Category: Sectors

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Dividend Stocks

Medibank Expected To Protect High Returns on Equity Rather Than Chase Growth

Business Strategy and Outlook

Medibank is Australia’s largest private health insurer operating under the Medibank and ahm brands. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Despite the “free” universal public system in Australia, around 45% of Australia’s population have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. Government policy settings are expected, which promote the take up and retention of private health insurance products, to remain in place. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

It is believed that Medibank’s current strategy, which has seen growth in policyholder numbers and margins, should see the positive trends continue. Initiatives included increasing the number of service providers where individuals pay no-gap, introducing reward programs (such as discounts) for members, investing in the digital offering to make claim lodgment easier, adding tools and resources such as 24/7 nurse teleservice, and a new focus on in-home care. To help support margins there has also been a renewed focus on claim costs. Medibank secured audit rights with hospitals which allows the insurer to investigate where rehabilitation referrals of a hospital exceed industry averages and expanded efforts to identify errors in claims made by hospitals.

Despite larger players generating respectable return on equity on mid-single-digit profit margins, smaller providers have less capacity to absorb the expected claims inflation. This could eventually lead to industry consolidation, or at the least a pull-back in marketing expenses and policyholder acquisition costs. Medibank’s Other Health Services division provides in-home healthcare services such as nursing, rehabilitation, and health coaching for corporates. Medibank health also includes the sales of travel, life, and pet insurance, where Medibank is not the underwriter but is paid a commission.

Financial Strength

In a debt-free position Medibank is in sound financial health. The insurer is projected to fund long-term organic growth from cash flows, while maintaining the current 75% to 85% target dividend payout range. As at Dec. 31, 2021, Medibank held AUD 1.95 billion in capital, equating to 13% of annual premiums, the top end of the firm’s 11%-13% target range.Given low claims volatility in health insurance the insurer could carry some debt, but given a large acquisition is not expected, the conservative balance sheet is likely to remain a feature of Medibank. Investment assets of AUD 2.8 billion were allocated 18% to cash, 61% to fixed income, and 21% to equities, property and other assets as at Dec. 31, 2021.

Bulls Say’s

  • Industry growth is tied to a steadily increasing population, ageing demographics and the rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs. 
  • Premium growth is generally tied to the increasing cost of healthcare. 
  • The symbiotic relationship with the private hospital operators and buyer power over general practitioners is a key strength of Medibank’s business model. The majority of private hospital income is paid by the insurers.

Company Profile 

Previously owned by the Australian government, Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.8 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Initiating on Tencent Music Entertainment, USD 8.60 FVE; Cloud Music, HKD 130 FVE; TME Our Top Pick

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy & Outlook:

With over 600 million monthly active users, or MAU, Tencent Music Entertainment, or TME, is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 60% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making. A low subscriber-to-user ratio in the mid-teen percentages offers a long runway for paying user growth in music streaming. With platforms putting more content, such as popular songs, behind the paywall, more users would subscribe, and fuel top-line growth. Potential revenue growth also comes from advertising, where the firm’s investments into long-form audio are likely to open up more ad inventory. Even though social entertainment (mainly video live streaming) contributes most of the firm’s revenue, it is believed that there will be minimal growth ahead given competition from Douyin and Kuaishou.

With China’s antitrust laws putting an end to TME’s exclusive music copyright agreements, it’s anticipated more competition for users. Its peer Cloud Music is aiming to bridge the content gap by signing with previously inaccessible labels. Despite competitive headwinds, the TME will remain the largest platform for music streaming, benefiting primarily from network effect and intangible assets that maintain user engagement and stickiness. The subscription prices are unlikely to go lower because: 1) competitors are making losses and have little incentive for price competition; and 

2) Chinese streaming platforms offer almost the lowest prices worldwide, so more discounts will be less effective in attracting users.

Unlike developed markets, the supply side of music in China is more fragmented, with just 30% of licensing from top five labels. As licensors sell their content on a mostly fixed cost basis, TME is well-positioned to see margin expansion as revenue grows.

Financial Strengths:

TME is financially sound. As of the end of 2021, the firm was sitting on a net cash position of CNY 22 billion, more than three times that of peer Cloud Music. Despite some near-term industry challenges, the firm to generate positive free cash flows over the next years. Taking advantage of the low interest environment, the company issued a total of USD 800 million (CNY 5 billion) senior unsecured notes at below 2% interest in 2020. 

The debt/equity ratio is running at a manageable 30%, and debt/EBITDA is maintained below 1.5 times as at the end of 2021. The firm is believed to maintain this capital structure. Given the positive free cash flow assumptions the firm can easily fulfill its debt obligations while simultaneously funding future investment initiatives. The business has been generating positive free cash flows since 2016. In 2021, it generated a free cash flow of CNY 3.5 billion. This is significantly better than peer Cloud Music, who will be burning through cash for the next couple of years.

Bulls Say:

  • Compared to Spotify, TME has plenty of room for subscriber growth that should come about as it moves more music content behind the paywall.
  • TME piggybacks off Tencent’s billion-plus user network. This relationship allows for better retention of users while attracting new ones.
  • By investing in independent artists and long-form audio, TME could better manage content cost over the long term.

Company Description:

TME is the largest online music service provider in China. It was founded in 2016 with the business combination of QQ Music (founded in 2005), Kuwo Music (founded in 2005) and Kugou Music (founded in 2004) streaming platforms. Tencent is the largest shareholder of TME with over 50% shares and over 90% voting rights held. TME also provides social entertainment services, including music live audio/video broadcasts and online concert services through the three platforms mentioned above, and online karaoke through an independent platform WeSing.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Self-help measures planned to optimize Kingfisher’s store footprint

Business Strategy and Outlook

Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base. 

Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity. 

With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.

Financial Strength

Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus.Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance. Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.

Bulls Say’s

  • Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U. K. and France, as well as people spending more time indoors during the pandemic. 
  • Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations. 
  • As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.

Company Profile 

Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

It is alleged the acquisition of Suez will be significantly value-accretive for Veolia

Business Strategy and Outlook

Veolia Environment is the world’s largest water company. Treatment and distribution of water accounts for 30% of the group’s revenue. In France, where Veolia is the historical leader, the business has been affected by a wave of contract renewals since 2010, which reduced profitability. Still, the indexation of those contracts to inflation should support earnings if high inflation persists. 

Veolia’s waste management accounts for 40% of turnover. This business is more cyclical and was hit by economic crises in Europe over 2009-13. Since 2015, the economic recovery in Europe has boosted waste volumes and enhanced margins. The group intends to increase the profitability and structural growth of this division by expanding exposure to hazardous waste treatment, which exhibits efficient scale. Veolia’s third main business is energy. This business makes up 20% of the turnover and encompasses energy services, heating and cooling networks, and electricity. This is more defensive than waste management. However, the weight of municipal clients limits pricing power.

In April 2021, Veolia and historical rival Suez reached a merger agreement after seven months of fierce battles for the former to acquire the 71.1% it did not hold in the latter at EUR 19.85 per share in January 2022. Veolia agreed to relinquish activities representing EUR 7 billion or 40% of Suez turnover and EUR 1.2 billion of EBITDA comprising French waste and water businesses and some international water activities like in Italy or Morocco. Importantly, Veolia managed to seize all the assets it’s deemed strategic: water activities in Spain and Chile (Agbar), the U.S. regulated water business and waste activities in the U.K. and Australia. Despite the high price paid, it is alleged the acquisition of Suez will be significantly value-accretive for Veolia thanks to the high amount of synergies. The European Commission cleared the deal on Dec. 14, 2021, conditional on remedies representing around EUR 0.3 billion of turnover. The last antitrust issue is the U.K. where the CMA is conducting an investigation that might lead to a disposal of some of the local waste assets acquired from Suez.

Financial Strength

Veolia’s standalone net debt decreased from EUR 13.2 billion in 2020 to EUR 9.5 billion at the end of 2021. This drop was notably driven by a EUR 2.5 billion rights issue in October 2021 and the issuance of EUR 0.5 billion of hybrid bonds accounted as equity to fund the acquisition of Suez which was completed in January 2022. On a proforma basis, net debt amounted to EUR 18.2 billion at year-end 2021. In 2022, projections are done on pro forma net debt to decrease to EUR 17.14 billion as the EUR 9 billion cash outflows dedicated to the tender offer for 71% of Suez shares not held by Veolia in January are more than offset by the EUR 10.4 billion disposals of Suez assets that Veolia agreed to relinquish to a consortium formed by GIP, Merdiam, Caisse des Depots and CNP Assurances. Experts’ 2022 net debt estimate implies a net debt/EBITDA ratio of 2.7, below the group’s guidance of around 3 times. Beyond 2022, it is foreseen the leverage ratio to decrease to 1.7 in 2026 on EBITDA growth notably fuelled by the achievement of the EUR 0.5 billion synergies. Analysts forecast dividend to grow by 14.9% per year on average between 2021 and 2026, in line with the current income growth, as targeted by the group. This points to a 2026 dividend of EUR 2, twice as higher as the EUR 1 paid on 2021 results.

Bulls Say’s

  • The acquisition of Suez will be significantly value accretive for Veolia thanks to high synergies despite the high price paid. To get the comparable international assets through bolt-on acquisitions would have been much more costly. 
  • Inflation is positive for Veolia thanks to the indexation of 70% of its contracts, the ability to pass through cost increases in other contracts and the long position in electricity and recycled materials. 
  • Increasing exposure to hazardous waste will structurally increase the group’s margins and returns on invested capital.

Company Profile 

Veolia is the largest water company globally and a leading player in France. It is also involved in waste management with a significant exposure to France, the United Kingdom, Germany, the United States, and Australia. The third pillar of the group is energy services, giving the group significant exposure to Central Europe. Veolia started to refocus its activities in 2011, leading to the exit of almost half of its countries and of its transport activity, which should be completed within the next few years. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

SAP SE: Cloud Continues to Deliver Strong Growth

Investment Thesis:

  • Leading market share positions in on-premise enterprise resources planning (ERP) and on-premise customer relationship management (CRM) markets with customers in over 180 countries and strong brand awareness. 
  • The market is undervaluing SAP’s CRM business (relative to its peer group such as Salesforce.com).
  • Support revenues and Cloud subscriptions provide recurring revenue, which gives SAP a defensive profile. 
  • Competent management team.
  • Strong operating and free cash flow generation with attractive dividend policy (payout ratio of at least 40%).

Key Risks:

  • Slower take-up for HANA and S/4HANA. 
  • Deteriorating sentiment if the economy and IT spending weakens. 
  • Market share loss in software revenue driven by cloud migration.
  • Aggressive M&A with risk of overpaying.
  • Additional opex spending dampening margin expansion. 
  • Key-man risk due to management changes.
  • Competition from other established players like Microsoft, Salesforce.com and Oracle.
  • The CFO Luka Mucic departure in March 2023 is a negative.

Key Highlights:

  • For FY22 management expects accelerating cloud revenue growth, supported by strong traction of SAP S/4HANA Cloud, leading to (in CC) Cloud revenue of €11.55–11.85bn (up +23-26%), Cloud and Software revenue of €25–25.5bn (up +4-6%) with share of more predictable revenue (total of cloud revenue and software support revenue) increasing +300bps to 78%, non-IFRS operating profit of €7.8–8.25bn (flat to down 5%), FCF of >€4.5bn (vs €5.01bn in pcp), effective tax rate (IFRS) of 25-28.0% (vs 21.4% in pcp) and an effective tax rate (non-IFRS) of 22-25.0% (vs 19.9% in pcp).
  • By 2025 management continues to expect total revenue of >€36bn with Cloud revenue of >€22bn, non-IFRS operating profit of >€11.5bn with non-IFRS cloud gross margin of ~80%, more predictable revenue share of 85%, and FCF of €8bn.
  • The Company announced a new share repurchase program with a volume of up to €1bn to service future share-based compensation awards, which is planned to be executed in CY22. 
  • Revenue growth of +19% in CC to $9.59bn with S/4HANA growing +47% in CC to $1.1bn.
  • Cloud backlog growing +32% (+26% in CC) to $9.45bn with S/4HANA cloud backlog up +84% (+76% in CC) to $1.71bn.
  • IFRS cloud gross margin improving +40bps to 67%. 
  • ‘RISE with SAP’ continued to gain traction, closing more than 650 customer deals in 4Q21, bringing total customer count to 1,300 since launch in 1Q21, and accelerated adoption momentum in cloud with SAP adding ~1,300 SAP S/4HANA customers (>2x the last four quarter average of 600) in the quarter (~50% customers were net new with win rate against competitors >70%), taking total adoption to more than 18,800 customers (out of which ~5,000 are S/4HANA cloud customers), up +18% over pcp, of which more than 13,100 (~70%) are live.

Company Description:

SAP SE (SAP) is a global software and service provider headquartered in Walldorf, Germany, operating through two segments: Applications, Technology & Services segment, and the SAP Business Network segment. The Applications, Technology & Services segment is engaged in the sale of software licenses, subscriptions to its cloud applications, and related services and the SAP Business Network segment includes its cloud-based collaborative business networks and services relating to the SAP Business Network (including cloud applications, professional services and education services). SAP is the market leader in enterprise application software and also the leading analytics and business intelligence company, with the Company reporting that more than 77% of all transaction revenue globally touches an SAP system.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Reels is now FB’s fastest growing content format by far and the biggest contributor to engagement growth on Instagram

Investment Thesis:

  • Strong market position in online advertising.  
  • Value accretive acquisitions in existing and new growth areas.
  • Focus on innovation across advertising businesses, which should help to sustain growth. 
  • Strong and competent management team.   
  • Strong balance sheet (net cash position) giving flexibility to invest in growth options or undertake capital management initiatives. 
  • Social media dominance with brands like WhatsApp, Instagram and Facebook.
  • Potential earnings upside from rolling out payment solutions and cryptocurrency.

Key Risks:

  • De-rating should growth rates miss expectations.
  • Growing competition from other platforms (e.g., TikTok).
  • Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data (e.g., AAPL’s new iOS allows users to stop companies from tracking their movements).
  • Deterioration in economic conditions, which would put pressure on the advertising revenue.
  • Competition from companies like Alphabet Inc. and Amazon.com Inc. could put pressure on margins. 
  • Potential return from investment on new, innovative technology fails to yield adequate results.
  • Key man risk if the founder and CEO Mark Zuckerberg decides to depart.

Key Highlights:

  • Total revenue grew +20% (+21% in CC) to $33.7bn, with Family of Apps (Facebook + Instagram + Messenger + WhatsApp + other services) revenue up +20% to $32.8bn (ad revenue growth of +20%/21% in CC to $32.6bn with total number of ad impressions served across services increasing +13% and the average price per ad increasing +6% was partially offset by -8% decline in other revenue to $155m due to a decline in payment revenue earned from games) and Reality Labs (AR & VR related consumer hardware, software and content) revenue up +22% to $877m, driven by strong Quest 2 sales during the holiday season.
  • Cost of revenue increased +22%, driven primarily by Reality Labs hardware costs, core infrastructure investments, and payments to partners. Total expenses were up +38% to $21.1bn with Family of Apps expenses up +35% to $16.9bn and Reality Labs expenses up +48% to $4.2bn.
  • Operating income declined -1% to $12.6bn with margin declining -900bps to 37% as +6.8% increase in Family of Apps operating income to $15.9bn (margin down -589bps to 48.48%) was more than offset by Reality Labs operating loss widening by +57% to $3.3bn.
  • NPAT declined -8% to $10.3bn with EPS down -5% to $3.67, driven by decline in operating income and +32% higher tax.
  • Capex increased +15% to $5.5bn, driven by investments in data centers, servers, network infrastructure and office facilities.
  • FCF increased +36% to $12.6bn driven by +28.9% increase in operating cashflow to $18.1bn.
  • The Company repurchased $19.18bn of our Class A common stock and ended the year with Cash and cash equivalents of $48bn.
  • 1Q22 total revenue of $27-29bn, up +3-11% over pcp, negatively impacted by headwinds to both impression (increased competition + shift of engagement to Reels) and price growth (ad targeting and measurement given Apple’s iOS changes + macroeconomic challenges impacting ad budgets + FX headwind).
  • FY22 total expenses of $90-95bn (vs prior outlook of $91-97bn).
  • FY22 capex (including principal payments on finance leases) of $29-34bn driven by investments in data centres to support AI and Machine Learning.
  • FY22 tax rate to be similar to FY21. 
  • Holding a view that short-form video will be an increasing part of how people consume content moving forward, management continues to replace some time in News Feed and other higher monetizing surfaces to transition services towards short-form video like Reels. (Reels is now FB’s fastest growing content format by far and the biggest contributor to engagement growth on Instagram) and expects pressure on ad impression growth in the near term given Reels monetizes at a lower rate than Feed and Stories, and competition from dominant players like TikTok and YouTube.

Company Description:

Meta Platforms Inc. (NASDAQ: FB) is the biggest social network worldwide focused on building products that enable people to connect and share through mobile devices, personal computers and other surfaces. The Company’s products include Facebook, Instagram, Messenger, WhatsApp and Oculus. The Company also engages in selling advertising placements to marketers, to help them reach people based on a range of factors, including age, gender, location, interests and behaviours. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Global Markets

Inghams Group – The Board declared a fully franked Dividend of 6.5 cps, in line with the pcp, and Equates to Payout Ratio of 60.9%

Investment Thesis:

  • Trading on undemanding multiples and below our valuation. 
  • Potential for an improvement in the pricing environment. 
  • Quality management team who has managed disruptions for the Covid-19 pandemic well. 
  • Quality assets and operates as Australia and New Zealand’s largest integrated poultry producer.
  • Project Accelerate has proven successful in driving automation and labour productivity, which supports earnings uplift despite decrease in revenue.  
  • Procurement initiatives implemented with benefits in line with expectation.
  • Investing to increase capacity and capability across the business in Australia and New Zealand plants.
  • Capital management initiatives are possible with a strong balance sheet.

Key Risks:

  • Re-negotiation of key contracts with large customers on unfavourable terms. 
  • Increase in feed and electricity costs, which may be pushed to customers through market price increases, reducing competitiveness. 
  • No news on the appointment of a new CEO creates uncertainty. 
  • Customer concentration risk in QSR (Quick Service Restaurants) and Supermarkets. 
  • Susceptible to exotic disease breakouts, impacting ING’s ability to supply poultry products. 
  • Significant reduction in volume and quality from parent stock supplier.
  • Material interruptions to ING’s complex and interlinked supply chain.

Key Highlights:

  • Group core poultry sales volumes grew +5.6%, driven by strong volume growth of +6.5% in Australia.
  • Statutory EBITDA of $220.4m, and Underlying EBITDA of $222.4m, was up +2.2% and +1.7%, respectively.
  • Statutory NPAT of $38.4m, up +8.8% and Underlying NPAT of $39.7m, up +5.9%
  • Cash flow from operations of $186.6m, was up +4.7%. Cash conversion ratio of 83.5% reflects seasonal working capital cycle and in-line with the pcp.
  • ING retained a solid balance sheet with net debt of $264.6m and leverage of 1.3x, a significant reduction from 1.7x in the pcp.
  • Total capital expenditure of $24.0m was lower than the pcp, reflecting completion of hatchery projects, ongoing project disruptions caused by Covid-19 lockdowns and delays in equipment being shipped.
  • The Board declared a fully franked dividend of 6.5 cps, in line with the pcp, and equates to payout ratio of 60.9% of Underlying NPAT post AASB 16 adjustments, which is at the lower end of ING’s 60 – 80% target range.
  • In Australia segment, Core poultry volumes grew +6.5% to 203.4kt, despite Covid-19 lockdowns and challenging market conditions. Revenue grew +1.9% driven by core poultry revenue growth of +2.2%, which grew despite weak pricing across the Wholesale channel due to excess supply, partially offset by feed revenue, declining -2.0% as customers transition supply away in preparation for closure of the ING’s WA Feedmill. Underlying EBITDA declined -0.3% to $185.1m, reflecting a lower Intercompany royalty charge, reduced by $3.2m.
  • In New Zealand segment, Core poultry volumes were flat at 33.7kt, as Covid-19 lockdowns were reintroduced. Core poultry revenue increased +3.6%, due to price increases applied across all channels to help offset higher feed costs and inflationary pressures related to supply chain disruption. Underlying EBITDA of $19.1m increased $3.3m versus the pcp, with the change to intercompany royalty charge accounting for $3.2m.

Company Description:

Inghams Group Ltd (ING) is Australia and New Zealand’s largest integrated poultry producer. The Company produces and sells chicken, turkey and stock feed that is used by the poultry, pig, dairy and equine industries. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Cadence being market leader in analog EDA tools, with over 80% of the market share for more than two decades

Business Strategy and Outlook

Cadence provides electronic design automation software, intellectual property, and system design and analysis products that are critical to the semiconductor chip design process. It is held Cadence offers a compelling value proposition for investors looking to capitalize on secular trends in technology that are increasing the complexity of chip designs and advancing the digitalization of various end markets. Analysts fair value estimate for Cadence is $138 per share, up from $127 as experts’ model stronger near-term growth and profitability. With shares trading at around $155, It is foreseen the narrow-moat stable-moat-trend company as slightly overvalued. 

It is likely Cadence’s products are transformational in enabling increasingly complex integrated circuit and system-on-chip design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Cadence is the second-largest EDA vendor, behind Synopsys, having multidecade-spanning market dominance in analog design and emerging as a force in digital design. While it is seen Cadence to grow at a slightly more muted pace than Synopsys, it is likely the firm’s analog stability, focus on profitability, and building of a holistic offering that includes unique system-level solutions as creating a compelling, risk mitigated narrative.

Cadence’s origins rest with analog chip design, which is an inherently stickier market than digital design, where Synopsys had its beginnings. Cadence is the market leader in analog EDA tools, holding over 80% of the market share for more than two decades. Analog chips boast more complex and archaic designs than digital chips, with longer design cycles and more loyal, risk-averse customers. While Synopsys holds a larger piece of the overall EDA market, it is anticipated Cadence’s core EDA segment benefits from a wider moat than Synopsys’ does because of the company’s exposure to analog chip design.

Financial Strength

It is likely Cadence’s narrow moat is derived from high customer switching costs associated with its EDA and system design and analysis businesses, and intangible assets associated with its IP portfolio. In experts’ opinion, this customer stickiness and broad, proprietary IP portfolio will drive excess returns on capital for Cadence over the next 10 years. It is alleged that Cadence’s unified portfolio of EDA tools lends itself to specialized, high-touchpoint, deeply integrated software that is believed to give rise to significant time costs, operational risks, and implementation expenses if it were to be replaced. It anticipated Cadence to grow at an 11% CAGR through 2026, as it is likely an uptick in EDA tool adoption from growing demand for new technologies and rising chip design costs. It is projected the systems business to support growth as well as designs trend from chip-level to board-level and multitier integrated systems become the standard for supporting advanced technologies. It is anticipated the IP business’ profitability focus, expansion of the margin-accretive systems business, and operating leverage to support margin expansion. It is held Cadence to increase non-GAAP operating margin from 35% in fiscal 2021 to 43% in fiscal 2026. In addition to deep integration into design flows, it is likely product familiarity is a defining factor among users of EDA tools that also drives higher switching costs. First, productivity gains from product familiarity drive a faster time-to-market, which is mission-critical in this industry when winning new nodes and designs is largely determined by staying ahead of the semiconductor industry’s pace of innovation. Second, as chip design is an incredibly expensive process, the margin for error is virtually non-existent and engineers are more likely to prefer tools with which they are familiar.

Company Profile 

Cadence Design Systems was founded in 1988 after the merger of ECAD and SDA Systems. Cadence is known as an electronic design automation, or EDA, firm that specializes in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems. Historically, semiconductor firms have relied on the firm’s tools, but there has been a shift toward other non-traditional “systems” users given the development of the Internet of Things, artificial intelligence, autonomous vehicles, and cloud computing. Cadence is headquartered in Silicon Valley, has approximately 8,100 employees worldwide, and was added to the S&P 500 in late 2017.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

JD’s daily active users’ year-over-year growth of 25% in this quarter surpassed annual active customers’ growth of 21%

Business Strategy and Outlook

JD’s growth in the number of third-party merchants was at the highest level in the last three years, as JD added more new merchants in the quarter than the previous three quarters combined. This will benefit the high-margin marketplace and advertising revenue, though t is held it will be partially offset by reduced fees for merchants amid more intense competition and reduced advertising budgets of merchants amid weaker consumer sentiment. The 98 million increases in annual active customers in the year, who are more likely to come from lower-tier cities, did not reduce average spending per user. Average spending per user was up 4.5% year over year in 2021, reverting from the 3.5% decline in 2020. This is in contrast with Alibaba, whose average spending per user declined by a low-single digit percentage year over year in 2021 due to a higher mix of customers from lower-tier cities. This means that either new users, as a whole, have average spending as high as the old users, or the old users have increased their spending levels to offset dilution from these new users.

JD’s share price has declined due to fears of delisting in the U.S., renewed concerns of a regulatory crackdown and increased common prosperity measures; it is likely such news will continue to weigh on investor sentiment in the near term. Other risks include uncertainty over the losses at the new businesses and whether the lagging impact of real estate weakness on home appliances and electronics will be worse than expected. Improved profitability, improving consumer sentiment in China, the U.S. and Chinese governments resolving the accounting problem, and signs of regulatory relief, will lead to a rerating in expert’s view.

Users’ shopping frequency and the range of categories purchased improved in this quarter. Average spending per user improved by 11% in the quarter for new users. Frequency of shopping by existing customers was up by 3% and average spending per user has increased by 4.5%. Daily active users’ year-over-year growth of 25% in this quarter surpassed annual active customers’ growth of 21%. These demonstrated JD’s stronger user engagement.

Financial Strength

The net product revenue or first-party gross merchandise volume growth estimate for 2022 is 16% now versus 25% previously. It is anticipated gross merchandise volume, or GMV, to grow 18% year over year in 2022, with third-party GMV growth of 19%. The total revenue is now 17% compared with 25% year over year previously in 2022. In 2022, the non-GAAP net margin is 1.9%, versus 1.8% in 2021 as new businesses and logistics improve profitability while JD Retail’s margin remains stable. Marketplace and advertising revenue in 2022 will grow at 20% year over year versus 35% in 2021. It is seen the growth of the home appliance and electronics segment accelerate in the fourth quarter to 21.7% from 18.8% in the third quarter despite macroeconomic uncertainty. This is helped by sales in offline stores in lower-tier cities. JD’s strong relationship with brands in the segment also helped it to secure inventory amid shortages.

Company Profile 

JD.com is China’s second-largest e-commerce company after Alibaba in terms of transaction volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses. JD.com launched its online marketplace business in 2010.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Chorus posted solid 1H22 Results; Dividend guidelines increased and announced share buyback

Investment Thesis 

  • CNU trades on a dividend yield of ~4.7%.
  • Once UFB capex and capex on fiber network significantly fades, CNU is very cash generative and its capex will revert to maintenance spend.
  • Significant barriers to entry with high capex required for new competitors.
  • Benefits from population growth (i.e. potential for more connections) and increasing bandwidth requirements from trends such as end-users watching TV on the internet or increasing content on the internet. 
  • Fiber remains the best possible broadband product and has become the preferred broadband product of choice for customers. CNU announced in January 2017 that CNU reached an agreement with the government to take fiber to ~200,000 more customers (on top of the 1.1m already planned for first year UFB roll-out). CNU commenced UFB2 rollout in July 2017, which is expected to complete around December 2024. This would result in high penetration with ~85% of NZ population with access to fiber by 2024. The NZ government provided an additional up to ~NZ$291m in funding (whereas other fiber companies received ~NZ$16m in funding to extend fiber to ~33k more premises).

Key Risks

  • Potential changes to management and strategy with new incoming Kate McKenzie.
  • Increasing prevalence in usage of wireless networks over fiber networks, especially in regional NZ, where there is either poor or no broadband coverage.
  • Any capital expenditure blowout.
  • Network outages or reliability issues.
  • Regulatory risk. 

1H22 Results Highlights Relative to the pcp: 

  • Revenues increased +1% to $483m largely due to gains from ongoing network optimisation programme. 
  • Operating expenses declined -9.3% to $136m amid ongoing focus on reducing discretionary costs and decline in some expense lines due to Covid-19 restrictions. 
  • EBITDA increased +5.8% to $347m, which combined with +2.4% increase in D&A expense amid growth in network asset base and -7.8% decline in interest costs due to the refinancing of debt at lower rates in 1H21 (weighted average effective interest rate declined -30bps to 3.7%) delivered NPAT of $42m, up +55.6%. 
  • Capex declined -25.5% to $263m with fibre remaining the dominant category of spend at 85% and copper related expenditure continuing to trend downwards. 
  • Credit metrics improved with net debt to EBITDA declining to 4.03x from 4.24x at 1H21, and well within bank covenants (financial covenants require senior debt ratio to be no greater than 4.75x) and BBB/Baa2 rating by S&P/Moody.

Dividend guidance increased + share buyback announced

Given the finalisation of crucial inputs by Commerce Commission for the new regulatory framework together with the subsequent increase in credit thresholds for CNU by ratings agencies (Moody’s and S&P recognise that the new regulatory regime now provides CNU with some certainty over the revenues that can be earned from the fibre network), management upgraded their FY22 dividend guidance by +34.6% to 35cps and forecast FY23 dividend to be a minimum of 40cps and the FY24 dividend a minimum of 45cps. CNU also announced a share buyback of up to $150m (might be suspended if management identifies more accretive opportunities for shareholder value to be realised). 

Company Profile

Chorus Ltd (CNU) is a dual-listed (ASX and NSX) wholesale and retail telecommunications company based in New Zealand. CNU maintains and builds the Chorus local access network made up of local telephone exchanges, cabinets and copper and fiber cables throughout New Zealand.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.