Category: Sectors

Inflated Raw Material Costs In Conjunction With Significant Market Competition To Impede Growth For Catalent Inc.

Post author By lvc-admin
Post date May 11, 2022
No Comments on Inflated Raw Material Costs In Conjunction With Significant Market Competition To Impede Growth For Catalent Inc.

Business Strategy and Outlook

Catalent is a leading contract development and manufacturing organization, or CDMO. The company has an extensive network of partnerships with pharmaceutical and biotechnology firms that leverage its expertise and scale to optimize drug production and avoid the risks of in-house drug manufacturing. The challenges and compliance risks associated with changing a drug’s manufacturing process create a sticky relationship for Catalent’s customers. Drug companies tend to stick with trusted suppliers with good track records of regulatory compliance, which makes them unlikely to switch to a different CDMO. Catalent provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Outsourcing penetration is anticipated to continue incrementally increasing, driven by the complexities of biologics manufacturing.

Biologics are large, complex molecules such as antibodies, recombinant proteins, vaccines, and cell and gene therapies. Catalent’s biologics segment accounted for 48% of its fiscal year 2021 revenue. The biologics manufacturing process requires around-the-clock maintenance, with an emphasis on maintaining the integrity of the cell and its DNA as well as keeping the cells free of contaminants. The same cell line reproduces to continue making the product until the end of the drug’s life. Therefore, for clients to switch manufacturers would require establishing a new cell line that would result in variations, or transferring the technology, which makes it vulnerable to changes as well. Biopharma customers are likely to continue outsourcing to CDMOs in order to benefit from access to flexible capacity and manufacturing improvements. According to Industry Standard Research, only one third of pharmaceutical manufacturing is currently conducted in-house while two thirds are outsourced.

Financial Strength

Catalent is in fair financial health, and the business is expected to continue providing a steady stream of cash. The company has historically utilized debt, particularly for acquisitions. Catalent ended 2021 with $3.2 billion in total debt after completing several acquisitions over the last few years of biologics-focused businesses, cell and gene therapy companies, and a gummies manufacturer. Catalent is focused on expanding its biologics capabilities to meet increased demand for complex biologics manufacturing and diversify its offerings to customers. The company is expected to be able to meet its financial obligations thanks to continued strong growth. At the end of 2021, Catalent had nearly $900 million in cash and equivalents, which is considered a healthy amount to support additional growth.

Bulls Say’s

Contract development and manufacturing organizations like Catalent have sticky businesses with long-term contracts and high switching costs for its customers.
As drug portfolios are increasingly made up of complex drugs like biologics and emerging therapies, Catalent’s biopharma customers will be more reliant on outsourced manufacturing.
With its global scale, Catalent is less dependent on any one customer or drug, which allows it to better absorb unexpected late-stage trial failures or drops in demand.

Company Profile

Catalent is a contract development and manufacturing organization, or CDMO. It operates under four segments: biologics, softgel and oral technologies, oral and specialty delivery, and clinical supply services. Catalent derives its revenues primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Catalent has over 50 facilities across four continents.

(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.

Tags USA Market

Technology Stocks

Link’s First-Half Result a Formality as Acquisition inches Closer (Corrected)

Post author By lvc-admin
Post date May 10, 2022
No Comments on Link’s First-Half Result a Formality as Acquisition inches Closer (Corrected)

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. 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. Both the 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 Strengths:

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:

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.
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:

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

(Source: Morningstar)

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

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

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

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.

Tags Recommendations

Technology Stocks

ITT’s Projected Aftermarket Revenue To Underpin Growth Prospects Following Strong First-Quarter Earnings Release

Post author By lvc-admin
Post date May 10, 2022
No Comments on ITT’s Projected Aftermarket Revenue To Underpin Growth Prospects Following Strong First-Quarter Earnings Release

Business Strategy and Outlook

The positive outlook for ITT is predicated on its best-performing segment, motion technologies, or MT. MT traditionally outpaces market growth by 700 to 1,000 basis points, a trend which is projected to continue. And while industrial process, or IP, remains a price-competitive business, management should be commended for improving its adjusted segment operating margins to the midteens, despite a very difficult operating environment. Both IP and ITT’s connect and control technologies segment, or CCT, should increasingly create shareholder value as management furthers lean improvements.

Within MT, brake pads are most bullish, as they still present a robust growth opportunity in the medium-term. Their potentially positive impact on intrinsic value is favourable, given MT’s sales exposure. Positive MT growth drivers are expected to underpin a strong secular trend away from copper and other metal brakes, market preference for smoother, noise-damping brakes, as well as demand for increased safety leading to additional adoption of ceramics. These dynamics play to ITT’s strength in material science development. Rising installations of disc brakes, which demonstrate superior braking efficiency, are another tailwind. These forces are expected to drive aftermarket growth, particularly as vehicle production rates increase throughout the current forecast. Innovations like the smart pad have the potential to directly interface with a vehicle’s control unit and provide drivers a wealth of data, including enhanced diagnostics of noise and vibration, real-time braking torque and pressure data, and sensor readings during adverse weather patterns. And MT’s wealth of competitive advantages position it strongly in the transition toward electric vehicles on the original equipment side, even as the aftermarket will be a slow, but long-term headwind on the aftermarket side.

Finally, aerospace and defense constitutes about 47% of CCT’s sales mix. While defense is tied to elevated defense budgets in the near term, ITT is well positioned in the commercial aerospace recovery. Even with near-term challenges, both IP and CCT can raise its adjusted operating margins to between 19% and 20% over the long term

Financial Strength

ITT is on solid financial footing and the firm has a moderate credit risk rating. It is noted that following a transaction on June 30, 2021, ITT no longer has any obligation with respect to pending and future asbestos claims. Ringfencing this liability was an excellent move on the part of management, since it removed both uncertainty and headline risk. Using a punitive methodology (incorporating all interest-bearing obligations and calls on capital), ITT consistently runs a net cash positive position. Therefore, the company’s ability to service its current obligations is not of major concern.

Bulls Say’s

Solutions like copper-free and smart brake pads will help ITT win content on additional and existing platforms, and its material science expertise should help with wins in the electrical vehicle original equipment segment.
CEO Luca Savi will bring the same focus and drive operational efficiency to both IP and CCT as he did in MT; long-term, both IP and CCT can deliver 20% segment operating margins.
An unleveraged balance sheet gives the company room to make value-accretive acquisitions.

Company Profile

ITT is a diversified industrial conglomerate with nearly $3 billion in sales. After the spinoffs of Xylem and Exelis in 2011, the company’s products primarily include brake pads, shock absorbers, pumps, valves, connectors, and switches. Its customers include original-equipment and Tier 1 manufacturers as well as aftermarket customers. ITT uses a network of approximately 700 independent distributors, which accounts for about one third of overall revenue. Nearly three fourths of the company’s sales are made in North America and Europe. ITT’s primary end markets include automotive, rail, oil and gas, aerospace and defense, chemical, mining, and general industrial.

(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.

Tags Street Talks

Dividend Stocks

CMS Expands Its Investment In Renewable Energy And Carbon Emissions Reductions Based On State Policy Support

Post author By lvc-admin
Post date May 10, 2022
No Comments on CMS Expands Its Investment In Renewable Energy And Carbon Emissions Reductions Based On State Policy Support

Business Strategy and Outlook

CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS’ work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan.

With regulatory and political backing, CMS plans more than $14 billion of investment the next five years and could add to that as it receives regulatory backing for new projects. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years. Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive regulatory decisions. CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s 10-year integrated resource plan framework. Regulators are expected to approve CMS’ 10-year integrated resource plan settlement. If CMS can keep rate increases modest by controlling operating costs, continued regulatory support is anticipated and could even add as much as $5 billion of investment on top of its current plan.

CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire the Palisades nuclear plant and all of its coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strength

Although CMS has trimmed its balance sheet substantially, its 65% consolidated debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. CMS has reduced its near-term financing risk with opportunistic refinancings. CMS is expected to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth.

CMS’ consolidated returns on equity are projected to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favorable bond markets to extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that ultimately could end up reducing CMS’ allowed returns, customer rates and earnings.

Apart from financing the large Covert power plant acquisition in 2023, CMS is not expected to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. The $930 million aftertax cash proceeds from the EnerBank sale are anticipated to offset new equity needs through 2024. With constructive regulation, CMS will be able to use its operating cash flow to fund most of its investment plan during the next five years.

Bulls Say’s

Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth.
CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow.
CMS’ board has more than doubled the dividend since 2011. 7% annual dividend increases are anticipated going forward even if the payout ratio remains above management’s 60% target.

Company Profile

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.9 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021.

(Source: MorningStar)

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

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

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Technology Stocks

No Meaningful Surprises in ITT’s First-Quarter Print as We Maintain FVE; Shares Cheap

Post author By lvc-admin
Post date May 10, 2022
No Comments on No Meaningful Surprises in ITT’s First-Quarter Print as We Maintain FVE; Shares Cheap

Business Strategy & Outlook

As per the predication the positive outlook for ITT on its best-performing segment, motion technologies, or MT. MT traditionally outpaces market growth by 700 to 1,000 basis points, a trend expect to continue. And while industrial process, or IP, remains a price-competitive business, management should be commended for improving its adjusted segment operating margins to the midteens, despite a very difficult operating environment. Both IP and ITT’s connect and control technologies segment, or CCT, should increasingly create shareholder value as management furthers lean improvements.

Within MT, the most bullish on brake pads, which still present a robust growth opportunity in the medium-term. Their potentially positive impact on intrinsic value, given MT’s sales exposure. The positive MT growth drivers include a strong secular trend away from copper and other metal brakes, market preference for smoother, noise-damping brakes, and demand for increased safety leading to additional adoption of ceramics. These dynamics play to ITT’s strength in material science development. Rising installations of disc brakes, which demonstrate superior braking efficiency, are another tailwind. These forces will drive aftermarket growth, particularly as vehicle production rates increase throughout the explicit forecast. Innovations like the smart pad have the potential to directly interface with a vehicle’s control unit and provide drivers a wealth of data, including enhanced diagnostics of noise and vibration, real-time braking torque and pressure data, and sensor readings during adverse weather patterns. And MT’s wealth of competitive advantages positions it strongly in the transition toward electric vehicles on the original equipment side, even as the aftermarket will be a slow, but long-term headwind on the aftermarket side.

Finally, aerospace and defense constitute about 47% of CCT’s sales mix. While defense is tied to elevated defense budgets in the near term, ITT is well positioned in the commercial aerospace
recovery. Even with near-term challenges, the both IP and CCT can raise its adjusted operating margins to between 19% and 20% over the long term.

Financial Strengths

ITT is on solid financial footing and the firm a moderate credit risk rating. The following a transaction on June 30, 2021, ITT no longer has any obligation with respect to pending and future asbestos claims. The ringfencing this liability was an excellent move on the part of management, since it removed both uncertainty and headline risk.

Using a punitive methodology (incorporating all interest-bearing obligations and calls on capital), ITT
consistently runs a net cash positive position. Therefore, no one is overly concerned about whether ITT can service its current obligations.

Bulls Say

Solutions like copper-free and smart brake pads will help ITT win content on additional and existing platforms, and its material science expertise should help with wins in the electrical vehicle original equipment segment.

CEO Luca Savi will bring the same focus and drive operational efficiency to both IP and CCT as he did in MT; long-term, both IP and CCT can deliver 20% segment operating margins.

An unleveraged balance sheet gives the company room to make value-accretive 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.
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.

Tags Top Stories

Small Cap

BLD on a pro forma basis is expected to have net debt of less than $400m

Post author By lvc-admin
Post date May 10, 2022
No Comments on BLD on a pro forma basis is expected to have net debt of less than $400m

Investment Thesis

Near-term outlook remains uncertain in Australia with higher costs and supply chain constraints.
BLD is a much cleaner business operations following several divestments, which increased focus.
Boral is expected to benefit from proposed infrastructure projects.
Better realization of price increases, whilst volumes remain solid.
Focused on the Australian market.
Proceeds from divestments could be returned to shareholders.
Large cornerstone shareholder – Seven Group Holdings (owns approx. 70%) – may provide shareholder turnover stability

Key Risks

Increase Concentrated earnings, focused on just the Australian Construction market.
Indirect and direct effect of coronavirus on operations.
Potential delays to infrastructure assets leading to a volume gap in the market.
Cost pressures continue to exceed price increases.
Unfavorable weather impacts.
BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives

Key Highlights

BLD’s 1H22 results were impacted by Covid-19 related construction shutdowns and adverse wet weather. 1H22 revenue from continuing operations of $1.5bn was up +1% YoY driven by activity in detached house, A&A and RHS&B. However, operating earnings of $78m declined -23% YoY, with EBIT margin declining -100bps to 5.8%, due to $33m impact from Covid-19 lockdowns and expenses (energy + other costs). $22m from the cost out program (Transformation program) provided some offset. Maintain Neutral recommendation given the stock trades on a healthy forward PE-multiple of 24x, which we believe adequately reflects BLD’s leverage to the Australian infrastructure spend, further capital returns potential and cost outs supporting earnings (Transformation program). Further, BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives.

1H22 results summary – continuing operations. (1) Revenue of $1.5bn was up +1% (or up +3% on a comparable basis), driven by activity in detached house, A&A (alterations & additions) and RHS&B (roads, highways, subdivisions & bridges) and despite there being disruptions from lockdowns. The Company did see solid volumes in concrete (up +1%) and quarries (up +4%). Further, management noted that concrete like-for-like prices were steady and up +2% in quarries. (2) Operating earnings (EBIT) of $78m were down -23% (with EBIT margin declining to 5.8% from 6.8%), which was largely driven by the impact from Covid-19 related construction shutdowns (which adversely impacted earnings by $33m) and expenses (energy + other costs). Partially providing some buffer to EBIT was higher volume (up $22m) and $22m from the cost out program (Transformation program), which includes the $24m of cost inflation. (3) Operating cash flow from operations of $86m was down -22%, reflecting lower EBITDA performance due to construction shutdowns
Capital return of $2.72 per share. Given the completion of disposal of BLD’s North American Building Products and Fly Ash, and Australian Building Products businesses (Timber and Roofing & Masonry) for more than $4bn, the Company will return $3bn surplus capital to shareholders via a $2.65 capital reduction and 7cps unfranked dividend.
Capital structure. Following the divestments of its non-core assets and expected capital return to shareholders, BLD on a pro forma basis is expected to have net debt of less than $400m. Management is targeting net debt of $900m to $1.1bn (including leases) and leverage (net debt / EBITDA) of 2 – 2.5x.
FY22 outlook comments. Management did not provide overly specific guidance but noted the following: (1) 2H22 revenue is expected to be above 1H22, driven by out-of-cycle national price increases effective Jan/Feb 2022. However, this is expected to offset the impact of higher energy costs, which will remain a headwind in 2H22. (2) No construction shutdowns in 2H22 ($33m impact in 1H22) are expected to be offset by typical 2H seasonality due to 6 fewer trading days.

Company Profile

Boral Ltd (BLD) is the largest integrated construction materials company in Australia, producing and selling a broad range of construction materials including quarry products, cement, concrete, asphalt and recycled materials. The Company has a portfolio of assets consisting of upstream and downstream assets. BLD employs approximately 10,300 employees and contractors and has 367 construction materials sites across Australia.

(Source: BanyanTree)

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.

Tags Top Stocks

Small Cap

The company’s platform reach should grow as Sabre continues to revitalize its technology

Post author By lvc-admin
Post date May 10, 2022
No Comments on The company’s platform reach should grow as Sabre continues to revitalize its technology

Business Strategy and Outlook

Despite material near-term travel demand headwinds driven by the coronavirus, it is anticipated Sabre to maintain its position in global distribution systems over the next several years, driven by a leading network of airline content and travel agency customers as well as its solid position in technology solutions for these carriers and agents. Sabre’s roughly 40% GDS transaction share is the second-largest of the three companies (behind narrow-moat Amadeus and ahead of privately held Travelport) that together control nearly 100% of market volume. Sabre is also a leader in providing technology solutions to travel suppliers.

Sabre’s GDS enjoys a network advantage, which is the source of its narrow-moat rating. As more supplier content (predominantly airline content) is added, more travel agents use the platform, and as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book. Also, the company’s platform reach should grow as Sabre continues to revitalize its technology and looks to expand with low-cost carriers and in countries where it previously had only minimal penetration, which are also markets with higher yields than the consolidated North American region.

Replicating the company’s GDS platform would entail aggregating and connecting content from several hundred airlines to a platform that is also connected to travel agents, which requires significant costs and time. Although it is seen for GDS aggregation, processing, and back-office advantages as substantial, technology architectures like that of eTraveli (set to be acquired by narrow-moat Booking Holdings in early 2022), enable end users to access not only GDS content but supply from competing platforms, which could take some volume from companies like Sabre. Also, GDS faces some risk of larger carriers making direct connections with larger agencies, although it is likely for these relationships to be the exception rather than the rule and for Sabre to still be the aggregating platform in either case.

Financial Strength

Although Sabre’s balance sheet is leveraged, it has shored up its liquidity profile and has enough runway to operate at zero revenue into 2023. Sabre has achieved this profile by eliminating $275 million in costs, tapping its $400 million revolver, raising debt and equity, and selling its AirCentre business for $393 million (closed in the first quarter of 2022) Sabre’s financial health was tested in 2020, as lower demand from COVID-19 and higher incremental investment into new markets and the cloud, caused its near-term net debt/adjusted EBITDA to breach covenants (which are currently suspended given the material impact of COVID-19). While Sabre’s net debt/adjusted EBITDA ended 2019 at 3.1 times, it turned negative in 2020 and 2021, it is anticipated the ratio will improve to 6.7 times in 2023. Sabre is seen reaching this leverage ratio despite temporarily halting dividends and repurchases in 2020 and through 2023, cutting costs, and extending near-term debt maturities out three years, resulting in no material debt due until 2024, when $1.8 billion is scheduled to mature. Also, it is held Sabre’s strong competitive positioning and free cash flow generation during more normal environments will afford it flexibility to work with banking partners in the near term. It is alleged Sabre to payout 45%-50% of its earnings in dividends in 2024-31, after temporarily suspending dividends in early 2020. EBIT/interest coverage was 2.3 times in 2019 and is expected to surpass that level by 2024. It is forecasted free cash flow generation of $1.5 billion during 2022-26.

Bulls Say’s

The company’s GDS network hosts content from all airlines and is used by many travel agents, resulting in a large industry share. Replicating the GDS network involves meaningful time and costs.
The network advantage is supported by Sabre’s platform revitalization to next-generation cloud technology, which drives innovation, reliability, and cost efficiencies.
The business model is predominantly driven by transaction volume and not pricing, leading to less cyclical volatility.

Company Profile

Sabre holds the number-two share of global distribution system air bookings (40.9% as of the end of 2020 versus 38.8% in 2019; 2021 booking share was not provided). The travel solutions segment represented 89% of total 2021 revenue, split between distribution (two thirds of segment sales) and airline IT solutions (one third) revenue. The company also has a growing hotel IT solutions division (11% of revenue). Transaction fees, which are mostly tied to volume and not price, account for the bulk of sales and profits

(Source: MorningStar)

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

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

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It is going to be challenging for Spirit to expand content on existing aircraft platforms organically

Post author By lvc-admin
Post date May 9, 2022
No Comments on It is going to be challenging for Spirit to expand content on existing aircraft platforms organically

Business Strategy and Outlook

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, and structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue. It is likely Spirit will need significant additional inorganic growth to achieve its goals.

Spirit AeroSystems was spun out of Boeing in 2005 and the company remains the sole-source supplier for the majority of the airframe content on the 737 and 787 programs. Spirit is particularly exposed to Boeing’s 737 program, which generally accounts for roughly half of the company’s revenue. Boeing retained all of the intellectual property when it spun out the company. It is alleged that the lack of intellectual property and these long-term supply agreements prevent Spirit from fully monetizing its sole-source supplier position.

Spirit became an Airbus supplier in 2006 with the acquisition of BAE Aerostructures and has inorganically expanded content on Airbus products in recent years. It’s held in positivity: Spirit’s revenue diversification because it reduces the firm’s product concentration risk. It is probable that the firm will hold off from inorganic growth, as Spirit has taken substantial debt to fund unprofitable operations during the COVID-19 pandemic and will have few capital allocation options other than deleveraging during an aerospace recovery. It is believed that it will be challenging for Spirit to expand content on existing aircraft platforms organically.

Financial Strength

Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company had $1.5 billion of cash on the balance sheet and about $3.8 billion of debt at the end of 2021, and access to another $950 million of debt if it so needs. It is held roughly slightly below breakeven cash flow in 2022, and that the firm will be able to meet its goal of removing $1 billion of debt off its balance sheet in the three-year period leading to 2023. It is projected that Spirit will focus on deleveraging post-pandemic. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Based on projections, it is regarded that the firm will be able to cover the debt maturities in cash, but it is likely the 2025 obligations will be the most difficult for the firm to cover. It is alleged that managing the debt maturity schedule will be the paramount issue Spirit faces in an aerospace recovery, and that shareholder remuneration will likely be a secondary focus for the firm.

Bulls Say’s

Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier.
Spirit has restructured to become more efficient when aircraft manufacturing recovers.
Spirit is diversifying its customer base, which is likely to make it less susceptible to customer specific risk.

Company Profile

Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s revenue.

(Source: MorningStar)

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

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

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Majority Owner Hochtief to Bid AUD 22 in Tilt for Full Control of Cimic

Post author By lvc-admin
Post date May 9, 2022
No Comments on Majority Owner Hochtief to Bid AUD 22 in Tilt for Full Control of Cimic

Business Strategy & Outlook:

Cimic has developed the ability, reputation, and balance sheet strength to undertake numerous large-scale contract mining and construction projects simultaneously and in different countries. Few companies, apart from Cimic, in the domestic contract mining and construction market have the reputation, skill, knowledge, or capability to undertake challenging megascale mining and infrastructure projects. But excess returns of the recent past look to be a function of the China-driven commodities boom. Traditionally, Cimic’s annual operating revenue is split 60%-65% engineering and construction work, 20%-25% contract mining and 10%-15% services and property development work. Cimic’s contract mining business is highly capital-intensive but inherently lower risk than construction. Domestic and international mining contracts are normally schedule-of-rates style, with Cimic assuming risk on productivity and volumes.

Cimic lowers operating risk on contract mining work by mainly undertaking open-cut mining at coal and iron ore sites with quality deposits for large resource companies. However, competition can be fierce for new contract mining work and renewals. Despite relatively stable cash flows, the consequences of problems at a few large-scale construction projects can negatively affect the company’s overall operating cash flow and earnings. Large domestic infrastructure construction projects are predominantly fixed-price/fixed-time contracts, or alliance style with shared risk. Cimic’s project tenders incorporate a theoretical profit margin (pretax, overheads and depreciation) of at least 10%, providing a margin of safety. However, in fiscal 2011, Cimic incurred a net loss, primarily as a result of large losses on just two major infrastructure construction projects and at the company’s Middle East construction joint venture. Cimic exited the Middle East in early 2020, wearing AUD 700 million in post-tax financial guarantees. Cimic has numerous large-scale mining, infrastructure and service projects in Australia and internationally. Transparency on individual contracts/projects is low, feeding in to high uncertainty rating.

Financial Strengths:

Cimic is in strong financial health. The company finished December 2021 with AUD 502 million in net debt, leverage (ND/(ND+E)) of 32% and net debt to EBITDA a comfortable 0.6. The company sold a 50% stake in its Thiess mining contracting business to the U.K.’s Elliot in 2020, the transaction generating AUD 2.1 billion net cash proceeds. Cimic’s capital intensity is tempered with exposure to the equipment heavy mining contracting sector lessened. This should enhance the rate of cash conversion in future. In addition to the cash proceeds, the Thiess sell down reduces Cimic’s lease liability balance by approximately AUD 500 million. Net operating cash flow exceeded AUD 1.0 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years. But net operating cash flow fell to AUD 927 million in 2019, not helped by one-off BIC Contracting exit costs in the Middle East and has been negative through to June 2021 due to COVID-19 and unwind in factoring. Traditionally, the company has a strong balance sheet and cash flow, which provides the necessary flexibility to tender for large infrastructure and mining contract projects. The cashflow to turn positive as the economy exits from COVID-19.

Bulls Say:

Cimic is the dominant infrastructure construction and mining services company in Australia and competes against only a small number of companies. Cimic holds AUD 36 billion of work in hand and a reasonably positive outlook.
Cimic has a solid long-term reputation for complex project design, execution and delivery.
Cimic’s new approach is to focus on risk management including tender accuracy, risk identification, satisfactory time allowance, adequate pricing risk and exact project delivery.

Company Description:

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 79% of Cimic.

(Source: Morningstar)

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

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

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

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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Recent acquisitions in the business position Scotts to take advantage of growing demand from states where cannabis has been recently legalized

Business Strategy and Outlook

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products aimed at helping consumers grow and maintain their lawns. The U.S. consumer segment, which consists of lawn and gardening products, generated 65% of total revenue in fiscal 2021. Scotts has generated healthy margins on its products through effective branding, which allows it to maintain favorable product positioning and shelf space in the largest mass-market and home improvement retailers. Scotts has also been able to charge a premium over competitors because of its strong brand equity. While actual product differentiation in the industry is limited, consumers have been willing to pay up for Scotts’ products.

Future demand for gardening products will depend on growth in the housing industry. It is alleged housing starts to average 1.5 million per year through 2030. While housing starts alone should increase demand for gardening products, it is held some secular trends that will offset the growth. Living-preference shifts to smaller lots and urban centers should result in less need for gardening products. Additionally, a greater proportion of gardening products will be sold online. Currently, the vast majority of sales occur at brick-and-mortar retail. Even if Scotts increases its online sales presence, it may lose some pricing power as many products in the gardening industry shift away from brick-and-mortar retailers to online platforms, where Scotts will likely face more lower-priced competition.

The Hawthorne segment, which includes indoor gardening, hydroponics, and lighting equipment, contributed a little under 30% of revenue in fiscal 2021. Its growth is closely tied to the legalization of cannabis in the U.S., as its products are frequently used by licensed growers. Recent acquisitions in the business should position Scotts to take advantage of growing demand from states where cannabis has been recently legalized. The majority of U.S. consumer sales typically come from Home Depot and Lowe’s. However, this should decline as a percentage of companywide revenue as the Hawthorne segment grows.

Financial Strength

Scotts Miracle-Gro currently has elevated leverage. As of March 31, calculation for net debt/adjusted EBITDA was nearly 5 times, well above with management’s long-term target leverage of 3.5 times. However, the company built up inventory in both the U.S. consumer and Hawthorne businesses in anticipation of improving volumes in the second half of the fiscal year. As the company works down its inventory and uses the cash to repay debt, it is noticed there are no issues with its current financial position. Further, as the Hawthorne business continues to recover from the current industry oversupply, it is alleged for EBITDA growth will resume and leverage ratios will fall back to management’s targets. Over the last five years, dividends grew at an average mid-single-digit rate. Management has indicated that it intends to continue raising the dividend, and Scotts should have the free cash flow to do so. Management uses additional free cash flow to either repurchase shares or pay a special dividend. For example, in 2020, Scotts paid a $5 per share special dividend.

Bulls Say’s

U.S. household formation growth will drive demand for gardening products. As the market leader in consumer gardening products, Scotts will benefit from the secular housing trend.
Consumer behavior has changed as a result of COVID-19, with more consumers engaging in gardening as an activity. As the largest player in the consumer gardening market, Scotts will benefit from this change.
The emerging cannabis industry represents a lucrative opportunity for Scotts, which is well positioned to capture this segment of the market.

Company Profile

Scotts Miracle-Gro is the largest provider of gardening and lawncare products in the United States. The majority of the company’s sales are to large retailers that include Home Depot, Lowe’s, and Walmart. Scotts Miracle-Gro can sell its products at a higher price point than its competition because of a well-recognized portfolio of brands that include Miracle-Gro, Roundup, Ortho, Tomcat, and Scotts. Scotts is also the leading supplier of cannabis-growing equipment in North America through its Hawthorne business.

(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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