Category: Sectors

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

Post author By lvc-admin
Post date May 26, 2022
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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.

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

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

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

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

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

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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.

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

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

Post author By lvc-admin
Post date May 25, 2022
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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.

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

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Improving Economy Should Benefit Hawaiian Electric

Post author By lvc-admin
Post date May 25, 2022
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Business Strategy and Outlook

Hawaiian Electric Industries derives approximately three fourths of consolidated earnings from an electric utility and the remaining from Hawaii-based American Savings Bank. The Hawaiian economy, driven in large part by tourism, affects both businesses. Utility regulation in Hawaii includes usage-decoupled ratemaking that for the most part shields utility earnings from lower sales due to residential rooftop solar growth. Last year, state regulators implemented a new performance-based ratemaking framework, including annual revenue adjustments, separate rate recovery for certain capital investments, and performance incentives. The five-year rate plan, up from the prior three-year rate plan, allows for annual revenue adjustments for inflation, operating efficiencies, and customer dividends. Separate recovery mechanisms for capital projects support the state’s renewable ambitions.

Existing rate adjustments for expenses such as purchased power, energy cost, renewable energy infrastructure, demand management, and pension, remain in place. New incentive mechanisms allow earnings upside, though strict operating efficiency targets could make this difficult. HEI’s base allowed return on equity is set at 9.5%, though returns are likely to be lower during the initial transition to the new rule making. At the end of March, returns were 8.1%. Earnings at the unit are supported by the subsidiaries’ plans to invest $1 billion to $1.3 billion through 2024, supporting the consolidated 5% earnings growth estimate. American Savings Bank provides low-cost capital for the utility. The bank has a history of maintaining a low risk profile and strong balance sheet. Loans are focused on high creditworthy counterparties, as evidenced by the low levels of loan losses during the pandemic. The bank’s earnings have quickly recovered from the pandemic. It is expected its earnings to grow at a mid-single-digit rate.

Shareholders were treated to a 3.2% dividend increase in the first quarter of 2019, the first increase in 20 years, and similar increases in 2020 and 2021. Its forecasted for 4% annual dividend growth over the next five years, slightly below the EPS growth estimate.

Financial Strength

HEI has a strong capital structure and good financial health. It is expected the utility to invest about $1.2 billion over the next three years, in line with management’s $1.0 billion to $1.3 billion range. Even with this investment, the HEI will be able to maintain a strong balance sheet. Ongoing modest equity issuances should result in a debt/total capital ratio around 50% and over 6.0 times EBITDA/net interest expense coverage for the foreseeable future. The company has manageable long-term debt maturities, it is anticipated it will be able to refinance as debt comes due. The dividends will grow in line with earnings and management will maintain its 60%-65% payout ratio. HEI’s dividend policy is supported by the predictable cash flow from the company’s underlying businesses.

Bulls Say’s

Performance-based ratemaking reduces earnings volatility while offering opportunities for management to earn incentives over its base allowed returns. Sales decoupling and automatic rate adjustments allow for increases in most O&M and rate base growth.

It is expected HEI to invest nearly $1.2 billion over the next three years, supporting nearly 5% average annual earnings growth.

American Savings Bank’s conservative loan book has resulted in lower loan losses than its peers. ASB’s steady cash flows help support investment at the utility.

Company Profile

Hawaiian Electric Industries is the parent company of three Hawaii-based regulated utilities and Hawaii’s third-largest financial institution, American Savings Bank. The utilities provide electricity on the five islands of Oahu, Hawaii, Maui, Molokai, and Lanai. Nearly 40% of electricity in its service territory comes from renewable energy; this portion is growing rapidly as the state has set a goal of 100% by 2045.

(Source: MorningStar)

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

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

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

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Caterpillar Reiterates its Margin, Free Cash Flow and Services Targets at its 2022 Investor Day

Post author By lvc-admin
Post date May 25, 2022
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Business Strategy & Outlook

The Caterpillar will continue to be the leader in the global heavy machinery market, providing customers an extensive product portfolio consisting of construction, mining, energy, and transportation products. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands. Caterpillar’s strong brand is underpinned by its high-quality, extremely reliable, and efficient products. Customers also value Caterpillar’s ability to lower the total cost of ownership. The company’s strategy focuses on employing operational excellence in its production process, expanding customer offerings, and providing value-added services to customers. Since 2014, Caterpillar has taken steps to reduce structural costs and its fixed asset base by implementing cost management initiatives and by either closing or consolidating numerous facilities, reducing its manufacturing floorspace considerably. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Caterpillar provides, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed.

Caterpillar has exposure to end markets that have attractive tailwinds. On the construction side, the company will benefit from the $1.2 trillion infrastructure deal in the U.S. The country’s road conditions are in poor condition, which has led to pent-up road construction demand. In energy, the improvement in the price of oil since COVID-19 lows will encourage exploration and production companies to increase oil and gas capital expenditures, leading to increased sales of Caterpillar’s oil-well-servicing products. That said, mining markets will have limited upside, as fixed-asset investment growth in China starts to slow, likely capping commodity price upside.

Financial Strengths

Caterpillar maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of 2021, coming in at 0.2. Total outstanding debt, including both short- and long-term debt was $9.8 billion. Caterpillar’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at $8.4 billion on its industrial balance sheet. One can also find comfort in Caterpillar’s ability to tap into available lines of credit to meet any short-term needs. Caterpillar has access to $10.5 billion in credit facilities for the consolidated business (including financial services), of which, $2.8 billion is available to the industrial business. Caterpillar’s focus on operational excellence in its industrial operations and improved cost base has put the company on better footing when it comes to free cash flow generation throughout the economic cycle. The company can generate $6 billion in free cash flow in midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $28 billion in 2021, along with $27 billion in finance receivables and $826 million in cash. As per view view, Caterpillar enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, substantially boosting Caterpillar’s sales growth.

Higher fixed-asset investment growth in China strengthens support for increased investment in mining capital expenditures, benefiting Caterpillar

A continued recovery from the temporary demand shock in oil prices will lead to increased oil and gas capital expenditures, leading to more engine, transmission, and pump sales for Caterpillar.

Company Description

Caterpillar is an iconic manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest manufacturer of heavy equipment with over 13% market share in 2021. The company is divided into four reportable segments: construction industries, resource industries, energy and transportation, and Caterpillar Financial Services. Its products are available through a dealer network that covers the globe with about 2,700 branches maintained by 160 dealers. Caterpillar Financial Services provides retail financing for machinery and engines to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Caterpillar product sales.

(Source: Morningstar)

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

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

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

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Tencent Music’s Long-Term Growth is Underpinned by Continuing Increase in Subscribers

Post author By lvc-admin
Post date May 25, 2022
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Business Strategy & Outlook:

With over 600 million monthly active users, or MAU, Tencent Music Entertainment, or TME, is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 60% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making. A low subscriber-to-user ratio in the mid-teen percentages offers a long runway for paying user growth in music streaming. With platforms putting more content, such as popular songs, behind the paywall, more users would subscribe, and fuel top-line growth. Potential revenue growth also comes from advertising, where the firm’s investments into long-form audio are likely to open up more ad inventory. Even though social entertainment (mainly video live streaming) contributes most of the firm’s revenue, still there will be minimal growth ahead given competition from Douyin and Kuaishou.

With China’s antitrust laws putting an end to TME’s exclusive music copyright agreements, more competition is anticipated for users. Its peer Cloud Music is aiming to bridge the content gap by signing with previously inaccessible labels. Despite competitive headwinds, TME will remain the largest platform for music streaming, benefiting primarily from network effect and intangible assets that maintain user engagement and stickiness. The subscription prices are unlikely to go lower because: 1) competitors are making losses and have little incentive for price competition; and 2) Chinese streaming platforms offer almost the lowest prices worldwide, so more discounts will be less effective in attracting users. Some margin upside is expected for Tencent Music as growing subscription revenue brings more cost leverage. Unlike developed markets, the supply side of music in China is more fragmented, with just 30% of licensing from top five labels. As licensors sell their content on a mostly fixed cost basis, TME is well-positioned to see margin expansion as revenue grows.

Financial Strengths:

TME is financially sound. As of the end of 2021, the firm was sitting on a net cash position of CNY 22 billion, more than three times that of peer Cloud Music. Despite some near-term industry challenges, the firm is expected to generate positive free cash flows over the next years. Taking advantage of the low interest environment, the company issued a total of USD 800 million (CNY 5 billion) senior unsecured notes at below 2% interest in 2020. The debt/equity ratio is running at a manageable 30%, and debt/EBITDA is maintained below 1.5 times as at the end of 2021. The firm shall maintain this capital structure. Given positive free cash flow assumptions, the firm can easily fulfill its debt obligations while simultaneously funding future investment initiatives. The business has been generating positive free cash flows since 2016. In 2021, it generated a free cash flow of CNY 3.5 billion. This is significantly better than peer Cloud Music, who will be burning through cash for the next couple of years. TME is expected to remain cash flow positive over the next five years.

Bulls Say:

Compared with Spotify, TME has plenty of room for subscriber growth that should come about as it moves more music content behind the paywall.
TME piggybacks off Tencent’s billion-plus user network. This relationship allows for better retention of users while attracting new ones.
By investing in independent artists and long-form audio, TME could better manage content cost over the long term.

Company Description:

TME is the largest online music service provider in China. It was founded in 2016 with the business combination of QQ Music (founded in 2005), Kuwo Music (founded in 2005) and Kugou Music (founded in 2004) streaming platforms. Tencent is the largest shareholder of TME with over 50% shares and over 90% voting rights held. TME also provides social entertainment services, including music live audio/video broadcasts and online concert services through the three platforms mentioned above, and online karaoke through an independent platform WeSing.

(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.

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

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Envestnet’s Wealth Solutions Had Secular Growth but Margin Expansion Has Been Lackluster

Post author By lvc-admin
Post date May 25, 2022
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Business Strategy & Outlook:

Envestnet was founded in 1999 to offer independent advisors access to a comprehensive wealth-management platform. The firm’s founder, the late Jud Bergman, recognized two major trends in the industry. The first was the move away from the wirehouse firms. The second was the move from a commission-based toward a fee-based model. Wealth solutions represents about 75% of the firm’s net revenue.About half of this consists of asset-based fees with the fee rate dependent on the level of services provided. The factors such as product mix, new client onboardings, and switches from an asset-based to subscription model can affect the fee rate. The other half of wealth solutions include the Tamarac platform geared toward registered investment advisors, subscription software to enterprises, recently acquired financial planning software MoneyGuidePro, and professional services.

Tamarac’s popularity with RIAs has been a strong driver of growth. In 2015, Envestnet acquired Yodlee, which makes up the firm’s data and analytics segment. Yodlee’s revenue consists of its core data aggregation, alternative data to asset managers, and analytics to advisory firms. This segment is less moaty, as Yodlee faces competition from Plaid and MX Technologies as well as many alternative data providers. Following Visa’s announced (but ultimately nixed) acquisition of Plaid at a high, media reports have indicated that Envestnet is looking to sell Yodlee. For now, Envestnet is comfortable keeping Yodlee in its product portfolio. Envestnet believes marketplace exchanges can add to growth. In 2019, the company launched an insurance exchange with six national carriers to connect an advisor’s clients with annuity products. In addition to the insurance exchange, Envestnet launched Advisor Credit Exchange to help advisors address the lending needs of their clients. Envestnet is also focusing on growing asset-based revenue by providing value-added services such as impact portfolios, direct indexing, and tax overlays

Financial Strengths:

Envestnet’s financial strength is sound. The company has used leverage for acquisitions. As of Dec. 31, 2021, Envestnet has approximately $429 million of cash and $849 million in convertible debt. This equates to a net leverage ratio of about 1.6 times EBITDA. While it’s true that the firm’s wealth solutions segment contains asset-based revenue, net of direct asset-based cost of revenue, these fees are less than 40% of the firm’s revenue. In addition, it is estimated that 40% of Envestnet’s AUM/A are not in equities. And given the fact that most of Envestnet’s remaining revenue is essentially recurring, with the company’s debt levels.

Bulls Say:

Envestnet has leading market share, and its product suite offers greater breadth than competitors.
Envestnet could pursue strategic alternatives with Yodlee.
Envestnet should continue to benefit from the trend of advisors leaving wire house firms to start their own practices and the shift from commission-based to fee- based advice.

Company Description:

Envestnet provides wealth-management technology and solutions to registered investment advisors, banks, broker/dealers, and other firms. Its Tamarac platform provides trading, rebalancing, portfolio accounting, performance reporting, and client relationship management software to high-end RIAs. Envestnet’s portfolio management consultants provide research services and consulting services to assist advisors, including vetted third-party managed account products. In November 2015, Envestnet acquired Yodlee, a provider of data aggregation.

(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.

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

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Operational Challenges Hinder International Paper’s Ability to Capitalize on Strong Box Demand

Post author By lvc-admin
Post date May 25, 2022
No Comments on Operational Challenges Hinder International Paper’s Ability to Capitalize on Strong Box Demand

Business Strategy & Outlook

International Paper manufactures packaging products and cellulose fibers. It accounts for roughly one third of the North American corrugated packaging market. Though it has operations in Brazil, Russia, India, and China, more than three fourths of its sales come from North America. A decade of consolidation in the corrugated packaging industry has allowed International Paper to raise prices and boost margins, but increased competitive intensity and rising input costs have weighed on profitability in recent years.

In International Paper’s largest segment, industrial packaging, the company manufactures containerboard. Roughly 80% of the company’s containerboard production is sent to International Paper’s box plants where it is converted into corrugated packaging. The remaining 20% is sold on the open market to local or regional box manufactures. This packaging is used in a variety of end markets, including food and beverage, e-commerce, paper products, and other goods. Corrugated boxes provide a strong yet lightweight packaging option that is cost-effective. This dynamic has made corrugated boxes a favorite in the packaging industry and is used in many different end markets. Roughly 85% of the sales in industrial packaging are in the United States. The cellulose fibers segment produces fluff, market, and specialty pulps. Fluff pulp is used to produce absorbent products such as baby diapers while market pulp is used to manufacture tissue and paper products. Fluff and specialty pulps account for about 80% of the cellulose segment. In 2021, International Paper spun off its printing paper segment, now known as Sylvamo. International Paper initially kept a 19.9% ownership stake in Sylvamo but has since sold roughly half its position in the company. IP’s management team has stated that they intend to monetize their remaining position in Sylvamo soon. International Paper also received a one-time dividend of $1.4 billion, which Sylvamo funded with debt. Following the completion of the spinoff, International Paper is primarily a containerboard business with some fluff pulp assets.

Financial Strengths

The international Paper has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. Following the spinoff of the firm’s paper business, International Paper reduced its debt by $2.5 billion to shore up up its financial position and maintain its investment-grade credit rating. International Paper now has a net debt/EBITDA of roughly 1.6, down from 4.0 in 2016. Historically, International Paper has made acquisitions in both the industrial packaging and cellulose fibers industry. The any future acquisitions would be small as both industries are highly consolidated, with International Paper having the largest share in both markets. International Paper has roughly $5 billion of outstanding debt with staggered maturities through 2048. International Paper has ample liquidity, with over $1 billion of cash on hand and no outstanding borrowings on a $1.5 billion credit facility. International Paper has a history of strong free cash flow generation, and the firm to maintain its sound capital structure.

Bulls Say

After a decade of adjusting its business model to improve profitability, International Paper will enjoy solid returns as it now operates primarily as a containerboard company.

International Paper, WestRock and Packaging Corp. of America will remain disciplined in taking economic downtime when needed in order to safeguard prices.

International Paper’s exposure to emerging markets will provide excellent opportunities for growth in the coming years.

Company Description

International Paper manufactures packaging products and cellulose fibers. It accounts for roughly one third of the North American corrugated packaging market. Though it has operations in Brazil, Russia, India, and China, more than three fourths of its sales come from North America. International Paper serves a variety of end markets, including industrial, consumer products, and manufacturing.

(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.

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

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While Estee Lauder Is Affected by China’s COVID-19 Restrictions, Disruption Should Be Short-Lived

Post author By lvc-admin
Post date May 25, 2022
No Comments on While Estee Lauder Is Affected by China’s COVID-19 Restrictions, Disruption Should Be Short-Lived

Business Strategy & Outlook

The Estee Lauder has earned a wide moat, based on its valuable portfolio of global leading brands, its preferred status with its channel partners in department stores, specialty beauty outlets, travel retail locations, and a scale-based cost advantage.

Although the pandemic is presenting challenges for Estee and its peers, one can be optimistic about its competitive position and long-term strategy. Estee has made significant investments in omnichannel, marketing, and innovations that are helping the firm recover briskly from the pandemic and the subsequent inflation and supply chain disruptions. The firm’s growth opportunities should persist over the long term as emerging markets (a third of sales) still spend significantly less than developed markets on prestige beauty. Per Euromonitor, average annual per capita spend on prestige beauty in 2021 was $104 in the U.S., $114 in South Korea, $22 in China, $6 in Brazil, and $1 in India. Estee also has significant opportunity to expand its brands geographically. This opportunity is particularly pronounced in the context of its brand reach, as nearly all of its 30 brands are sold in the U.S., but only 15 have launched in China, 10 in India, and nine in Brazil.

Despite its solid competitive standing, Estee isn’t immune to headwinds. Even prior to COVID-19, Estee had been struggling with its large exposure to global department stores as the channel faces declining traffic from consumers shifting their purchases to other outlets. However, the firm has been proactively diversifying its channel reach, developing a strong presence in e-commerce (28% of sales) and specialty beauty. In the next few years, Estee will accelerate these efforts with the implementation of its post-COVID-19 business acceleration plan. This will result in the closure of 10%-15% of freestanding stores and some unproductive department store counters, elimination of 3.5% of jobs, and realigning of the distribution network, resulting in annual savings of $300 million-$400 million, a portion of which will be reinvested in e-commerce, omnichannel, and digital marketing capabilities.

Financial Strengths

Estee Lauder has traditionally carried a very low level of debt. Net debt to adjusted EBITDA has consistently remained less than one (averaging 0.2 times over the past 10 years), and this metric to remain low, with Estee holding more cash than debt on average over the next five years. As such, EBITDA interest coverage has been more than sufficient, averaging 16 times over the past three years, and to average 31 times over the next five years. The Estee has ample liquidity to weather disruptions from the pandemic and its aftershocks, with $6.3 billion in cash and available liquidity as of March. The firm’s stated and demonstrated priorities for its robust generation of free cash flow to the firm (midteen percentage of sales over the 10-year forecast, versus high single digits on average the past three years due to the pandemic) are to invest in organic growth, acquire compelling businesses should the opportunity arise, and return cash to shareholders. The Estee to average 4%-5% of revenue toward capital expenditures each year, in line with historical averages. In an effort to conserve cash during the pandemic, Estee suspended the June 2020 dividend (which conserved $170 million), reinstated it the following quarter at the previous $0.48, and has since increased it to $0.60. Over the long term, dividends will grow 13% annually, generally in line with earnings growth, maintaining a 30%-40% payout ratio. No one can modeling unannounced acquisitions as the timing and magnitude is very difficult to predict. Instead, the model excess cash is used to repurchase shares (1%-2% of outstanding shares annually, or about $1.5 billion-$2.5 billion, about double the average directed toward buybacks each year since fiscal 2015), which as prudent when shares trade below the assessment of its intrinsic val

Bulls Say

The firm has many available levers for growth, given the rise of the global middle class, China’s beauty consumption expanding from skincare into makeup, fragrance and haircare, and geographic expansion opportunities for the firm’s portfolio of strong brands.

Estee Lauder, as a prestige beauty pure play, is best positioned to benefit from consumers trading up from mass to prestige, which is occurring across the globe.

Estee Lauder is aggressively investing in the more profitable e-commerce channel, adapting to evolving consumer preferences, while simultaneously enhancing its margins

Company Description

Estee Lauder is the world leader in the global prestige beauty market, participating across skincare (59% of fiscal 2021 sales), makeup (26%), fragrance (12%), and haircare (3%) categories, with popular brands such as Estee Lauder, Clinique, MAC, La Mer, Jo Malone, Aveda, Bobbi Brown, Too Faced, Origins, Dr. Jart+, and The Ordinary. The firm operates in 150 countries, with 23% of fiscal 2021 revenue stemming from the Americas, 43% from Europe, the Middle East and Africa, and 34% from Asia-Pacific. The company sells its products through department stores, travel retail, multibrand specialty beauty stores, brand-dedicated freestanding stores, e-commerce, salons/spas, and perfumeries.

(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.

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

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Technology Stocks

No-Moat Orica’s First-Half Earnings Improve but Inflation and Freight Weight

Post author By lvc-admin
Post date May 25, 2022
No Comments on No-Moat Orica’s First-Half Earnings Improve but Inflation and Freight Weight

Business Strategy and Outlook

Orica has expanded its mining services business around a leading global market share in explosives. Earnings are leveraged to mining volume and commodity prices. The Australian explosives duopoly affords relatively high margins and returns; however, these are coming under pressure as Orica’s more lucrative three- to four-year contracts mature and are replaced with longer-duration and lower-margin contracts. Orica benefits from resources development activity in Latin America, South Africa, and Russia. Non-Australian explosives usage also depends on construction demand, which is somewhat less cyclical. Orica has grown its explosives business by both organic and acquisitive means. In fiscal 2006 it bought the European, Middle Eastern, African, Asian, and Latin American businesses of Dyno Nobel, which helped provide scale and lower costs. This was followed by divestment of a 70% interest in fertiliser business Incitec Pivot. In fiscal 2007, Orica expanded capacity at its Queensland ammonium nitrate plant and increased capacity at Kooragang Island, New South Wales. An ammonium nitrate plant in Bontang, Indonesia started production in 2012, and there were plans to double capacity at Kooragang Island, but timing will depend on market demand. Orica also participates in an ammonium-nitrate plant joint venture in the Pilbara iron ore region in Western Australia.

Orica’s Australian explosives market share is an estimated 55%-60%, with the remainder largely held by peer Incitec Pivot. The Incitec Pivot’s Moranbah, Queensland, plant is included in this estimate. In the U.S., the explosives industry is a concentrated market. Orica has a well-established presence with an estimated market share of 30%-35%. The key competitors are Dyno Nobel (owned by Incitec Pivot), which has similar market share, and Austin Powder. The key markets for explosives in the U.S. are coal and metals mining, as well as construction and quarrying. A focus on higher shareholder returns has improved with investment options subjected to disciplined returns criteria. Orica will not invest in new plant unless an 18% return on net assets can be achieved.

Financial Strength

First-half fiscal 2022 cash conversion fell to just 66% with a sharp increase in working capital leading to negative net operating cash flow of AUD 158 million. The cash outflow saw net debt rise to AUD 1.65 billion versus AUD 1.52 billion at end December 2021. Leverage (ND/(ND+E) increased to 38% from 35% and net debt/EBITDA (based on annualised first-half metrics) is at 2.3. While somewhat high, this remains within company targets and all else equal sub-1.0 net debt/EBITDA is expected by as soon as fiscal 2025. There remains significant headroom to gearing covenants of 57.5% and average drawn debt tenor of 4.7 years is healthy. But in the meantime the leveraged balance sheet bears consideration in any investment decision and contributes to the high fair value uncertainty.

Orica has AUD 1.7 billion in available liquidity, limited near-term refinancing requirements and headroom to covenants of 57.50% gearing at 2.0 times interest cover. But covenants could be rapidly tested in a circumstance where customers can’t pay and Orica says some customers have been unable to process payments due to physical lockdowns. Despite this, Orica hasn’t identified issues with debtors’ ability to pay otherwise.

Bulls Say’s

Orica is a global leader in explosives and part of a duopoly in Australia. It is leveraged to ongoing regional resources demand driven by the industrialisation and urbanisation of China and India.
The intensity of explosives and chemicals used in mining is increasing as ore grades decline and strip ratios increase.
There are a number of organic growth opportunities available to the Orica, particularly the expansion of ammonium nitrate capacity and explosives production.

Company Profile

Orica is a leading global manufacturer and supplier of chemicals and explosives, primarily to the mining industry. It has operations in 50 countries across six continents. Mining services is the lone growth engine now that the chemicals business has been sold. Orica has an approximate 28% share of the global commercial explosives market. It provided resins, steel bolts, and other products for underground mining and tunnelling though this business is now sold. It also supplies chemicals such as sodium cyanide to the mining industry

(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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