Category: Sectors

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Technology Stocks

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

Business Strategy and Outlook

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

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

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

Financial Strength

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

Company Profile 

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

(Source: MorningStar)

General Advice Warning

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

Categories
Technology Stocks

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

Business Strategy and Outlook

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

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

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

Financial Strength

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

Company Profile 

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

(Source: MorningStar)

General Advice Warning

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

Categories
Dividend Stocks

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

Investment Thesis 

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

Key Risks

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

1H22 Results Highlights Relative to the pcp: 

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

Dividend guidance increased + share buyback announced

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

Company Profile

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

(Source: Banyantree)

General Advice Warning

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

Categories
Technology Stocks

CrowdStrike Holdings to entrench itself by selling multiple modules over time with its platform-based approach

Business Strategy and Outlook

CrowdStrike is solidly growing its partner revenue stream, which can be critical to keeping the customer addition momentum. ARR from public cloud deployments was $106 million at the end of the fourth quarter, up 20% sequentially. AWS marketplace ARR grew over 100% year over year and CrowdStrike’s MSSP ARR grew by over 200% year over year. While it is withholding these large growth numbers to moderate with scale, it is seen ample growth opportunities as organizations migrate away from legacy endpoint providers and look to managed service partner offerings for protection. Additionally, it is alleged that CrowdStrike’s leading professional services organization is a powerful lead generator. For every $1 spent on professional services, such as resolving organization’s breaches, the company subsequently generates $5.71 in security subscription ARR, up from $5.51 the year prior.

Guidance for the first quarter includes 53% year-over-year sales growth and adjusted earnings of $0.22-$0.24. For fiscal 2023, CrowdStrike is targeting 48% annual revenue growth and adjusted earnings of $1.03-$1.13. It is anticipated that CrowdStrike can overachieve these guideposts behind the strong momentum in core endpoint and adjacent areas, an increased reach due to partner success, and a heightened threat environment creating a powerful demand for upgraded cybersecurity posture.

Analysts have been raising their fair value estimate for narrow-moat CrowdStrike Holdings to $225 per share from $200 after its fourth-quarter results topped analysts lofty revenue growth and earnings expectations, and the company provided robust fiscal 2023 guidance. Even with CrowdStrike shares soaring by 14% in after-hours trading to $193, which is still seen as marginal upside for investors. The increase is spurred from expecting higher growth alongside margin expansion as it is likely for CrowdStrike to gain in an outsize manner from various trends. It is held, CrowdStrike will continue landing customers at a rapid rate as organizations move away from legacy endpoint protection solutions, and then further entrench itself by selling multiple modules over time with its platform-based approach. The company also benefits from a heightened threat environment with a larger attack surface brought up by remote work and organizations using more cloud-based resources, a skills gap within cybersecurity driving demand for CrowdStrike’s managed security, and its professional services being called upon for breach remediation assistance.

Financial Strength

Fourth-quarter sales growth of 63% year over year came from subscriptions increasing by 66% and professional services expanding by 26%. Annualized recurring revenue expanded 65% to $1.73 billion and remaining performance obligations grew 67% to $2.27 billion, both year over year. It is anticipated these robust results show CrowdStrike’s leadership in its core endpoint protection, growth in adjacent areas like IT hygiene and log ingestion, and momentum with partners. CrowdStrike ended the quarter with 16,325 customers, up 65% year over year. Alongside rapid client additions, experts positively view the company being able to keep world-class retention metrics, with dollar based net retention of 124% and gross retention of 98%. Customers buying at least 4 and 6 subscriptions were 69% and 34%, respectively, which is meant to show organizations consolidating spending toward CrowdStrike’s platform

Company Profile

CrowdStrike Holdings provides cybersecurity products and services aimed at protecting organizations from cyberthreats. It offers cloud-delivered protection across endpoints, cloud workloads, identity and data, and threat intelligence, managed security services, IT operations management, threat hunting, identity protection, and log management. CrowdStrike went public in 2019 and serves customers worldwide.

(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

Xero Ltd : Many technology stocks have been caught in an asset price bubble linked to interest rates

Business Strategy and Outlook

The relationship between Xero’s market valuation and interest rates isn’t simple or linear, but it is held it’s been strong in recent years. For example, between early 2017 and late 2020, Xero’s one-year forward enterprise value to revenue multiple increased to 26 from 6 without an equivalent increase in its revenue growth outlook, in experts opinion. During this period, the 10-year Australian government bond yield fell to around 1% from around 3%. It is likely falling interest rates encouraged investors to increase their valuations for Xero, which was a catalyst for self-feeding share price momentum and relative valuation based upward re-valuations. But, if anything, Xero’s reported revenue has been weaker than it is anticipated in recent years. For example, Xero’s fiscal 2021 revenue was 9% below the forecast experts made in 2017.

Although it is well attributed the technology stock rally between early 2020 and late 2021 to interest rate falls, many investors and much of the media attributed it to a permanent increase in demand for information technology products and services, triggered by the coronavirus pandemic. However, the realization that many technology stocks have been caught in an asset price bubble linked to interest rates, rather than driven higher by sustainable earnings growth, appears to be occurring, and previously “hot” stocks are experiencing severe share price falls.

However, it is agreed the world has changed over the past four years, and the notion of competition within a global cloud-based software as a service market has evolved to recognize that the market isn’t bound by national borders in the same way as it used to be. Another other option for Intuit would be to acquire Xero but divest businesses in regions where regulatory obstacles exist. This could mean at least acquiring Xero’s U.K. business, which would still strengthen its existing business in an important geography and arguably leave far less viable competitors in other regions.

Financial Strength

At this stage, it is considered an acquisition of Xero by Intuit to be unlikely for several reasons. Unlike United Kingdom based Sage Group’s acquisition-led growth, Intuit has expanded its software organically globally. An acquisition of Xero would create a second platform and brand for Intuit which is uncertain, the company would want to maintain over the long term. Migrating Xero’s customers onto Intuit branded products would also be challenging. However, despite these challenges, an acquisition of Xero by Intuit isn’t completely out of the question. Although Xero’s one-year forward enterprise value to revenue ratio of 12 is still higher than Intuit’s at 10, the premium has fallen significantly to just 23% currently from 139% in December 2020. A continuation of this trend could make Xero attractive, particularly as the firm offers arguably higher revenue growth than Intuit, significant cost synergies, a good global geographical fit, and the removal of Intuit’s main global competitor. The recent increase in interest rates has been swift, with the one-year Australian government bond yield increasing to 0.81% from 0.01% since September 2021, and the 10- year Australian government bond yield increasing to 2.5% from 1.2% over the same period. Experts agree that these trends have been the main cause of the reversal in the technology stock bull market, which began in March 2020. Since November 2021, the S&P/ASX All Technology index is down 29% and the Nasdaq Composite index is down 22%. Concerningly high inflation data is also increasingly indicating that interest rates may have further to rise

Company Profile 

Xero is a provider of cloud-based accounting software, primarily aimed at the small and medium enterprise, or SME, and accounting practice markets. The company has grown quickly from its base in New Zealand and surpassed local incumbent providers MYOB and Reckon to become the largest SME accounting SaaS provider in the region. Xero is also growing internationally, with a focus on the United Kingdom and the United States. The company has a history of losses and equity capital raisings, as it has prioritised customer growth.

(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

FedEx Ground Margins Grappling With Wage/Cost Inflation, but Improvement Still Likely

Business Strategy and Outlook

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape–FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.

Leading up to the pandemic, ground margins were grappling with heavy network investment, the gradual mix shift to lower-margin B2C deliveries, lost Amazon revenue, and a pullback in B2B shipments. That said, the pandemic driven e-commerce shift and related surge in residential package delivery demand, coupled with a massive uptick in parcel carriers’ pricing power drove a resurgence in FedEx’ profitability. Recovering B2B activity has also played a material role. Material labor constraints emerged in recent quarters, setting margins back . Therefore, Morningstar analysts assuming management will be able to mitigate some of these headwinds with increased productivity, and ground margins should see some recovery in the quarters ahead.

In general, FedEx’ extensive international shipping network is extraordinarily difficult to duplicate and domestic/international e-commerce tailwinds should remain favorable for years to come (outside a major recession). Despite Amazon insourcing more of its own U.S. last-mile package deliveries, FedEx continues to bolster its ground and express capabilities and is well positioned to serve the myriad other retail shippers pursuing e-commerce, not to mention its entrenched relationships in B2B delivery. The TNT integration has made headway, and expects efforts to bear more fruit in Europe as FedEx finalizes the integration by May 2022.

Financial Strength

Total debt approached $21 billion as of fiscal year-end 2021 (ended May), down slightly from $22 billion in fiscal 2020. Since May 2017, FedEx has borrowed around $7 billion (net) to finance aircraft purchases, sorting facility expansion and automation, pension funding, dividends, and periodic share repurchases. This partly reflects $3 billion of unsecured debt issued in April 2020 to increase financial flexibility as the pandemic hit, and to pay off part of its commercial paper program. FedEx ended fiscal 2021 with $7 billion in cash and equivalents, up from $5 billion. Total debt/adjusted EBITDA came in near 2 times in fiscal 2021, which represents improvement from 3.3 times in fiscal 2020, as the operating backdrop improved significantly. We expect that metric to hold relatively steady in fiscal 2022. Adjusted EBITDA excludes mark-to-market pension charges and nonrecurring costs.

Bull Says

  • Outside a prolonged recession, FedEx’s U.S. ground package delivery operations should continue to enjoy robust growth tailwinds rooted in favorable ecommerce trends.
  • FedEx’s massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.
  • During its nearly five-decade history, FedEx has weathered multiple economic cycles. While short term results may suffer, the firm’s powerful parcel delivery network is firmly established.

Company Profile

FedEx pioneered overnight delivery in 1973 and remains the world’s largest express package provider. In its fiscal 2020 (ended May 2020), FedEx derived 51% of revenue from its express division, 33% from ground, and 10% from freight, its asset-based less-than-truckload shipping segment. The remainder comes from other services, including FedEx Office, which provides document production/shipping, and FedEx Logistics, which provides global forwarding. FedEx acquired Dutch parcel delivery firm TNT Express in 2016. TNT was previously the fourth-largest global parcel delivery provider.

 (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

HACK aims to track the performance of an index that provides exposure to the leading companies in the global cybersecurity sector.

Approach

The index tracks the performance of the exchange-listed equity securities of companies across the globe that (i) engage in providing cyber defence applications or services as a vital component of its overall business or (ii) provide hardware or software for cyber defence activities as a vital component of its overall business. The fund invests at least 80% of its total assets in the component securities of the index and in ADRs and GDRs based on the component securities in the index.

Portfolio

An ETF Model Portfolio is a carefully selected portfolio of exchange traded funds (ETFs) and other exchange traded products constructed and managed by a professional investment manager.

The investment manager typically also provides regular reporting on the portfolio’s performance, along with ongoing communication on changes to the portfolios, the rationale for doing so, and broader commentary on the micro and macro environment.

BetaShares offers four series of model portfolios, each of which seeks to achieve capital growth and income streams through a careful blending of asset classes, including Australian and international equities, bonds, cash and commodities. The models are constructed using ETFs and other exchange-traded products, resulting in institutional-quality portfolios that are cost-effective, highly diversified, transparent, and simple to explain to clients.

  • Strategic asset allocation (SAA) ETF model portfolios: Built using forward-looking 10-year expected returns and risk for a diversified range of major asset classes.
  • Dynamic asset allocation (DAA) ETF model portfolios: Utilise return/risk parameters from SAA, rebalanced quarterly based upon BetaShares’ modelling of asset class misevaluations, risk objectives and economic considerations.
  • Dynamic Income model portfolios: Aim to produce total returns that are similar to the dynamic ETF models, but are weighted towards income rather than capital growth.
  • Pension Risk-Managed Model Portfolios: Uses ETPs that aim to provide enhanced income returns and/or less volatile returns through a systematic risk-management overlay.

People

dam O’Connor is a member of the BetaShares Distribution team responsible for supporting Institutional and Intermediary Broker and Adviser channels. Prior to joining BetaShares, Adam worked in stockbroking and advisory with Bell Potter Securities. Alex is responsible for leading the strategy and overall management of the business. Prior to co-founding BetaShares, Alex was closely involved in the establishment and development of several leading Australian financial services businesses including Pengana Capital and Centric Wealth. Alistair is a member of the BetaShares Distribution team, responsible for supporting Institutional and Intermediary Broker channels, as well as supporting the firm’s capital markets activities. Annabelle is a member of the BetaShares marketing team focusing on social media and content. Anthony is responsible for supporting the investment and operations functions at BetaShares. Anton is BetaShares’ internal legal adviser and is also responsible for managing the compliance function.  Ben is responsible for supporting the distribution of BetaShares funds to advisers across the Victoria and South Australia regions. Benjamin is a member of the BetaShares Distribution team, responsible for assisting with client inquiries.

Brendan is responsible for growing and servicing BetaShares Adviser business clients across Western Australia. In this role, Brendan is focused on educating advisers about the role and benefits of ETF’s and SMA’s in client portfolios and sharing updates on the expanding range of strategies available across the BetaShares product suite. Cameron’s responsibilities span supporting all distribution channels and working alongside the portfolio management team. Prior to joining BetaShares, Cameron was a portfolio manager at Macquarie Asset Management, and was responsible for the structuring and management of Macquarie’s listed and unlisted structured product offering. Cameron’s other experience includes Head of Product at Bell Potter Capital, working on JP Morgan’s Equity Derivatives desk and at Deloitte Consulting.

Performance 

The ETFMG Prime Cyber Security ETF was the first ETF to focus on the cyber security industry. It tracks an index of companies involved in hardware, software and services, classifying the underlying stocks as either infrastructure or service providers. Top holdings include Cisco Systems, Akamai and Qualys.

About Fund

FactSet ETF Analytics Scoring Methodology is one of the first wide-ranging and robust methodologies for evaluating, comparing and contrasting exchange-traded funds. The researchers and analysts at FactSet developed the system. The result of thousands of hours of research, debate and testing, FactSet ETF Analytics Scoring Methodology provides a comprehensive structure for investors to analyze ETFs. FactSet’s quantitative system allows an investor to evaluate a fund at a glance, aggregating a sweeping range of detailed, often-difficult-to-obtain data points. FactSet’s Letter Grade combines the Efficiency and Tradability score evaluating costs to the investor. The combined score is assigned a letter grade (A-F) providing an institutional-caliber view on how well run and how liquid the ETF is. Efficiency includes risks, which are potential costs. Funds that minimize these risks can be more efficient.

(Source: Betashare)

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Categories
Funds Funds

Realindex Australian Share-Class A: A well versed, Economical Option with Good Background

Approach
Realindex uses a systematic index method employing four equally weighted measures of a company’s economic size to rank and weight stocks in the portfolio. These criteria are adjusted sales, cash flow, and dividends and latest available adjusted book value. Additional earnings quality, near-term value, and debtcoverage filters act to reduce exposure to stocks with greater uncertainty. A signal was also introduced in November 2015 that downweights stocks with negative momentum and overweights stocks with positive momentum. As a part of its endeavor to improve current metrics, Realindex has more recently refined the book value metric to factor in intangibles as well by adjusting it with capitalize R&D and marketing expenses. The filters have contributed to a value bias and tilt to established companies that typically trade at a discount. This alternative approach to traditional index investing aims to eliminate the relationship between portfolio weighting and over/undervaluation associated with weighting a portfolio by market cap. The portfolio is rebalanced quarterly, resulting in average annual turnover of about 15%. The team handles all aspects of research, portfolio management, implementation, and execution with a focus on minimizing trading costs and market impact.


Portfolio
Realindex constructs a diversified, value-leaning portfolio. The strategy’s factors and price filters can lead to some differences relative to the more commonly used S&P/ASX 200 Accumulation Index. For example, the portfolio typically has lower price/book ratios and higher dividend yields. Realindex’s absolute weighting to most sectors remains relatively stable because the fundamental size characteristics tend not to fluctuate wildly unlike the sector weights fluctuation in market-cap benchmarks. Other deviations have been a historic tilt away from healthcare and real estate. Relative to the category index, S&P/ASX 200 Index, the strategy is value-focused and yield-oriented. Large-cap bias is apparent in the portfolio, but it is relative to the category average. As of November 2021, the portfolio was overweight in financial services and underweight in resources and healthcare. Realindex’s portfolio, traditionally, has remained quite similar to market-cap benchmarks overall. Historically, active share has hovered around 20%.

People
Realindex has been through a significant phase of transition in the past couple of years bought about by the end of the partnership with RAFI and the exit of a few senior portfolio managers. This has provided an opportunity for Realindex to revamp its overall team structure and bring on experienced investment professionals. The experienced David Walsh has joined as the head of investment, leading portfolio management and research, which Scott Hamilton leads. With the hires of Joana Nash and Ron Guido as experienced senior quant portfolio managers, Realindex has also beefed up its quant research capabilities.
The team is nimbler now for prioritization and effective collaboration on research initiatives and efficient implementation of the research outcomes, although it is preferred to have clearer lines between the research and portfolio management teams. The visible progress made in the trailing 18 months in research projects (for example, ESG factor impact on price and incorporating intangibles into the book value) augmenting the investment process through the implementation of novel signals is testimony of the team’s collective ability. The recent departure of experienced senior portfolio manager Raelene De Souza is unfortunate. Historically, Realindex has been successful in attracting top investment talent. But the length of their association with the firm has been shorter than it is prefered.


Performance
Realindex Australian Shares has delivered impressive peer-relative performance from inception through February 2022. Its five-year return of 8.5% per year as of February 2022 has easily outpaced the category average but only matched the broader market’s index return, indicating the tough environment it has been for value managers. This performance is principally attributed to the overweighting in materials, underweighting in healthcare, and energy. Better stock inclusion from the resources and consumer cyclical sectors has been additive too. Specifically, overweightings in BHP Group and Wesfarmers has added to performance and offset marginally by the overweighting in Westpac Banking. Amid the pandemic-induced uncertainties across the market, the strategy was admirably more resilient than the average category manager. The impressive outperformance was largely fueled by the strategy’s overweighting in materials, consumer cyclical, and consumer staples (a recurring theme across short- and long-term performance), although slightly offset by its overweighting in financial services. Over the trailing year through February 2022, the strategy has outperformed the S&P/ASX 200 Index but marginally stayed below the category average as value stocks have staged a reversal.

About Fund:
Realindex forms a universe of Australian companies based on accounting measures.Factors such as quality, near – term value and momentum are applied to form a final portfolio of companies. The resulting portfolio has a value tilt relative to the benchmark and provides the benefits of being lower in cost, lower turnover and highly diversified compared to traditional active investment strategies. Realindex overhauled its investment team with an aim to create a nimbler team structure and has hired investment professionals with a high skillset and experience level. The new team has made real progress in the trailing 18 months defining the research agenda and prioritizing projects in terms of their potential to value add. These developments paint a positive picture for the strategy; however, investors should note that the team’s tenure is short and Realindex’s track record in team turnover has not been impressive. As such, it is alleged for the investment team to exhibit longevity before experts’ conviction level is strengthened.

(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
Fixed Income Fixed Income

Cheap passive exposure to Australian fixed income

Approach

This strategy aims to track the Bloomberg Ausbond Composite 0+ Index with a tracking error of 0.05% per year or less (before fees). IShares is typically able to achieve full replication of the government-bond component in the portfolio because of ample liquidity and breadth. To alleviate liquidity challenges, the firm uses stratified sampling to acquire corporate and supranational exposures–an industry-standard approach, but one in which iShares excels thanks to its sophisticated global trading systems and experienced team. When the team can’t buy all the bonds in the index at a reasonable price, it will instead buy a basket of bonds that has similar credit and duration risks within allowable tolerance ranges. The team also employs strategies like securities lending to generate additional returns, helping to offset the performance drag from factors like fees and trading costs. IShares’ scale further minimises trading costs; a large active book and the firm’s ETF business allow for cross-trades and wide broker access. IShares thus executes trades cheaply, which is crucial in index fund management. It’s worth noting that Bloomberg’s index assumes distributions earn no interest, whereas iShares may accrue interest on its distribution cash balances. This may cause some tracking error, but ultimately it is a positive tailwind.

Portfolio

This strategy aims to fully replicate the Bloomberg AusBond Composite 0+ Index. Factoring cost, liquidity, and existing diversification if it doesn’t make sense to own all the bonds on issue, it will use stratified sampling to buy a basket of bonds with similar credit and duration risks. As of 28 Feb 2022, the index was composed of government and semigovernment bonds (85%), supranationals (5%), and corporate bonds (9%). The fund invests in high-quality bonds, with AAA rated debt constituting 71% of the benchmark’s quality exposure. Banks and other financials issue most of the credit in the index. The fund’s duration continues to increase with the benchmark as yields mostly hovered around historic lows barring the recent spike, up from 4.95 years at October 2016 to 5.8 years at 28 Feb 2022. The lengthening duration is a result of Commonwealth Government Bonds being issued at longer tenures, such as 30 years. But it means the fund faces the risk of rising yields globally, when we would expect active managers in this space to outperform their long-duration passive peers. Overall credit quality and appropriate diversification make this strategy an appropriate core exposure.

Performance: In terms of Annualised and Cumulative basis

Top 10 Holdings of the fund

About the fund

The fund aims to provide investors with the performance of the Bloomberg Aus Bond Composite 0+ Yr Index SM, before fees and expenses. The index is designed to measure the performance of the Australian bond market and includes investment grade fixed income securities issued by the Australian Treasury, Australian semi-government entities, supranational and sovereign entities and corporate entities.

(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

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

Investment Thesis:

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

Key Risks:

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

Key Highlights:

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

Company Description:

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

(Source: Banyantree)

General Advice Warning

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