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Technology Stocks

LNK results reflects Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA

20025825 - closeup image of businessman drawing 3d graphics

Investment Thesis:

  • LNK is currently under a takeover offer by D&D, which the LNK Board has unanimously recommended. 
  • Leveraged to ongoing outsourcing of administration by retail super funds.
  • LNK still has exposure to any further upside in PEXA’s valuation. 
  • New contract wins in Fund Administration and increased market activity.
  • Successfully delivering on its offshore expansion story. 
  • Efficiency benefits from the cost out program. 
  • Clarity around Brexit will remove uncertainty / potential discount assumed in current valuation / share price.  
  • Value accretive bolt-on acquisitions. 
  • Favourable currency movements. 

Key Risks:

  • LNK does not receive all the regulatory approvals for the current takeover offer from D&D. 
  • Lower market activity and business / investor confidence. 
  • Loss of major client contract(s) in Fund Administration.
  • Adverse changes in super regulatory environment – e.g. super account consolidation.
  • Lack of product development.
  • Adverse currency movements.

Key Highlights:

  • Link Administration Holdings Ltd (LNK) reported strong 1H22 results ahead of expectations, with the Company upgrading its FY22 guidance.
  • LNK’s results reflect – Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA.
  • Statutory Loss of $81.7m was due to a non-cash impairment charge of $81.6m related to the BCM business and rationalisation of LNK’s premises footprint.
  • According to management, the GTP remains on track to deliver the committed gross annualised savings of $75m by the end of FY22.
  • For 1H22, the GTP delivered gross savings of $14.9m (including D&A).
  • D&D takeover offer unanimously recommended by LNK Board – total consideration of $5.68 per share.
  • As per LNK’s announcement on 22 December 2021, the Company has entered a scheme of implementation deed with Dye & Durham (D&D) to have 100% of its shares acquired at $5.50 per share plus a fully franked 3cps interim dividend (which declared at the 1H22 results)
  • Investors may also receive a further 15cps if LNK reaches an agreement to sell its Banking and Credit management (BCM) business prior to or up to 12 months after the implementation of the scheme. LNK shareholders are expected to vote on the scheme in May 2022.
  • BCM sales does not proceed and investors miss out on the additional 15cps value.
  • There are contingencies in the offer, which also relates to the Woodford Matters (if there are fines before the completion of the scheme this may delay or put the takeover into jeopardy).

Company Description:

Link Administration Holding Ltd (LNK) is the largest provider of superannuation fund administration services to super fund in Australia. Further, the Company is also a leading provider of shareholder management and analytics, share registry and other services to corporates in Australia and globally. The Company has 5 main divisions: (1) Retirement & Super Solutions (RSS), (2) Corporate Markets (CM), (3) Technology & Operations (T&O), (4) Fund Solutions (FS) and (5) Banking & Credit Management (BCM). LNK was listed on the ASX in October 2015. 

(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

Jack Henry Remains Committed to the Idea That Slow and Steady Wins the Race

price of btc is going to breakout

Business Strategy and Outlook

 Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers.

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is to be believed was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur

 Jack Henry has generally outperformed its larger peers in terms of growth, and expect this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  •  The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions.

(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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Global stocks

J.B. Hunt’s Intermodal Rate Backdrop Holding Strong, 2022 Freight Outlook Favorable

Business Strategy and Outlook

 At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it struck an agreement with Norfolk Southern in the East. Hunt has established a clear leadership position in intermodal shipping, with a 20%-plus share of a $22 billion-plus industry. The next-largest competitor is Hub Group, followed by Schneider National’s intermodal division and XPO Logistics’ intermodal unit. Intermodal made up slightly less than half of Hunt’s total revenue in 2021.

Hunt isn’t immune to downturns, but over the past decade-plus it’s reduced its exposure to the more capital-intensive truckload-shipping sector, which represents about 28% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt is also shifting its for-hire truckload division to more of an asset-light model via its drop-trailer offering while investing meaningfully in asset-light truck brokerage and final-mile delivery.

 Rates in the competing truckload market corrected in 2019, driving down intermodal’s value proposition relative to trucking. Thus, 2019 was a hangover year and fallout from pandemic lockdowns pressured container volume into early 2020. However, truckload capacity has since tightened drastically, contract pricing is rising nicely across all modes, and underlying intermodal demand has rebounded sharply on the spike in retail goods consumption (intermodal cargo is mostly consumer goods) and heavy retailer restocking. Hunt is grappling with near-term rail network congestion that’s constraining volume growth, but the firm is working diligently with the rails and customers to minimize the issue. The expectation is that  2.5%-3.0% U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer term, with 2.0%-2.5% pricing gains on average, though Hunt’s intermodal unit should modestly outperform those trends given its favorable competitive positioning.

Financial Strength

J.B. Hunt enjoys a strong balance sheet and is not highly leveraged. It had total debt near $1.3 billion and debt/EBITDA of about 1 time at the end of 2021, roughly in line with the five-year average. EBITDA covered interest expense by a very comfortable 35 times in 2021, and expect Hunt will have no problems making interest or principal payments during our forecast period. Hunt posted more than $350 million in cash at the end of 2021, up from $313 million at the end of 2020. Historically, Hunt has held modest levels of cash, in part because of share-repurchase activity and its preference for organic growth (including investment in new containers and chassis, for example) over acquisitions. For reference, it posted $7.6 million in cash and equivalents at the end of 2018 and $14.5 million in 2017. The company generates consistent cash flow, which has historically been more than sufficient to fund capital expenditures for equipment and dividends, as well as a portion of share-repurchase activity. It is expected that trend to persist. Net capital expenditures will jump to $1.5 billion in 2022 as the firm completes its intermodal container expansion efforts, but after that it should also have ample room for debt reduction in the years ahead, depending on its preference for share buybacks. Overall, Hunt will mostly deploy cash to grow organically, while taking advantage of opportunistic tuck-in acquisitions (a deal in dedicated or truck brokerage isn’t out of the question, but and suspect the final mile delivery niche is most likely near term).

Bulls Say’s

  •  Intermodal shipping enjoys favorable long-term trends, including secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail). 
  • It is believed that the intermodal market share in the Eastern U. S. still has room for expansion, suggesting growth potential via share gains from shorter-haul trucking. 
  • J.B. Hunt’s asset-light truck brokerage unit is benefiting from strong execution, deep capacity access, and tight market capacity. It’s also moved quickly in terms of boosting back-office and carrier sourcing automation.

Company Profile 

J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).

(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

Jack Henry & Associates: margins under pressure as company developed and migrated clients to a new card processing platform

Business Strategy and Outlook

Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, it is seen this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers. 

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is likely was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur. 

Jack Henry has generally outperformed its larger peers in terms of growth, and is believed for this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. It is held Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions. 

(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
Global stocks Shares

Mondelez’s management refraining from quantifying its cost-saving aims

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Business Strategy and Outlook

Since taking the helm at Mondelez four years ago, CEO Dirk Van de Put has orchestrated a plan to drive balanced sales and profit growth by empowering local leaders, extending the distribution of its fare, and facilitating more agility as it relates to product innovation (aims that are hitting the mark). It wasn’t surprising reigniting the top line was at the forefront of its strategic direction. More specifically, Mondelez targets 3%-plus sales growth long term as it works to sell its wares in more channels and reinvests in new products aligned with consumer trends at home and abroad. Further, it has looked to acquire niche brands to build out its category and geographic exposure, which is seen to be prudent. 

But despite opportunities to bolster sales, it weren’t anticipated the pendulum to shift entirely to top-line gains under Van de Put’s watch; rather, based on his tenure at privately held McCain Foods and past rhetoric, it is alleged driving consistently profitable growth would be the priority. As such, the suggestion showcase that Mondelez is poised to realize additional efficiency gains through fiscal 2022 favorably. While management has refrained from quantifying its cost-saving aims, it is seen an additional $750 million in costs (a low- to mid-single-digit percentage of cost of goods sold and operating expenses, excluding depreciation and amortization) it could remove (on top of the $1.5 billion realized before the pandemic). It is foreseen this can be achieved by extracting further complexity from its operations, including rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities. 

It isn’t likely that, these savings to merely boost profits, though. In this vein, management has stressed a portion of any savings realized would fuel added spending behind its brands in the form of research, development, and marketing, supporting the brand intangible asset underpinning Mondelez’s wide moat. This aligns with analysts forecast for research, development, and marketing to edge up to nearly 7% of sales on average over the next 10 years (or about $2.4 billion annually), above historical levels of 6% ($1.7 billion).

Financial Strength

In assessing Mondelez’s balance sheet strength, it isn’t foreseen any material impediments to its financial flexibility. In this vein, Mondelez maintained $3.5 billion of cash on its balance sheet against $19.5 billion of total debt as of the end of fiscal 2021. Experts forecast free cash flow will average around 15% of sales annually over Experts 10-year explicit forecast (about $5.2 billion on average each year). And it is in view that returning excess cash to shareholders will remain a priority. Analysts forecast Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2031 (implying a payout ratio between just north of 40%), while also repurchasing around 2%-3% of shares outstanding annually. It is held Mondelez has proven itself a prudent capital allocator and could also opt to add on brands and businesses that extend its reach in untapped categories and/or geographies from time to time–although it is unlikely believe it has much of an appetite for a transformational deal. It is alleged the opportunity to expand its footprint into untapped markets–such as Indonesia and Germany–or into other adjacent snacking categories (like health and wellness) could be in the cards. Recent deals have included adding Tate’s Bake Shop for $500 million in 2018, Perfect Snacks (in 2019, refrigerated snack bars), Give & Go (2020, an in-store bakery operator),and Chipita (2021, Central and Eastern European croissants and baked goods) to its fold. But at just a low-single-digit percentage of sales, none of these deals are material enough to move the needle on its overall results.

Bulls Say’s

  • Mondelez’s decision to empower in-market leaders and fuel investments behind its local jewels (which historically had been starved in favor of its global brands) stands to incite growth in emerging markets for some time. 
  • Experts suggest the firm is committed to maintaining a stringent focus on extracting inefficiencies from its business, including the target to shed more than 25% of its noncore stock-keeping units to reduce complexity. 
  • Management has suggested it won’t sacrifice profit improvement merely to inflate its near-term sales profile, which is foreseen as a plus.

Company Profile 

Mondelez has operated as an independent organization since its split from the former Kraft Foods North American grocery business in October 2012. The firm is a leading player in the global snack arena with a presence in the biscuit (47% of sales), chocolate (32%), gum/candy (10%), beverage (4%), and cheese and grocery (7%) aisles. Mondelez’s portfolio includes well-known brands like Oreo, Chips Ahoy, Halls, Trident, and Cadbury, among others. The firm derives around one third of revenue from developing markets, nearly 40% from Europe, and the remainder from North America. 

(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
Shares Small Cap

COE’s results with production of 1.57 MMboe, up +31%; sales volumes of 2.02 MMboe, up +67%, and sales revenue of $95.4m, up +96%.

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Investment Thesis:

  • Strong FY22 guidance provided by management. 
  • Sole will provide significant uplift in production and free cash flow. 
  • Sole’s volumes are mostly contracted out, which provides greater certainty at reduced exposure to price movements. 61% of COE’s 2P reserves (Proved and probable reserves) are under take-or-pay contracts, with uncontracted gas predominantly from 2024 onwards. 
  • Upside from COE’s exploration activity around Gippsland and Otway Basin. 
  • Strong management team led by CEO/MD David Maxwell, who has over 25 years industry / developing LNG projects with companies such as BG Group, Woodside Petroleum and Santos Ltd. 
  • Favorable industry conditions on the east coast gas market – with tight supply could lead to higher gas prices. 
  • Potential M&A activity – especially considering recent de-rating.

Key Risks:

  • Execution risk – Drilling and exploration risk.
  • Commodity price risk – movement in oil & gas price will impact uncontracted volumes. 
  • Regulatory risk – such as changes in tax regimes which adversely impact profitability. 
  • M&A risk – value destructive acquisition in order to add growth assets.
  • Financial risk – potentially deeply discounted equity raising to fund operating & exploration activities should debt markets tighten up due external macro factors.

Key Highlights:

  • COE’s management announced strong guidance relative to FY21: FY22 production guidance 3.0 – 3.4 MMboe (FY21: 2.63 MMboe); sales volume 3.7 – 4.0 MMboe (FY21: 3.01 MMboe); underlying EBITDAX $53 – $63m (FY21: $30m); capex of $24 – 28m (FY21: $32.3m).
  • COE achieved record results with production of 1.57 MMboe, up +31%; sales volumes of 2.02 MMboe, up +67%, and sales revenue of $95.4m, up +96%.
  • The +31% increase in total production to 1.57 MMboe, was driven by higher production from the Sole field and higher sales volumes contributed to a +163% increase in underlying EBITDAX to $25.5m.
  • COE was able to improve performance at Orbost Gas Processing Plant to drive earnings: Underlying EBITDAX up +163% to $25.5m; underlying net loss after tax of $6.0m (H1 FY21: $17.4m loss).
  • Step-change in total company gas production: H1 FY22 average daily rate of 50TJ/day, up +39% relative to 1H21 average daily rate of 36 TJ/day.
  • Athena Gas Plant sales began after successful commissioning.
  • COE retained a solid balance sheet with $92.2m in cash reserves at 31 December 2021.

Company Description:

Cooper Energy Ltd (COE) is an oil & gas exploration company focusing on its activities in the Cooper Basin of South Australia. The Company’s exploration portfolio includes six tenements located throughout the Basin. Gas accounts for the major share of the Company’s sales revenue, production and reserves. COE’s portfolio includes: (1) gas production of approximately 7PJ p.a. from the Otway Basin, most of which comes from the Casino Henry gas project which it operates. (2) COE is developing the Sole gas field to supply 24 PJ of gas p.a. from 2019. (3) Oil production of approximately 0.3 million barrels p.a. from low-cost operations in the Cooper Basin.   

(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

Strong 2022 Outlook Motivates Us to Lift Eaton’s Fair Value Estimate

Business Strategy and Outlook

 Eaton is a specialized producer of highly engineered products and services. These offerings are designed to solve customer pain points in vital portions of the world’s infrastructure. We believe Eaton has mostly positioned its portfolio in profitable niches that should benefit from secular trends like energy transition and electrification, to propel long-term growth. Eaton’s portfolio can be divided into two portions: it’s more legacy industrial sector and its electrical sector. 

Industrial serves a variety of end markets and houses the aerospace and vehicle segments, while electrical consists of the Americas and global segments. Eaton’s products mostly compete in differentiated niches of its end markets, which we think reduces the risk of commoditization. Moreover, many of its end-market solutions are mission-critical, like fuel pumps in aerospace applications or uninterruptible power supply in hospitals. Others lower customers’ total cost of ownership or compete in industries with a high cost of failure.

 In 2018, the company created a new segment, eMobility, which aims to take advantage of the secular trend toward electric vehicles. It is believed that the company can leverage its technology core competency from its electrical sector while taking advantage of its OEM relationships in its vehicle segment. Of all of Eaton’s businesses, the most bullish trend is in its electrical sector and its aerospace business, given data center growth, necessary upgrades to aging infrastructure, and the eventual commercial aerospace recovery.

After revisiting the Eaton thesis and came away far more bullish on the company after management made two prudent capital allocation decisions to sell the commoditized and secularly challenged businesses in lighting and hydraulics. The recent bolt-ons, particularly Tripp Lite, given growth potential in the data center market are particularly liked. It is now believed that Eaton will likely hit all its upward revised targets by 2025, save for its eMobility margin aspirations, given continued investment needs there. Nonetheless, the market is too generous in its assessment of Eaton based on fundamental, intrinsic valuation.

Financial Strength

Eaton is on a decent financial footing. Eaton’s credit rating had steadily improved under Craig Arnold’s stewardship to single A, but the firm is slightly more leveraged now from a net debt/EBITDA standpoint at 2.4 times as a result of the coronavirus pandemic. Nonetheless, it is not a concern as these results are in line with peers, and expect this ratio will come down to under 2 times by 2023 as the firm’s growth returns. It is estimated that 25% of cash on the balance sheet is needed to support Eaton’s global operations, though it is also noted that Eaton is a very strong generator of free cash flow. Further, the firm’s interest coverage ratio (EBIT/interest) is nearly 14 times, which when considered is a strong indicator that the company can safely meet its obligations. Given acquisitions announced at the end of 2020, Eaton will be out of the merger and acquisition market in 2021, given its dividend and share repurchase commitment, but consider the company financially healthy enough to pursue acquisitions once more in 2022 if it should prefer this route over repurchases. At year-end 2020, the company’s pension and other postretirement liabilities’ shortfall totalled just over $1.6 billion, which detracts about $4 from our fair value estimate. Nonetheless, this effect may be overstated in a rising interest-rate environment.

Bulls Say’s

  •  Eaton’s portfolio moves will create lots of value for shareholders and transform Eaton from a 10% ROIC generator to one in the mid-teens. 
  • Investors should welcome many of the secular trends Eaton is positioned to capture, including energy transition, digitization, and electrification as well as the commercial aerospace recovery. 
  • The market could rerate Eaton with an even higher multiple if Congress passes an infrastructure bill. 

Company Profile 

Eaton is a diversified power management company operating for over 100 years. The company operates through various segments, including electrical products, electrical systems and services, aerospace, vehicle, and most recently eMobility. Eaton’s portfolio can broadly be divided into two halves. One part of its portfolio is housed under its industrial sector umbrella, which serves a large variety of end markets like commercial vehicles, general aviation, and trucks. The other portion is Eaton’s electrical sector portfolio, which serves data centers, utilities, and the residential end market, among others. While the company receives favorable tax treatment as a domiciliary of Ireland, most of its operations take place in the U.S.

(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 Expert Insights

Star Entertainment Group reflects gross revenue declined -22% to $580m, EBITDA declined -87% to $29m and NPAT loss of $74m

Investment Thesis:

  • Additional cost measures announced to support earnings.
  • Monopolies in the casino industry in SGR’s operating geographies and is one of the market leaders in other games such as slots.
  • Economic moat in the nightlife landscape in Sydney given regulatory environment (such as lock-out laws).
  • Diversified business base across different types of entertainment, hotels, retail stores and food & beverage establishments.
  • Strong tourism growth once borders reopen is expected to a tailwind for SGR.
  • Lower AUD could improve international spending in domestic markets.
  • Domestic table games segment remains strong.

Key Risks:

  • Weakening VIP segment, potentially making Sydney less viable.
  • Further deterioration of consumer spending and household discretionary income 
  • Regulatory risks e.g. repeal of lockout laws could increase competition in the nightlife landscape in Sydney.
  • Establishment of new Crown casino in Sydney will increase competition (especially amongst VIP customers) and could potentially dismantle SGR’s monopoly in Sydney.
  • Win-rate risk (if the casinos have a much lower win-rate than the mathematical expected value).
  • Potential scandals.

Key Highlights:

  • On a normalised basis, gross revenue declined -22% to $580m, EBITDA declined -87% to $29m and NPAT was a loss of $74m, impacted by Covid-19 related property shutdowns, operating restrictions, and border closures. Statutory EBITDA of $31m (pre significant items) was down -87% and statutory net loss was $74m (post significant items) vs profit of $49.7m in pcp.
  • Operating expenses increased +23.6% to $401m, reflecting Covid-19 related inefficiencies and investment in staff to position the properties for re-opening.
  • Net debt increased by +4% over 2H21 to $1.2bn with net leverage increasing to 5.2x, impacted by property shutdowns. However, SGR received full waiver of debt covenants for the December 2021 testing date and an amendment of the covenant ratios for the June 2022 testing date.
  • SGR has liquidity of $520m in cash and undrawn facilities.
  • Asset sale continued (to release capital from non-core or low-yielding assets), with SGR selling VIP jet for ~$40m, entering into agreement for the sale of an interest in the Treasury Brisbane assets for $248m (ex GST) and continuing work on the potential sale and leaseback (or similar transaction) of a minority holding in The Star Sydney property. 
  • Operating cashflow declined -96% to $11m with cash collection down -90% to 45%.
  • Capex of $125-150m (FY23 guidance is ~$175m).
  • D&A expense of ~$205m.
  • Net funding costs of $50-55m.
  • JV equity contributions of ~$35m, primarily relating to Gold Coast Tower 2.
  • Cost pressures to continue in 2H22 driven by wages, insurance, energy, Covid-19 related challenges and further investment in headcount in regulatory and compliance functions.
  • Trading Update – in the period from 1 January 2022 to 13 February 2022, total revenue was up +7% YoY with Sydney revenue up +20% (gaming revenue up +17% and non-gaming revenue up +46%) and Queensland revenue is down -6% (gaming revenue down -12% and non- gaming revenue up +32%) with Omicron impact peaking in mid-January and progressively easing. 

Company Description:

The Star Entertainment Group Limited, an integrated resort company, provides gaming, entertainment, and hospitality services in Australia. The Company operates through three segments: Sydney, Gold Coast, and Brisbane. It owns and operates The Star Sydney casino, which includes hotels, apartment complex, restaurants, and bars; The Star Gold Coast casino, which consists of hotels, theatre, restaurants, and bars; and Treasury casino in Brisbane that comprises hotel, restaurants, and bars. The company also manages the Gold Coast Convention and Exhibition Centre. The company was formerly known as Echo Entertainment Group Limited and changed its name to The Star Entertainment Group Limited in November 2015.

(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

Tassal Group Board declared an interim dividend of 8cps, up +14.3%, in line with a target pay-out ratio of at least 50% of Operating NPAT.

Investment Thesis:

  • Number one player in the domestic market (approximately 50% market share), with only one major competitor (Huon Aquaculture Group). This could see rational pricing behavior, which should be positive for both companies. 
  • High barriers to entry (assets, desired temperatures and regulatory licences are difficult to obtain).
  • Initiatives like selective breeding programs and investments in infrastructure appear to be paying dividends, with more recent generations of TGR’s salmon showing more robust growth than their predecessors. 
  • Given the complex nature of salmon farming, TGR is unlikely to have its dominant position as an Australian leading salmon farmer seriously threatened in the foreseeable future.
  • Addition of prawns into TGR’s product portfolio brings diversification benefits to the Company’s risk profile.
  • Growth in prawns represents material upside for group earnings.

Key Risks:

  • Impact on production due to adverse weather conditions and diseases. 
  • The De Costi subsidiary presents an opportunity for diversification; however, execution and competitive risks remain. 
  • Potential review of chemical colouring in salmon may lead to further negative publicity and undermine demand for salmon. 
  • Cost pressures or cost blowout could deteriorate margins significantly given the large cost base relative to earnings (EBITDA).
  • Irrational competitive behaviour (domestic and international markets).
  • Negative media reports on the sustainability of the Tasmanian salmon industry.
  • Regulatory risks regarding Federal, State and Local laws and regulations regarding the leases, licenses, permits and quotas which may affect TGR’s operations.

Key Highlights:

  • TGR’s operating EBITDA was up +14.1% to $89.5m, driven by strong revenue growth of +43.3% to $419.1m, but partially offset by lower EBITDA $/kg due to Grocery tenders in late FY21 and a material increase in supply chain costs.
  • Operating cashflow of $86.99m, was up 110.2% and more aligned with operating EBITDA.
  • Revenue of $419.14m, up +43.3%.
  • Operating cash flow of $86.99m, up +110.2%
  • Underlying EBIT of $50.01m, up +6.9%.
  • Underlying NPAT of $31.18m, up +10.3%.
  • The Board declared an interim dividend of 8cps, up +14.3%, in line with a target payout ratio of at least 50% of Operating NPAT.
  • Leverage (Bank debt / Operating EBITDA) reduced from 2.55x to 2.37x as cash was used to lower debt and growth in EBITDA (in line with operating cashflow). Debt service cover was stable at 2.80. Gearing (Net debt/ Equity) reduced to 38.0% from 39.7%.
  • TGR retained prudent credit metrics with significant headroom to banking covenants.
  • TGR has substantial headroom available in debt facilities with $160.1m in undrawn debt facilities and cash of $43.1m. 
  • Capex fell to $46.0m (versus 1H21: $67.7m) as TGR’s major investment program rolled off.

Company Description:

Tassal Group (TGR) is Australia’s largest vertically integrated seafood/aquaculture company. Based in Tasmania, TGR is engaged in hatching, farming, processing, sale and marketing of Atlantic salmon and ocean trout. Tassal is also undergoing investments to enter the prawn’s market. The company’s products are distributed in Australia, Japan and other international markets. 

(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

Carsales.com Ltd (CAR) reported strong 1H22 results & Balance sheet position; Declared fully franked dividend of 25.5cps

Investment Thesis

  • Leading market position in online car classifieds. 
  • Overseas expansion provides new growth opportunities from the challenging core Australian market. 
  • Heavily reliant on two growth stories (South Korea and Brazil).
  • Diversified geographic coverage.
  • Bolt-on acquisitions provide opportunities to supplement organic growth.
  • The Company can sustain high single-digit and low double-digit revenue growth. 
  • CAR’s move into adjacent products and industries. 
  • Increasing pricing in South Korea to boost margins.
  • Looking to take more of the car buying experience online with dealers (i.e. increasing its total addressable market). 

Key Risk

  • Rich and demanding valuation.
  • Competitive pressures, that is car dealer driven substitute platform or the No. 2 & 3 player gain ground on CAR.
  • Motor vehicle sales remain subdued.  
  • Value destructive acquisition / execution risk with international strategy.
  • Not immune from broader downturn in economy (consumer likely to delay a significant purchase in time of uncertainty). 

1H22 Results Highlights. Relative to the pcp: 

  • Look-through revenue of $282m, up +30% and Look-through EBITDA was up +15% to $149m, driven by strong domestic results in the Private and Media segments, growth in Encar in South Korea and good cost discipline. 
  • Adjusted NPAT of $89m up 20% and adjusted EPS of 31.4c. 
  • CAR reported strong cash flow with Reported EBITDA to operating cash flow conversion of 100%. The Board declared a fully franked interim dividend of 25.5cps, consistent with longstanding dividend payout policy of 80%.

Company Profile

Carsales.com Ltd (CAR), founded in 1997, operates the largest online automotive, motorcycle and marine classifieds business in Australia. Carsales is regarded as one of Australia’s original disruptors and has expanded to include a large number of market-leading brands. The Company employs over 800 and develops world leading technology and advertising solutions in Melbourne. CAR has also expanded to numerous global markets, such as South Korea, Brazil, and other countries in Latin America.

  • 1H22 Results Highlights. 

 (Source: Banyantree)

  •                    Given the

shareCompany Profi                             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.