Category: Sectors

Categories
Dividend Stocks

Admiral’s investments in proprietary tech have created returns that far exceed anything generated by its peers

Business Strategy and Outlook

Admiral is a rare example of an insurance company with a narrow economic moat. Furthermore, Admiral’s persistent competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so in a persistent and reliable way. These investments range from information technology hardware to software to data and Admiral’s latest round of investments have gone into probability-based machine learning that has then been built bespoke. This internal development and customisation of technology, to make it proprietary, is the reason behind Admiral’s market-leading profitable growth. Using its technology and data Admiral has been able to select the most profitable risks. And furthermore, it is the latest round of investments into artificial intelligence, Admiral seems well placed to drive improvements in its U.K. motor loss ratio. This is because Admiral has historically looked to select drivers that pay by credit card and one way to utilise probability-based learning is to predict fraudulent claims more accurately. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen. 

Admiral has historically underwritten policyholders exhibiting higher risk. In its establishment, younger drivers and drivers based in London were all part of the business’ perimeter of nonstandard risks. On one side, Admiral’s historical preference for younger drivers further places the business at an advantage versus the rest. The live Financial Conduct Authority, or FCA, general insurance pricing rules aim to stamp out the practice of price walking, an activity that has been much more prevalent in older generations. Going further, Admiral’s latest round of investments add to its runway for success. Probability-based machine learning has high application when using inter-related data features to identify lower-risk policyholders within higher-risk datasets. Admiral’s perimeter of insuring urban-based nonstandard risk policyholders plays into this

Financial Strength

Admiral’s float investment strategy focuses on low-risk, low volatility, preservation of capital. Admiral typically does this by investing in government bonds, corporate bonds, private credit, cash and money market instruments. As at end-2021 Admiral held 69.3% of its full investment portfolio, excluding cash, in fixed income and debt securities. This has risen from 60.5% a few years ago. Admiral’s allocation to money market funds stands at 28.4% as at end-2021 and this is an allocation that the business has pared back from 35.9% since the same 2019 time frame. In full-year 2021 Admiral generated a 2.0% investment yield. In future it is anticipated that this will rise to 2.1% over 2022 and climb by 10 basis points on average per year until it reaches a long-term 2.5% rate. Across Admiral’s entire investment portfolio, also in 2022 the business will generate 0.7% of gains, with a 50% harvesting rate. It is forecasted these annualised investment gains will climb over the medium term to a long-term 1.4%. Admiral’s total long-term investment return will therefore settle at around 3.7%. On the surface, leverage appears to be one Admiral’s downsides. For example, up until 2013 the business looks like it performed well, maintaining financial prudence of zero debt level. In 2014 this debt started to rise with the July 2014 issuance of GBP 200 million in subordinated notes. These notes have a July 2024 redemption date and 5.5% fixed interest rate. Since 2017 Admiral’s leverage looks to have climbed but this is ultimately because of the 2017 formation of Admiral Loans. Since it was established, Admiral Loans has issued GBP 446.5 million in loan-backed securities that are backing Admiral’s sale of personal loans. Excluding this GBP 446.5 million as at end-2021, Admiral’s debt as a percentage of equity falls from 47.6% to 15.9%, which shows a much better profile. It is forecasted Admiral will reach around a 47.5% debt-to-equity level

Bulls Say’s

  • Admiral’s U.K. motor returns on new investment far outstrip anything achieved by peers, driven by its proprietary tech. 
  • Admiral still only holds a 15.5% share of the U.K. motor insurance market with a big ensuing industry shakeout. 
  • Admiral has a long runway for growth in U.K. home and international car segments, and significant room for improvement in these loss rates.

Company Profile 

Admiral is a personal lines insurance company that operates predominantly in the U.K. Primarily, the business is a motor insurer with the U.K. motor and international car business accounting for over 95% of Admiral’s gross written premiums. The business also has a nascent but growing U.K. household insurance division. When Admiral started out in 1993 the business was established to sell motor insurance to nonstandard risk policyholders. These nonstandard risks included younger drivers, women drivers, drivers wanting to pay by credit card, and drivers based in London. Over the years Admiral has continued to expand its wheelhouse of nonstandard risk selection.

(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

Near-Term Investments Should Position Starbucks Well for Long-Term Category Gains

Business Strategy & Outlook: 

Starbucks is the largest specialty coffee chain in the world, generating some $29 billion in sales during fiscal 2021. The firm’s attention to premium-quality coffee distinguishes it from chained competitors (alleviating pressure from quick-service restaurant competitors and at-home consumption), allowing Starbucks to charge substantially higher prices while creating a buzz around what has historically been a commoditized product. While the subindustry has attracted significant competitive attention, Starbucks’ premium positioning has allowed the firm to outflank competitors, leveraging its brand to raise prices 6.8% annually in the U.S. over the last five years, healthily in excess of category inflation. Commanding unit economics, with payback periods in the ballpark of a year and a half (against three to six years in the broader QSR space), should pave the way for mid-single-digit unit growth through 2031, as the firm increases penetration in its core company-owned markets (the U.S. and China), and with license partners in more than 80 global markets. 

Starbucks’ recent strategic focus on streamlined operations, adjacent menu innovation, digital engagement, and selective store closures strikes us as appropriate, with new openings concentrated in underpenetrated middle America and Chinese markets. While the firm’s trade area initiative created growth headwinds in 2020, as the firm closed 800 underperforming units in the U.S. and Canada, it should provide a durable foundation for unit development as the chain adjusts to a world that seems poised to skew toward off-premises sales, closer to home. Finally, the firm’s ongoing investments in its loyalty program, with nearly 27 million active users in the U.S. at the end of the second quarter of 2022, should resonate with an audience that has grown increasingly amenable to digital ordering, with more than half of order volume now driven by program participants. Starbucks remains a compelling long-term “growth at scale” story and the anticipating average top-line growth of nearly 11% through 2026 and adjusted EPS growth averaging 12.2% in base-case scenario.

Financial Strengths: 

Starbucks’ financial strength as sound. The company targets a lease-adjusted debt/EBITDAR of 3 times, consistent with an investment-grade credit rating. The calculations suggest that it was in compliance with this target at the end of fiscal 2021, with a lease adjusted debt/EBITDA ratio of 2.6 times. The firm also has access to an untapped $3 billion credit facility and a $3 billion commercial paper program. With few hard assets, the operating income-based leverage metrics are a more appropriate proxy for restaurant businesses’ liquidity and solvency. Starbucks’ debt/EBITDA returned to normalized levels in fiscal 2021, finishing the year around 2.3 times leverage, well below 5.3 times during a trying 2020. The EBITDA/interest coverage (11.6 times) in fiscal 2022. Starbucks’ strong free cash flow to the firm conversion (averaging 8.9% of sales through 2024) offers the flexibility to invest in technological improvements, new restaurant openings, and menu innovation. The firm shall prioritize growth capital expenditures (estimated at $5.7 billion through 2024), dividends ($7.2 billion), and share repurchases ($11.5 billion), with management targeting a long-term 50% dividend payout ratio. While share repurchases were suspended during the second quarter of fiscal 2022, and expect them to be ultimately reinstated in fiscal 2023 based on the firm’s investment opportunity priorities and $4.0 billion in cash and cash equivalents on the balance sheet at the end of the second quarter of fiscal 2022.

Bulls Say: 

  • Starbucks’ “stars for everyone” initiative should drive continued adoption of the firm’s loyalty program, materially increasing customer lifetime value.
  • Leading market share in China and exposure to a growing middle class contribute to a compelling growth narrative for the company.
  • Strength in the cold beverage platform could drive volume toward underpenetrated afternoon dayparts, helping prop up average unit volume with minimal incremental labor costs.

Company Description: 

Starbucks is one of the most widely recognized restaurant brands in the world, operating nearly 34,000 stores across more than 80 countries as of the end of fiscal 2021. The firm operates in three segments: North America, international markets, and channel development (grocery and ready-to-drink beverage). The coffee chain generates revenue from company-operated stores, royalties, sales of equipment and products to license partners, ready-to-drink beverages, packaged coffee sales, and single-serve products.

(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
Shares Small Cap

Demand for Boats Remains Strong, Boosting Selling Prices and Profits at Narrow-Moat Malibu

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy & Outlook: 

Malibu is a long-established name in performance sport boats, venturing into the sterndrive and saltwater segments via acquisitions in recent years. It is believed that its brand, innovative products, and consistent pricing power contribute to a brand intangible asset, which underpins the narrow moat rating. Supporting its market leadership, it’s demonstrated an ability to meet evolving customer preferences, bringing new products to market quickly, with new models and 30-40 new features rolled out annually in the performance sport segment. And it has capitalized on its brand strength by expanding into adjacent categories, such as trailers and accessories, which shall continue. However, Malibu hasn’t rested only on innovation to grow profits, also curating savings through streamlined production and rising efficiencies (through vertical integration). As evidence, efforts at Pursuit’s new plant had increased the EBT margin at the brand to 14% in 2021 (from 9% in 2020). With continuous improvements to the manufacturing process, Malibu should be able to limit expense growth over time. Additionally, Malibu shall grow via strategic acquisitions. 

The addition of Cobalt, Pursuit, and Maverick within the last five years has provided robust sales growth for the firm (averaging 33%), thanks to a strategy based on fit and the ability to raise shareholder value. As a result, the model expects tie-ups every other year in the $140 million price range, providing a volume bump of more than 500 incremental units on average. While such transactions should drive sales growth, and remain confident in Malibu’s ability to also maintain consumer interest in its legacy brands. The Malibu’s sales shall grow 10% on average over the next decade, including acquisitions. While demand for outdoor recreational products has been elevated with social distancing measures due to the pandemic, and maintained sales growth stemming from market share gains and expansion into whitespace categories. As a result of its success, Malibu should generate competitive adjusted returns on invested capital, including goodwill, that average 24% over the next decade.

Financial Strengths:

Malibu has maintained a healthy balance sheet, with leverage historically rising modestly as a result of its acquisition strategy. However, with adjusted EBITDA growing faster than debt in recent years, the leverage ratio has remained at less than 1 at the end of fiscal 2021, barring the pursuit of any transformational acquisitions. For access to liquidity, Malibu has a $170 million revolving credit facility (2024 maturity) and a $100 million term loan (2022-24 maturity). The company drew down its revolver as a precaution as COVID-19 spread domestically, but had repaid the loan prior to 2020 year-end (and now has around $57 million outstanding as of March 31). In normal operating periods, expecting cash on hand, cash from operations, and utilization of the credit facility to allow Malibu to fund its capital expenditures, which finance projects, tooling, and production improvements. In addition, the firm has agreements with third-party lenders to provide floor plan financing for dealers. Furthermore, Malibu has historically maintained flexibility in its capital structure through stock repurchases. The board of directors authorized the repurchase of up to $70.0 million of Class A Common Stock and the LLC Units, which is valid until Nov. 8, 2022. However, the modest repurchases over the near term, given the team’s penchant to spend strategically on acquisitions. Over the long term, Malibu should be able to generate enough free cash flow to finance both acquisitions and consistent share repurchases.

Bulls Say:  

  • Vertical integration across the brand portfolio could provide margin expansion.
  • The firm’s long-term annual sales growth goal of 10% should be attainable thanks to Malibu’s penchant for consistent acquisitions in underpenetrated categories. 
  • Malibu’s strong balance sheet, with low leverage and healthy free cash flow/equity, should offer the company the flexibility to withstand cyclical downturns and finance bolt-on acquisitions from cash on hand.

Company Description: 

Malibu Boats is a leading designer and manufacturer of power boats in the United States. It is the market leader in performance sport boats, sold under its Malibu and Axis brands. It acquired Cobalt Boats, a leading producer of sterndrive boats, in 2017 number-one market share position in the U.S. in the 24-foot to 29-foot segment), and Pursuit Boats, which makes high-end offshore and outboard motorboats in 2018. In 2021, it purchased Maverick Boat Group, a leading seller of flat fishing boats, with exposure to bay, dual-console, and center-console boats. Malibu has also expanded into boat trailers and accessories, and in 2020 began producing its own engines for its performance sport boats. Malibu’s target market includes a wide range of water enthusiasts who embrace active lifestyles.

(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

Ferguson set out to clean up its balance sheet following the great financial crisis

Business Strategy and Outlook

 Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2020, Ferguson’s exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 32%. It is forecasted that the U.S. R&R spending to grow at a 4%–5% compound annual rate this decade. While R&R spending surged during the pandemic, and don’t think demand for home projects is set to stall. Instead, it is believed that the pandemic stepped sales up to a structurally higher base for more normalized growth going forward. In terms of U.S. residential construction, it is believed to have a 1.6 million-unit production pace is maintainable for much of the decade, and the forecast is 15.7 million cumulative starts between 2022 and 2031.

Ferguson has built leading positions across most of its end markets through its roll-up acquisition strategy. The company typically acquires local competitors, gaining access to new brands, suppliers, regions, and customers. It is expected that Ferguson will continue to this strategy, which should augment its scale-driven competitive advantage. Ferguson’s pricing strategy has transformed from being primarily localized to more standardized across the group over the past decade. In the past, branch managers had more discretion over pricing in order to react to local competitive dynamics. Today, the company employs a more disciplined approach to pricing, allowing it to take better advantage of its economies of scale. Ferguson sold its Wolseley U.K. business for approximately $420 million in February 2021. This business struggled to generate value for the group despite being one of the largest distributors in the United Kingdom. There were very few synergies between geographies and little overlap in suppliers. Ferguson’s strategic shift to the United States will be a tailwind for the firm’s prospects, and  Ferguson’s primary listing on the New York Stock Exchange could increase interest from U.S. investors.

Financial Strength

Ferguson set out to clean up its balance sheet following the great financial crisis, and its improved net debt/EBITDA from 3.5 times before the 2008 crisis to 0.8 times as of Jan. 31, 2022. Net debt at the end of the second quarter of fiscal 2022 (January 2022) was $2.2 billion. Ferguson’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy that augments growth with acquisitions but also returns cash to shareholders. In terms of liquidity, it is believed that the company can meet its near-term debt obligations, given its strong cash balance. Its cash position at the end of the second quarter of fiscal 2022 stood at $828 million. It also found comfort in Ferguson’s ability to tap available lines of credit to meet any short-term needs. Also, it was encouraged by the countercyclical nature of industrial distributors’ free cash flow generation, which results from the ability to drawdown inventory during times of economic malaise. Ferguson generated over $1 billion of free cash flow during the great financial crisis, and is expected that the current economic weakness to push free cash flow levels materially higher as working capital requirements ease.  Ferguson enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  •  Ferguson’s roll-up strategy in the U.S. should lead to market share gains, boosting revenue growth in excess of the market average. 
  • Ferguson’s strategic shift to the U.S. away from international markets has strengthened group operating margins. 
  • Ferguson generates strong free cash flow throughout the economic cycle despite serving cyclical end markets

Company Profile 

Ferguson distributes plumbing and HVAC products primarily to repair, maintenance, and improvement, new construction, and civil infrastructure markets. It serves over 1 million customers and sources products from 34,000 suppliers. Ferguson engages customers through approximately 1,600 North American branches, over the phone, online, and in residential showrooms. In fiscal 2021, Ferguson derived 94% of its nearly $23 billion of sales in the U.S. According to Modern Distribution Management, Ferguson is the largest industrial and construction distributor in North America. The firm sold its U.K. business in 2021 and is now solely focused on the North American market.

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

Ferragamo’s New CEO Has Similar Goals to Predecessors but a Bigger Budget; Shares Fairly Valued

Business Strategy & Outlook

Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories.  The firm benefits from relatively strong control over distribution (almost 70% of revenue is retail, versus more than 70% for Burberry, Prada, and Gucci, but in line with Hugo Boss), while its strong

representation in airport locations (about 150 travel retail stores) positions it well to benefit from growth in global travel flows and tourist luxury spending (about half of industry spending is done while travelling).

The Ferragamo has not carved a moat. It is a relatively small player in the fragmented luxury footwear category (43% of revenue). The luxury footwear industry is fragmented and largely wholesale (thus prone to discounting), with fast product life cycles, exposing industry players to fashion risk. The leather goods category (44% of Ferragamo’s revenue) as more conspicuous, but Ferragamo is much less established there than market leaders (with 1% market share versus over 15% for Louis Vuitton, 10% for Gucci and 6.5% for Hermes). Moreover, its more affordable price points (EUR 800-1,500 handbags versus EUR 800-4,000 for luxury peers) reduce the prestige value of purchases. The Ferragamo’s pricing power as in line with or toward the lower end of a luxury coverage.

The company is taking actions that could bring it back to the industry average growth after several years of underperformance. The actions such as increasing the firm’s share of “newness” to engage the existing and younger consumer, reining in a subpar distribution channel, and focusing on retail efficiency and supply chain transformation with more flexibility, less pre-committed inventory, and more capacity open to late orders. Still, Ferragamo’s lack of critical mass versus very well-established competition in leather goods and generally a more competitively intense environment in footwear could make a turnaround challenging.

Financial Strengths

Ferragamo’s financial position is solid, with net cash on the balance sheet. Dividend payments have been suspended as the pandemic hit in 2020 and 2021 but resumed from 2022. 

To consider a low use of debt to be appropriate, given the operating leverage of the business model (the estimation is around 60%-70% of operating expenses to be fixed in a normal environment) and its cyclicality (revenue declined by 10% during the financial crisis in 2009 and over 30% in 2020). The capital expenditures to be boosted in the near term to over 7% from 3%-5% in the recent five years, focusing on renovations, supply chains and technology, in line with new management’s strategic plan. To moderate after 2026. The average free cash flow margin to be around 9% (versus 7% in 2019 and 23% in 2021). The Ferragamo to be able to meet its financial obligations and business investment needs in the future.

Bulls Say

  • Ferragamo is an early entrant in emerging markets, with strong presence and brand recognition in Asia and South America. This positions it to benefit from middle-class growth in those markets.
  • Ferragamo has an above-industry presence in airport locations. Around half of luxury purchases are already done while travelling and the number of outbound travelers is expected to grow as incomes rise.
  • Ferragamo’s profitability could improve as new collections and store refurbishments drive improving store density (currently on the lower end of the peer group).

Company Description

Founded in 1927, Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. The company generates about 43% of revenue in the footwear category, 44% in leather goods, 6% in apparel, 6% in accessories. It was one of the pioneers in establishing a

presence in Asia, where it generates 38% of sales, and other emerging markets (6% of sales in Central and South America). Ferragamo generates 19% of revenue in Europe, 29% in the U.S., and 8% in Japan.

(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
ETFs ETFs

BEAR seeks to generate returns that are negatively correlated to the returns of the Australian sharemarket

Fund Objective

BEAR seeks to generate returns that are negatively correlated to the returns of the Australian share market. The Fund expects to generate a positive return when the S&P/ASX Accumulation 200 Index falls (and a negative return when the index rises).  

The BetaShares Bear Funds are designed to provide returns that are negatively correlated with the Australian or U.S. share market, and so may be used to help protect against, or profit from, share market declines. It is important for investors in a Bear Fund to understand its features, including how it is priced, and that it targets a return over a one-day period only. Additionally, BetaShares strongly recommends investors review the relevant PDS and consider the risks associated with an investment in the relevant Bear Fund. These include the risk of negatively correlated returns, market risk, futures risk and gearing risk (in the case of BBOZ/BBUS). Investors should also check the BetaShares website for details of the Fund’s historical performance, as well as the current portfolio exposure, to ensure that the Fund continues to meet their investment objectives.

Strategy

BEAR is an ‘inverse ETF’. It invests in cash and cash equivalents and sells equity index futures contracts (i.e. ASX SPI 200 futures) to obtain its exposure. Selling these futures can typically be expected to generate a positive return when the S&P/ASX Accumulation 200 Index declines on a given day, and a negative return when the Index increases. A 1% fall in the Australian share market on a given day can generally be expected to deliver a 0.9% to 1.1% increase in the value of BEAR (and vice versa).

BetaShares Funds can be bought or sold during the trading day on the ASX, and trade like shares. ASX CODE BEAR BLOOMBERG CODE BEAR AU IRESS CODE BEAR.AXW IRESS INAV CODE BEARINAV.ETF DISTRIBUTIONS ANNUAL MGT FEE 1.19% P.A. EXPENSES CAPPED AT 0.19% P.A. INDIRECT COSTS 0.10% P.A. FUND INCEPTION 6 JUL 12 BENCHMARK S&P/ASX ACCUMULATION 200.

Portfolio

BetaShares offers four series of model portfolios, each of which seeks to achieve capital growth and income streams through a careful blending of asset classes, including Australian and international equities, bonds, cash and commodities. The models are constructed using ETFs and other exchange-traded products, resulting in institutional-quality portfolios that are cost-effective, highly diversified, transparent, and simple to explain to clients.

People

Adam O’Connor is a member of the BetaShares Distribution team responsible for supporting Institutional and Intermediary Broker and Adviser channels. Prior to joining BetaShares, Adam worked in stockbroking and advisory with Bell Potter Securities. Adam holds a Bachelor of Laws with Honours and a Bachelor of Business (Finance) from the Queensland University of Technology. Adam also holds a Diploma of Stockbroking from Deakin University and is an accredited Financial Adviser in Securities and Managed Investments and Superannuation. Brendan is responsible for growing and servicing BetaShares Adviser business clients across Western Australia. In this role, Brendan is focused on educating advisers about the role and benefits of ETF’s and SMA’s in client portfolios and sharing updates on the expanding range of strategies available across the BetaShares product suite.

Alex is a member of the BetaShares Distribution team, responsible for supporting Institutional and Intermediary Broker channels. Alexander is a member of the BetaShares Distribution team, responsible for client inquiries and supporting the sales team. Alistair is a member of the BetaShares Distribution team, responsible for supporting Institutional and Intermediary Broker channels, as well as supporting the firm’s capital markets activities. Benjamin is a member of the BetaShares Distribution team, responsible for assisting with client inquiries. Craig is responsible for growing and servicing BetaShares Adviser business clients across Queensland. In this role, Craig is focused on educating advisers about the role and benefits of ETF’s in client portfolios, and sharing updates on the expanding range of strategies available across the BetaShares product suite. 

Performance 

Past performance is not an indicator of future performance. Returns are calculated in Australian dollars using net asset value per unit at the start and end of the specified period and do not reflect brokerage or the bid ask spread that investor incur when buying and selling units on the ASX. Returns are after fund management costs, assume reinvestment of any distributions and do not take into account tax paid as an investor in the Fund. Returns for periods longer than one year are annualised. Current performance may be higher or lower than the performance shown.

About Fund

BetaShares Funds can be bought or sold during the trading day on the ASX, and trade like shares. ASX CODE BEAR BLOOMBERG CODE BEAR AU IRESS CODE BEAR.AXW IRESS INAV CODE BEARINAV.ETF DISTRIBUTIONS ANNUAL MGT FEE 1.19% P.A. EXPENSES CAPPED AT 0.19% P.A. INDIRECT COSTS 0.10% P.A. FUND INCEPTION 6 JUL 12 BENCHMARK S&P/ASX ACCUMULATION 200.

(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

NAB: The board declared a fully franked interim dividend per share of 73 cents, up 6 cps.

Investment Thesis:

  • NAB is trading on an undemanding valuation, with 1.6x Price to Book (P/B) and dividend yield of 4.8%. 
  • All else being equal, NAB is offering an attractive dividend yield on a 2-yr (5.2%) and 3-Yr (5.6%) view. 
  • Strong oligopoly position in Australia (along with three other major banks in CBA, ANZ, WBC).
  • Strong management team and Board.
  • Macro environment to be both a tailwind and headwind – a rising interest rates environment to be both positive and negative in that while it will enable banks to charge more for loans, it also could result in deterioration in asset quality, slower loan growth, as well as higher inflation and wage growth to be detrimental to costs expense.
  • Well capitalized after the capital raising.
  • Though management is cautioned to expect cost to increase, it is highlighted NAB’s strong franchise model with management capable of improving below a 40% cost to income ratio.
  • Potential pressure on net interest margins as competition intensifies with other major banks. Though these pressures to slightly alleviate as it can move into a higher interest rate environment.
  • Improving return on equity with management proving their abilities in recent times to manage profitability in a low interest rate environment.
  • Strong provisioning coverage.
  • A well-diversified loan book.

Key Risks:

  • Impacts from Covid-19 are more severe than already provisioned for.
  • Low growth environment impacting earnings.
  • Potential cuts or reduction to dividends due to low earnings growth. 
  • Intense competition for loan and deposit growth.
  • Normalizing / increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits and wholesale funding (increased funding costs).
  • Any legal fees, settlements, loss or penalties associated with ASIC or US-based law suits.

Key Highlights:

  • Statutory net profit of $3,551m, up +10.7%. Cash earnings up +3.7% to $3,480m. Underlying profit of $4,865m was up +6.3%.
  • Net operating income of $8,828, up +4.6%. Revenue increased +4.6%, driven by higher volumes, increased fees and commission income, offset by lower margins. Net Interest Margin (NIM) declined 11 basis points (bps) to 1.63%, (or excluding the impact from and Treasury and higher holdings of liquid assets, NIM declined 3bps), reflecting competitive pressures and mix issues in housing lending, partly offset by lower deposit and funding costs.
  • Operating expenses was up +2.6% at $3,963m (but flat relative to 2H21), driven by additional bankers and resources to support growth, combined with salary increases and investment in technology, partially offset by productivity benefits achieved through simplification and third-party savings, and lower occupancy costs.
  • NAB’s 1H22 credit impairment charges were $2m, compared to a 1H21 write-back of $128m reflecting increased charges for forward looking provisions combined with an underlying write-back. 1H22 charges for forward looking provisions of $67m (includes a $131m top-up to the economic adjustment to reflect increased downside risks such as potential impact of higher inflation and interest rates, partly offset by a net $64m from target sector forward looking adjustments).
  • Common equity tier 1 ratio of 12.48% is 52bps lower than the pcp, as NAB completed a $2.5bn buy-back but remains above the Bank’s targets. Pro forma CET1 ratio of 11.65% includes the estimated impacts of the proposed acquisition of the Citigroup Australian consumer business (~31 bps), further $2.5bn on-market share buy-back (~58bps) and proceeds from the BNZ Life divestment (~6bps).
  • The Board declared a fully franked interim dividend per share of 73 cents, up 6cps. Cash payout ratio of 68.3% was 30bps lower.
  • Business & Private Banking. Cash earnings of $1,429m was up +17.5% driven by strong growth in lending and deposit volumes, broadly stable margins and a rise in fee income, lower credit impairment charges partially offset by higher operating expenses (NAB added further resources to support growth and invested in technology).
  • Personal Banking. Cash earnings of $788 was -8.3% weaker due to lower credit impairment write-backs, reduced revenue given competitive pressures and mix shift in the housing lending portfolio, partially offset by lower operating expenses benefitting from productivity and the sale of the broker aggregation business in 1H21.
  • Corporate & Institutional Banking. Cash earnings of $806 was up +3.1 due to strong growth in lending and deposit volumes, higher Markets and fee income, partially offset by lower credit impairment write-backs and higher operating expenses.
  • New Zealand Banking. Cash earnings of NZ$ 668m was up +8.4% reflecting growth in lending and improved margins, partly offset by higher operating expenses and an increase in credit impairment charges.

Company Description:

National Australia Bank Limited (NAB) is one of Australia’s largest banks, with majority of their financial service businesses operating in Australia and New Zealand. The bank also has a presence in Asia, UK and the US. NAB offers banking services, credit and access card facilities, leasing, housing and general finance, international and investing banking, wealth and funds management, life insurance and custodian, trusts and nominee services.  

(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.

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

Magna International Is a Well-Diversified Auto Parts Supplier With an Entrepreneurial Culture

Business Strategy & Outlook

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of better returns for investors. While breadth in product

and services can be advantageous with regard to cross-selling–commercial activities that bolster content per vehicle and market penetration the only limited evidence that Magna’s diversified strategy has benefited investors in the form of higher margins and returns on invested capital.

Many suppliers focus on a particular area of the vehicle. In sharp contrast, Magna’s capabilities are so broad that the firm could nearly design, develop, supply, and assemble vehicles all on its own. In 2021, the firm contract manufactured roughly 125,600 vehicles, generating $6.1 billion in revenue and $287 million in adjusted EBIT for a margin of 4.7%. While Magna’s Complete Vehicle segment has a growth opportunity with startup electric vehicle companies, the operation is highly capital intensive with limited margin, constraining return on invested capital. Diversifying into so many areas increases the risk that management resources become spread too thin, allocation of capital resources may be less

than optimal, and the firm becomes less effective at developing expertise in any one area

 Magna is able to generate long-term excess returns on invested capital if its product offering was more focused but its customer base and geographical manufacturing footprint were better diversified. Everyone would also like to see more disclosure regarding research and development, especially with certain parts of the business focused on powertrain electrification and autonomous technologies. Even though Magna will benefit from these industry disruptive technologies, the degree of Magna’s product diversity dampens consolidated top-line growth and ROIC expansion potential from electric powertrain and vehicle autonomy. Even so, the firm’s healthy liquidity and balance sheet are able to support operations through severe industry downturns, such is the case with the coronavirus pandemic and microchip shortage.

Financial Strengths

Magna has a clean balance sheet with limited debt and ample liquidity. With average total debt/total capital at 11% for the past decade, interest expense is low, reducing risk to profits during a customer production downturn like that of the COVID-19 pandemic and the microchip shortage. Even so, the company has an inefficient capital structure, not taking advantage of the tax benefit of interest expense. With limited leverage on the balance sheet, Magna could make a relatively large acquisition if the right opportunity were to present itself. Magna’s capital needs have been primarily funded through equity and cash flow. The company has a $750 million undrawn unsecured revolving line of credit that was amended in December 2021 to mature in December 2022. Magna has a $1 billion U.S.-dollar denominated and a EUR 500 million euro denominated commercial paper programs. Including 2021 year-end cash balance of $2.9 billion, total liquidity, excluding commercial paper programs, is $3.7 billion. Netting cash against debt, net debt/EBITDA at the end of 2021 was 0.3 times.

Bulls Say

  • High switching costs and significant barriers to entry enable sticky market shares.
  • Incremental revenue from contracted new business provides revenue growth slightly above global industry production volume and should bolster operating leverage in the near term.
  • As automakers consolidate purchases with fewer suppliers, large vendors such as Magna are in the best position to gain share because they can offer a wide range of parts, modules, and complete systems.

Company Description

Magna International prides itself on a highly entrepreneurial culture and a corporate constitution that outlines distribution of profits to various stakeholders. This automotive supplier’s product groups include exteriors, interiors, seating, roof systems, body and chassis, powertrain, vision and electronic systems, closure systems, electric vehicle systems, tooling and engineering, and contracted vehicle assembly. Roughly 46% of Magna’s revenue comes from North America while Europe accounts for

approximately 43%.

(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

United Rentals Benefits From Strong Rental Equipment Demand, Despite Tight Industry Supplies

Business Strategy & Outlook

The United Rentals will continue to be the top player in the equipment rental industry. As the industry leader, the company provides customers better equipment availability and reliability than smaller players. However, many of the equipment brands found in United Rentals’ product catalog can also be found at other competitors, such as Sunbelt Rentals (owned by Ashtead), Herc, and at thousands of other rental companies across North America.

United Rentals has employed an aggressive mergers and acquisitions strategy, completing hundreds of acquisitions over the past two decades. The company to continue rolling in smaller rental companies onto its rental platform, further expanding its geographical reach and fleet categories.  The equipment rental industry is ripe for consolidation and United Rentals will be a beneficiary, but so too will its competitors. The company will likely be competing with other players looking to build scale. In terms of its branch network, United Rentals operates approximately 1,300 rental locations throughout North America, significantly more than the next-largest player, Sunbelt Rentals, which operates over 900 locations in the region. The company is also increasingly extending into the specialty equipment vertical (28% of sales), which includes trench safety, power and HVAC, and fluid solutions.

Finally, the company has exposure to end markets with near-term, attractive tailwinds. The construction and industrial markets will continue to improve from their pandemic lows. Nonresidential construction spending has been depressed, but this trend will reverse over the next few years as economic growth will spur new project development for industrial, retail, hotel, and office markets. The total addressable market for the equipment rental industry will continue to expand as rental penetration increases. More and more contractors are electing to rent general equipment (aerial lifts, forklifts, generators) that are intermittently used on projects. This allows them to save on project costs.

Financial Strengths

United Rentals maintains a sound balance sheet. Total debt at the end of 2021 stood at $9.7 billion, which equates to a net debt/adjusted EBTIDA ratio of 2.2 times. The company can get its net leverage ratio under 2 times over the forecast. This will largely be not only led by the expectations of increasing rental penetration, but also thanks to improving macroeconomic factors, such as higher construction and industrial spending. These factors to boost United Rentals’ adjusted EBITDA. The company’s solid balance sheet gives management the financial flexibility to continue running its growth-focused capital allocation strategy going forward that mostly favors expanding its equipment fleet, particularly specialty equipment.

 United Rentals can generate solid free cash flow throughout the economic cycle. By the midcycle year, and the company to generate nearly $2.7 billion in free cash flow, supporting its ability to return free cash flow to shareholders. Similar to previous years, the United Rentals’ capital allocation strategy to be heavily focused on building out its equipment fleet and making tuck-in acquisitions. The management will continue to buy back shares, but there is no expected dividend to paid out in the near term. In terms of liquidity, the company can meet its near-term debt obligations given its access to credit facilities, approximately $2.6 billion in 2021. The company’s cash position stood at $144 million, which is lower than some of the other companies under the coverage, but the comfort in United Rentals’ ability to liquidate rental equipment on its balance sheet in the event of an economic downturn. In United Rentals maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

  • Increased equipment rental penetration in North America could result in more general equipment rentals, driving higher revenue growth for United Rentals.
  • Construction and industrial spending may begin to recover from pandemic lows, creating demand for United Rentals’ products.
  • United Rentals’ growing focus on building up its specialty fleet could lead to higher dollar utilization and increased profitability.

Company Description

United Rentals is the world’s largest equipment rental company, and principally operates in the United States and Canada, where it commands approximately 15% share in a highly fragmented market. It serves three end markets: general industrial, commercial construction, and residential construction. Like its peers, United Rentals historically has provided its customers with equipment that was intermittently used, such as aerial equipment and portable generators. As the company has grown organically and through hundreds of acquisitions since it went public in 1997, its catalog (fleet size of $16 billion) now includes a range of specialty equipment and other items that can be rented for indefinitely long time periods.

(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

Smith & Nephew Seeks to Expand Presence in ASCs; Modestly Lowering Our Fair Value Estimate

Business Strategy & Outlook

Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopedic competitors, it has punched above its weight in terms of introducing meaningful innovation with its pioneering hip resurfacing implant and knee replacements with Verilast technology, which it contends can last for 30 years. These are significant improvements that exceed the evolutionary innovation typically seen in orthopedics.

Nevertheless, as the competitive set consolidates, Smith & Nephew’s position as a midsize competitor leaves it vulnerable as the hospital customer base seeks to reduce vendors to save costs. The firm’s market share–about 10% of hips and knees–translates into a tenuous position. Share shifts in this market are glacial at best, thanks to significant switching costs, and new technology does not necessarily overcome those switching costs. Smith & Nephew’s strong show of meaningful innovation translated into a mere 200-basis-point gain in share over the past decade. This showdown between technical innovation and the stickiness of surgeon preference underscores how difficult it is to induce practitioners to switch. This dynamic and Smith & Nephew’s smaller user base mean the firm could find itself locked out of more hospitals and healthcare systems in the future.

The firm has been aggressively pivoting to reduce its reliance on large-joint replacement with the acquisition of ArthroCare for its arthroscopy and sports medicine presence, concerted efforts to penetrate emerging markets, and the new additions of Osiris Therapeutics for its regenerative products and Leaf Healthcare’s pressure sore-monitoring system. The jury is still out on whether this is enough to allow Smith & Nephew to compete effectively against competitors that continue to grow larger and remain independent. As the market moves gradually toward more vendor consolidation, Smith & Nephew eventually pair up with a larger rival, such as Stryker or Johnson & Johnson, in order to better compete.

Financial Strengths

Thus far, the little to make us nervous about Smith & Nephew’s financial flexibility. While the firm has periodically made acquisitions, it has also generated enough cash to deleverage in relatively quick fashion. For example, following the acquisitions of Osiris in 2019, debt/EBITDA rose to just over 4 times, but has moderated since then. Smith & Nephew can easily meet its interest obligations many times over. Prior to the pandemic, the firm consistently held net debt/EBITDA around 1 time. As with other med tech firms, Smith & Nephew issued debt in 2020 to enhance its cash cushion in the face of uncertainty. With procedure volume resuming, the firm to end the year with net debt/EBITDA around 2.3 times and for further deleveraging in the ensuing years. This still leaves plenty of flexibility for management to leverage up, if management decides to further round out Smith & Nephew’s portfolio in adjacent areas to its core markets. At this point, the firm can fund ongoing operations and support its intention to make regular share repurchases with its cash flow, but it may use debt financing for more large acquisitions.

Bulls Say

  • Smith & Nephew participates in the fast-growing sports medicine arena thanks to its extensive arthroscopy portfolio.
  • A strong arthroscopy presence in ambulatory surgical centers leaves Smith & Nephew well positioned to expand its large joint footprint in that setting.
  • Smith & Nephew has been building out its presence in emerging markets. Considering the obstacles in developed markets that keep it from transforming into a top-tier player, S&N may enjoy greater upside in developing markets.

Company Description

Smith & Nephew designs, manufactures, and markets orthopedic devices, sports medicine and arthroscopic technologies, and wound-care solutions. Roughly 42% of the U.K.-based firm’s revenue comes from orthopedic products, and another 30% is sports medicine and ENT. The remaining 28% of revenue is from the advanced wound therapy segment. Roughly half of Smith & Nephew’s total revenue comes from the United States, just over 30% is from other developed markets, and emerging markets account for the remainder.

(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.