Category: Sectors

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Technology Stocks

Paycom Continues Impressive Growth Trajectory During Q1 2022; $388 FVE Maintained

Business Strategy & Outlook:

Paycom’s unified platform appeals to midsize and enterprise clients who prefer an all-in-one payroll and HCM solution. The company’s platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complimentary analytics tools for clients and the recent roll out self-service payroll module, BETI. 

Paycom will continue to take market share of the growing payroll and HCM industry through industry consolidation and capitalizing on the shortfalls of competitors. The company has reported impressive growth to date, reflecting an ability to win clients and demonstrating how the cost and efficiency benefits of streamlining payroll and HCM solutions to a single platform can overcome inherent client switching costs. It is anticipated Paycom’s average revenue per client, or ARPC, will increase at a CAGR of 7% due to a gradual shift upmarket and from taking greater share of wallet through upselling existing and new modules. Paycom’s target market has shifted upwards over several years, with the company formally lifting the upper bound to 10,000 in fiscal 2021, from 2,000 in fiscal 2013. This shift paired with increased module uptake has led to an approximately 18% increase in ARPC over the same period. While the Paycom’s average client size to increase, its offering will be less appealing to mega enterprises who typically prefer to integrate best of breed solutions, by limiting the upmarket upside for Paycom.

Financial Strengths:

Paycom is in a strong financial position. At the end of fiscal 2021, Paycom had a net cash position of over $240 million and reported about $27 million of long-term debt, which is primarily associated with construction activity at its corporate headquarters. The company has access to at least $75 million of liquidity under a secured term loan and revolving credit agreements. Under these agreements, Paycom is subject to certain operating and financial covenants including restrictions on incurring further debt, issuing distributions and must maintain an EBITDA to fixed charge ratio of no less than 1.25 times and funded indebtedness of no greater than 2 times EBITDA. Paycom to maintain a net cash position, to comfortably cover interest on outstanding debt and to remain compliant with these covenants over the forecasted period. Paycom does not pay dividends but returns capital to shareholders through an ongoing share repurchase program. The future share repurchases will be partly offset by the regular issuance of shares under Paycom’s employee stock compensation and purchase plan. While Paycom operates a capital light business model with strong free cash flow generation potential, the company will continue to not pay dividends for the foreseeable future and instead invest excess cash in growth through primarily organic investments.

Bulls Say:

  • The increasing employee usage and employee self-service will entrench Paycom’s platform further into a client’s business, increasing client stickiness.
  • Increasing regulatory complexity under a U.S. Democratic Administration should create tailwinds for the payroll and HCM industry.
  • Paycom’s employee self-service payroll BETI is pushing the envelope amid an industry shift toward greater employee usage and the consumerization of payroll and HR software.

Company Description:

Paycom is a fast-growing provider of payroll and human capital management, or HCM, software primarily targeting clients with 50-10,000 employees in the United States. Paycom was established in 1998 and services about 16,000 clients, based on parent company grouping. Alongside its core payroll software, Paycom offers various HCM add-on modules including time and attendance, talent management, and benefits administration.

(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

Hannover, a Rare Moat in Reinsurance

Business Strategy & Outlook

Hannover Re is a property and casualty, and life and health reinsurer with property and casualty contributing a little over two thirds of the company’s profits to shareholders. Hannover Re has a slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving the deep expertise in niche areas. While this may sound a bit woolly, some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. The conceptualize this 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 and this leads to better standards of

underwriting. Furthermore, anticipate this leads to stronger client relationships. Because underwriters are client-facing and thus renewals a reiterative negotiation, with Hannover Re’s

underwriters in the position to directly negotiate and discuss client needs without the need for constant deferral, clients feel and are more connected to Hannover Re and this drives stronger retention rates. As the stronger retention drives lower commission and acquisition costs.

In addition to the culture of excellence in underwriting with a proven reputation for expertise in specialist lines, Hannover Re benefits from an expense advantage and these two benefits are aligned. For example, with deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies. As the business has the institutional capacity to absorb this internally with regard to its frontline, coupled with the lower levels of internal referrals that

have 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 Strengths

 Hannover Re has a good balance sheet. Leverage is quite low with debt standing at around EUR 3.4 billion. That stands in contrast to equity owned by shareholders of EUR 10.9 billion. Admittedly, of that EUR 2.3 billion is attributable to gains on securities classified as available for sale. Where Hannover’s balance sheet is weakest with the largest part of Hannover’s market risk attributable to default and spread risk. As dig a bit deeper, one can see 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. Over all this is a balance sheet that has room for quite a bit of improvement. First and foremost, the 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

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

Company Description

Hannover Re is a German-based reinsurance company with a strong reputation in writing specialist lines of reinsurance and a low-cost operating model. The business and its management team are highly disciplined, rarely ever making an acquisition and favoring a strategy of specials over a

commitment to a buyback when looking to return excess capital to shareholders. The business 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 are not liable for any unintentional errors in the document.

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

Categories
Technology Stocks

Wipro’s Narrow Moat Stable Amidst Digital Transformation

Digital tablet display the stock market data

Business Strategy & Outlook

Wipro is a leading global IT services provider with the typical menu of offerings, from software implementation to digital transformation consulting to servicing entire business operations teams. Wipro merits a narrow economic moat rating, similar to many of its peers, as the benefits from switching costs and intangible assets, although it is benefiting from a cost advantage. While the company will likely struggle amid the COVID-19 pandemic, its stable moat trend will stay secure. Forays into the higher-value realm of industrial engineering will help ensure that Wipro does not miss out on substantial growth trends in the overall IT services industry.

In many regards, there’s uncanny resemblance between Wipro and its Indian IT services competitors, Infosys and TCS, such as in its offerings, offshore leverage mix (near 75%), or attrition rates (near

15%). However, Wipro has pockets of solutions where it distinguishes itself. For instance, its robotic process automation services are considered to rank above all other peers according to several sources, including Forrester Research.

Wipro isn’t unusual for being an IT services provider with switching costs and intangible assets. These are founded on the intense disruption that customers would experience when changing their IT services provider as well as Wipro’s specialized knowledge of the industry verticals it caters to and the distinct knowledge of its customers’ web of IT piping. But besides these two moat sources, Wipro benefits more from a cost advantage (which only allot to Indian IT services companies) based on its labor arbitrage model. While from such a cost advantage will diminish over time as the gap between Indian wage growth and GDP growth in primary markets narrows, Wipro’s moat is secure as the company’s foray into higher-value offerings and increasingly automated solutions offsets this trend.

Financial Strengths

 Wipro’s financial health is in good shape. Wipro had INR 350 billion in cash and cash equivalents as of March 2021 with debt totaling INR 83 billion. Wipro’s cash cushion will remain healthy, as the free cash flow to grow to INR 118 billion by fiscal 2026. This should allow for continued share buybacks and acquisitions. The share buybacks over the next five years will average INR 50 billion each year. The  acquisitions over the next four years following fiscal 2022 will average INR 9 billion each year. While it doesn’t explicitly forecast dividend increases over the near term, Wipro will have more than enough of a cash cushion to undergo any dividend raises as desired without needing to take on debt.

Bulls Say

  • Wipro could benefit from greater margin expansion than expected in base case as more automated tech solutions decrease the variable costs associated with each incremental sale.
  • Wipro should profit from a wave of demand for more flexible IT infrastructures following the COVID-19 pandemic, as more companies seek to be prepared for similar events.
  • As European firms become more comfortable with outsourcing their IT workloads offshore, Wipro should expand its market share in the growing geography.

Company Description

Wipro is a leading global IT services provider, with 175,000 employees. Based in Bengaluru, the Indian IT services firm leverages its offshore outsourcing model to derive over half of its revenue (57%) from North America. The company offers traditional IT services offerings: consulting, managed services, and cloud infrastructure services as well as business process outsourcing as a service.

(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

Transferring Coverage of Narrow-Moat Henkel; FVE Reduced to EUR 80

Business Strategy & Outlook

In January 2022, Henkel announced the decision to combine two of its business units (beauty care, and laundry and home care) into one consumer unit in an attempt to achieve more synergies in its

customer and channel execution after years of subpar performance, especially in North America. While the believe is that operating an overall larger portfolio is important in driving customer management and limited upside in terms of growth as there is little marketing and innovation expertise to be shared between the units. Moreover, large competitors in the space are moving in the opposite direction, with Unilever for instance recently announcing that it would move from three divisions to five business groups, with each responsible for end-to-end strategy and execution.

Nonetheless, Henkel’s CEO Carsten Knobel updated the company’s midterm ambition following the announcement of the customer unit formation. The firm now targets midterm organic sales growth of 3%-4%, up from 2%-4% previously, along with mid- to high-single-digit adjusted EPS growth at constant currencies, free cash flow expansion, and an adjusted EBIT margin of 16%. Notably, this level of adjusted EBIT margin falls below the peak level of 18% achieved in 2018, signaling that management is recognizing that some of the recent higher investment in marketing and innovation would not be temporary, with limited margin opportunities remaining. Given the firm’s track records, a 16% medium-term adjusted EBIT would imply an improvement in competitiveness in the consumer space, which don’t see as likely at this time. That applies to the top line as well, and the measures announced thus far do not warrant an increase in growth expectations. In order to hit its midterm ambitions, that more drastic portfolio decisions must be made, which should include further trimming of the brand portfolio, a clear plan to address the underperformance in North America and in the beauty care segment, as well as providing more clarity regarding the adhesive’s unit, which has been overlooked to some extent and unjustly punished for underperformance on the consumer side.

Financial Strengths

Henkel has a strong balance sheet, and it has historically been run with very conservative levels of leverage. Even at the time of the acquisition of the Sun Products corporation in 2016, which was financed with debt, debt/EBITDA only increased to about 1 time. It has remained fairly stable at

around 1 time since then, with net debt/EBITDA declining, averaging around 0.5 times over the last 5 years, significantly below large-cap consumer staples peers for which the average is closer to 2.0 times.

Acquisitions have declined in importance since the Sun Products purchase, but remain an integral part of management’s stated strategy. To this point, one of the reasons given for the formation of the Henkel Consumer Brands segment was to enable the company to step up its active portfolio management, both in terms of divestment or discontinuations of noncore brands and businesses, and

by creating a stronger basis for acquisitions across the consumer space. The restructuring of the business will only be completed in 2023, so it’s do not expect to see a massive transformative initiative until at least 2024. In the absence of acquisitions, however, Henkel is unlikely to need to raise capital, and even given the unambitious mid-single-digit estimate of EBITDA growth over five-year forecast period should ensure that the net debt/EBITDA ratio remains controlled for the foreseeable future, all else equal.

Bulls Say

  • The combination of the beauty care and the home care segments under one roof in the consumer segment should result in more rapid and material portfolio decisions.
  • Henkel offers plenty of balance sheet optionality and should be able to pursue targets ranging from bolt-on to transformative.
  • Henkel’s clear market leadership in adhesives technologies through its differentiated and customizable offering gives it a unique position to benefit from secular trends around lighter yet strong materials and energy efficiency.

Company Description

Two distinct customer groups comprise Henkel. The consumer segment (around 50% of consolidated 2021 sales) is laundry and home care, including the Persil and Purex laundry detergent brands, and beauty care, including the Schwarzkopf brand in hair care, and the Dial brand in hand soap. The adhesives technologies segment makes up the remaining 50% of sales. Sales from Western Europe accounted for 30% of the firm’s consolidated total in 2021, while Asia-Pacific and North America accounted for 17% and 25%, respectively.

(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 a rising rate environment now on the horizon, Comerica should see its profits materially increase

Business Strategy and Outlook

Comerica is predominantly a commercial-focused middle-market bank, with over 90% of loans related to commercial lending and the majority of these related to its middle-market business. While the bank started in Michigan and remains a key player in this market, it has gradually expanded into California and Texas, which offer more growth potential. This has been a multiyear project and included moving the headquarters to Dallas from Michigan in 2007 and greatly expanding operations in Texas by acquiring Sterling Bancshares in 2011. Expansion in California has happened gradually for years, and the market has become Comerica’s largest, with roughly one third of the bank’s loans now based there. 

The bank has concentrations in the commercial real estate market, dealer floor plan lending, and mortgage banking. Comerica has a relatively small energy portfolio, which is likely to remain at 5% or less of the total loan book. The bank also has two business units primarily focused on serving institutional investors; the technology and life sciences unit and the equity fund services unit. Overall, the bank has a diversified set of commercial-focused lending and advisory segments. 

Comerica remains very leveraged to interest rates, as the vast majority (roughly 80%) of its loans are adjustable rate, making the bank one of the most interest-rate-sensitive names. This, combined with the bank’s sticky deposit base from its core commercial clients, makes the bank ideally positioned for rising rates. The flip side of this business model is that the bank can be more pressured during extended periods of low rates. With a rising rate environment now on the horizon, Comerica should see its profits materially increase. It is foreseen Comerica will be one of the biggest beneficiaries of this rate backdrop. Comerica’s overall strategy of adding value through its deep, advisor-style relationships with small and midsize business clients is appreciated. Fee streams related to payments and wealth management will also help the bank outlearn its cost of capital over the long term.

Financial Strength

It is held Comerica is in good financial health. While losses from the energy portfolio ticked up in 2016 and again in 2020, the bank has managed the costs well and has shown that the risks are well managed. The common equity Tier 1 ratio has generally been above the bank’s 10% goal, which is viewed to be an appropriate target.

Bulls Say’s

  • A strong economy and higher rates are all positives for the banking sector and should propel revenues and profitability even higher. This is particularly true for Comerica, which has uniquely high-rate sensitivity. 
  • A healthy business environment should uniquely benefit Comerica’s loan growth compared with many peers, as the bank almost exclusively focuses on commercial business, not retail. 
  • The bank’s superior commercial relationships are hard to replicate and lead to a good deposit base, increasing the value of the Comerica banking franchise.

Company Profile 

Comerica is a financial services company headquartered in Dallas. It is primarily focused on relationship-based commercial banking. In addition to Texas, Comerica’s other primary geographies are California and Michigan, with locations also in Arizona and Florida and select businesses operating in several other states as well as Canada. 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Global stocks Shares

Vehicle Repair Demand Continues to Strengthen, Benefiting LKQ’s Q1 Results

Business Strategy & Outlook

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. The company has built scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, boosting productivity. The company’s strong distribution network will support its ability to keep order fulfilment rates high in both aftermarket and salvage products.

The company’s strategy focuses on being a one-stop shop for repair professionals, ranging from salvage products to aftermarket and remanufactured parts. LKQ’s parts are a strong alternative to original equipment manufacturers’ parts, exhibiting high quality in comparison. While insurance companies aren’t usually direct customers, they do have sway over which parts are used in vehicle repairs. LKQ’s alternative parts allows insurance companies to reduce their cost base while also reducing the cycle time for repairs. Historically, the company has used acquisitions to build up its capabilities and footprint, but that has changed over the past few years. LKQ has shifted its focus to integrating its businesses and improving its cost structure, and it will aim to make smaller tuck-in acquisitions as opposed to larger deals.

 LKQ is well positioned to compete as electric vehicle adoption increases. The shift to EVs will present new revenue opportunities for the company. In both hybrid and full-electric vehicles, new parts will be needed to keep vehicles on the road. For example, to see increased demand for battery-related parts and a need for remanufactured or refurbished batteries.

LKQ has exposure to end markets with attractive tailwinds. The demand for repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed by the COVID-19 pandemic). The high average age of vehicles will also support demand for repair work.

Financial Strengths

LKQ maintains a sound balance sheet. Its debt balance stood at $2.8 billion in 2021, down from $3.7 billion in 2019. LKQ’s management team has been focused on strengthening the balance sheet over the past few years. The company’s net leverage position (net debt/EBITDA) has steadily improved, declining from nearly 3 times to under 2 times in 2021. This resulted in LKQ reaching investment-grade status.

In terms of liquidity, the company will be on solid footing over the long term. In 2021, LKQ had a cash balance of nearly $300 million, but this will likely increase over the forecast, given the company’s shift in its acquisition strategy. In the past, LKQ was more willing to acquire companies to expand its capabilities and footprint. Going forward, the company will focus on small tuck-ins, freeing up more cash to reinvest in its business, repurchase shares and grow its dividend. A stronger cash position will help LKQ quickly react to a changing operating environment as well as meet any near-term debt obligations (no major maturities until 2024). The comfort in LKQ’s ability to access $1.2 billion in credit facilities. LKQ’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favours organic growth and also returns cash to shareholders.

 LKQ can generate solid free cash flow throughout the economic cycle. The company to generate over $1 billion in free cash flow in midcycle year, supporting its ability to return free cash flow to shareholders through share repurchases and dividends. Additionally, free cash flow growth over the next decade will be supported by improving EBITDA margins in LKQ’s Europe business, which to be in the low-double-digit range over the next five years.

Bulls Say

  • Growth in miles driven increases the wear and tear on vehicles, requiring more maintenance and repair work to keep them on the road, benefiting LKQ.
  • LKQ’s collision business could see rising demand from increasing auto claims as more drivers return to the road following the COVID-19 pandemic.
  • Increasing adoption of hybrid vehicles presents new revenue opportunities for LKQ, such as new battery related parts, in addition to its ICE-related parts.

Company Description

LKQ is a leading global distributor of non-OEM automotive parts. Initially formed in 1998 as a consolidator of auto salvage operations in the United States, it has since greatly expanded its scope to include distribution of new mechanical and collision parts, specialty auto equipment, and remanufactured and recycled parts in both Europe and North America. It still maintains its auto salvage business and owns over 70 LKQ pick-your-part junkyards. Separate from the self-service business, LKQ purchases over 300,000 salvage automobiles annually that are used to extract parts for resale. Globally, LKQ maintains approximately 1,700 facilities.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Honeywell’s First-Quarter Results Unsurprisingly Solid

Business Strategy & Outlook

Honeywell is one of the strongest multi-industry firms in operation today. The firm has successfully pivoted to capture multiple ESG trends, including the need to drive energy efficiency, reduce emissions, and e-commerce, among others. The predicate of the thesis is mostly on a) increased demand for warehouse automation solutions; b) new digital offerings that promote data analytics in power plants, as well as remote security management, and energy savings in building solutions; c) an increasingly automated world in mission critical end-markets like life sciences. Over the next five years, Honeywell is capable of mid-single-digit-plus top-line growth, incremental operating margins in the low-30s, low-double-digit adjusted earnings per share growth, and free cash flow margins in the midteens.

The Honeywell is capable of meeting that assumed targets through a combination of portfolio refreshes, powerful new product introductions, breakthrough initiatives, and strategic partnerships in areas where the firm has domain expertise, a focus on high growth regions that’ll help the firm grow faster than its core markets, continuous improvement initiatives cantered on fixed cost reduction, on-time delivery and simplified design, supply chain automation, and an increasing shift toward software with a recurring revenue stream. The Honeywell was wise to continue investing aggressively during the height of the pandemic, which will reward the firm with share gains.

Despite appreciable headwinds in about 40% of Honeywell’s portfolio from the pandemic, in some ways, the COVID-19 has only accelerated the need for automation, particularly in warehousing given the strong secular trend toward e-commerce. Many of Honeywell’s automation solutions offer customers meaningful ROI payback in a truncated period of time. Furthermore, the Honeywell is strongly positioned to lead in carbon capture given its large installed base and investments in solvents.

Finally, Honeywell’s early-stage investments like quantum computing represent a leapfrog in technology, and they have multiple use cases in fast growing industries like cybersecurity.

Financial Strengths

Honeywell operates from a very strong financial position and believes its credit risk is very low. Honeywell boasts one of the lowest net debt/EBITDA ratios of any of the U.S. multi-industry firms that cover at 1.1 times at the end of 2021, though with the exception of 2020, that figure has been at or below 1 time since 2012. In fact, credit its balance sheet strength as one of its greatest assets during the pandemic as it was allowed to maintain its growth capital expenditures plans while other competitors froze growth capital expenditures spending in 2020. Furthermore, Honeywell’s interest coverage ratio (EBIT/interest expense) stands at over 18 times as of the end of 2021, meaning Honeywell has ample firepower to service its interest payments. Finally, Honeywell’s pension and other postretirement benefits have a minimal effect on fair value, as its pension is overfunded, and its other retiree benefits deduct a mere 21 cents per share on the fair value (which likely overstates the impact given the rising interest rate environment in 2021).

Bulls Say

  • Honeywell is making several organic bets in mission critical end markets that should yield triple-digit IRRs over the long term, including in quantum computing and building automation.
  • Honeywell boasts one of the strongest balance sheets in the multi-industry universe, and the company has a history of under promising and over delivering on its targets.
  • With approximately 60% of its portfolio in short-cycle businesses and with the remaining portfolio in end markets like aerospace and oil and gas, Honeywell is poised to outperform in 2021 with a value-cyclical reopening trade.

Company Description

Honeywell traces its roots to 1885 with Albert Butz’s firm, Butz-Thermo Electric Regulator, which produced a predecessor to the modern thermostat. Today, Honeywell is a global multi-industry behemoth with one of the largest installed bases of equipment. The firm operates through four business segments, including aerospace, building technologies, performance materials and technologies, and safety and productivity solutions. In recent years, the firm has made several portfolio changes, including the addition of Intelligrated in 2016, as well as the spins of Garrett Technologies and Resideo in 2018. In 2019, the firm launched Honeywell Forge, its enterprise performance management software solution that leverages the firm’s domain expertise in buildings, airlines, and critical infrastructure.

(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

Henkel’s CEO Carsten Knobel updated the company’s midterm ambition following the announcement of the customer unit formation

Business Strategy and Outlook

In January 2022, Henkel announced the decision to combine two of its business units (beauty care, and laundry and home care) into one consumer unit in an attempt to achieve more synergies in its customer and channel execution after years of subpar performance, especially in North America. While it is held that operating an overall larger portfolio is important in driving customer management, it is probable to have limited upside in terms of growth as there is little marketing and innovation expertise to be shared between the units. Moreover, large competitors in the space are moving in the opposite direction, with Unilever for instance recently announcing that it would move from three divisions to five business groups, with each responsible for end-to-end strategy and execution. 

Nonetheless, Henkel’s CEO Carsten Knobel updated the company’s midterm ambition following the announcement of the customer unit formation. The firm now targets midterm organic sales growth of 3%-4%, up from 2%-4% previously, along with mid- to high-single-digit adjusted EPS growth at constant currencies, free cash flow expansion, and an adjusted EBIT margin of 16%. Notably, this level of adjusted EBIT margin falls below the peak level of 18% achieved in 2018, signalling that management is recognizing that some of the recent higher investment in marketing and innovation would not be temporary, with limited margin opportunities remaining. Given the firm’s track record, it is projected a 16% medium-term adjusted EBIT would imply an improvement in competitiveness in the consumer space, which is not seen to be likely, at this time. That applies to the top line as well, and it is alleged that the measures announced thus far do not warrant an increase in growth expectations. In order to hit its midterm ambitions, it is grasped that more drastic portfolio decisions must be made, which should include further trimming of the brand portfolio, a clear plan to address the underperformance in North America and in the beauty care segment, as well as providing more clarity regarding the adhesive’s unit, which has been overlooked to some extent and unjustly punished for underperformance on the consumer side.

Financial Strength

Henkel has a strong balance sheet, and it has historically been run with very conservative levels of leverage. Even at the time of the acquisition of the Sun Products corporation in 2016, which was financed with debt, debt/EBITDA only increased to about 1 time. It has remained fairly stable at around 1 time since then, with net debt/EBITDA declining, averaging around 0.5 times over the last 5 years, significantly below large-cap consumer staples peers for which the average is closer to 2.0 times. Acquisitions have declined in importance since the Sun Products purchase, but remain an integral part of management’s stated strategy. To this point, one of the reasons given for the formation of the Henkel Consumer Brands segment was to enable the company to step up its active portfolio management, both in terms of divestment or discontinuations of noncore brands and businesses, and by creating a stronger basis for acquisitions across the consumer space. The restructuring of the business will only be completed in 2023, so it is unlikely to see a massive transformative initiative until at least 2024. In the absence of acquisitions, however, Henkel is unlikely to need to raise capital, and even given experts’ unambitious mid-single-digit estimate of EBITDA growth over analysts’ five-year forecast period should ensure that the net debt/EBITDA ratio remains controlled for the foreseeable future, all else equal.

Bulls Say’s

  • The combination of the beauty care and the home care segments under one roof in the consumer segment should result in more rapid and material portfolio decisions. 
  • Henkel offers plenty of balance sheet optionality and should be able to pursue targets ranging from bolt-on to transformative. 
  • Henkel’s clear market leadership in adhesives technologies through its differentiated and customizable offering gives it a unique position to benefit from secular trends around lighter yet strong materials and energy efficiency.

Company Profile 

Two distinct customer groups comprise Henkel. The consumer segment (around 50% of consolidated 2021 sales) is laundry and home care, including the Persil and Purex laundry detergent brands, and beauty care, including the Schwarzkopf brand in hair care, and the Dial brand in hand soap. The adhesives technologies segment makes up the remaining 50% of sales. Sales from Western Europe accounted for 30% of the firm’s consolidated total in 2021, while Asia-Pacific and North America accounted for 17% and 25%, respectively. 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Global stocks

Increased focus from management on digitalization as Beiersdorf lags its peers in terms of its share of digital sales

Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

Business Strategy and Outlook

Beiersdorf’s strategy, C.A.R.E.+, focuses on three key growth drivers: skincare prioritization, white-space penetration, and an acceleration of digital transformation. Vincent Warnery, the new CEO appointed in May 2021, has emphasized his continued support for the strategy, having been part of Beiersdorf’s executive board at the time it was introduced in 2019. In the past few years, Beiersdorf has put the strategy into action by focusing its innovation program on the skincare category, with an emphasis on facial care, as the fastest-growing subcategory. It is anticipated for this strategy to be wise, given that the facial care segment features both faster growth and higher margins than the body care segment, in which Beiersdorf, and its flagship brand Nivea, have been historically over-indexed. 

Nivea is a EUR 4 billion brand and accounts for about two thirds of the sales in the consumer segment and over half of the group sales. The brand has a long history in Europe and is the largest brand in skincare globally, albeit in a highly fragmented market. Under Warnery, the business is moving toward a more centrally driven model, with a newly appointed global head of Nivea being responsible for all the branding decisions, allowing markets to focus on execution rather than adaptation of communication or brand strategy. However, it is alleged cohesiveness in marketing, repositioning to faster growing segments, and investments in digital are still needed to bring back some of the brand’s lost lustre. 

White-space penetration is another area emphasized by management as the business looks to decrease its reliance on Europe, and looks to expand its business, primarily in the U.S. and China. There is also increased focus from management on digitalization as Beiersdorf lags its peers in terms of its share of digital sales. Given all these initiatives, it is likely for the mix to be the largest contributor to margin expansion over the medium term, while marketing and sales investment will likely remain elevated to enable the implementation of the strategy

Financial Strength

Beiersdorf has one of the strongest balance sheets among consumer staples coverage. The company held EUR 1 billion of cash as well as EUR 4.5 billion in current and non-current securities on its balance sheet at the end of 2021, while debt only amounted to EUR 0.6 billion. This translates into a net debt to EBITDA of negative 4 times, using both cash and securities. The company argues that this conservative financial policy enables management to successfully navigate periods of crisis such as those experienced during the Covid-19 pandemic. However, it is held, this level of cash may be excessive, especially since shareholder distributions have been meagre, with dividends kept flat at EUR 0.70 for over a decade and a lack of share buy-back initiatives. Holding the dividend constant, it is projected the payout ratio (using net income) will decrease from 25% in 2021 to just 14% in five years. Leveraging up to 2 times debt/EBITDA, including cash and securities and the more than 2 EUR billion that Beiersdorf holds in treasury stock, could finance a transformative deal through cash of up to EUR 8 billion. However, given the company’s clear preference for conservative balance sheet management, it is not probable that there will be a significant appetite for a large deal, with management continuing to pursue bolt-on acquisitions and small deals in areas that complement the strategy of expanding their presence in skincare, such as the recent Chantecaille acquisition.

Bulls Say’s

  • Beiersdorf’s clear focus on skincare and the efforts to reposition Nivea into facial care has the potential to pay out in both superior growth and improved margin over the midterm. 
  • The move toward a centrally managed model should benefit the business, with more cohesive marketing and increased digital investment helping to rejuvenate Nivea. 
  • With its low cost of financing, cash and securities of EUR 5.5 billion, slowing global organic growth, and highly fragmented categories, it is likely, Beiersdorf will eventually be involved in industry consolidation.

Company Profile 

Beiersdorf is a Germany-based company engaged in producing personal-care products, with a focus on manufacturing cosmetic products. The company operates through two business segments. Consumer provides skincare and beauty care products and operates portfolio brands such as Nivea, Eucerin, La Prairie, Labello, Hansaplast, Elastoplast, and Florena. The other business segment markets self-adhesive system and product solutions, primarily for industrial customers, under the Tesa brand. Beiersdorf is majority-owned by Maxingvest. 

(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
ETFs ETFs

BlackRock iShares Enhanced Cash ETF: A diversified Portfolio of higher-yielding high Quality Short-term Money Market Instrument.

Investment Objective

The Fund seeks, by employing a passive investment strategy, to outperform the S&P/ASX Bank Bill Index (before fees and expenses). It offers the ability to achieve potentially enhanced regular income with a diversified portfolio of higher-yielding high quality short-term money market instruments, including floating rate notes. It is truly liquid and only holds instruments that can be easily sold to meet investor requirements.

Investment Strategy

The Fund seeks to achieve its objective by employing a passive investment strategy that aims to outperform the performance of the S&P/ASX Bank Bill Index (referred to in this section 6 of the PDS as the Index).   Given the synthetic nature of Index constituents (refer to section 6.4 of this PDS, titled “About the Index” for further information) it is not possible to implement an investment strategy that looks to construct a portfolio of Index constituents. Instead, the Fund’s conservatively managed passive investment strategy will construct a portfolio of money market and fixed income securities that typically provide higher yield without significant increase in default and interest rate risk. Securities will be selected with consideration to the security’s rating, sector, maturity, liquidity, and underlying credit fundamentals. 

The Fund will be managed using a buy and hold investment philosophy, similar to other passive investment strategies, with full daily portfolio transparency. A sampling methodology has been selected as the most appropriate investment technique, as it keeps trading costs to a minimum and provides the necessary flexibility to deliver investment returns that either meet or at times may exceed Index returns. Any outperformance of the Index will not be a result of active trading nor the investment expertise of the individual fund manager(s) in selecting particular investment securities that it considers will perform better relative to other securities. Rather, returns above the Index would typically result from prudent risk mitigation and diversification measures, including: 

► issuer diversification, for example, rather than having issuer concentration to the four major Australian banks, diversification can be achieved by investing in similarly rated authorised deposit taking institutions (ADIs) who issue securities at a margin above the benchmark BBSW rates (the rates provided by the major Australian banks) ‐ the overarching investment consideration is prudent risk management and credit risk mitigation and not active security selection by the individual fund manager(s) based on perceived credit quality, as the credit quality is the same; and 
► investment of up to 20% in Floating Rate Notes (FRNs) which earn a higher yield relative to very short‐term “cash‐like” securities ‐ these investments will be “buy and hold” and not actively traded, the overarching investment rationale for holding these securities is to further diversify credit risk in the portfolio. The Fund is also expected to attract additional returns from attractive interest rates on Australian dollar cash deposits. The interest rate on cash deposits will most likely exceed the 24-hour Cash Rate that is used as a price input into the Index return calculation, as BlackRock has long

established commercial relationships with several Australian ADIs, which allows cash to be placed on deposit at commercial rates. 

Cash deposits are not actively traded; rather allocations will be based on issuer concentration limits, therefore further diversifying the portfolio.   

Trading within the Fund is only expected to meet client flows or the reinvestment of maturating securities and not as a result of active security selection. The credit quality, liquidity risk and maturity profile of the Fund will be continuously monitored and adjusted with reference to the Index. Additionally, investments of the Fund are required to have a long‐term credit rating of BBB or higher or a short‐term credit rating of A2 or higher by S&P Ratings or an equivalent rating from Moody’s. Further details of the Fund’s investment strategy, including investment parameters, is set out in the Fund’s Investment Guidelines, which is available upon request. Given the Fund is unable to implement a traditional full replication or optimisation passive investment strategy, the Fund may at times incur greater tracking error than other ETFs (refer to the section of this PDS titled “Fund risks” for further information on the risks associated with investing in the Fund).

Performance: 

Asset Allocation:

People:

About the Index:

The Index offers short‐term exposure to Australian dollar‐ denominated bank bills with maturity profiles of up to 91 days.   Unlike traditional equity and fixed income indexes, the constituents of which are shares and bonds respectively, the Index consists of synthetic “securities” that cannot be purchased and sold. The constituents of the Index are a series of 13 hypothetical weekly bills, ranging from one‐week to 91 days in maturity that are interpolated using the 24-Hour Cash Rate and the 30‐Day, 60‐Day and 90‐Day Bank Bill Swap rates (BBSW). The credit worthiness of the bills included in the Index is deemed that of prime banks, i.e., the major four Australian banks. The 13 rates are derived from the four rate types described above and applied to each of the 13 hypothetical bills. As the Index progresses to the next weekly rebalancing date the term to maturity of each bill, and the Index as a whole, reduces daily until the shortest bill matures. The face value of this bill is then reinvested in a new bill with a term to maturity of 13 weeks and the term to maturity of the Index increases by approximately seven days. The total amount received on maturity, that is the face value, is reinvested in the discounted value of a new 91‐day bill. The Index is maintained so that maturing bills are reinvested in the discounted value of a new 91‐day bill on the day the cash is received (each Tuesday).

About the Fund:

Ishares Enhanced Cash ETF (ISEC) offers the ability to achieve capital preservation and potentially enhanced regular income with a diversified portfolio of higher-yielding high quality short-term money market instruments, including floating rate notes. The fund Achieve capital preservation and maximise regular current income with a diversified portfolio of higher-yielding high quality short-term money market instruments, including floating rate notes.

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