically diverse, with operations in the U.S. (34%) and China (20%) representing the largest country concentrations. 

(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

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

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.

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
Technology Stocks

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

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.

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
Technology Stocks

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.

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

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.

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
Technology Stocks

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.

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
Technology Stocks

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.

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
Technology Stocks

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)

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