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Global stocks Shares

AIG Targeting for an underlying combined ratio below 90% by the end of 2022

Business Strategy and Outlook

The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, had noncore businesses it needed to shed, and had material issues in its core operations that it needed to fix. It is encouraging, however, by the recent progress in terms of improving underwriting margins, and the plan to take out $1 billion in costs by 2022 would be another material step. In 2020, the impact of the coronavirus has obscured the company’s progress, but it is held results over the past year have been encouraging. COVID-19 losses to date have been very manageable. As a percentage of capital, losses have stayed well within the range of historical events that the industry has successfully absorbed in the past. 

The longer-term picture looks relatively bright. The pricing environment has not been particularly favorable in recent years. However, in 2019, pricing momentum picked up in primary lines, and this positive trend only accelerated in 2020. More recently, pricing has started to plateau, but the industry has enjoyed the highest pricing increases it has seen since 2003. While higher pricing is necessary to some extent to offset lower interest rates and a rise in social inflation, pricing increases appear to be more than offsetting these factors. As a result, commercial P&C insurers are experiencing a positive trend in underlying underwriting profitability, and potential for a truly hard pricing market can be seen, similar to the period that followed 9/11. 

It is seen AIG has made material progress in improving its under/over the past couple of years, and has set a target for an underlying combined ratio below 90% by the end of 2022. Assuming an average level of catastrophe losses, it is likely this is a level that would allow P&C operations to achieve an acceptable level of return, and a harder pricing market may make hitting this target easier.

Financial Strength

It is alleged AIG’s balance sheet is sound, although the company is arguably in a somewhat weaker position than peers until it can improve profitability. Equity/assets was 13% at the end of 2021. This level is lower than P&C peers but reasonable if AIG’s life insurance operations, which operate with higher balance sheet leverage, are considered. During 2014, the company reduced its debt load by about $10 billion and eliminated much of its high-coupon debt, which improved its financial flexibility. Barring any unforeseen events, it is anticipated the company has room to continue to return capital to shareholders, and management had been returning a lot of capital to shareholders, in part through divestitures and some restructuring, although in recent years management has curtailed buybacks as AIG pivoted toward growth and acquisitions have become part of the strategic plan

Bulls Say’s

  • The aftermath of AIG’s issues during the financial crisis occupied much of management’s attention for quite some time. With these issues resolved, management can focus on the company’s operations, and there could be ample scope for improvement. 
  • AIG has demonstrated progress in improving underwriting margins in its P&C business. 
  • The current focus on risk-adjusted returns sets a proper course for the company, and just increasing profitability to the level of its peers would represent a material improvement.

Company Profile 

American International Group is one of the largest insurance and financial services firms in the world and has a global footprint. It operates through a wide range of subsidiaries that provide property, casualty, and life insurance. Its revenue is split roughly evenly between commercial and consumer lines. 

(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

Airbnb Limiting Pebblebrook To Push Its Rates

Business Strategy and Outlook

Pebblebrook Hotel Trust is the largest U.S. lodging REIT focused on owning independent and boutique hotels. After Pebblebrook merged with LaSalle Hotel Properties in December 2018, the company owns 53 upper-upscale hotels, with more than 13,000 rooms located in urban, gateway markets. Pebblebrook’s combined portfolio has a higher revenue per available room price point and EBITDA margin than its hotel REIT peers. 

The recent merger with LaSalle provides Pebblebrook some new avenues to create value for shareholders. The company doubled in size while taking on only a portion of the general and administrative costs, making the combined company more efficient. Pebblebrook’s CEO, Jon Bortz, previously ran LaSalle and acquired many of the hotels in that portfolio. His knowledge of those hotels combined with management’s demonstrated ability to maximize margins should allow him to implement cost-saving initiatives that drive up margins. Additionally, management has begun an extensive renovation program across both the LaSalle portfolio and the legacy portfolio that will drive EBITDA gains over time. 

In the short term, the coronavirus outbreak significantly affected the operating results for Pebblebrook’s hotels, with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations allowed leisure travel to quickly return, driving high growth in 2021. It is held the company should continue to see strong growth in 2022 and beyond as business and group travel eventually returns to 2019 levels by 2024 in analysts base-case scenario. However, there are several factors that will remain headwinds for hotels over the long term. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing hotels from pushing rate increases even though it is nearing full occupancy on many nights. Finally, while the shadow supply created by Airbnb doesn’t directly compete most nights, it does limit Pebblebrook’s ability to push rates on nights when it would have typically generated its highest profits.

Financial Strength

Pebblebrook is in solid financial shape from a liquidity and a solvency perspective after the merger with LaSalle, but it is alleged that additional assets sales will put the company in great financial shape. The company seeks to maintain a solid but flexible balance sheet, which is anticipated will serve stakeholders well. Pebblebrook does not currently have an unsecured debt rating. Instead, it uses secured debt on its high-quality portfolio and takes out unsecured term loans. Debt maturities in the near term should be manageable through a combination of refinancing and the company’s free cash flow. Additionally, the company should be able to access the capital markets when acquisition opportunities arise. It is projected 2024, the year it is likely operations will fully return to normal, net debt/EBITDA and EBITDA/interest will be roughly 7.4 and 4.2 times, respectively, both of which are slightly outside of the long-term range for the company but should continue to improve over time.As a REIT, Pebblebrook is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cash flow from operating activities, providing plenty of flexibility for capital allocation and investment decisions. It is held Pebblebrook will continue to be able to access the capital markets given its current solid balance sheet and its large, higher-quality, unencumbered asset base.

Bulls Say’s

  • Potentially accelerating economic growth may prolong a robust hotel cycle and benefit Pebblebrook’s portfolio and performance. 
  • The acquisition of the LaSalle Hotel Trust portfolio provides management many renovation opportunities to drive revenue and margin growth. 
  • After the merger, Pebblebrook’s larger size could increase the company’s negotiating power with online travel agencies.

Company Profile 

Pebblebrook Hotel Trust currently owns upper-upscale and luxury hotels with 13,247 rooms across 53 hotels in the United States. Pebblebrook acquired LaSalle Hotel Properties, which owned 10,451 rooms across 41 U.S. hotels, in December 2018, the company current Pebblebrook CEO founded in 1998, though management has sold many of those hotels over the past few years. Pebblebrook’s portfolio consists mostly of independent hotels with no brand affiliations, though the combined company does own and operate some hotels under Marriott, Starwood, InterContinental, Hilton, and Hyatt brands. 

(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

ADAS Safety Features To Be Part Of Future Standard Equipment For Vehicles By End Of The Decade

Business Strategy and Outlook

It is alleged Aptiv’s average yearly revenue growth to exceed average annual growth in global light-vehicle demand by high-single-digit percentage points. The company provides automakers with components and systems that are in high demand from consumers and that government regulation requires to be installed. Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles. 

In analysts opinion, Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. Aptiv enjoys relatively sticky market share, supported by highly integrated customer relationships and long-term contracts. The design phase of a vehicle program can last between 18 months and three years depending on the complexity and extent of the model redesign. The production phase averages between five and 10 years. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration. 

New Car Assessment Programs are used by governments around the world to provide an independent vehicle safety rating. Legislators, especially in the United States and in Europe, have set NCAP guidelines that will progressively require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend certain models to achieve a 4- or 5-star safety rating, some ADAS features must be part of that vehicle’s standard equipment to even qualify for certain rating levels.

Financial Strength

In analysts view, Aptiv’s financial health is in good shape. Since 2015, pro forma for the spin-off of Delphi Technologies in 2017, total debt/total capital has averaged 15.2% while total debt/EBITDA has averaged 2.9 times.Most of Aptiv’s capital needs are met by cash flow from operations. However, the COVID-19 pandemic necessitated the drawdown of the company’s $2.0 billion revolver on March 23, 2020. The revolver was repaid after the company raised capital through share issuance and a mandatory convertible preferred in June 2020. Aptiv’s liquidity remains healthy at $5.6 billion, with around $3.1 billion in cash and equivalents as well as $2.0 billion in unutilized revolver and $510 million in available receivables factoring facility at the end of December 2021. The company has a debt/EBITDA covnenant ratio of 3.5 times. Aptiv’s $2.0 billion revolver expires in 2026.As of Dec. 31, 2021, Aptiv had approximately $4.1 billion in senior unsecured note principal outstanding with maturities that ranged from 2025 to 2051, at a weighted average stated interest rate of 2.8%. To fund a portion of the $4.3 billion acquisition of Wind River (remaining portion from available cash), in February 2022, Aptiv issued senior unsecured notes including $700 million at 2.396% due in 2025, $800 million at 3.250% due in 2032, and $1 billion at 4.150% due in 2052. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say’s

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, it is likely Aptiv’s revenue to grow mid- to high-singledigit percentage points in excess of the percentage change in global demand for new vehicles. 
  • The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile 

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 12% of 2021 revenue, including sales to GM’s Shanghai joint venture, followed by Stellantis at 11%, and Volkswagen at 9%. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively. 

(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

Etsy Inc : Major e-commerce marketplace operator sets sights on encouraging repeat purchase behaviour

Business Strategy and Outlook

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties–Etsy, Reverb, Depop, and Elo7–all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite.  

Etsy’s competitive strategy is viewed sound, with the quickly growing firm capitalizing on a surge of COVID-19 induced demand, providing one of only a handful of outlets through which customers could purchase facemasks during the nadir of the pandemic. Though mask sales have dwindled, the platform has remained sticky, with Etsy seeing its active buyer base swell to 96 million (up 18% annually) through 2021 despite lapping a halcyon 2020 in which it netted 36 million customers (75% growth from 2019). Experts claim 171% two-year stacked growth reflects investments made well in advance of the demand surge–from moving its marketplace operations to the cloud (through a partnership with Google), to investing heavily in search engine optimization efforts, and tinkering with performance and brand marketing to boost unaided awareness. 

Moving forward, Etsy is expected to continue to add unique inventory (recently onboarding a number of Indian sellers), to expand its burgeoning international operations (44% of fourth-quarter GMV), to continue to improve search functionality and to expand its suite of seller tools and advertising options, while periodically targeting competitively advantaged tuck-in acquisitions that offer exposure to similarly differentiated end markets. Particularly important will be efforts to increase repeat purchase behavior, with the long-term driver of GMV growth likely be increased average revenue per user in lieu of buyer acquisition after the firm achieves saturation in its six key markets–getting buyers to go to Etsy “not just for the cushions, but for the couch.”

Financial Strength

Etsy’s financial position is viewed sound. While the firm’s gross leverage looks high for an e-commerce company (averaging 5.2 times through 2024, according to analyst forecasts), main concerns are alleviated by a highly cash generative business, with free cash flow to the firm clocking in at 25% of sales in 2022, an operating model that requires minimal maintenance capital expenditure, and access to a $200 million credit facility. Moreover, a net debt position of only $1.3 billion as of the end of 2021 (1.6 turns) suggests only modest underlying leverage. Etsy’s convertible debt structure adds an interesting twist to financial statement analysis. The company has three outstanding series of convertible issuances–$1 billion in 0.25% 2021 notes (due in 2028), $650 million in 0.125% 2020 notes (due in 2026), and $650 million in 0.125% 2019 notes. The structure is common among technology firms, and offers a few key benefits; fewer restrictions, choice of cash or share settlement, cheap capital, and the ability to raise straight debt through subsequent issuance, which strikes us as reasonable (and aligns with practices at technology peers like Twitter and Wayfair). Etsy limits potential dilution with a capped call derivative strategy, with subsequent series that have been utilized to prepay outstanding balances. While the principal value of these notes is accounted for in long-term debt, the equity portion (option value) is accounted for as additional paid-in-capital, with premiums amortized as noncash interest expense over the option’s life. Finally, Etsy is expected to maintain substantial financial flexibility in order to meet its allocation priorities–investments in the business, strategic acquisitions, and share repurchases. Consistent with management commentary, any near-term cash dividend is not anticipated (2026 at the earliest, barring acquisitions), with management preferring the flexibility associated with buybacks.

Bulls Say’s

  • E-commerce trial amidst COVID-19 likely pulled forward e-commerce adoption by two to three years, benefiting digital native platforms like Etsy. 
  • After more than doubling its 2019 buyer base, Etsy has likely reached a demand tipping point, with high teens active buyer penetration across its core six markets heightening barriers to success for new entrants. 
  • The offsite advertisements offer a nice vehicle to increase platform take rates, GMV growth, and seller inventory turnover.

Company Profile 

Etsy operates a top-10 e-commerce marketplace operator in the U.S. and the U.K., with sizable operations in France, Germany, Australia, and Canada. The firm dominates an interesting niche, connecting buyers and sellers through its online market to exchange vintage and craft goods. With $13.5 billion in 2021 consolidated gross merchandise volume, the firm has cemented itself as one of the largest players in a quickly growing space, generating revenue from listing fees, commissions on sold items, advertising services, payment processing, and shipping labels. As of the fourth quarter of 2021, the firm connected more than 96 million buyers and more than 7.5 million sellers on its marketplace properties: Etsy, Reverb (musical equipment), Elo7 (crafts in Brazil), and Depop (clothing resale).

(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

Qantas Airways – Omicron impact on 2H22 underlying EBITDA of ~$650m

Investment Thesis:

  • Attractive way to play the Covid reopen trade for investors.  
  • Aiming for all segments to deliver return on invested capital > weighted average cost of capital.
  • Strong position in the domestic market (Qantas Domestic and Jetstar continue to remain the two highest margin earning airlines in the domestic market).
  • Jetstar is well positioned for growth and rising demand in Asia. 
  • Partnership with Woolworths for Loyalty bodes well for membership and earnings.
  • Oil price hedging in FY22 could contribute to performance.
  • Increased competition in the international segment.
  • Relative to peers, strong balance sheet strength; investment grade credit rating.

Key Risks:

  • Disasters that could hurt the QAN brand.
  • Earnings recovery gets pushed out again due to travel restrictions or return of another Covid-19 variant. 
  • Ongoing price led competition forcing QAN to cut prices affecting margins.
  • Leveraged to the price of oil. 
  • Adverse currency movements result in less travel.
  • Labor strikes. 
  • Depressed economic conditions leading to less discretionary income to spend on travel. 

Key Highlights:

  • Omicron impact on 2H22 underlying EBITDA of ~$650m (after mitigations) with operating expenses for 2H22 to include ~$180m of inefficiencies and ramp up costs.
  • Domestic capacity to be 68% of pre-Covid levels in 3Q22, increasing to 90-100% in 4Q22, equating to total FY22 capacity of ~60%.
  • International capacity to be 22% of pre-Covid levels in 3Q22, increasing to 44% in 4Q22, equating to FY22 capacity of 18%.
  • Loyalty on track to deliver more than $1bn gross cash receipts in FY22 and remains committed to its target of $500-600m underlying EBIT by FY24 after returning to double-digit growth by end of CY22.
  • Net capex (excluding land proceeds) in FY22 of $850m and in FY23 of $2.3-2.4bn.
  • Underlying D&A in FY22 of $1.8bn.
  • Net debt within the $4.4-5.5bn target range by end of FY22 and at the bottom half of range from FY23 onwards.
  • The Recovery Plan delivered $840m in savings since the start of the program and remains on track to deliver greater than $900m by the end of FY22.
  • Balance Sheet repair continued with net debt reduction of -9.8% over pcp to $5.5bn (now within target range), refinancing A$300m bond maturing in May 2022.
  • Total liquidity of $4.3bn including $2.7bn cash and committed undrawn facilities of $1.6bn maturing in FY23 and FY24.
  • Investment grade credit rating of Baa2 from Moody’s maintained. 
  • Shareholder distributions remain on hold. 
  • 1H22 fuel cost declined -75% compared to pre-Covid-19 to $0.5bn, primarily due to a -74% reduction in fuel consumption. 

Company Description:

Qantas Airways Ltd (QAN) provides passenger and freight air transportation services in Australia and internationally. QAN also operates a frequent flyer loyalty program. QAN was founded in 1920 and is headquartered in Mascot, Australia.

(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
LICs LICs

PTM reported revenue of $128.7m with attractive dividend yield

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Investment Thesis

  • Trades on an attractive dividend yield.
  • PTM is in a position to attract net inflows as value oriented strategies may make a sustained comeback. 
  • Recent decision to reduce fees from 1.35% to 1.54%, represents ~9% decline in revenue. In our view, we expect further pressure on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becoming more of the norm). 
  • Significant key man risk. Particularly poignant as Kerr Neilson has stepped down from CEO, and whilst he has not signaled plans to leave altogether, it remains a possibility.
  • New distribution channels present growth runways for PTM’s core funds.
  • Transition risk as the new CEO takes over. 

Key Risks

  • Trades on an attractive dividend yield.
  • PTM is in a position to attract net inflows as value oriented strategies may make a sustained comeback. 
  • Recent decision to reduce fees from 1.35% to 1.54%, represents ~9% decline in revenue. In our view, we expect further pressure on the funds management industry and fees (as a result of industry and super funds building inhouse capabilities and passive investing with significantly lower fees/asset allocators becoming more of the norm). 
  • Significant key man risk. Particularly poignant as Kerr Neilson has stepped down from CEO, and whilst he has not signaled plans to leave altogether, it remains a possibility.
  • New distribution channels present growth runways for PTM’s core funds.
  • Transition risk as the new CEO takes over. 

1H22 result highlights

  • Fee revenue increased +2% over pcp to $133.6m, with Management fee revenues increasing +3% over pcp due to the increase in average FUM and changes in product mix (average fee up amid higher portion of retail FUM) partially offset by -32% over pcp decline in Performance fee revenues to $2.5m. Other income declined from a $35.7m gain in pcp to a $4.9m loss due to unrealized losses on seed investments. 
  • Expenses increased +15.8% to $43.2m, primarily driven by +39.6% YoY increase in share-based payments expense as share-based payments expenses normalized after being relatively low in pcp due to rights forfeited during that period, and +42.3% increase in business developments costs mainly due to advertising and the launch of the Platinum Investment Bond. 
  • NPAT declined -33.6% over pcp to $60m, primarily driven by unrealized losses on seed investments, including share of associates losses, which contributed losses before tax of $7.4m compared to income before tax of $35m in pcp. Excluding gains and losses on seed investments (net of tax), underlying NPAT declined -1.2% over pcp to $65.1m. 
  • FUM declined -6.4% over 2H21 to $22bn (down -7% over pcp), driven by net outflow of $900m and negative investment returns of $500m primarily from the Asia ex-Japan investment strategy ($400m). 
  • The Board declared a fully franked interim dividend of 10cps, down -16.7% over pcp and equating to annualized yield of ~7.4% (using 31 December 2021 share price of $2.70).

Company Profile

Platinum Asset Management (PTM) is an ASX-listed, Australian based fund manager which specializes in investing in international equities. PTM currently manages ~A$23.6bn. 

 (Source: Banyantree)

General Advice Warning

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

Categories
Dividend Stocks

Economic Weakness and Challenging Competitive Environment Limiting America Movil SAB de CV’s Returns

Business Strategy and Outlook

As the largest telecom carrier in Latin American, America Movil provides broad exposure to rising demand for access to the internet and other data services across the region. That exposure comes with significant political, regulatory, and economic uncertainty, but it is anticipated Movil’s strong competitive position in most of the markets it serves, and its strong balance sheet will create value for shareholders over the long term.  

The Mexican business is Movil’s most important, accounting for about 40% of service revenue. Despite regulatory and competitive changes that hit in 2014-15, Movil has remained the dominant Mexican wireless carrier with more than 60% market share. Wireless competition has subsided recently, with Telefonica essentially exiting the industry and AT&T focused elsewhere, allowing pricing to stabilize. While the market isn’t as attractive as a decade ago, it remains highly profitable and should deliver stable growth. Movil also serves about half of the Mexican internet access market. Competitors are investing aggressively in fixed-line infrastructure, especially cable companies Groupo Televisa and Megacable and fiber provider TotalPlay. These three firms are capturing most of the growth in the broadband market, forcing Movil to upgrade its network. 

It is alleged Movil’s extensive network assets and deep financial resources will enable it to maintain its dominance in Mexico. However, the firm and its primary shareholders, the Slim family, are likely to garner regulatory scrutiny in Mexico from time to time as officials seek to increase network investment and service adoption. In Brazil, Movil’s second-largest market at about 30% of service revenue, the firm has assembled a solid set of assets as the second-largest wireless carrier and largest cable company in the country. Economic weakness and a challenging competitive environment have limited the firm’s ability to earn attractive returns on these assets. The planned carve-up of Oi among Movil, TIM, and Vivo, if approved by regulators, should improve the competitive situation, allowing for better pricing. Consolidation in the fixed-line market is likely, but this process may be painful.

Financial Strength

America Movil’s financial position is sound, in analysts view. The firm has long had a stated leverage target of 1.5 times EBITDA, but it hasn’t been able to approach that goal until recently, as the devaluation of the Mexican peso has offset efforts to trim debt denominated in other currencies. Reported consolidated net debt had hovered around 2 times EBITDA over the past several quarters. However, the sale of Tracfone to Verizon in late 2021 generated proceeds of $3.6 billion in cash and 57.6 million Verizon shares (worth about $3 billion). Movil has also used its stake in Dutch carrier KPN, worth about $2.7 billion, to issued low-cost euro debt exchangeable into KPN shares.With the Tracfone sale, debt net of cash and investments declined to MXN 400 million ($19 billion) at the end of 2021 from MXN 538 million ($27 billion) the year before, putting net leverage at 1.2 times EBITDA after lease expense. Large telecom firms elsewhere in the world often operate with significantly higher leverage. The composition of Movil’s debt load has also improved. The firm has trimmed its U.S. dollar-denominated debt to $8.5 billion from $16 billion since the end of 2014. The Verizon shares should provide a partial hedge against future currency moves. Additionally, Movil has reduced its euros-denominated debt to EUR 8.5 billion from EUR 11.2 billion at the end of 2019. In addition to the hedge the KPN stake provides, about 30% of this borrowing held at Telekom Austria, which Movil consolidates on its financial statements. Share-repurchase activity has been modest in recent years, and shareholders have had the option of taking dividends in scrip rather than cash. With total debt trending lower, though, Movil has ramped up shareholder returns. The firm added a MXN 25 billion ($1.2 billion) share repurchase authorization in March 2021 and another MXN 26 billion in November 2021, repurchasing a total of MXN 37 billion ($1.8 billion) during the year.

Bulls Say’s

  • America Movil has unmatched scale in the Latin American telecom market. It serves far more wireless customers in the region than nearest rival Telefonica and holds the leading share in Mexico, Colombia, and Argentina and the second-largest share in Brazil. 
  • A sharp reduction in U.S. dollar-denominated debt recently, combined with continued stable cash flow, should enable Movil to maintain a strong financial position while steadily increasing shareholder returns. 
  • Movil has deep experience dealing with the political and regulatory nuances of the Latin American market.

Company Profile 

America Movil is the largest telecom carrier in Latin America, serving about 280 million wireless customers across the region. It also provides fixed-line phone, internet access, and television services in most of the countries it serves. Mexico is the firm’s largest market, providing about 40% of service revenue. Movil dominates the Mexican wireless market with about 63% customer share and also serves about half of fixed-line internet access customers in the country. Brazil, its second most important market, provides about 30% of service revenue. Movil sold its low-margin wireless resale business in the U.S. to Verizon in 2021 and now owns a 1.4% stake in the U.S. telecom giant. The firm also holds a 51% stake in Telekom Austria and a 20% stake in Dutch carrier KPN. 

(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
LICs LICs

Post Holdings Inc Not Able To Command Price Premium

They need an advice. Young married couple talking while sitting on the therapy session with psychologist

Business Strategy and Outlook

Post has a unique portfolio of businesses. After spinning off its majority stake in the fast-growing BellRing Brands in March 2022, nearly half of its sales mix is cereal, which is highly profitable, but experiencing declining volumes. The other half of its portfolio consists primarily of egg and potato products, which possess a better growth profile, but carry low profit margins. It is alleged a competitive edge remains elusive, as Post has not demonstrated strong brand equities, preferred relationships with customers, or a cost advantage, which are the most likely moat sources for a packaged food company. 

The cereal business has been experiencing declining per capita consumption (prior to the pandemic) as consumers have shifted away from processed, high-sugar, high-carbohydrate fare. Adding to the challenge, no-moat Post, the third-largest player, has had to compete for ever-decreasing shelf-space with market leaders narrow-moat General Mills and wide-moat Kellogg. That said, Post’s cereal business is very profitable, with EBITDA margins around mid-20% and low-30% for the U.S. and European businesses, respectively. 

The refrigerated segments (52% of 2021 sales, with 32% food service and 20% retail) consists primarily of egg and potato products, but also side dishes, cheese, and sausage sold under brands such as Bob Evans and Simply Potatoes. While this business has more attractive growth prospects than cereal (growing 1%-2% versus cereal’s modest declines), agricultural commodities are difficult to differentiate and therefore generally do not command a price premium. As a result, this business has relatively low EBITDA margins (16%-18%) and does not offer the firm a competitive advantage, in analysts view.

Financial Strength

Post has a unique capital allocation strategy, preferring to carry a heavier debt load than most packaged food peers. Net debt/adjusted EBITDA has averaged 5.3 times the last 10 years, increasing following acquisitions and gradually declining as the firm uses free cash flow to pay down debt. Leverage stood at 5.5 times at the end of fiscal 2021 including BellRing Brands, and it is being modelled that the ratio remains above 5 times for the duration of experts forecast. Post’s legacy domestic cereal business generates significant free cash flow (about 12% of revenue, above the 10% peer average), although after acquiring the refrigerated foods, BellRing, and private brands businesses, this metric fell to a mid- to high-single-digit average in 2013 and beyond, now slightly below the peer average. Post’s interest coverage ratio (EBITDA/interest expense) has averaged 2.5 times over the past three years, compared with the 7 times peer average. While this ratio is quite tight, the firm has ample access to liquidity (even considering the uncertain environment caused by the pandemic), including $1.2 billion cash and $730 million available via on its credit revolver as of December 2021. Post has no intention to initiate a dividend. Instead, the firm plans to balance debt repayments, share repurchase, and acquisitions. Although it is likely that the firm will acquire additional businesses over the next several years, given the numerous uncertainties regarding these transactions, experts have opted to model free cash flow being used instead for share repurchase, which is foreseen as a good use of capital assuming it is executed at a value below analysts assessment of its intrinsic value.

Bulls Say’s

  • The refrigerated foods segment, half of Post’s business, is benefiting from consumers’ evolving preference for fresh, unprocessed high-protein eggs, and fresh and convenient side dish options. 
  • Although growth in the cereal business has been stagnant, it reports attractive profits and cash flows. 
  • Despite inflation and the uncertain economic environment that could ensue, demand for Post’s products should be relatively stable.

Company Profile 

Post Holdings operates in North America and Europe. For fiscal 2021 (restated for the separation of BellRing Brands), 47% of the company’s revenue came from cereal, with brands such as Honeycomb, Grape-Nuts, Pebbles, Honey Bunches of Oats, Malt-O-Meal, and Weetabix. Refrigerated food made up 52% of sales and services the retail (20% of company sales) and food-service channels (32%), providing value-added egg and potato products, prepared side dishes, cheese, and sausage under brands Bob Evans and Simply Potatoes. Post also holds a 60% stake in 8th Avenue, a private brands entity and a 14% stake in BellRing Brands, with protein-based products under the Premier Protein and Dymatize brands. Post launched a special purpose acquisition corp in 2021, but has not yet executed a transaction. 

(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
ETFs ETFs

Large- to mid-cap exposure to US equities at an attractive fee

Tile letter on red rack in word ETF (abbreviation of Exchange Traded Fund) on wood background

Approach 

This fund uses full physical replication to capture the performance of the S&P 500 Total Return Index. The fund owns–to the extent that is possible and efficient–all the underlying constituents in the same proportion as its benchmark. 

Portfolio 

The S&P 500 is a free-float-adjusted market-capitalisation-weighted index of 500 US companies that offers both large- and mid-cap exposure. With a total value of over USD 40 trillion, the index covers around 80% of the free-float-adjusted market capitalisation of the US equity market. The US Index Committee maintains the S&P 500 and meets monthly. It aims to minimise index membership turnover. If a constituent no longer meets the entrance requirements, the committee will not remove the member immediately if it deems the change temporary. The index rebalances quarterly in March, June, September, and December. The largest sector exposure is information technology (29%), followed by healthcare (13%) and financials (12%). With the inclusion of Tesla TSLA and the continued success of many of the largest stocks in the index over 2020, the top 10 now represent over one fourth of the index. That said, concentration risk concerns remain subdued as the top 10 companies traditionally drive around 20% of the return, a fair attribution for many market-cap-weighted strategies.

Performance

Funds that track the S&P 500 Net Return Index have consistently outperformed the category average by a range of 0%-4% on a yearly rolling basis, making a strong investment case for low-cost passive instruments such as this when seeking broad US equity exposure. Further evidence is found in the superior risk-adjusted return profile of the S&P 500 relative to the average peer in the category. Passive funds in this category have generally had better or equal Sharpe ratios over short and long periods. In fact, this strategy has routinely captured more of the upside and less of the downside. Tracking error has also generally been tight, sitting at around 3-5 basis points. Valuations between large and small caps have shown some dispersion as US large caps rerated significantly following the volatility that markets saw in first-quarter 2020, suggesting that outperformance of larger companies over the last few years has come with steeper degrees of price risk.

Top Holdings of the fund

About the fund

The Fund employs a passive management – or indexing – investment approach, through physical acquisition of securities, and seeks to track the performance of the S&P 500 Total Return Index.The Index is comprised of large-sized company stocks in the US.

The Fund attempts to:

  • Track the performance of the Index by investing in all constituent securities of the Index in the same proportion as the Index. Where not practicable to fully replicate, the Fund will use a sampling process.
  • Remain fully invested except in extraordinary market, political or similar conditions.

 (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
LICs LICs

PPT delivered strong earnings growth for 1H22; Positive momentum in all of its divisions going and scaling globally

Young businesswoman sitting at the table with touchpad and communicating with senior woman

Investment Thesis 

  • Trades below our valuation and represents >10% upside to current share price. 
  • PPT is a diversified business with earnings derived from trustee services, financial advice and funds management.
  • PPT has an opportunity to increase FUM via its Global Share Fund, which has a strong performance track record over 1, 3 and 5-years and significant capacity, whilst PPT continues to maintain FUM in Australia equities which is near maximum capacity. This equates to flattish earnings growth unless PPT can attract FUM into international equities, credit and multi-asset strategies (and other incubated funds).
  • Retail and institutional inflow of funds is expected to be solid especially from positive compulsory superannuation trend and flow from Perpetual Private. 
  • Potential for Perpetual Private to drive growth in funds under management and funds under advice.
  • Cost improvements in Perpetual Private and Corporate Trust.

Key Risks

  • Any significant underperformance across funds.
  • Significant key man risk around key management or investment management personnel.
  • Potential change in regulation (superannuation) with more focus on retirement income (annuities) than wealth creation.
  • Average base management fee (bps) per annum (excluding performance fee) continues to be stable at ~70bps but there are risks to the downside from pressures on fees.
  • More regulation and compliance costs associated with the provision of financial advice and Perpetual Private.
  • Exposure to industry funds which are building in-house capabilities (~15-20% of total PPT funds under management). 

1H22 Results Summary :

  •  Operating revenue increased +37% to A$384.9m, primarily driven by the full contribution of Barrow Hanley Global Investors (Barrow Hanley), strong relative investment performance, higher average equity markets and continued growth in both Perpetual Corporate Trust and Perpetual Private. 
  • Underlying expenses increased +31% to A$275.3m, mainly due to the addition of expenses relating to newly acquired businesses Jacaranda Financial Planning, Laminar Capital and a full six months of Barrow Hanley, as well as higher variable remuneration and investment in technology.
  • Underlying profit after tax (UPAT) increased +54% to A$79.1m, which combined with +16% increase in significant items (comprised of transaction and integration costs associated with the acquisition/establishment of Barrow Hanley, Trillium and other acquisitions, as well as the amortisation of acquired intangibles) delivered +113% growth in NPAT to A$59.3m. 
  •  The Company ended the half with cash of A$130.9m, down -24%, primarily due to reduction in FCF (resulting from international expansion, tax and interest payments) and investment in growth initiatives/acquisitions. Liquid investments increased +16% to A$154.8m, reflecting an increase in seed fund investments relating to ETFs and mutual funds. 
  • Borrowings increased +13% to A$248.1m, reflecting the draw-down of debt to fund strategic initiatives with additional capacity remaining for further investment, leading to gearing ratio (debt/debt+equity) increasing +150bps to 21.5%. 
  •  The Board declared a fully franked interim dividend of 112cps, up +33% and representing a payout ratio of 80%, in line with Company’s dividend policy of 60-90% of UPAT on an annualised basis.

Company Profile

Perpetual Ltd (PPT) is an ASX-listed independent wealth manager with three core segments in (1) Perpetual Investments which is one of Australia’s largest investment managers; (2) Perpetual Private which is one of Australia’s premier high net worth advice business; and (3) Perpetual Corporate Trust which provides trustee services. PPT manages ~$98.3 billion in funds under management, ~$17.0 billion in funds under advice and ~$922.8 billion in funds under administration (as at 30 June 2021.

(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.