Category: Sectors

Several Headwinds Hit Continental Q1 Results, Reduces 2022 Profit Guidance; EUR 143 FVE Unchanged

Post author By lvc-admin
Post date May 13, 2022
No Comments on Several Headwinds Hit Continental Q1 Results, Reduces 2022 Profit Guidance; EUR 143 FVE Unchanged

Business Strategy & Outlook

Considering industry trends in connectivity, electronics, and safety, the Continental’s revenue will grow at a faster rate than the estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental’s revenue growth, healthy return on invested capital, and a narrow economic moat rating.

After an acquisition binge that culminated in 2007 with the purchase of Siemens VDO, Continental has grown from being predominantly a European tiremaker to a global supplier of automotive components, systems, and modules. In 2008, Continental became an acquisition target as Schaeffler unsuccessfully bid for the company (Schaeffler still owns 46% of the voting interest).

Continental should benefit from automotive industry trends, including advanced driver-assist systems, autonomous driving features, V2X connectivity, and increased vehicular electronics. The company invests in and successfully cultivates innovative technologies. The Continental’s innovation combined with industry trends results in revenue growth and margins that are better than industry averages. Management’s long-term targets are to annually increase revenue in excess of 5% and generate adjusted EBIT margins in the 8% to 11% range. Management spun off its powertrain division in September 2021 into a new company called Vitesco that trades under the ticker VTSC. Since 2008, powertrain segment revenue has grown at an average annual rate of 6%. In 2019, pro forma Vitesco had EUR 9.1 billion in pre pandemic revenue and an adjusted EBITDA margin of 9.5%. However, in 2020, Vitesco pro forma revenue was EUR 8 billion with an adjusted EBITDA margin of 6% due to COVID-19-related industry factory closures. While Vitesco supplies components for internal combustion engine powertrains, the new company’s electrified vehicle powertrain product lines should support revenue growth in the mid-single-digit range.

Financial Strengths

Continental’s financial health appears to be in good shape. Management targets investment-grade credit ratings and a gearing ratio (net debt/equity) range of 40% to 60%. At the end of 2021, the company’s liquidity was EUR 7.3 billion, the gearing ratio was 30%, and total adjusted debt/EBITDAR, which treats operating leases as debt and rent expense as interest, was 2.7 times. Since 2011, Continental has averaged 1.8 times total adjusted debt/EBITDAR, while netting cash against debt results in about a 1.4 times ratio. The Continental’s cash generation and liquidity are more than sufficient to buffer a cyclical downturn in auto demand, including lingering effects of the pandemic and the microchip shortage.

By the end of 2006, Continental had reduced its debt to a more prudent level after its acquisitions made between 1998 and 2004. The capital structure became heavily debt-laden in 2007 when management made four acquisitions: Siemens VDO, Matador, Thermopol, and AP Italia. As a result, the company went through the financial crisis with a highly leveraged balance sheet, and debt levels remained elevated through 2013. Since 2011, the gearing ratio has averaged 47%. However, since 2014, Continental’s gearing ratio has averaged only 33%. The company has mostly used bank credit lines but also has outstanding bonds, securitization, factoring, asset-backed securities, commercial paper, and capital leases, all of which are on balance sheet. Maturities appear well laddered with the exception of roughly EUR 1.6 billion in short-term debt. The company has EUR 6.1 billion in open credit lines, of which, EUR 4.9 billion was available at year-end 2021. While Continental’s EUR 4.0 billion revolving bank line of credit due in 2025 had not been utilized, short-term debt includes EUR 1.2 billion outstanding on other lines of credit. The large short-term debt balance has typically been rolled to the next year.

Bulls Say

Continental is well positioned to capitalize on auto industry trends like safety, electronics, connectivity, and automated driving. As a result, the company’s revenue to average growth in excess of average annual growth in global vehicle production.

The ability to continuously innovate new process and product technologies should enable Continental to maintain a narrow economic moat.

A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Description

Continental is a global auto supplier and tiremaker. Operating segments include the autonomous mobility and safety segment and the vehicle networking and information segment in the automotive group, plus tires and ContiTech, which uses rubber in industrial and automotive components and systems, in the rubber group. Last year, pro forma for the spinoff of Vitesco, automotive group revenue was around 45% (AMS 22%, VNI 23%) of the total, rubber group revenue was 52% (tires 35%, CT 17%), and contract manufacturing for Vitesco was 3%. Top five customers include Mercedes-Benz, Ford, the Renault-Nissan-Mitsubishi alliance, Stellantis, and Volkswagen, representing about 33% of total revenue. Europe, at 48% of total revenue, is the company’s largest market, followed by North America at 26%.

(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 European Market

Technology Stocks

Pegasystems’ Management sizes the market at $50 billion, which includes both customer engagement and BPM

Post author By lvc-admin
Post date May 13, 2022
No Comments on Pegasystems’ Management sizes the market at $50 billion, which includes both customer engagement and BPM

Business Strategy and Outlook

It is alleged Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer engagement applications. It is anticipated the company to remain a leading provider in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. It is held that, the model transition was complicated in the early going, but it is moving to the scaling phase where Pegasystems’ financials should begin to improve going forward. High retention and long customer relationships are testament to the company’s switching-cost-driven narrow moat.

BPM software allows customers to streamline operations by automating business processes. Pegasystems’ no- and low-code platform allows the business user, rather than a software engineer, to automate the workflow in a way that matches the business need. There are a variety of templates for common uses that customers can draw from to further expedite the automation. Users can also draw from any previous work their company has done on the platform, employing chunks of code many times over. This allows for common processes to be written once and used repeatedly, thereby lowering costs and decreasing the time between process or application updates. The software was initially used in call centres. While customer engagement more broadly remains the primary driver, a wide variety of uses involving many complicated business processes have been brought into the fold. Lastly, the software allows for users to “build for change,” meaning once software-driven processes are in place, they can be changed quickly on the fly so that all similar uses are also updated.

Pegasystems has long been considered a leader in BPM and a contender in other niches. Management sizes the market at $50 billion, which includes both customer engagement and BPM. It is renowned, that the Pega platform is a high-end solution that larger enterprises with a high level of customer interactions would undertake.

Financial Strength

It is probable Pegasystems is financially sound, perhaps with a negative bias in the short term. The model transition to the cloud is now near the halfway point, suggesting that margins either bottomed in 2021 or perhaps will bottom in 2022 and will recover from there, while revenue growth will similarly accelerate and remain more robust for the next several years. It is foreseen by now software investors have had a chance to observe this pattern many times and recognize it for the better model that it is. It is likely, margins will expand and growth will accelerate and return to a more fully formed financial model in 2024. Management, customers, and investors alike all prefer the predictable subscription model over the lumpy perpetual license model. That said, it is accredited that the uncertainty inherent in reinventing the business. As of Dec. 31, 2021, Pegasystems had $363 million in cash and equivalents, with $600 million in face value convertible notes. It is anticipated free cash flow margins will bottom in 2022 and will improve steadily over the next several years. At the heart of this is the familiar transition to a subscription model. No reason can be seen why operating margin will not expand to at least 20% over time, driving free cash flow margins higher as well. It is likely, that it is possible the company will need to complete a nominal capital raise—less than 1% of the market cap, within the next several years as the model normalizes. In terms of capital deployment, Pegasystems pays a dividend and occasionally makes acquisitions. Acquisitions are typically small technology-driven deals. The company pays a $0.03 per share quarterly dividend which totalled approximately $10 million in both 2020 and 2021. It is renowned it is unusual for a smaller publicly traded software company to pay a dividend. Management has repeatedly reiterated it is committed to paying the dividend.

Bulls Say’s

The company has long been a leader in BPM, where uses are proliferating in an effort to increase productivity and lower costs.
Pegasystems has a differentiated product with a rule’s engine, process templates, a low-code development platform, robotics, and integrated customer engagement applications.
Moving to a cloud-driven solution should allow for a yearslong path of margin improvement and much better revenue visibility.

Company Profile

Founded in 1983, Pegasystems provides a suite of solutions for customer engagement and business process automation. The company’s key offering is the Pega Infinity platform, which combines business process automation with customer engagement applications.

(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 Recommendations

Global stocks Shares

Icon boasts impressive margins compared with similar-size peers

Post author By lvc-admin
Post date May 13, 2022
No Comments on Icon boasts impressive margins compared with similar-size peers

Business Strategy and Outlook

It is held Icon possesses all the necessary elements to win share in the late-stage contract research organization market: global capabilities, full-service offerings, extensive regulatory and clinical expertise, investment in innovation and technology, and operational excellence. Icon is one of a handful of CROs with the global infrastructure to carry out late-stage, multinational trials and hone international regulatory expertise.

Icon competes in one of the most lucrative areas of the CRO market: long, complex trials that require hundreds if not thousands of patients and thus have ample room for missteps. Late-stage trials consume a significant portion of drug patent lives, making reduction in clinical trial time a priority for CROs and their customers. Icon has done well in focusing on driving trial efficiencies, with consulting services and technology for patient identification and clinical trial management. As a result, it is anticipated that the firm will profit from near-term increases in outsourcing, but it is closely watched nascent trends in drug development, including the potential of real-world evidence and the use of data and analytics to reduce a drug’s time to market.

The firm’s historically conservative approach to capital allocation and investment has kept revenue growth relatively moderate in the past few years–in the midsingle digits, save for a boost in 2012 through 2014 due to capacity expansion after a couple of lucrative deals with Big Pharma companies. In July 2021, Icon completed the $12 billion purchase of competitor PRA Health Sciences. While it is alleged an increase in returns and cost-saving synergies realized within four years, the returns will nevertheless be partially diluted by goodwill due to the 30% premium that Icon paid. Operationally, Icon boasts impressive margins compared with similar-size peers. Its disciplined acquisition strategy has kept returns above its cost of capital and strengthened its core competencies, making it the closest pure play in the late-stage CRO industry. It is likely the company will be able to maintain operational excellence over time.

Financial Strength

Icon has historically maintained a conservative balance sheet. It ended 2021 with over $750 million in cash and cash equivalents. Icon completed its acquisition of PRA Health Sciences in July 2021 for $12 billion. It financed the deal with 48% cash and 52% stock. Icon raised $6 billion of debt to finance the PRA Health deal. It was broken into two instruments: $5.5 billion of floating term loan B notes over a seven-year period and $500 million in a fixed high-yield bond over a five-year period. Even though Icon took on significant leverage to fund this acquisition, there aren’t any major liquidity concerns as the company has demonstrated its operational discipline. Both Icon and PRA have strong records of positive free cash flows and maintain healthy balance sheets

Bulls Say’s

Icon is highly exposed to the late-stage CRO industry, which due to its complexity is conducive to long-term competitive advantages.
The company’s operational discipline should support strong earnings growth and high returns as Icon expands.
As an Irish company, Icon benefits from a lower tax rate than many of its peers based in the United States.

Company Profile

Icon is a global late-stage contract research organization that provides drug development and clinical trial services to pharmaceutical, biotechnology, and medical device firms. While the vast majority of its revenue comes from clinical research, Icon also offers ancillary services such as laboratory and imaging capabilities. The company is headquartered in Ireland.

(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 USA Market

Global stocks

Munich Re Is Still Probably the Safest Pair of Hands in Reinsurance

Post author By lvc-admin
Post date May 13, 2022
No Comments on Munich Re Is Still Probably the Safest Pair of Hands in Reinsurance

Business Strategy & Outlook

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, carving out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while the occurrence of this dynamic, the implementation of innovative technology as key to the ongoing strategic positioning and development of the business. The witnessing is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that this transfer has taken place, an improvement in divisional operating metrics. For the business unit in question, the calculate this as operating profit over gross premiums written.

More broadly, over the past two decades, the only one of Munich Re’s divisions has earned its cost of capital: nonlife reinsurance. Here, the division has earned above the 9.0% cost of equity that the group level, whereas returns to shareholders in the life reinsurance division have fallen far below.

Financial Strengths

The Munich Re is generally in good financial health with a strong solvency position and the lowest leverage within the coverage of European reinsurers.

Bulls Say

Munich Re has one of the strongest management teams that have come across in European insurance coverage.

There is a strong focus on innovation in the business that is unusual for a company of this size.

The turnaround to date of Ergo has been strong. This division is now earning over its cost of capital and there continues to be scope for improvement.

Company Description

Munich Re is one of the largest reinsurance firms in the world and also sells primary insurance.

(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 Australian Market

Global stocks Shares

Losses Mount for Flight Centre Despite Progressive Release of Pent Up Demand

Post author By lvc-admin
Post date May 13, 2022
No Comments on Losses Mount for Flight Centre Despite Progressive Release of Pent Up Demand

Business Strategy & Outlook

A wave of COVID-19-induced damages has been inflicted on Flight Centre since March 2020. Government restrictions on travel and border control (international, domestic), grounding of airline capacity and strict lockdown measures on consumers have created an unprecedented squeeze on the group. The measures to execute a drastic reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the malaise.

Flight Centre is one of the world’s largest travel agents, but it still generates substantial earnings in Australia and New Zealand. Unrivalled scale and brand strength in the domestic travel market has delivered buying power and pricing flexibility that resulted in high returns on capital. Flight Centre has a strong network of services that has driven solid end-user traffic and bookings over the past 20 years, but it is not believable that this is sufficient to protect the company against online competitors over the next 10 years. Because of the discretionary nature of travel and high levels of operating leverage, earnings can be very volatile. During the financial crisis, net profit after tax fell to AUD 38 million in fiscal 2009 from AUD 143 million in fiscal 2008. The company is heavily loss-making during the current 2020 pandemic also. This inherent volatility means fair value uncertainty is high.

Flight Centre’s significant scale and extensive store network have made the firm a key distribution channel for travel suppliers and generated cost advantages that enable it to offer competitive prices. However, with the threat from online competitors increasing, the physical stores are likely to increasingly lose relevance longer term. From about 2005, facing a maturing domestic market, the company increased its focus on offshore markets, particularly the United Kingdom and United States. The group made several offshore acquisitions during this period. The company is also increasingly focused on corporate travel, which is more structurally resilient than leisure.

Financial Strengths

As at the end of December 2021, there was AUD 1,059 million of available liquidity, thanks to the AUD 700 million injected by shareholders in April/May 2020 and two convertible bond issues totalling AUD 800 million. This is sufficient liquidity for Flight Centre to see through until late 2023, even if total transaction volume remains at current depressed levels.

Bulls Say

A strong balance sheet allows Flight Centre to take advantage of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to more effectively address specific market segments.

Brand strength provides a potent underpinning for the blended online/physical store offering.

Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favorable deals with travel providers.

Company Description

Flight Centre Travel is one of the biggest travel agencies in the world. It operates an extensive network of shops globally, most of them located in Australia, the United States, and Europe. The group participates across the whole spectrum of the travel services market, including leisure travel retailing, in-destination experiences, corporate travel arrangement, and youth travel retailing. The services are facilitated via some 40 brands, with Flight Centre being the flagship brand in the leisure segment and FCM Travel the key brand in the corporate.

(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 Australian Market

Technology Stocks

Alibaba Increased Its Share Buyback Program to USD 25 Billion From USD 15 Billion

Post author By lvc-admin
Post date May 13, 2022
No Comments on Alibaba Increased Its Share Buyback Program to USD 25 Billion From USD 15 Billion

Business Strategy & Outlook

Alibaba BABA is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. A strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba.

Alibaba’s internet services had annual active consumers of 953 million as of September 2021, versus the 1.2 billion online population in September 2021 per Quest mobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.

While the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. While early, the management’s views about Ele.me offering incremental monetization opportunities from Alibaba’s user base.

Financial Strengths

Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience

initiatives through its current balance sheet and strong cash flow profile. Additionally, the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. The company to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.

Bulls Say

Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.

Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021.

Alibaba’s core commerce (which includes China marketplace-based businesses and other loss-making businesses) adjusted EBITA margin was 26.2%, higher than JD retail’s 2.3% non-GAAP EBIT margin and PDD’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.

Company Description

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer).

Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%).

(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 Top Stories

Global stocks Shares

We See a Long Growth Runway for Allegion’s Seamless Access Strategy

Post author By lvc-admin
Post date May 13, 2022
No Comments on We See a Long Growth Runway for Allegion’s Seamless Access Strategy

Business Strategy & Outlook

Allegion, a global leader in security products and solutions, was spun off from Ingersoll-Rand in December 2013. No longer forced to compete for capital from a conglomerate parent, Allegion is now able to employ a more robust acquisition strategy to expand its scale, technological capabilities, and product portfolio. At over 70% of sales and 80% of segment profitability, Allegion’s Americas segment is the firm’s largest and strongest business, with a leading position in locks, exit devices, and door controls. The Americas business has been the key driver of Allegion’s stable, industry-leading profitability, which is a testament to the firm’s market position and pricing power. the Americas business to post mid-to-high single-digit organic growth after the coronavirus-fueled downturn in 2020-21 as the segment capitalizes on increased retrofit and upgrade spending across commercial and residential end markets that is drive by the convergence of electronics and mechanical security solutions, elevated U.S. residential construction, and strategic acquisitions. The segment’s already strong profit margins should benefit from a mix-shift to higher-priced electronics products and operating leverage on increased volumes, partially offset by structurally lower profit margins from the acquired access technologies business.

The company’s international businesses are subscale, which factors into the segment’s weak margin performance relative to Allegion’s strong Americas segment; however, the company is working diligently to keep strengthening these businesses through restructuring, channel development, and strategic acquisitions that build scale and expand the company product portfolio. These initiatives appear to be working as the international segment reported record profitability in fiscal 2021 (11% adjusted operating margin). The international segment profitability will continue to improve as these initiatives take hold. Like the Americas segment, this segment should also benefit from the convergence of electronic and mechanical security technology.

Financial Strengths

As part of the spinoff transaction in 2013, Allegion paid a $1.3 billion one-time dividend to Ingersoll-Rand. Allegion issued a commensurate amount of debt in 2013 to fund the dividend to its former parent. Since then, Allegion’s gross debt/EBITDA leverage ratio has improved to approximately 2.0 currently. Management continues to target an investment-grade rating on its debt going forward.

Allegion has approximately $1.4 billion of outstanding debt, which consists of approximately $250 million outstanding on the company’s term facility, $400 million of 3.2% senior notes due in 2024, $400 million of 3.55% senior notes due in 2027, and $400 million of 3.5% senior notes due in 2029. In 2021, Allegion incurred about $50 million of net interest expense and generated approximately $618 million of adjusted EBITDA, which equates to a comfortable EBITDA coverage ratio of about 12 times. The Allegion’s use of leverage is reasonable, and the company’s free cash flow generation should comfortably support its debt service requirements and future capital allocation decisions. Given the firm’s reasonable use of leverage and consistent free cash flow generation, the Allegion’s financial health is satisfactory.

Bulls Say

Allegion’s strong market position and pricing poourr in North America should continue to support the firm’s stable, industry-leading profitability.

The convergence of electronic and mechanical security products and increased infrastructure spending should drive sales growth and margin expansion opportunities.

Allegion generates strong free cash flow and is a balanced capital allocator. The company can continue to use its free cash flow to increase its dividend, repurchase shares, and make value-accretive acquisitions and invest in lead-edge technology ventures.

Company Description

Allegion is a global security products company with a portfolio of leading brands, such as Schlage, von Duprin, and LCN. The Ireland-domiciled company was created via a spinoff transaction from Ingersoll-Rand in December 2013. In fiscal 2021, Allegion generated 68% of sales in the United States. The company mainly competes with Swedish-based Assa Abloy AB and Switzerland-based Dormakaba.

(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 USA Market

Dividend Stocks

Telefonica Brasil Posts Solid Customer Growth, but Costs Pressure the Business

Post author By lvc-admin
Post date May 13, 2022
No Comments on Telefonica Brasil Posts Solid Customer Growth, but Costs Pressure the Business

Graphic of investment stock market data analysis business

Business Strategy & Outlook

The Telefonica Brasil (Vivo) is one of the strongest telecom carriers in Brazil, vying with America Movil to offer converged wireless and fixed-line services across much of the country. But the market faces several challenges, including stiff competition, a fragmented fixed-line industry, and general economic weakness that has also hurt the value of the Brazilian real in recent years. The plan to carve up Oi’s wireless assets appears to be nearing completion, promising to significantly improve the industry’s structure, cutting the number of wireless players to three. While results will likely remain volatile, Vivo will prosper as Brazilians continue to adopt wireless and fixed-line data services.

Vivo is the largest wireless carrier in Brazil by far, holding 33% of the wireless market, including 37% of the more lucrative postpaid business. The firm generated about 60% more wireless service revenue in 2020 than America Movil or TIM, its closest rivals. The three carriers have agreed to split up the wireless assets of Oi, the distant fourth-place operator that has been in bankruptcy protection. If successful, the transaction would remove a sub-scale player from the industry. With three large carriers remaining, the competition will grow increasingly rational, solidifying the pricing discipline seen recently. Vivo’s share would also expand to about 38%, adding additional scale that should benefit margins and returns on capital.

In the fixed-line business, Vivo has struggled recently. Its share of the broadband business has slipped to 15% from 27% five years ago as it has lost customers in areas where its network is older and less capable and upstarts are investing aggressively to build fiber. Vivo is investing aggressively as well, though, at its own fiber network now reaches nearly 20 million homes, nearly 30% of the country. The firm has numerous initiatives in place, including an infrastructure joint venture, with plans to build to nearly 10 million by the end of 2024, but it remains to be seen how many carriers will be vying for these customers with networks of their own.

Financial Strengths

Vivo’s financial health is excellent, as the firm has rarely taken on material debt. The net debt load increased to BRL 4.4 billion following the acquisition of GVT in 2015, but even this amounted to less than 0.5 times EBITDA. Cash flow has been used to allow leverage to drift lower since then. At the end of 2021, the firm held BRL 500 million more in cash than it has debt outstanding, excluding capitalized operating leases. Even with the capitalized value of operating lease commitments, net debt stands at BRL 10.4, equal to 0.6 times EBITDA. Even after funding its share of the Oi transaction and assuming no incremental benefit to EBITDA, net financial leverage would stand at only 0.8 times.

Parent Telefonica has control of Vivo’s capital structure. While Telefonica’s balance sheet has improved markedly in recent years, the firm still carries a sizable debt load and faces growth challenges in its core European operations. Vivo aims to pay out at least 100% of net income in dividends and the distribution has averaged BRL 5.5 billion annually over the past three years. The firm plans to pay out BRL 6.3 billion in 2022. If the business hit a rough patch, though, the dividend may not prove to be in shareholders’ interest relative to other uses of cash. For Telefonica, though, moving cash up to the parent directly helps its balance sheet. Fortunately, dividend growth isn’t sacrosanct. Reported net income declined in 2019 and the payout in 2020, based on the prior year’s income, declined about 15%. The dividend declined another 7% in 2021 based on 2020 earnings. These cuts have come despite ample free cash flow generation. To calculate the dividend would have consumed only 55% of 2020 free cash flow if the 2019 payout had been maintained. Vivo also has a share buyback program but repurchases have been minimal recently. The firm repurchased BRL 496 million in 2021, by far it largest outlay over the past several years. The buyback in 2022 is again expected to be around.

Bulls Say

Vivo is the largest telecom carrier in Brazil and benefits from scale-based cost advantages in both the wireless and fixed-line markets.

The firm is well-positioned to benefit as consumers demand increased wireless data capacity. Its network in Brazil is first-rate and its reputation for quality is second-to-none.

Owning a high-quality fiber network enables Vivo to offer converged services throughout much of the country, while buttressing its wireless backhaul, improving network speeds and capacity.

Company Description

Telefonica Brasil, known as Vivo, is the largest wireless carrier in Brazil with nearly 85 million customers, equal to about 33% market share. The firm is strongest in the postpaid business, where it has 50 million customers, about 37% share of this market. It is the incumbent fixed-line telephone operator in Sao Paulo state and, following the acquisition of GVT, the owner of an extensive fiber network across the country. The firm provides internet access to 6 million households on this network. Following its parent Telefonica’s footsteps, Vivo is cross-selling fixed-line and wireless services as a converged offering. The firm also sells pay-tv services to its fixed-line customers.

(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

Dividend Stocks

Hannover, a Rare Moat in Reinsurance

Post author By lvc-admin
Post date May 12, 2022
No Comments on Hannover, a Rare Moat in Reinsurance

Business Strategy & Outlook:

Hannover Re is a property and casualty, and life and health reinsurer with property and casualty contributing a little over two thirds of the company’s profits to shareholders. Hannover Re has a slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving the deep expertise in niche areas. While this may sound a bit woolly, but it is observed that some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. This is conceptualized through lenses of decision-making and responsibility. Whereas in other reinsurance firms, underwriters may need to defer back to a head of risk or perhaps even the c-suit, underwriters at Hannover Re have the authority, experience, and expertise to make and take those decisions more directly. With more of these decisions being made closer to the front line it is believed that this leads to better standards of underwriting. Furthermore, this leads to stronger client relationships. Because underwriters are client-facing and thus renewals a reiterative negotiation, with Hannover Re’s underwriters in the position to directly negotiate and discuss client needs without the need for constant deferral, clients feel and are more connected to Hannover Re and this drives stronger retention rates. The stronger retention drives lower commission and acquisition costs. In addition to the culture of excellence in underwriting with a proven reputation for expertise in specialist lines, Hannover Re benefits from an expense advantage and these two benefits are aligned. For example, with deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies. As the business has the institutional capacity to absorb this internally with regard to its frontline, coupled with the lower levels of internal referrals that are outlined, Hannover Re supports more premium per employee than other comparables. The outcome of this is tangible with the business benefiting from at least a 100-basis-point expense ratio advantage.

Financial Strengths:

Hannover Re has a good balance sheet. Leverage is quite low with debt standing at around EUR 3.4 billion. That stands in contrast to equity owned by shareholders of EUR 10.9 billion. Admittedly, of that EUR 2.3 billion is attributable to gains on securities classified as available for sale. Hannover’s balance sheet is weakest with the largest part of Hannover’s market risk attributable to default and spread risk. This relates to Hannover’s allocation to credit. Of the EUR 14.2 billion held in corporate bonds, EUR 7.8 billion is held around investment-grade. The shape of the government and semi-government bond portfolios is much more appealing. Hannover has also substantially increased its allocation to equities. Goodwill is however nice and low. Overall, this is a balance sheet that has room for quite a bit of improvement. This does not fit in with the typical corporate culture at Hannover Re. The quality of the credit portfolio is also a little light. But in the main this is a business that is not highly leveraged and is very financially disciplined.

Bulls Say:

Hannover Re has a strong culture of expertise and experience in specialist underwriting.
Hannover Re is a cost leader with one of the lowest proportional amounts spent on administrative expenses.
Hannover Re focuses on organic growth rather than acquisitions. This not only comes through in its lean structure and lower expenses, but also in its approach to capital management and distributions to shareholders.

Company Description:

Hannover Re is a German-based reinsurance company with a strong reputation in writing specialist lines of reinsurance and a low-cost operating model. The business and its management team are highly disciplined, rarely ever making an acquisition and favouring a strategy of specials over a commitment to a buyback when looking to return excess capital to shareholders.

(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 Street Talks

Dividend Stocks

BASF Is the World’s largest Chemical Company

Post author By lvc-admin
Post date May 12, 2022
No Comments on BASF Is the World’s largest Chemical Company

Business Strategy & Outlook:

BASF is the world’s largest chemical company, competing in almost every major chemical category. Given its German roots, around half of sales are generated in Europe, but investment is largely focused on higher-growth emerging markets, particularly China. End markets are widely diversified between industrial uses, energy, and transportation, but also fewer cyclical areas such as consumer goods and agriculture. The company was built on the production of basic commodities such as petrochemicals. However, its current strategy targets a shift toward speciality chemicals and customized solutions. This is viewed as a wise endeavour, given the increased pricing power and lower cyclicality typically associated with speciality chemicals.

BASF’s traditional chemicals business includes the chemicals (35% of EBIT), materials (29% of EBIT), industrial solutions (12% of EBIT), surface technologies (10% of EBIT), and nutrition and care (6% of EBIT) segments. The chemicals and materials segments produce basic commodities and represents the core of BASF’s Verbund production concept, a key competitive advantage. The company’s massive Verbund production sites integrate several plants together, generating approximately EUR 1 billion in cost savings per year. The latter three segments are weighted toward speciality products with particularly strong competitive positions in catalysts and consumer care chemicals. BASF’s agricultural solutions segment (8% of EBIT) is focused on crop protection such as fungicides and herbicides. However, the company entered the seeds business in 2018 via purchasing the regulatory-mandated divestments in the Bayer-Monsanto acquisition. While no cost synergies are expected, as this was a rare opportunity for BASF to gain critical mass in the attractive seeds market.

Financial Strengths:

BASF’s balance sheet is strong. The model-driven credit risk assessment is low. The company has a conservative financial policy and targets an A credit rating, which shall continue. As of 2021, the company had total net debt of EUR 14 billion, excluding pension liabilities. Net debt/EBITDA declined to 1.2 times in 2021. The company’s debt maturity profile is balanced. The company is strongly committed to the dividend and targets an increase every year. However, the payout ratio is getting high compared with BASF’s cyclicality. The company typically has the balance sheet capacity to support the dividend. However, an extended economic slump would likely lead to a dividend cut.

Bulls Say:

BASF is shifting its portfolio toward speciality chemicals and customised solutions, which should increase pricing power and reduce cyclicality.
Development of the battery materials business and the China Verbund should ensure long-term growth is adequate.
The company’s Verbund production process enables strong returns, despite higher costs for oil-based raw materials compared with peers with better access to low-cost natural gas markets.

Company Description:

Based in Germany, BASF is the world’s largest chemical company, with products spanning the full spectrum of commodities to specialities. In addition, the company is a strong player in agricultural crop protection. Given its sheer size, BASF has a top-three market position in 70% of its businesses.

(Source: Morningstar)

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

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

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 Top Stocks