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Global stocks Shares

Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria

Business Strategy & Outlook

Incitec Pivot aims to expand its business around its strong global market share in explosives. This provides an increasingly stable earnings stream relative to volatile earnings from its fertilizer business. Competitive advantages include a duopoly Australian explosives business and global explosives operations. Incitec Pivot is also a dominant player in the Australian domestic fertilizer market and enjoys a degree of domestic fertilizer pricing power from its dominant market share in eastern states, but it is too small to influence global prices. The fertilizer business does not possess an economic moat. Explosive earnings are leveraged to mining volumes as much as price and should benefit from long-term global growth in demand for minerals and metals. Additionally, mining strip ratios are expected to increase over time, with more explosives required to mine the same amount of ore. Given these dynamics, the demand for ammonium nitrate is to continue growing. However, growth is likely to be uneven and subject to cyclical changes in demand for commodities. Significant increases in capacity have led to near-term oversupply of ammonium nitrate on the east and west coasts of Australia. Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria. There will likely be an oversupply of ammonium nitrate in Western Australia to 2020 and in Eastern Australia to 2021. 

In Western Australia, Orica has commissioned a new plant in the Pilbara with Yara of Norway. Incitec Pivot sources its ammonium nitrate from Wesfarmers in the west, so margins will be overly hurt by the oversupply. Incitec Pivot’s explosives business is strategically short ammonium nitrate, or AN, production capacity by around 200,000 tonnes in a long-capacity market. A superior product offering is essential to facilitate this strategy, with demand supported by flexible third-party agreements that are footprint-logical. Expansion at Moranbah in the east would only be considered after markets come back into balance.

Financial Strengths

Group net operating cash flow increased 68% to AUD 1.09 billion in fiscal 2022. This allowed net debt to fall by 7% to AUD 949 million. Gearing is modest at 15% and net debt/EBITDA just 0.5. Low debt with a strong fiscal 2023 cash flow forecast creates optionality for additional capital management. Debt ratios are well below the company’s 1.0 to 1.5 net debt/EBITDA target range. This places Incitec in a sound position to navigate the conversion of Gibson Island to import only and to explore new opportunities like green hydrogen manufacture. That and/or capital management post fiscal 2022. There is an expressed concern over capital misallocation in the recent past, including on-market share buy-backs. It is pleasing therefore that management has expressed an investment bias to capital-light and faster cash returning projects aligned to the strategy. The equity capital raised in fiscal 2020 increased the company’s liquidity and supported a continued investment grade credit rating. Over the long run, Incitec Pivot to return approximately 50% of earnings to shareholders through dividends, which is a reasonable payout ratio.

Bulls Say

  • Investors enjoy bumper dividends at peak cycle times.
  • Continued growth of the explosives business will reduce earnings volatility.
  • Over the longer term, explosives earnings are favorably leveraged to mining volumes rather than prices, and mine strip ratios are expected to increase over time.

Company Description

Incitec Pivot is a leading global explosives company with operations in Australia, Asia, and the Americas. It is estimated its share of the global commercial explosives market at about 15%. Explosives contribute 80% of EBIT. Incitec Pivot is also a major Australian fertilizer producer and distributor and is the only Australian manufacturer of ammonium phosphates and urea. Ammonium phosphates are sold in the domestic market and exported.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Dividend Stocks

PPT delivered strong earnings growth for FY22 with underlying PBT 19 percent yy

Investment Thesis

  • Trades below the 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).

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • The company entered into a binding Scheme Implementation Deed to acquire 100% of shares in Pendal Group, targeted to be implemented by late CY22/early CY23 and Pendal shareholders receiving 1 PPT share for every 7.50 Pendal shares plus $1.976 cash/Pendal share (implying an offer price of $6.54/Pendal share), with acquisition expected to;
  •  Realise $60m of annual pre-tax synergies within the first two years and deliver double digit EPS accretion for PPT in the 12 months post implementation, with one-off costs to achieve synergies of $110m phased with majority incurred over 18 months and other transaction costs of $40m.
  • Create greater scale with $1.4bn in revenue and ~$456m in UPBT driven by increased economies of scale, and combined AUM of >$201bn, covering Global, US, UK, European and Australian equities, Multi Asset and Cash and Fixed Income strategies, significantly improving market position and brand recognition. 
  • Expanded team with employees across 16 locations around the globe and enhanced global distribution network. Management expects to fund the cash component of the offer totalling $757m via a new debt facility, which will also re-finance Perpetual’s existing debt facility and include undrawn headroom for liquidity management purposes and expects pro forma leverage to be ~1.7x gross debt/pro forma EBITDA (~1.3x Net Debt/pro forma EBITDA) with de-leveraging occurring in year 3 post-implementation given the strong cash flow generation of the combined businesses with a clear pathway to 1.2x Gross Debt/pro forma EBITDA (~0.8x Net Debt).
  • The Board declared a fully franked final dividend of 97cps, resulting in a total dividend for the full year of 209cps, an increase of +16% y/y, representing a payout ratio of 80%, in line with company’s payout range of 60-90% UPAT on an annualised basis. 
  • ROE improved +44bps y/y to 16.2%.

Company Description

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).

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

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

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

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

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

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

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

Categories
Dividend Stocks

SGM’s FY22 results were solid and driven by higher volumes and prices

Investment Thesis

  • Improvement in scrap prices across key regions. 
  • Cloud recycling could add significant earnings over the long run. 
  • Investment in improving scrap quality should improve SGM’s competitive position. 
  • Undemanding valuation relative to its own historical average and ASX200 Industrials Index. 
  • Self-help initiatives to support earnings. 
  • Improving Return on Capital (ROC). 
  • Current on-market share buyback. 

Key Risks

  • Significant downturn in global economy. 
  • Trade war between China and the U.S. escalates. 
  • Weaker scrap prices in key regions. 
  • Lower volumes. 
  • Regulatory changes – particularly around China’s anti-pollution policies. 
  • Cost pressures impacting group margins 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Underlying revenue of $9,264.4m was up +56.6%, driven by higher volumes and selling prices (ferrous and non-ferrous). Sales volumes of 8,106m tonnes, was up +12.2%. 
  • Underlying operating earnings (EBIT) of $756.1m was up +95.6% on pcp, driven predominantly by: strong contribution from SA Recycling, contributing the bulk of the $144.8m improvement in JV contribution; non-acquired growth in volumes contributed over $100m; and $307.8m in margin growth. Earnings growth was partially offset by $170.9m increase in organic metal costs. Underlying NPAT of $578.9m was up +103.8%. 
  • The Board declared a final dividend of 50cps (50% franked), bringing the full year dividend to 91.0cps, up +116.7% YoY. 
  • Return on productive assets (capital efficiency) improved by 16% to 39.0%. (5) Capital expenditure forecast for FY23 was increased – at the March Investor Day management estimated FY23 sustaining and environmental capex would be approximately $175m, however this has been increased to $220m due to higher spending on environmental and increased costs from inflation. 
  • North America Metal (NAM) sales revenue of $2,669.9m was up 66.8% driven by higher sales prices and sales volumes (up +17.7%). Intake also improved over the period and was higher than pre-Covid levels. Trading margin of $881.4m was up +55% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Segment underlying EBIT of $293.4m was up +114.2%. 
  • Australia & New Zealand Metal (ANZ) revenue of $1,694.4m was up +54.2% driven by +55.2% increase in average selling prices. Sales volumes were largely unchanged on pcp (-0.3% YoY). Trading margin of $423.1m was up +34.9%. Costs were up +16.5% and lower than NAM due to flat volumes. Segment EBIT of $186.9m was up +80.2%. 
  • UK Metal sales volumes were up +9.0% YoY and average selling prices up +47.3%, driving sales revenue growth of +60.6% YoY to $1,594.9m. Management noted that the Trading Margin of $234.6m was up only +23.9% “due to market structure and competitive dynamics, UK was not able to hold onto as much of the sales price increase as NAM or ANZ.” Segment underlying EBIT of $69.8m was up +52.7% on pcp. 
  • Sims Lifecycle Services reported revenue of $327m (up +2.5%) and underlying EBIT of $16.3m was down -25.2% driven by the 30% reduction in prices for units resold, driven by reduced manufacturing activity in China due to Covid lockdowns. 
  • SA Recycling reported sales volumes growth of +33.3%, sales revenue up +74.8% to $4,993.1m, trading margin of $1,520.1m up +69% and underlying EBIT (50% share) of $298.5m 

Company Description

Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.

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

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

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

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

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

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

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

Categories
Global stocks Shares

Ralph Lauren has closed more than 75 stores, reduced exposure to U.S. department store and off-price channels

Business Strategy & Outlook

Ralph Lauren’s restructuring over the past few years puts it on solid footing as it navigates macroeconomic challenges. In response to poor inventory control and heavy discounting in years past, Ralph Lauren has closed more than 75 stores, reduced exposure to U.S. department store and off-price channels, and cut product lead times. These and other changes have resulted in strong gross margin increases. Although sales have declined in North America from peak levels, the restructuring, including new merchandise and better pricing for core products, has positioned Ralph Lauren for low-single-digit sales growth and mid-60s gross margins. Further, advertising support as a percentage of sales in the mid-single digits in the long term and anticipate its direct-to-consumer sales will rise to 73% of sales in fiscal 2032 from 63% in fiscal 2022, thereby reducing the brand’s dependence on U.S. physical retail and providing better control over pricing and positioning.

An increasing direct-to-consumer business as essential as customer visitation is declining in many retail stores and malls. Much of Ralph Lauren’s growth came from international markets. The brand is more of a premium brand in Europe and Asia than in North America, allowing for reduced discounting and higher average unit retail. In Europe, store openings in underserved markets to support its existing e-commerce and attract new customers. In Asia, where Ralph Lauren trails some competitors, 7% compound average annual sales growth over the next decade as stores open and e-commerce expands in mainland China. Sales in Europe and Asia-Pacific will rise to 58% of total sales in fiscal 2032 from 49% in fiscal 2022. As evidence of the potential for Ralph Lauren, a comparable American brand, narrow-moat PVH’s Tommy Hilfiger, produced 75% of its sales outside North America in fiscal 2021.

Financial Strengths

Ralph Lauren has a strong balance sheet. The company recently sold Club Monaco (undisclosed terms) and licensed Chaps. It also paid off $500 million in debt that came due in 2022. After these moves, it closed September 2022 with long-term debt of $1.1 billion but $1.4 billion in cash and investments (net cash of about $4 per share). Ralph Lauren will generate significant cash flow for stock buybacks and dividends despite disruption from the pandemic. After suspending it during the pandemic, the firm resumed its dividend in fiscal 2022 and plans to pay $3 per share in dividends in fiscal 2023.Its long-term dividend payout ratio at about 44%. As for buybacks, Ralph Lauren repurchased shares on a consistent basis prior to the pandemic and has recently resumed them. It will generate an average of about $680 million per year in free cash flow to equity over the next five fiscal years and use practically all of it for share repurchases and dividends. Ralph Lauren’s yearly capital expenditures dropped below 3% of sales as its conserved cash during the pandemic. Now, though, larger investments in digital capabilities, store remodels, and store openings. Ralph Lauren’s annual average capital expenditures at 4.5% of sales over the next five years.

Bulls Say

  • Business trends have improved for Ralph Lauren in Europe and Asia, which is advantageous as both regions have higher average unit retail and better growth prospects than the United States. 
  • Ralph Lauren’s gross margins are higher than those of some competitors and have been improving, as much of its merchandise achieves premium pricing. 
  • Ralph Lauren’s growth came from controlled retail and e-commerce, allowing for better command over pricing and marketing. The firm has reduced its share of revenue from wholesale channels by about 20 percentage points over the past 12 years.

Company Description

Founded by designer Ralph Lauren in 1967, Ralph Lauren Corp. designs, markets, and distributes lifestyle products in North America, Europe, and Asia. Its products include apparel, footwear, eyewear, jewelry, leather goods, home products, and fragrances. The company’s brands include Ralph Lauren Collection, Polo Ralph Lauren, Lauren Ralph Lauren, and Double RL. Distribution channels for Ralph Lauren include wholesale (including department stores and specialty stores), retail (including company-owned retail stores and ecommerce), and licensing.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Technology Stocks

Danaher continues to prune its portfolio of businesses

Business Strategy & Outlook

Through the Danaher Business System, Danaher aims for continuous improvement of its scientific technology portfolio by seeking out attractive markets and then making acquisitions to enter or expand within those fields and divest assets that are no longer seen as core. After acquisitions, Danaher aims to accelerate core growth at acquired companies by making R&D and marketing-related investments. It also implements Lean manufacturing principles and administrative cost controls to boost operating margins. Overall, Danaher’s strategic moves are appreciable, which have pushed it into attractive end markets with strong growth prospects and sticky, recurring revenue streams. For example, recurring revenue could reach about 80% of sales after the pending environmental and applied solutions (EAS) group divestiture in late 2023.

Danaher’s acquisition-focused strategy has contributed to it becoming a top-5 player in the highly fragmented and relatively sticky life science and diagnostic tool markets less than 20 years after its first acquisition in the space (Radiometer in 2004). Recent life science and diagnostic acquisitions have included Beckman Coulter, Pall, and Cepheid. In early 2020, Danaher completed the acquisition of GE Biopharma, now called Cytiva, which fills in some gaps for Danaher within the biopharmaceutical development and manufacturing tool market. Within the life sciences field, the end market is particularly attractive given its strong growth trajectory, high margins, and high switching costs associated with regulatory and reproducibility concerns of end users. Management has started making more acquisitions in that space, such as Aldevron, and expects more tuck-in acquisitions in this and other end markets. Danaher also continues to prune its portfolio of businesses. The planned EAS group divestiture is just the latest for the company that distributed shares in the now publicly traded Fortive Corp (industrials) in 2016 and Envista (dental) in 2019 directly to shareholders. More divestitures are possible in the future, as well.

Financial Strengths

Danaher’s acquisition-focused strategy makes financial flexibility and capital market access important. In recent years, the company has issued debt to make significant acquisitions, such as Beckman Coulter (2011), Pall (2015), Cepheid (2016), and Cytiva (2020) before deleveraging to more manageable levels again. At the end of 2021, gross leverage stood at just 2 times, including COVID-19-elevated profits. Danaher has expressed a desire to maintain its investment-grade status, and it should be achievable. However, the company is highly acquisitive, and future acquisitions could significantly boost leverage from current levels before the company aims to return to more manageable levels.

Bulls Say

  • The Danaher Business System focuses on continuous improvement, including the acceleration of core growth and margin expansion through marketing initiatives and innovation, which appears positive for Danaher’s long-term prospects. 
  • Danaher’s shift to healthcare markets has created a less cyclical business in attractive markets with high barriers to entry and impressive recurring consumables revenue streams. 
  • Danaher has plenty of opportunities to consolidate and improve performance in its targeted life science and diagnostic end markets.

Company Description

In 1984, Danaher’s founders transformed a real estate organization into an industrial focused manufacturing company. Through a series of mergers, acquisitions, and divestitures, including the Fortive separation in 2016, Danaher now focuses primarily on manufacturing scientific instruments and consumables in three segments: life sciences, diagnostics, and environmental and applied solutions. In late 2019, Danaher separated from its dental business through an initial public offering process, and in early 2020, it acquired GE’s Biopharma business, now called Cytiva, which added to its life sciences segment.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Global stocks

State Street’s front office includes Charles River’s portfolio modeling and legacy State Street’s foreign-exchange trading

Business Strategy & Outlook

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industry wide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did appear to moderate to about 2.5% in 2020. In addition, low interest rates continue to pressure net interest income, but this is showing signs of moderating. Following its announced acquisition of Brown Brothers Harriman, which is expected to close in the third quarter of 2022, State Street will be the largest custodian by assets under custody. Given pressures in the industry, the management to continue to focus on managing expenses. With the acquisition of Charles River Development in 2018, State Street is emphasizing its integrated “front to back” offering (branded as State Street Alpha), which it believes will lead to stickier, high-revenue-generating customer relationships. State Street’s back-office offerings include custody, fund accounting, and fund administration. Its middle office includes client reporting, post-trade workflows, investment risk monitoring, and performance/attribution analysis. State Street’s front office includes Charles River’s portfolio modeling and data-management software as well as legacy State Street’s foreign-exchange trading and securities finance solutions.

State Street is also one of the largest global asset managers, with over $3 trillion in primarily passive assets under management. This business, which is less than 15% of the firm’s revenue, has underperformed. Media reports indicate that the firm may explore strategic alternatives, including a joint venture; while such a course of action may make strategic sense, it won’t materially affect the fair value estimate.

Financial Strengths

State Street’s financial structure is sound. As of Dec. 31, 2021, the firm had a common equity Tier 1 ratio (advanced) of 14.3%, comfortably exceeding its regulatory minimum of 8.5%. State Street’s supplementary leverage ratio was 7.4%, above the 5% minimum. While the firm had some extraordinary losses during the financial crisis related to asset-backed commercial paper, it has learned from the crisis and looks quite unlikely to see a repeat of this. In addition, the balance sheet is conservatively invested and the firm’s loans and leases have resulted in relatively low charge-offs. The company did increase its provisions amid the COVID-19 epidemic but has since released these as the economy performed better than expected in 2021.

Bulls Say

  • With the acquisition of Charles River Development, State Street’s front-to-back offerings offer competitive advantages and should lead to a greater wallet share of clients and stickier client relationships.
  • In comparison with a traditional bank, only about one fourth of State Street’s revenue is from net interest income, and the firm has very modest exposure to credit risk.
  • A joint venture or sale of its asset-management business could unlock value for shareholders.

Company Description

State Street is a leading provider of financial services, including investment servicing, investment management, and investment research and trading. With approximately $43.7 trillion in assets under custody and administration and $4.1 trillion assets under management as of Dec. 31, 2021, State Street operates globally in more than 100 geographic markets and employs more than 38,000 worldwide.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Global stocks

Molson Coors continues to look for capital-efficient opportunities internationally

Business Strategy & Outlook

Molson Coors has long been a mainstay of the global beer industry, with North American staples like Coors and Miller and leading European brands such as Carling. However, these trademarks that were once strengths are now largely declining in relevance and volume. Moreover, while they are starting to see improvements, the firm’s legacy brands have proved difficult to parlay into higher-end categories with more propitious growth prospects, as innovation efforts in this regard have seen mixed success. With the firm’s dominance largely in secularly challenged segments of the malt category, this positioning reaps advantages sufficient for a moat. Management announced a plan in the fourth quarter of 2019 to realign the business. Though it was long overdue, CEO Gavin Hattersley’s plan was strategically prudent. It entails materially higher levels of manufacturing, innovation, and marketing investment across the portfolio, particularly in the above-premium segment where Molson Coors has lagged. Funded mostly by expected savings from business restructuring, the firm also looks to extract efficiencies by making its infrastructure and commercial functions more technologically adept. 

Molson Coors’ competitive positioning is not entirely bleak, and its growth trajectory has been irreparably impaired. The company continues to look for capital-efficient opportunities internationally; for example, it has transitioned to licensing arrangements in markets like Mexico. It has also assembled an impressive portfolio of seltzers, which should allow it to capture some growth from exposure to an adjacent category. Roughly one third of volume in Europe is in the above-premium category, where the company either owns or licenses healthy brands like Blue Moon, Staropramen, and Peroni. Ultimately, however, establishing a more meaningful position in competitively advantaged malt and other alcohol segments will be tremendously difficult, as the firm will be beleaguered by competition while its legacy business continues to falter.

Financial Strengths

Molson Coors is in reasonable financial health. The company took on material debt in relation to the MillerCoors transaction, but management has done a good job reducing leverage at the cadence that was committed to when the deal was consummated. The firm closed 2021 with net debt/adjusted EBITDA of 3.5 times, putting it on track to reach management’s target of under 3 times by the end of 2022. Molson Coors has historically generated healthy free cash flow to equity, clocking in at an average of $1.3 billion annually over the past five years (a low-double-digit proportion of sales). Cash flow was adversely affected in 2020 by pandemic disruption, and it will remain depressed in the medium term due to incremental investment stemming from management’s revitalization plan and one-time restructuring charges associated with workforce severance and technology implementation. Still, levels will average $1.2 billion over the next five years, with steady improvement longer-term driven by improving margins, capital-efficient international expansion, and prudent working capital management. Management’s guiding principle as it relates to leverage is to maintain its investment-grade credit rating. This implies that it will continue to pay down debt, as well as confine its activities on the merger and acquisition front to strategic tuck-ins. The dividend, raised in 2019 after being frozen for three years, was suspended in May 2020 to shore up the liquidity profile amid COVID-19. In July 2021, the board reinstated the dividend at a payout roughly 40% below the antecedent, which it believes illuminates not only the firm’s financial prudence, but also its commitment to the hefty investments that will be required to resuscitate the brewer’s competitiveness. Liquidity should not be a concern as the firm continues to navigate the pandemic, as it had $525 million in cash plus $1.5 billion available under its revolving credit facility as of June 2022.

Bulls Say

  • If management is able to strike gold with meaningful innovation, it has the distribution to scale its offerings more broadly and efficiently than smaller competitors. 
  • Management’s recent decision to decommission a slew of secularly challenged brands in the economy segment should free up resources (distribution space, administrative focus, manufacturing capacity) to divert toward more fruitful categories. 
  • Technology-enabled transformation of infrastructure and commercial functions should present low-hanging fruit from which to extract cost savings.

Company Description

Molson Coors is the fifth-largest beer producer globally, boasting top-two positioning in the U.S., Canada, and United Kingdom. It brews and markets a slew of company-owned brands including Blue Moon, Coors, Miller, Vizzy, and Staropramen. It also sells various partner brands in certain locales such as Topo Chico (licensed from Coca-Cola), Amstel and Dos Equis in Canada (through an exclusive import/license arrangement with Heineken), and Corona in Central Europe (through an agreement with Anheuser-Busch InBev). The firm’s go-to market approach differs by geography as well, primarily using independent distributors in the U.S. but deploying hybrid models in Canada and Europe.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Global stocks Shares

VUK reported a very strong FY21 result, with +546%

Investment Thesis

  • Trades on undemanding valuations (i.e. depressed price to book and price to earnings) and below valuation (which also includes a Brexit / Covid discount).
  • Potentially further provisioning required as a result of Covid-19.
  • Improving shareholder returns (including potential for buybacks).
  • Delivering on medium term targets.
  • Solid franchise and branch network.
  • Synergies from Virgin Money acquisition to support earnings growth.
  • Expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears).
  • Funding position remains sound, however excess funding for potential capital management is unlikely now.
  • Increasing penetration in the SME and retail banking space in the UK.

Key Risks

  • The UK economy recovers quicker than expected post-Covid-19.
  •  VUK resumes dividend payments earlier than expected.
  • More intense competition for deposit and loan growth.
  • Increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits.
  • Medium term guidance targets, especially cost reduction targets, fall short.
  • Regulatory changes especially around any capital requirements and hence lower ROEs achieved.
  • Brexit uncertainty (potentially leading the UK economy into recession).
  • Clarity provided over Virgin Money disappoints.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Underlying operating income +2% to £1572m, with net interest income increasing +5% to £1412m as lower deposit costs, structural hedge benefit and growth in higher yielding assets more than offset mortgage spread pressures, partially offset by -16% decline in non-interest income to £160m, reflecting weaker market conditions.
  • Underlying operating expenses reduced -2% to £902m with the underlying cost-to-income ratio reducing -200bps to 57% as efficiencies from cost savings programmes were partly offset by higher variable remuneration. 
  • Impairment release of £131m (vs £501m charge in pcp) amid robust asset quality & improving outlook, however, maintained coverage levels of 70 bps (down -33bps), well above pre-pandemic levels. 
  • Underlying PBT improved +546% to £801m driven by a recovery in income, lower costs and

improved impairment performance leading to underlying RoTE improving +17.2% to 17.8%.

VUK returned to statutory profit before tax of £417m from £168m loss, equating to statutory RoTE of 10.2%.

  • Capital strengthened with CET1 increasing +150 bps to 14.9% (14.4% excluding software benefit) equating to buffer of £1.4bn over MDA threshold of 8.7%, and strong liquidity & funding position maintained with LCR of 151% (up +11%) and 108% (up +100 bps) loan-to-deposit ratio. 
  • Capital returns resumed with the Board declaring a 1p dividend (updated capital framework and dividend policy post-SST at 1H22).

Company Description

Virgin Money UK Plc is a holding company that owns Clydesdale Bank and Yorkshire Bank in the United Kingdom. It was formed by National Australia Bank (NAB) in February 2016, in advance of the divestment of its UK segment via IPO. VUK is a full-service challenger bank of scale servicing both retail and SME in the UK market. VUK services ~160k small business customers with a turnover of less than £2m, and ~23k medium businesses with a turnover of >£2m.

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

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

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

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

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

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

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

Categories
Dividend Stocks

W.R. Berkley and peers are experiencing a positive trend in underlying underwriting profitability

Business Strategy & Outlook

W.R. Berkley’s niche focus and strict underwriting discipline result in a business model that has historically earned outstanding returns during hard market pricing periods, but only slightly better than adequate returns during soft periods. In 2020, the pandemic negatively affected both the industry’s and W.R. Berkley’s results. However, losses in 2020 were very manageable and well within the range of historical events that the industry has successfully absorbed in the past. W.R. Berkley recognized losses roughly in line with peers. However, the picture for the future has brightened significantly. The pricing environment had not been particularly favorable for commercial lines in previous years, and W.R. Berkley had stayed cautious as a result. However, in 2019, pricing momentum picked up in primary lines, and this positive trend only accelerated in 2020. While higher pricing is necessary to some extent to offset some negative claims trends, pricing increases appear to be more than offsetting these factors. 

As a result, W.R. Berkley and peers are experiencing a positive trend in underlying underwriting profitability, and the company has been getting more aggressive. There is a potential for a truly hard pricing market, similar to what the industry saw in 2003. In this scenario, narrow-moat and highly disciplined operators such as W.R. Berkley would be positioned to earn very attractive returns. Starting in 2003, the company generated returns above 20% for five years. However, given that the industry remains well-capitalized, the magnitude and duration of excess returns will be lower than during that period. Still, as a result of these factors, W.R. Berkley will generate strong returns in the near term. More importantly, management’s approach will favor shareholders in the long run. 

Financial Strengths

W.R. Berkley’s equity/assets ratio of 21% at the end of 2021 is a bit below industry averages, but it is acceptable, given the nature of the company’s lines and the relative lack of catastrophe exposure. The current level is in line with the company’s historical average. W.R. Berkley’s investment portfolio is fairly typical for the industry, with most of the money invested in municipal bonds, corporate bonds and asset-backed securities. But W.R. Berkley shortened the duration of its portfolio in anticipation of a rise in interest rates and shifted its allocation toward investments that generate returns primarily through capital appreciation. The potential long-term upside to this tactic, this has increased near-term pressure on investment income and raises investment risk. Still, its investment portfolio is reasonably safe and this move is unlikely to have a material effect on valuation or the company’s financial health.

Bulls Say

  • The company’s reinsurance operations are a drag on overall results. 
  • The investment in international opportunities creates a point of uncertainty, and results to date have been merely adequate. 
  • During soft pricing periods, Berkley will struggle to earn meaningful excess returns, as it is unwilling to reduce staff.

Company Description

W.R. Berkley is an insurance holding company with a host of subsidiaries that primarily write commercial casualty insurance. The firm specializes in niche products that include various excess and surplus lines, workers’ compensation insurance, self-insurance consulting, reinsurance, and regional commercial lines for small and midsize businesses.

(Source: Morningstar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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

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

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

Categories
Technology Stocks

Xero Ltd (XRO) delivered strong top-line growth in FY22 driven by YoY growth

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

Investment Thesis

  • Competent leadership team with a proven track record of delivering strong growth (Strong top-line momentum driven by strong support of accountants and bookkeepers with annualised monthly recurring revenue increasing at CAGR 32% and strong subscriber growth with positive LTV (Lifetime Value) trends (over FY17-22, ANZ LTV grew at CAGR 34% and International LTV grew at CAGR 49%). 
  • Solid product offering that is secure, scalable and efficient technology which is competing against competitors with technology that has legacy issues. XRO’s small business platform is an ecosystem of more than 700 connected apps backed by a community of more than 50,000 users of XRO’s API developer tools. Going forward the Company could potentially increase its revenue by monetising its platform in other ways like charging third party app developers. 
  • Potential for meaningful acquisitions to fill gaps in product capability. The Company is well positioned to make acquisitions going forward (given its balance sheet and funding status). 
  • The Company continues to focus on cloud accounting, and there’s a significant upside potential in the sector given the fact that the current levels of small business cloud accounting adoption globally is estimated to be less than 20% of the total market or opportunity across English-speaking countries in which the Company operates. 

Key Risks

  • Decrease of migration to cloud software. 
  • Currency headwinds due to weakening of NZ$ relative to AUD, USD and Pound. 
  • Deteriorating sentiment if the economy and IT spending weakens. 
  • Excessive competition from other established players like Intuit leading to loss of market share.
  • Inability to extract higher operational efficiencies as the Company scales up. 
  • Issues in gaining market share especially in markets with established incumbents 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Operating revenue grew +29% YoY (+30% in CC) to $1.1bn, with Core accounting revenue up +23% driven by subscriber growth (up +19% YoY to 3.3 million) and ARPU increases (driven by price increases) and Platform revenue up +113% (to account for 11% of total operating revenue) driven by growth in payments, payroll and revenues from recently acquired businesses including Planday. 
  • Gross profit increased +31% YoY to $957.4m with margin improving +130 bps to 87.3% (includes the operations of Planday), largely due to efficiency gains in customer support teams and hosting costs for cloud-based products.
  • Total operating expenses, inclusive of acquisition integration costs, increased +39% YoY, reflecting greater investment in product design and development and sales and marketing expenses as travel cost resumed, resulting in -32% YoY decline in operating profit to $42m. 
  • Net loss was $9.1m vs net profit of $19.8m in FY21, impacted by a fair value revaluation gain on contingent consideration of $38.9m, a new revenue incentive with Planday management resulting in a $10.5m expense and goodwill impairment relating to the acquisition of Waddle of $20.4m. 
  • Free cash flows declined -96% YoY to $2.1m as +8% YoY increase in operating cash flow was more than offset by +117% YoY increase in investments. XRO has $150m of undrawn committed debt facilities. 
  • Total LTV increased +43% YoY to $10.9bn in FY22 (equating to 5-year CAGR of +34% for ANZ and +49% for International), equating to LTV/CAC (LTV/customer acquisition cost) of 6.9x (up +0.5x YoY), driven by good progress on subscriber growth, a marked improvement in average revenue per user (ARPU) of +7% YoY (+9% in CC), along with a -11bps YoY decline in monthly churn to 0.90%, which remained consistently below pre-Covid pandemic level. 

Company Description

Xero Ltd (XRO) is a software as a service (SaaS) company, engaged in the provision of a platform for online accounting and business services to small businesses and their advisors. The Company operates through two operating segments: Australia and New Zealand (ANZ), and International (UK + North America + Rest of the World).

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