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Global stocks

Current Inflationary Environment Provides Demand Tailwinds for No-Moat TreeHouse Foods

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Business Strategy and Outlook

Despite being the largest pure-play private-label food manufacturer in the U.S., TreeHouse’s performance has historically been stymied by poor execution, including lacklustre service levels and disjointed go-to-market efforts. Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and it is believed that the private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape, once pandemic disruption subsides. While it is expected the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), TreeHouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability. Management has reoriented the business strategy to align more with market dynamics instead of product categories. For categories that are either in early or mature stages of growth (snacking and beverages), the team is looking to grow the top line profitably through volume leverage and value-added innovation. For categories that are in stagnation or decline (typically centre-of-store wares), the goal is to maintain share and improve profitability through different manufacturing or order fulfilment processes. Ultimately, these mandates appropriately balance clarity with nuance and should allow it to optimize its asset base.

 Portfolio optimization is also a core strategy pillar, and it has rationalized many underperforming areas of the assortment. It has also divested secularly challenged business lines like nuts and ready-to-eat cereal. The firm is expected to be more aggressive in discontinuing or monetizing suboptimal assets. In this context, in March 2022, management announced its exploring strategic alternatives to maximize shareholder value through divesting its stagnant businesses (meal preparation) and realigning operations around the high-growth snacking and beverages business. While recent deals executed under the current management team have been more favourable, it is viewed this strategy with some scepticism considering the firm’s mixed track record regarding acquisitions thus far.

Financial Strength

TreeHouse’s financial health looks reasonable to us, though it does leave a bit to be desired. The company has leveraged up meaningfully in the past to fund acquisitions (like Flagstone in 2014 and Ralcorp in 2016), constraining its ability in recent years to make value accretive investments. Leverage is quite high (project 4.5 times net debt/adjusted EBITDA for 2022), although its expected this will fall below 2.5 times by 2025. As management continues work to divest assets (it recently completed the RTE cereal business sale, and one shouldn’t be surprised to see more portfolio grooming), even more cash should be available for debt paydown. TreeHouse generates a good bit of free cash flow, averaging in the mid-single-digit range as a percent of sales in recent years. While the company will continue to invest a fair amount of capital in modernizing and streamlining its production/warehousing, it is believed margin improvement, along with process changes (like increasing made-to-order products, which reduces inventory requirements and waste) will allow free cash flow to normalize in the mid- to high-single-digit range. TreeHouse also has other cash flow levers, including its receivables sales program, whereby it monetizes its receivables more quickly in partnership with a financial intermediary. The company is still responsible for administering and collecting the receivables, but net-net, it is expected this program will continue to reduce its working capital funding needs during any given period. The firm’s debt covenants are fairly restrictive. Most of the debt is secured, and maximum allowable leverage is 4.5 times, although the firm received a temporary waiver to exceed this ratio in February, given pandemic-related headwinds. Some of its notes also inhibit dividend payments. Longer term, as business fundamentals improve, debt is paid down, and the firm’s credit rating improves, it is anticipated it will have more favourable access to capital markets

Bulls Say’s

  • The private label industry should continue to benefit from secular trends across the grocery retail landscape and demographic trends in the U.S. 
  • If the coronavirus induces prolonged recessionary conditions in the U.S., private label will likely outperform, and TreeHouse would benefit disproportionately as a market leader. 
  • Its massive manufacturing apparatus should allow the company to benefit from the secular shift toward small, niche brands, by way of co-packing arrangements.

Company Profile 

Treehouse Foods, the largest private label manufacturer in the U.S., is the product of a slew of acquisitions, the most significant being the 2016 acquisition of Ralcorp, Conagra’s former private brands business. The firm plays in over 25 categories, including snacks like pretzels and cookies, meals like pasta and dry dinners, and single-serve beverages like pods and ready-to-drink coffee. Retailers represent its most significant end-market, where it sells products for resale under retailer brands, but it also serves foodservice customers (providing a similar service as its retail business), industrial (selling bulk food for repackaging and repurposing), and branded consumer goods firms (under co-packing arrangements). Over 90% of its revenue comes from the US.

(Source: MorningStar)

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

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

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

Categories
Global stocks

Norwegian’s Return to Profitability on the Near-Term Horizon with Entire Fleet Deployed

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Business Strategy and Outlook

Changes to consumer behaviour surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents over an extended horizon. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which have proven successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. Still, it’s expected Norwegian could intermittently see pricing competition as global supply returns to market, limiting near-term yield upside (also impacted by the redemption of future cruise credits through year end). On the cost side, inflated spending on the procurement of goods and higher oil prices could keep costs exacerbated in 2022. However, it is expected both pricing and costs to normalize over time, rising at a low single digit rate longer-term. Altogether, these factors lead to average returns on invested capital, including goodwill, these are set to fall below 10.5% weighted average cost of capital estimate over a multiyear period, supporting no-moat rating. Norwegian has carved out a compelling position in cruising, thanks to its freestyle offering, the product still has to compete with other land-based vacations and discretionary spending for wallet share. However it’s harder to capture the same percentage of spending over the near term, given the perceived risk of cruising, heightened by previous media attention.

While liquidity issues appear to be alleviating for cruise operators, Norwegian was able to liberally access the debt and equity markets since the beginning of the pandemic. Such capital market efforts signalled Norwegian’s dedication to weathering a return to normalcy for demand. Given that the firm should return to profitability in the back half of 2022, the $2.1 billion in cash of Norwegian’s balance sheet (as of March 2022) should provide ample dry powder for the firm to operate with over the near-term

Financial Strength

Norwegian has accessed significant liquidity since the beginning of the pandemic, most recently raising around $2.1 billion in debt in February 2022 to retire expensive, early pandemic issued notes with rates above 10%. These efforts signal Norwegian’s dedication to optimize its balance sheet opportunistically. Given that cash demands should largely be covered by advance ticket sales with the fleet fully redeployed, the liquidity constraints are becoming less worrisome, and that cash on the balance sheet ($2.1 billion as of March 2022) should provide cushion for a smooth operating conditions. Although the company is set to remain cash flow negative in 2022, it is expected it could achieve positive EBITDA performance for the full year. However, when considering the plethora of debt raises since the beginning of the pandemic, Norwegian is likely to remain above its 2.5-2.75 times net debt/adjusted EBITDA target it had previously sought to achieve. It doesn’t have Norwegian reaching around this range until 2028 as it slowly pays down debt and finances new ship purchases, implying a return to investment grade is a longer-term focus. Additionally, the firm surpassed its debt/capital covenant of less than 70%, ending 2021 at around 84% (with restrictive covenants waived into 2022), indicating a higher risk balance sheet.

Bulls Say’s

  • As Norwegian is smaller than its North American cruise peers, it has the ability to deploy its assets nimbly as cruising demand rises, allowing for strategic pricing tactics. 
  • The further rescission of COVID-related travel policies (particularly internationally) could allow cruises to appeal to a wider cohort of consumers, leading to demand growth faster than it is currently expect. 
  • Norwegian has capitalized on leisure industry knowledge from its prior sponsors as well as the addition of high-end Regent Seven Seas and Oceania brands, gathering best practices and leverage with vendors

Company Profile 

Norwegian Cruise Line is the world’s third-largest cruise company by berths (at nearly 60,000), operating 28 ships across three brands (Norwegian, Oceania, and Regent Seven Seas), offering both freestyle and luxury cruising. The company has redeployed its entire fleet as of May 2022. With nine passenger vessels on order among its brands through 2027 (representing 24,000 incremental berths), Norwegian is increasing capacity faster than its peers, expanding its brand globally. Norwegian sailed to around 500 global destinations before 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 is not liable for any unintentional errors in the document.The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S

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Business Strategy and Outlook

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S. construction spending. It is forecasted strengthening demand growth for the public sector and modest growth for the private sector. Accounting for roughly half of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. At a national level, it is expected public infrastructure spending to grow by 6% per year on average, an acceleration from the last couple of decades. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provided stability and near-term funding certainty, but didn’t solve the still-weakening gas tax. However, long-term federal funding was passed in late 2021, totalling $1.2 trillion.

The outlook for road spending differs considerably from state to state. Differences in population growth, road conditions, funding mechanisms, and overall state fiscal health influence spending. Vulcan’s largest states by revenue–Texas, California, Virginia, Tennessee, and Georgia–have significant road spending needs and strong finances to support high growth. Private-sector demand consists of residential and nonresidential construction, including commercial and industrial properties. Nonresidential construction is the most important driver in the category, as spending is more material-intensive per dollar than residential construction. It is forecasted that the nonresidential spending growth to slow to 4% in the longer term, as many key sectors to make more efficient use of their construction spending. Additionally, it is expected residential starts to converge the long-term housing-start forecast of 1.5 million by 2030. Residential construction historically supports nonresidential construction growth.

Financial Strength

At the end of the fourth quarter of 2021, net leverage was roughly 2.5 times net debt/adjusted EBITDA, compared with the company’s target of roughly 2-2.5 times. Continued improvement in construction markets should help leverage to improve further, falling below 1 times net debt/adjusted EBITDA by the end of 2024, all else equal. The weighted average debt maturity is 11 years (as of year-end 2021), so maturities look quite manageable.

In June 2021, Vulcan announced the acquisition of U.S. Concrete. Given the healthy balance sheet before the close, the deal is unlikely to hamper Vulcan’s financial health. This case is bolstered by the relatively smaller size of U.S. Concrete. With the poorly timed and expensive acquisition of Florida Rock Industries in 2007, Vulcan’s debt surged from roughly $500 million to $3.7 billion. Combined with the recession that devastated construction activity, Vulcan’s leverage soared to more than 8 times debt/adjusted EBITDA. The company took difficult but important steps to protect its cash flow and improve its balance sheet in the aftermath. The company learned a lesson, given its current approach to M&A with more discipline. The acquisition of Aggregates USA in 2017 exemplifies Vulcan’s more disciplined, balance sheet-friendly approach

Bulls Say’s

  • Vulcan has a favourable geographic footprint in states that have a strong need for increased road work and the capability to fund it. 
  • Not-in-my-backyard tendencies make the permitting process incredibly difficult for new quarries, forming high barriers to entry and protecting Vulcan’s business from incoming entrants. 
  • Vulcan has made significant progress on its costcutting initiatives, demonstrated by its improving cost per ton despite relatively flattish demand.

Company Profile 

Vulcan Materials is the United States’ largest producer of construction aggregates (crushed stone, sand, and gravel). Its largest markets include Texas, California, Virginia, Tennessee, Georgia, Florida, North Carolina, and Alabama. In 2021, Vulcan sold 222.9 million tons of aggregates, 11.4 million tons of asphalt mix, and 5.6 million cubic yards of ready-mix. As of Dec. 31, 2021, the company had nearly 16 billion tons of aggregates reserves

(Source: Morning Star)

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

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

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

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

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

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

JD is seeing signs of Bottoming Out, Downgrading 2022 Estimates

Business Strategy & Outlook:  

JD.com has emerged as a leading disruptive force in China’s retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share has increased from 21% in 2016 to 27% in 2020. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model. JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. JD is the largest retailer in China by revenue. Among listed Chinese peers, JD’s net product revenue in 2020 was two to three times higher than for Suning, the second-largest listed retailer. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. The increase in mix from higher-margin third-party platform business and efficiency of scale will also help lift margins. In the medium term, the investment into community group purchase and JD logistics, and the higher mix of lower-margin supermarket category will hold back some of the margin gains. Starting in April 2017, the logistics business became an independent business unit that opens its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply chain management, integrated warehouse, and delivery services to penetrate into less developed areas. As the logistics business gains scale and reaches higher capacity utilization, the gross profit margin shall improvement. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.

Financial Strengths: 

JD.com had a net cash position of CNY 135 billion at the end of 2020. Its free cash flow to the firm has continued to generate positive FCFF at CNY 8.1 billion in 2020. JD has not paid dividends. JD.com has invested heavily in fulfilment infrastructure and technology in recent years, leading to concerns about its free cash flow profile and margin improvement story. The management will put more emphasis on growing revenue per user, expansion into lower-tier cities and the businesses’ profitability. Therefore, JD will not invest in new areas as aggressively as before, so JD will be able to maintain positive non-GAAP net margin versus being unprofitable before. its financial strength will improve in future. Most of the initial investments in the third-party logistics business have been carried out, and utilization of the warehouses has picked up. Its technology team is already in place without the need to add substantial headcounts. JD will also be cautious in its investment in the group-buying business and new retail, given a profitable business model has not been established in the market. JD has tried to improve its asset-heavy model by transferring a portfolio of warehouses to establish a CNY 10.9 billion logistics property core fund in partnership with the sovereign wealth fund of Singapore, GIC. JD will own 20% of the fund, lease back the logistics facilities, and receive management fees for managing the facilities. The deal will be completed in phases with the majority of them completed in 2019.

Bulls Say: 

  • JD.com’s nationwide distribution network and fulfilment capacity will be extremely difficult for competitors to replicate. 
  • As its first-party business gains scale, cost advantage will lead to lower sourcing costs and higher margin.
  • JD is now the largest supermarket in China, the high- frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.

Company Description: 

JD.com is China’s second-largest e-commerce company after Alibaba in terms of gross merchandise volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
LICs LICs

Market Selloff Affects Franklin Resources’ Flows and AUM; Lowering Fair value Estimate to $29

Business Strategy & Outlook: 

A confluence of several issues—poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel—has made it increasingly difficult for active asset managers to generate organic growth, leaving them more dependent on market gains to increase their assets under management. While there will always be room for active management, think the advantage for getting and maintaining placement on platforms will go to managers that have greater scale, established brands, solid long-term performance, and reasonable fees. As such, it’s been big proponents of consolidation among the U.S.-based asset managers the past several years, with firms expected to pursue scale as a means of offsetting the impact of fee and margin compression (driven by the growth of low-cost passive products). However, a combination of narrow-moat Franklin Resources with no-moat Legg Mason was not even on the radar; it is believed both firms were more likely acquirers of smaller asset managers as opposed to either one being an acquisition target. 

The combined firm closed out April 2022 with $1.456 trillion in managed assets, composed primarily of equity (32%), fixed-income (39%), multi-asset/balanced (10%) funds, alternatives (15%) and money market funds (4%), giving it the size and scale necessary to be competitive. The new Franklin provides investment management services to retail (52% of managed assets), institutional (46%) and high-net-worth (2%) clients and is one of the more global firms of the U.S.-based asset managers with more than 35% of its AUM invested in global/international strategies and 25% of managed assets sourced from clients domiciled outside the U.S. While the Legg Mason deal to keep margins from deteriorating in the face of industrywide fee compression and rising costs (necessary to improve investment performance and enhance product distribution), near-term organic growth will struggle to stay positive, albeit better than the solidly negative growth profile for a stand-alone Franklin Resources.

Financial Strengths:

Franklin entered fiscal 2022 with $3.2 billion in principal debt (including debt issued/acquired as part of the Legg Mason deal): $300 million of 2.8% notes due September2022, $250 million of 3.95% notes due July 2024, $400 million of 2.85% notes due March 2025, $450 million of 4.75% notes due March 2026, $850 million of 1.6% notes due October 2030, $550 million of 5.625% notes due January 2044, and $350 million of 2.95% notes due August 2051. At the end of March 2022, the firm had $5.8 billion in cash and investments on its books. More than half of thesetypes of assets have traditionally been held overseas, with as much as one third of that half used to meet regulator capital requirements, seed capital for new funds, or supplyfunding for acquisitions. Assuming Franklin closes out the year and, it will enter fiscal 2023 with a debt/total capital ratio of around 22%, interest coverage of around 20 times, and a debt/EBITDA ratio of 1.5 times. Franklin has generally returned excess capital to shareholders as share repurchases and dividends. During the past 10 fiscal years, the firm repurchased $7.4 billion of common stock and paid out $7.1 billion as dividends(including special dividends). While Franklin’s current payout ratio of 30%-35% is lower than the 40% average payout (when excluding special dividends) during the past five years, and only low-single-digit annual increases in the dividend until the integration of the Legg Mason deal is well behind it. As for share repurchases, Franklin spent $208 million, $219 million, and $755 million buying back 7.3 million, 9.0 million, and 24.6 million shares, respectively, during fiscal 2021, 2020, and 2019. Given the likelihood that Franklin may decide to pay off some of its debt as it comes due the next several years, and it isn’t expect to see a large level of share repurchases in the near term.

Bulls Say:

  • Franklin Resources is one of the 20 largest U.S.-based asset managers, with more than two thirds of its AUM sourced from domestic clients. It is also the fifth- largest global manager of cross-border funds.
  • The purchase of Legg Mason has lifted Franklin’s AUM to around $1.5 trillion, hoisting it into the second- largest tier of U.S.-based asset managers, which includes firms like Pimco, Capital Group, and J.P. Morgan Asset Management.
  • Franklin maintains thousands of active financial advisor relationships worldwide and has close to 1,000 institutional client relationships.

Company Description: 

Franklin Resources provides investment services for individual and institutional investors. At the end of April 2022, Franklin had $1.456 trillion in managed assets, composed primarily of equity (32%), fixed-income (39%), multi-asset/balanced (10%) funds, alternatives (15%) and money market funds (4%). Distribution tends to be weighted more toward retail investors (52% of AUM) investors, as opposed to institutional (46%) and high-net-worth (2%) clients. Franklin is also one of the more global firms of the U.S.-based asset managers, with more than 35% of its AUM invested in global/international strategies and 25% of managed assets sourced from clients domiciled outside the United States.

(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

Synopsys Outperforms With IP Sales Leading the Way Amid Rising Technical Complexity; FVE Up to $334

Business Strategy & Outlook:   

Synopsys provides electronic design automation (EDA) software, intellectual property (IP), and software integrity (SI) products that are critical to the semiconductor chip design process. As secular trends toward artificial intelligence, 5G communications, autonomous vehicles, and cloud computing, among others, accelerate, Synopsys will benefit from both the rising complexity of chip designs and the advancing digitalization of various end markets. The narrow-moat Synopsys has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform amid a growing semiconductor landscape. Synopsys’ products are transformational in enabling increasingly complex integrated circuit (IC) and system-on-chip (SoC) design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Synopsys is the largest player in the EDA space, and specifically in digital design as well. With a larger digital exposure, and it is discovered that Synopsys privy to higher growth vectors and as a result expect growth greater than that of top competitor Cadence. Outside of core EDA, Synopsys’ IP and SI businesses as benefiting from industry trends. As systems companies increasingly design their own differentiated silicon in-house, and Synopsys to benefit as its customer base expands beyond traditional semiconductor designers. This trend in achieving technological differentiation through chip customization to support IP adoption, as leveraging IP blocks for standardized components allows for significant time and resource savings and reallocation to differentiating components. Further, given the rising complexity of chip design, rising cost of failure, and increasing importance of software security, Synopsys’ growing SI business presents an important point of differentiation for the company. Reflecting the mission criticality of EDA tools, Synopsys exhibits negligible churn, with customer retention consistently at approximately 100%, and has relationships with all major chip design companies in the United States.

Financial Strengths:  

Synopsys is in a very healthy financial position. As of January 2022, Synopsys had $1.1 billion in cash and cash equivalents versus $24 million in debt. The firm repaid its $75 million outstanding term loan balance in 2021 and is now solely liable for a 12-year credit agreement of approximately $33 million in aggregate, of which about $24 million is outstanding as of January 2022. Approximately 90% of Synopsys’ revenue is of a recurring nature, given that the firm primarily sells time-based licenses. Synopsys’ average license length is approximately three years, with periodic software updates delivered throughout the license’s term ensuring continual access to Synopsys’ evolving technology. The ratable revenue of time-based licenses tends to smooth returns compared with utilizing a perpetual license model, allowing for better visibility into the future of the business. Synopsys is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows. Free cash flow margin has grown from 21% in fiscal 2017 to 33% in fiscal 2021, and return on invested capital is increasingly widening its spread above cost of capital. 

Bulls Say:  

  • Secular tailwinds in chip design such as 5G, Internet of Things, AI, and others should increase demand for EDA tools and support growth for Synopsys.
  • The growing Software Integrity business enables a larger TAM for Synopsys and addresses expanding demand for real-time identification of security vulnerabilities across the entire software development lifecycle.
  • Synopsys provides mission-critical EDA software, having relationships with all major domestic chip designers and retention rates of approximately 100%.

Company Description: 

Synopsys is a provider of electronic design automation (EDA) software, intellectual property (IP), and software integrity (SI) products. EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. The firm’s growing SI business allows customers to continuously manage and test the code base for security and quality. Synopsys’ comprehensive portfolio is benefiting from a mutual convergence of semiconductor companies moving up-stack toward systems-like companies, and systems companies moving down-stack toward in-house chip design. The resulting expansion in EDA customers alongside secular digitalization of various end markets benefits EDA vendors like Synopsys.

(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

Activewear Is a Growth Category, but Under Armour Lacks a Competitive Edge

Business Strategy & Outlook

The Under Armour as lacking an economic moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, Under Armour’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, its North America sales have not grown over the past five years as it restructured and demand for performance gear, Under Armour’s primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, the long-term benefits for Under Armour will be limited as compared with global brands wide-moat Nike and narrow-moat Adidas. A Under Armour has fallen behind on innovation and its product is not sufficiently differentiated.

Under Armour has recently had problems in both its direct-to-consumer and wholesale businesses. Although sales through its direct-to-consumer channels increased to $2.3 billion in 2021 from $1.5 billion in 2016 (calendar years), Nike and others have experienced much greater direct-to-consumer growth in this period. Under Armour has opened its own stores as wholesale distribution has slowed, but 90% of them in North America are off-price. Still, its direct-to-consumer revenue will rise to 61% of total revenue in fiscal 2032 from 42% in its last fiscal year. This should allow Under Armour to have better control over its brand, but one cannot see evidence that it allows for premium pricing and see it as a defensive move. The Under Armour’s international segment will produce growth over the long term, but the firm faces significant competition from global and native operators with established brands and distribution networks. According to Euromonitor, the combined sportswear markets in Asia-Pacific and Western Europe were about $160 billion in 2021, greater than North America’s roughly $140 billion. As Under Armour generates only about 30% of its revenue in Europe and Asia-Pacific, it has room for growth, but it lacks strong retail partnerships and brand recognition.

Financial Strengths

The Under Armour has enough liquidity to get through COVID-19 even as the effects have not fully passed. Prior to the crisis, the firm’s long-term debt consisted only of $593 million in 3.25% senior unsecured notes that mature in 2026. Then, in May 2020, Under Armour completed an offering of $500 million in 1.5% convertible senior notes that mature in 2024. However, as this additional funding has proven to be unnecessary, the firm has already paid down more than 80% of this convertible debt. Even after these debt repayments, at the end of March 2022, the firm had $1 billion in cash and $1.1 billion in borrowing capacity under its revolver. Thus, the Under Armour to operate in a net cash position for the foreseeable future. Under Armour’s free cash flow to equity has recovered from the pandemic impact, totaling about $850 million over the past two fiscal years. The forecast about $5.6 billion in free cash flow generation over the next decade. Although the firm does not pay dividends, it recently authorized its first share buyback program. The firm repurchased $300 million in shares in February 2022, and the forecast another $20 million in buybacks in fiscal 2023. Moreover, Under Armour’s restructuring has reduced base operating expenses by about $200 million, and the forecast its capital expenditures will remain low at about 2% of sales. The firm may use some of its free cash flow for acquisitions, but one cannot forecast acquisitions due to the uncertainty concerning timing and size. Although its growth has been largely organic, the firm acquired three fitness apps for a combined $710 million in past years as part of a strategy that has been mostly abandoned. It has also made some smaller investments, such as an investment of $39.2 million in its Japanese licensee, Dome, in 2018 to raise its ownership stake to 29.5%. Under Armour later had to write down this investment because of restructuring at Dome.

Bulls Say

  • Under Armour quickly became no-moat Kohl’s second biggest brand after its introduction in 2017. This partnership allows Under Armour to reach more female customers. Kohl’s is expanding shelf space for activewear. 
  • Under Armour’s restructuring has produced an average annual savings of $200 million. The firm can reinvest these savings into marketing and international expansion while improving its operating margins.
  • Under Armour could gain shelf space and distribution as Nike has reduced or eliminated shipments to some major sportswear retailers.

Company Description

Under Armour develops, markets, and distributes athletic apparel, footwear, and accessories in North America and other territories. Consumers of its apparel include professional and amateur athletes, sponsored college and professional teams, and people with active lifestyles. The company sells merchandise through wholesale and direct-to-consumer channels, including e-commerce and more than 400 total global factory house and brand house stores. Under Armour also operates a digital fitness app called MapMyFitness. The Baltimore-based company was founded in 1996.

(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

Massive Opportunity for Sea but Path to Profitability Remains Difficult to Navigate

Business Strategy & Outlook

The Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. Per Euromonitor, Shopee has 30% share of its main market, Indonesia, and it estimated about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process, it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, one cannot see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, the growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

The massive potential for Sea is evident as e-commerce is 7%-8% of overall retail sales in Southeast Asia, compared with 22% for China. It forecasted a 23% five-year compound annual growth rate for the digital economy in the region. China’s e-commerce is expected to grow 11% in the same period. Given the robust macro backdrop, this should provide a conducive landscape for Shopee to succeed. Despite a massive opportunity, Shopee remains vulnerable to increased sales and marketing expenses and low switching costs. Other platforms can offer the same products with subsidies to consumers who are cost-conscious. This also implies the possibility of new competitors in e-commerce in the region that can replicate the same strategy. Given the lack of differentiation for Shopee, one can see further heavy subsidies in order to ward off threats and maintain market share, which could be impossible to continue in the long term in the pursuit of profitability. The company has indicated a goal for Shopee to be cash flow positive by 2025, but this could be a challenge without clear key advantages.

Financial Strengths

One cannot believe that Sea has any financial issues outside of the concerns about heavy cash burn. It has cash and short-term investments of USD 11.7 billion against only USD 3.3 billion total debt as of the end of 2021. Short-term liquidity is not an issue as the firm has USD 286 million of short-term debt and its current ratio is 2 times. The main concern is that the cash balance could erode quickly if sales and marketing and research and development expenses continue at this rate. In 2021, cash (excluding stock-based compensation and depreciation) operating expenses were USD 5.0 billion, which implies that Sea should be able to withstand cash burn for at least two years in a worst-case scenario where it generates zero revenue. It would not surprise us if Sea raises additional capital in order to have more of a cash buffer, but one cannot believe this poses any risk for now should the company become profitable. Outside of cash burn concerns, there are no red flags concerning leverage nor interest expenses.

Bulls Say

  • Sea could maintain its leading market share as Southeast Asia e-commerce expands without having to sacrifice profitability through increased sales and marketing spending.
  • Garena could find another hit game that increases bookings in addition to Free Fire. Also, India could rescind its sanctions on Free Fire
  • SeaMoney could increase its market share above its current 3% and become the one of the preferred payment options in Southeast Asia.

Company Description

Sea operates Southeast Asia’s largest e-commerce company, Shopee, in terms of gross merchandise value and number of transactions. Sea started as a gaming business, Garena, but in 2015 expanded into e-commerce, which is now the main growth driver. Shopee is a hybrid C2C and B2C marketplace platform operating in eight core markets. Indonesia accounts for 35% of GMV, with the rest split mainly among Taiwan, Vietnam, Thailand, Malaysia, and the Philippines. For Garena, Free Fire was the most downloaded game in January 2022 and accounted for 74% of gaming revenue in 2021. Sea’s third business, SeaMoney, facilitates e-wallet payments on Shopee and offline and provides other digital financial services such as credit lending.

(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

Ritchie Bros. Puts a Spotlight on its Services Business at its Investor Day

Digital tablet display the stock market data

Business Strategy & Outlook

Ritchie Bros. provides auction and marketplace services for used heavy equipment. The company’s strong auction liquidity attracts both buyers and sellers to its network. The Ritchie Bros. will continue to be one of the top players in the asset disposition market. The network effects present in its business have consistently delivered higher average selling prices for consignors (or sellers) and provided buyers a wide range of equipment to choose from. For both parties, Ritchie Bros. drives significant amount of value, which has allowed it to monetize its network effects and develop a strong competitive positioning.

Ritchie Bros.’ strategy going forward is to move its business from being primarily transaction based to more solutions based. It has developed digital solutions that range from inventory management solutions for buyers to market intelligence tools for sellers. The company is also pushing to provide more services to customers, such as equipment inspections, storage, and advertising, in addition to asset valuation services. While these services have the potential to drive higher profitability, the it will be challenging to drive adoption rates higher in the near term. Customers will need to be convinced of the value that add-on services can bring to their buying or selling experience.  The company has exposure to attractive tailwinds in the near term. Construction equipment makes up more than half of the equipment sold through Ritchie Bros., with the balance in transportation and agriculture equipment. The near term looks bright for each of these markets, meaning Ritchie Bros. will likely see increased activity on its marketplace. In economic upturns, equipment owners often opt to sell their older equipment to buy newer ones. Ritchie Bros. also benefits when markets are pressured, and equipment owners look to increase their liquidity levels through asset disposals (such as bankruptcies). The used equipment supply will continue to loosen in the near term and lead to greater auction liquidity for Ritchie Bros.

Financial Strengths

Ritchie Bros.’ total debt at the end of 2021 stood at $1.7 billion, which equates to a net debt/adjusted EBITDA ratio of 4. The company issued new debt (over $900 million) in 2021 to fund its acquisition of Euro Auctions, however, the company intends to issue redemption notices on the new debt, given its decision to discontinue the deal. Historically, the company’s total debt has ranged between $100 million-$250 million. In 2016, Ritchie Bros.’ total debt rose to $619 million (up from $110 million in 2015) after it issued notes with a principal of $500 million (due in 2025) to partially fund its acquisition of Iron Planet. The company can generate $400 million in free cash flow in the midcycle year, supporting its ability to bring debt levels down.

Ritchie Bros. also provides financial services to its customers by matching them with lenders (it receives a fee for acting as broker). Management has expressed interest in expanding its financial services to get access to assets that will likely be sold through bankruptcies. The Ritchie Bros. will work to leverage its partnership with Gordon Brothers, an investment firm focused on working with businesses dealing with insolvency issues. By using its excess capital, Ritchie Bros. can potentially bring additional assets to its marketplace to be sold off, but this is more of a long-term opportunity rather than an immediate value driver. 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 2021 stood at $326 million on its balance sheet. One can also find comfort in its ability to tap into available lines of credit to meet any short-term needs. The company has access to $525 million in credit facilities. It maintains a strong financial position with a clean balance sheet.

Bulls Say

  • Increasing construction activity could lead equipment owners to buy new machines and sell their used equipment through Ritchie Bros.’ auctions, substantially boosting its revenue growth.
  • Equipment owners may feel more comfortable putting their machines up for sale as the economic environment improves, strengthening Ritchie Bros.’ auction liquidity.
  • Ritchie Bros.’ success operating in a fully online environment during the pandemic might convince more buyers to leave other machinery-focused websites for its auctions, which could boost the company’s profitability.

Company Description

Ritchie Bros. operates the world’s leading marketplace for heavy equipment. The company started as a live auctioneer of industrial equipment, since then it has greatly expanded its operations to include the sale of construction, agricultural, oilfield, and transportation equipment. Ritchie Bros. operates over 40 live auction sites in more than 12 countries, along with online marketplaces, including iron Planet, Marketplace-E, and GovPlanet. Its agricultural auctions are frequently much smaller venues and can include liquidations of single farms. The company holds over 300 auctions yearly and sells over $5 billion worth of equipment.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

A less Uncertain Future for Australian Banks, particularly on the Downside

Business Strategy & Outlook:  

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand. The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. The banks greater investment into specialist credit teams across areas such as agriculture, health, education, franchising, as well as business banking centres, sets the bank apart. This ultimately led to a better understanding of the customers’ requirements, faster turnaround times, and higher approval rates. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers. While risks directly related to COVID-19 have abated, wage pressures, labour, and supply chain challenges, and high inflation pose challenges as the cash rate increases. The main current influences on earnings growth are modest credit growth and widening margins as the banks reprice lending rates in a rising cash rate environment. Operating expenses will continue to rise as the bank invests to capture growth opportunities, this despite productivity improvements being realised. After enjoying super low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020. It is expected a return to midcycle levels around 0.18% in fiscal 2025. The MLC wealth divestment completed in May 2021 after reaching an agreement with IOOF for AUD 1.44 billion as the bank simplifies and refocuses on its core banking operations.

Financial Strengths: 

National Australia Bank is in good financial health, with common equity Tier 1 of 12.5% above the regulator’s 10.5% benchmark as at March 31, 2022. The bank slashed the fiscal 2020 dividend to AUD 60 cents per share on both lower earnings a reduced dividend payout ratio. The payout shall average 70% of earnings before notable items over the next five years, in line with the target range of 65%-75% introduced in 2020. National Australia Bank completed a AUD 2.5 billion buyback announced in July 2021, announcing an additional AUD 2.5 billion buyback in March 2022. Assuming completion of the second share buyback and the acquisition of Citigroup’s Australian consumer business, the bank should remain above its 10.75% to 11.25% target range.

Bulls Say: 

  • Management focus is on the successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth.
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from the rebound in demand for business credit.
  • NAB has the ability to achieve significant cost savings and drive operational efficiency improvements.

Company Description:

National Australia Bank is the most business-focused of the four major banks, holding the largest share of business loans and the number-three spot in home loans. National Australia Bank is currently the third-largest bank by market capitalisation, with the franchise covering consumer, small business, corporate, and institutional sectors. Under the UBank brand the bank also owns one of Australia’s largest digital-only banks. Offshore operations in New Zealand round out the group.

(Source: Morningstar)

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