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

Business Strategy and Outlook

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

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

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

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: MorningStar)

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

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

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
Dividend Stocks

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

Business Strategy & Outlook: 

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

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

Financial Strengths: 

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

Bulls Say:  

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

Company Description:

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

(Source: Morningstar)

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

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

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

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

Business Strategy and Outlook

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

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

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

Financial Strength

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

Bulls Say’s

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

Company Profile 

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

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Bio-Techne Buoyed by Growing Demand for Cell and Gene Therapies, Long-Term Goals on Track

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Business Strategy & Outlook

Bio-Techne is a market leader in proteins for the pharma, biotech, academic, and diagnostic markets and maintains strong market positioning in antibodies and testing controls for diagnostic partners. The firm’s market leadership in proteins has not come at the expense of pricing, and Bio-Techne is often the highest-priced provider of proteins and antibodies. Bio-Techne is likely to capitalize on current high growth of biologics in the 6%-8% range, which have been outpacing the mid-single-digit growth of traditional small molecules. Cell and gene therapies require protein inputs, and Bio-Techne’s reputation for quality in a market with few regulatory quality minimums help Bio-Techne win new business despite relatively robust competition. To have long-term success, Bio-Techne needs to maintain a dominant position in proteins, and at the same time expand its presence in genomics, without compromising on quality standards across the firm’s large protein

portfolio.

Bio-Techne’s strategy involves prioritizing top line growth with manufacturing capacity investment and large-scale customer deals, while complementing organic growth with meaningful

acquisitions. The company is heavily focused on gaining a foothold in genomics, and has seen some early success with Applied Cell Diagnostics’ RNA-ish and Exosome’s liquid biopsy ExoDx, two technologies that are in the process of being scaled to the market after being acquired within the last five years.

Though the coronavirus pandemic initially depressed sales, with lab closures early in 2020 and uncertainty on academic research funding, Bio-Techne has also seen some upside. The firm offers

direct-to-home liquid biopsy tests and has seen high demand for proteins used for COVID-19 vaccines and treatments. The recent approval of the ExoDx biopsy was well-timed, given that the test

can be sent directly to a patient’s home for urine collection following approval from a telehealth doctor. While the ongoing pandemic has been a net negative, expanded capacity of COVID-19 testing and high demand for protein inputs have mostly offset temporary headwinds of lab shutdowns and research cuts.

Financial Strengths 

Bio-Techne has solid financial strength. Though leverage had temporarily increased from acquisitions, and debt/adjusted EBITDA reached a multiyear high of 2.25 times in 2019, Bio-Techne now has net debt leverage of about zero. Barring any large acquisitions, leverage to remain well below 2.0 times over the coming years. Bio-Techne’s healthy interest coverage ratio also indicates an appropriate level of debt, with the firm maintaining an operating income/interest expense ratio in the high-single digits, with the ratio ending 2020 at around 15 times. The interest coverage well above 20 times over the next five years. Bio-Techne’s primary source of funding for acquisition activity is a $600 million revolving credit facility, established in August 2018. This credit facility can be extended to an additional $200 million, and the company also took out a term loan of $250 million, with both facilities set to mature in August 2023. As of year-end 2020, Bio-Techne had $344 million of long-term debt, split between the term loan and revolving facility. The additional lending capacity of the credit agreement gives Bio-Techne an appropriate level of flexibility to make capital allocation decisions, and lenders appear to have high confidence in the firm’s ability to pay interest and principal on the debt, with the credit agreement allowing for a maximum interest rate of 75 basis points over Libor for standard lending.

Bio-Techne has generated good levels of operating cash, with consistent operating cash flow above $120 million in each of the last nine years, and the cash flow averaging $442 million in the next five years. We also expect free cash flow to average $353 million over that period.

Bulls Say

  • While private payers currently do not cover the ExoDx biopsy test, getting reimbursement approvals along with expanded indications could allow for product revenue upward of $100 million, compared with under $50 million currently.
  • Bio-Techne is set to benefit from high market growth of biologics, which require protein inputs, and regulatory approvals of biosimilars could be an additional tailwind for protein growth.
  • Funding for academic health research through the National Institutes of Health could increase in a post pandemic world, and could offset state budget cuts in academia.

Company Description

Based in Minnesota, Bio-Techne is a life sciences manufacturer supplying consumables and instruments for the pharma, biotech, academic, and diagnostic markets. The company reports in two segments, protein sciences (75% of revenue), and diagnostics and genomics (25%). The protein-focused segment makes equipment and associated consumables for protein characterization and analysis and sells antibodies for research and clinical purposes. In diagnostics, Bio-Techne provides controls and calibrators for diagnostic manufacturers and has a portfolio of diagnostic oncology assays. The United States accounts for about 55% of revenue, and the firm also has operations in EMEA (20% of sales), the U.K. (5%), and APAC (15%), with the rest of the world accounting for the remaining 5%.

(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

ANZ Bank Gives Up on Ambitious Cost Target, Earnings Growth From Higher Loans and NIM Achievable

Business Strategy & Outlook

ANZ Bank is the smallest of Australia’s four major banks by market value and the largest bank in New Zealand and the Pacific, offering a full range of banking and financial services to the consumer, small business and corporate sectors. Like the other major banks, ANZ Bank has a well-recognized and trusted bank brand, large advertising and marketing budget, and customer fulfillment capacity (branches, systems, funding capacity) to capitalize on this brand equity. The firm’s strategy to simplify and focus on its highly profitable core banking operations is logical.

Tight underwriting standards, lender’s mortgage insurance, low average loan/valuation ratios, a high incidence of loan prepayment, full recourse lending, a high proportion of variable rate home loans, and the scope for interest-rate cuts by the Reserve Bank of Australia, or RBA, combine to mitigate potential losses from mortgage lending. The main current influences on earnings growth are modest credit growth, with strong demand for home loans partially offset by high saving rates and businesses still cautious on making large investments given the uncertain economic outlook. As the RBA lifts the cash rate, banks will reprice loans by more than funding costs rise, and margins will gradually recover. Operating expenses are increasing due to regulatory and compliance project spend, as well as investments to make the bank more efficient and competitive on home lending approval times.

Despite high expectations, the “super-regional” strategy has been de-emphasized as returns failed to match expectations. ANZ is now specifically targeting large clients and has walked away from lending to small businesses. Given ANZ would have no competitive advantage against local (and much larger) lenders, they support the revised strategy.

Financial Strengths

ANZ Bank is in good financial health, with a common equity Tier 1 capital ratio of 18% at March 31, 2022, based on internationally harmonized Basel III rules. Based on APRA’s stricter rules, ANZ Bank’s common equity Tier 1 capital ratio at March 31, 2022, was 11.5%, comfortably above the regulator’s 10.5% minimum.

The proportion of customer deposits to total funding is above 60%, reducing exposure to volatile funding markets. Issuance of covered bonds will incrementally diversify the funding base. Total liquid assets exceed total offshore wholesale debt, and ANZ Bank could theoretically afford to retire all its offshore wholesale debt in the event that these debt markets close and the maturing debt cannot be rolled. This would be disruptive, but at least the bank would be solvent.

ANZ has AUD 4.5 billion in excess capital, or AUD 1.60 per share as at Dec. 31, 2021. Assuming a target common equity Tier 1 ratio of 11% the bank has around AUD 2.3 billion in surplus capital after completion of its AUD 1.5 billion share buyback.

Bulls Say

  • Good progress overhauling the group by selling noncore businesses and renewing the focus on retail, commercial and institutional banking in Australia and New Zealand. This should improve earnings quality.
  • ANZ Bank is still best placed among peers to capitalize on long-term growth in trade and investment flows with Asia.
  • Non-bank lenders reliant on wholesale funding and equity markets may cede market share back to the major banks in a rising rate environment.

Company Description

ANZ Bank is one of Australia’s four major banks and provides retail, business, and institutional banking services to customers in Australia, New Zealand, and Asia-Pacific. The super-regional Asian strategy was de-emphasized, with management focusing on the higher-returning businesses in Australia and New Zealand. ANZ Bank still retains a tilt to its Asia-centric strategy, but is now more balanced, better capitalized and a simpler bank.

(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

Genworth Revenue Benefits from Refinancing Activity, but New Policies Continue to Slow

Business Strategy & Outlook: 

Genworth has a 50-year history in providing lenders mortgage insurance in Australia but has only been listed on the ASX since May 2014. Global U.S.-based insurer Genworth Financial Inc. listed it and completely sold out in 2021. It is likely Genworth will find it challenging to grow its LMI business in the face of increased competition. The entrance of Arch Capital Group, and increased tendency of lenders to self-insure, will see Genworth cede further share over time. LMI protects a lender against a potential gap between the outstanding loan amount plus costs and the sale proceeds from the mortgaged property. While it’s the lender who is protected and decides whether to purchase LMI, the premium is paid by the borrower. 

The low growth in high loan/value ratio, or HLVR, loans, due to low systemwide home loan growth, as well as banks being more risk-averse after the Royal Commission and tightening of lending standards. An economic backdrop where Australians are holding historically high levels of home-loan debt, and wage growth is low, makes strong credit growth and a significantly stronger appetite for loans with higher LVRs unlikely. Management is rolling out optionality for borrowers to pay premiums in monthly instalments and paying LMI upfront at a discount (instead of capitalized on the loan). While initiatives such as these are important to address borrower challenges in saving a deposit, they can lead to Genworth earning less on an average policy, and by not receiving premiums upfront, reduces funds available for Genworth’s investment portfolio. Unless Genworth’s larger customers integrate these offering into their systems, take up will likely be low. In June 2021 Genworth’s largest customer, Commonwealth Bank, issued a request for proposal relating to its LMI requirements. While the agreement was renewed for another three years, it highlighted the risk to the insurer’s outlook given its reliance on Commonwealth Bank. The bank accounts for around 65% of Genworth’s GWP.

Financial Strengths: 

Genworth is regulated by APRA to maintain a certain prescribed capital level, or PCA. Genworth’s PCA is driven primarily by its LMI concentration risk charge (which is mainly based on its probable maximum loss based on a three-year economic or property downturn of an APRA determined 1-in-200-year severity level) and insurance risk charge (the risk that net insurance liabilities are greater than the value determined by the actuary). Genworth targets a regulatory capital base of 1.32 times-1.44 times its PCA, which it has been consistently above. The PCA as at Dec. 31, 2021, is a healthy 2 times. Genworth announced a share buyback of AUD 100 million as a first step in moving the solvency ratio closer to the board’s target range. With AUD 3.7 billion in cash and investments, and reinsurance covering AUD 800 million of claims above AUD 1.65 billion, the insurer has adequate coverage for a severe economic recession.

Bulls Say: 

  • Fiscal and monetary stimulus cushion an economic downturn in Australia, resulting in a rise in delinquencies but allows Genworth to remain profitable.
  • A sound balance sheet provides the capacity to continue to institute capital management initiatives, including special dividends and buying back more shares.
  • The recent relaxation of some macro-prudential measures and low cash rates may spur lenders to issue more investor and HLVR home loans, which Genworth is well positioned to benefit from.

Company Description:

Genworth Mortgage Insurance Australia listed on the Australian Securities Exchange in 2014 after its U.S.-based parent, Genworth Financial Inc. (NYSE: GNW), sold down its stake. It has since exited. With a history spanning over 50 years, Genworth Australia is a provider of lenders’ mortgage insurance, or LMI, in Australia. In Australia, LMI is predominantly purchased on loans with a loan/value ratio, or LVR, above 80%. LMI protects a lender against a potential loss (gap) between the outstanding loan amount and sale proceeds on a delinquent loan property. LMI does not protect the borrower, however the premium is paid by the borrower. It’s regulated by the Australian Prudential Regulation Authority, or APRA, which requires it to meet minimum regulatory capital requirements.

(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

With deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies

Business Strategy and 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 characterised by underwriting and carving deep expertise in niche areas. While this may sound a bit woolly, experts sense is that some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. It is conceptualised 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 alleged to lead to better standards of underwriting. Furthermore, it is probable for this to lead 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. As it is known, 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 outlined, Hannover Re supports more premium per employee than other comparable. The outcome of this is tangible with the business benefiting from at least a 100-basis-point expense ratio advantage.

Financial Strength

As it can be seen 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. It is already touched on where Hannover’s balance sheet is weakest with the largest part of Hannover’s market risk attributable to default and spread risk. As digging a bit deeper, it can be seen that 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. First and foremost, it is found out for allocation to equities very opportunistic. 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’s

  • 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 Profile 

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. The business is also found to be innovative in finding alternative and unearthed profit sources.

(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
Shares Small Cap

The growth that the Western Union Co is seeing in digital transfers does not appear to be leading to strong overall growth

Business Strategy and Outlook

Western Union’s primary macroeconomic exposure is to employment markets in the developed world, as the search for better economic opportunities is the fundamental driver for money transfers. While conditions have improved over time in the United States and Europe, a region that is about equally important for Western Union as the U.S., growth remains modest, with new entrants adding to the issues for legacy operators like Western Union. At this point, it is unlikely for a catalyst to improve the situation. Pandemic-related headwinds appear to be lingering, and the decision to exit Russia will add pressure. It is still anticipated that Western Union has a wide moat based on its sizable scale advantage, but with a stagnant top line, the value of the moat over the next few years could be questioned. 

Another major issue for Western Union is the industry shift toward electronic methods of money transfer. The company has been actively building out its presence in electronic channels in recent years to adapt to the change in the industry. Western Union saw a sharp spike in digital transfers at the beginning of the pandemic, and growth has remained strong. Western Union achieved a 32% year-over-year increase in transaction growth in 2021 as this area of the company’s business jumped to about a quarter of revenue. It is alleged the firm’s aggressive approach is the best strategy as Western Union positions itself to maintain its scale advantage despite the shift. In analysts’ opinion, scale and market share across all channels will be the dominant factor in long-term competitive position, and Western Union appears to be maintaining its overall position. However, the growth that the company is seeing in digital transfers does not appear to be leading to strong overall growth, and this situation is unlikely to change.

Financial Strength

Western Union’s capital structure is fairly conservative, as management sees a strong credit profile as an advantage in attracting agents. The company carried $3.0 billion in debt at the end of 2021, resulting in debt/EBITDA of 2.3 times; this is a reasonable level, in experts’ reasoning, given the stability of the business. Western Union also typically holds a substantial amount of cash. Net debt at the end of 2021 was approximately $1.8 billion, and it is held, that the company might hold a net debt position of about $2 billion over time. Given recent changes to tax laws, it’s possible Western Union might not hold as much cash as it has historically, as it will no longer incur a tax penalty upon repatriation. This could help free management’s hand, as the company historically has returned the bulk of its free cash flow to shareholders through stock repurchases and dividends.

Bulls Say’s

  • The demographic factor that has historically driven industry growth–namely, the differential between population growth in developing and developed countries–remains in place for the foreseeable future. 
  • Western Union didn’t see a major drop-off during the last recession or the pandemic, highlighting the stability of the business. 
  • While the motives for immigrants to relocate to wealthier countries are well understood, developed countries also have incentive to open their borders, as negligible native population growth makes immigration a necessity for long-term GDP growth.

Company Profile 

Western Union provides domestic and international money transfers through its global network of about 500,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network. 

(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
Dividend Stocks

Maintaining the Fair Value Estimate of $26 for KeyCorp After First-Quarter Earnings

Business Strategy & Outlook: 

KeyCorp was hurt during the financial crisis largely because of its ventures into higher-risk commercial real estate lending in out-of-footprint states. Since the crisis, KeyCorp has wound down most of its construction-related commercial real estate business and refocused on its core corporate banking operations and capital markets services. With increasing credit quality and declining credit-related costs, along with significant operational improvements, KeyCorp has returned to healthy profitability. The bank’s First Niagara acquisition back in 2016 has also helped drastically improve the bank’s operating efficiency and scale. KeyCorp has an odd geographic mix, as Ohio, New York, and Washington state are its three largest deposit markets. While this provides some protection from a localized downturn, it has also made hitting ideal branch and deposit concentrations more difficult. The First Niagara acquisition has improved many of these metrics for KeyCorp in New York (First Niagara was headquartered out of Buffalo), such as deposits per branch and average metropolitan statistical area market share. KeyCorp also gained access to some key new product sets, most notably residential mortgages, which remains a key growth driver for the bank today. The bank’s latest investments into more technologically forward endeavors, including the acquisitions of HelloWallet, Laurel Road, AQN Strategies, and XUP Payments. Laurel Road is a key growth engine for the bank today, using a digital national platform approach. KeyCorp’s noninterest income comes primarily from investment banking and asset and trust management services. While noninterest income did not grow substantially for the decade prior to 2019, the bank has turned a corner here. KeyCorp is expanding its relatively new credit card income base as well as its own mortgage and capital markets operations. These efforts have largely paid off, and the fees will be consistently higher from 2020 forward than they were for the previous decade. The bank shall continue to remain very competitive in its core middle-market niche, while also building out its focused retail operations.

Financial Strengths:

KeyCorp is in adequate financial health. The bank has performed well through the pandemic, with credit costs being very manageable. The bank’s common equity Tier 1 ratio of 9.4% as of March seems adequate to us. The capital-allocation plan remains fairly standard for KeyCorp, with a focus on investing in organic growth and extra capital being used to fund share buybacks and pay a dividend. Management targets a 40%-50% dividend payout ratio with much of the rest used for share buybacks if no organic investment opportunities present themselves. Bolt-on acquisitions also remain a possibility.

Bulls Say:

  • A strong economy and higher rates are all positives for the banking sector and should propel revenue and profitability higher for KeyCorp. 
  • The bank’s extra growth from its Laurel Road initiatives and more growth for its capital markets segment should continue for the foreseeable future.
  • Key’s investment banking and capital markets offerings allow the bank to win business from corporate clients that seek more robust offerings but are too small to attract attention from bulge-bracket firms.

Company Description:

With assets of over $170 billion, Ohio-based KeyCorp’s bank footprint spans 16 states, but it is predominantly concentrated in its two largest markets: Ohio and New York. KeyCorp is primarily focused on serving middle-market commercial clients through a hybrid community/corporate bank model.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks Shares

Lower Copaxone Sales, US Generic Competition, Unfavorable Exchange Rates Weigh on Teva’s Results

Business Strategy & Outlook: 

Israel-based Teva Pharmaceutical is one of the largest global generic drug manufacturers, with a significant presence in the United States and in Western Europe. Generic drug manufacturers with large exposure to the U.S. have fared very poorly compared with the overall market over the past few years due to factors that resulted in a highly deflationary generic drug price environment. To combat further margin deterioration, the largest, most capable manufacturers have invested more heavily in development and marketing of complex generics and biosimilars, which face much less competition and price erosion than small-molecule generics. 

Founded in 1901, Teva was a small wholesale drug business in Jerusalem that converted into a local drug manufacturer during World War II with the rise in demand. The company consolidated the market in 1960 to create the largest drugmaker; it later expanded into Europe and the U.S. and then into generics in 1984 with the passage of the Hatch-Waxman Act. In the following 30 years, Teva completed roughly 30 acquisitions to further its position as the largest global generic manufacturer with roughly 90 manufacturing and research and development facilities worldwide. Despite efforts to curb margin deterioration by eliminating unprofitable drugs in the portfolio, Teva’s top and bottom lines have been negatively affected by a 70% decline in sales for its largest specialty drug, Copaxone, following generic entry and competition from new therapies. At its peak in 2013, Copaxone generated $4.3 billion in sales and contributed one fifth of total company revenue. While the company’s specialty drug pipeline is deep and consists of several novel biologic products and biosimilars, the growth is expected to be anemic over the next few years with slow generic revenue growth and a further decline in Copaxone sales. The company forecasts $750 million in Copaxone revenue in 2022.

Financial Strengths:

As of year-end 2021, Teva holds net debt of $20.9 billion, with $1.4 billion due in 2022, $2.1 billion due in 2023, and $2.0 billion due in 2024. The company’s $2 billion in cash and free cash flow generated from operations gives us some assurance that Teva should meet its obligations in the near term. Legal risk from ongoing litigation related to opioids, price-fixing, and Copaxone is also a risk to liquidity over the next several years. The base assumption calls for $2 billion in a cash settlement paid over a period of 15 years.

Bulls Say:

  • As a leading global generic manufacturer, Teva enjoys economies of scale over its smaller peers.
  • Teva’s specialty portfolio represents one fifth of sales and diversifies the company from generic drug deflation risk.
  • Teva’s biosimilar for Humira is anticipated to launch in the U.S. in 2023, which should bolster specialty segment sales.

Company Description: 

Based in Israel, Teva is one of the world’s largest generic drug manufacturers, with over 3,500 products marketed in over 60 countries. While a majority of its revenue is attributed to prescription generic drugs, Teva develops and markets its own branded specialty and biopharmaceutical products, primarily in the U.S. and in Europe. The company’s branded portfolio generates one fifth of total revenue and consists of patented therapies targeting central nervous system conditions (Austedo, Ajovy, Copaxone), oncology (Bendeka/Treanda), and respiratory conditions (ProAir, Qvar). While global competition has facilitated the commodification of small-molecule generic drugs, Teva’s portfolio rationalization has resulted in less overall price erosion versus peers.

(Source: Morningstar)

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

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

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