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Dividend Stocks

Amadeus and GDS relationships to be the exception rather than the rule

Business Strategy and Outlook

While Amadeus still stands to see material near-term corporate and European demand headwinds from the coronavirus and geopolitical conflict, it is aniticipated its leadership position in global distribution systems, or GDS, to endure during the next several years, driven by its leading network of airline content and travel agency customers as well as its healthy position in software solutions for these carriers and agents. Amadeus is the largest of the three GDS operators (narrow-moat Sabre is number two, followed by privately held Travelport) that control nearly 100% of market volume. 

Amadeus’ GDS enjoys a network effect (source of its narrow moat). As more supplier content (mostly airline content) is added, more travel agents use the platform; as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book and service the end customer with. The 2016 acquisition of airline IT company Navitaire and 2018 acquisition of hotel IT company TravelClick expanded Amadeus’ GDS network advantage through new customer integration, as Navitaire focuses on low-cost carriers while the company’s existing Altea division focuses on full-service carriers, and TravelClick has a midscale lodging presence versus Amadeus’ legacy hotel offering, which focuses on enterprises. 

Replicating a GDS platform entails aggregating and connecting content from hundreds of airlines to a platform that is also connected to travel agents, requiring significant costs and time. Still, although it is viewed GDS advantages as substantial, technology architechtures like that of eTraveli (set to be acquired by narrow-moat Booking Holdings in early 2022), enable end users to access not only GDS content but supply from competing platforms, which could take some volume from GDS operators. Also, GDS faces some risk of larger carriers and agencies direct connecting, although it is likely these relationships to be the exception rather than the rule.

Financial Strength

While near-term industry travel demand remains below prepandemic marks, Amadeus’ balance sheet is clearer. Amadeus entered 2020 with just 1.4 times net debt/EBITDA, and it is projected it has enough liquidity for four years even at near zero demand levels. Amadeus has taken aggressive actions to shore up its liquidity profile. In March 2020, Amadeus began to cut costs and secured an additional EUR 1 billion one-year bridge loan, in addition to the undrawn EUR 1 billion revolver it already had. In April 2020, the company raised EUR 1.5 billion with a EUR 750 million equity offering (at a 5% discount to closing stock prices) and a EUR 750 million convertible note (at a strike price 40% above closing stock prices). In May 2020, Amadeus raised EUR 1 billion in debt at interest rates of 2.5%-2.9%. It is alleged banking partners to provide any additional needed funding, given Amadeus’ sizable network, switching costs, and efficient scale advantages that underpin its narrow moat.Net debt/EBITDA increased to 5.5 times in 2021, due to lower demand resulting from COVID-19, but it is foreseen a return to within management’s 1-1.5 times target range by 2023. Although about EUR 2.7 billion of the company’s EUR 4.3 billion in long-term debt matures over the next four years, its low leverage and stable transaction-based model in normal demand environments should not present any financial health concerns. It is projected Amadeus will generate EUR 7 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26.

Bulls Say’s

  • The company’s GDS network hosts content from most airlines and is used by many travel agents, resulting in significant industry share. Replicating this network would involve meaningful time and costs. 
  • The network advantage is supported by new products and technology that further integrate airlines and agents into its GDS platform. The company’s Navitaire, AirIT, and TravelClick acquisitions aid this expanding technology and integration reach. 
  • The business model is driven by transaction volume and not pricing, leading to lower cyclical volatility.

Company Profile 

Among the top three operators, Amadeus’ 40%-plus market share in air global distribution system bookings is the largest in the industry. The GDS segment represents 56% of total prepandemic revenue (2019). The company has a growing IT solutions division (44% of 2019 revenue) that addresses the airline, airport, rail, hotel, and business intelligence markets. Transaction fees, which are tied to volume and not price, account for the bulk of revenue and profits. 

(Source: MorningStar)

General Advice Warning

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

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Dividend Stocks

Sun Life have to carefully weigh the capital required along with potential for disruption to its existing operations

Business Strategy and Outlook

Following the 2008-09 financial crisis, Sun Life made several positive changes to its business operations, most notably selling its lagging U.S. life insurance and annuities business. Sun Life’s medium-term objectives include underlying EPS growth of 8%-10%, underlying return on equity of 12%-14%, and a dividend payout rate of 40%-50%. Canada and the United States continue to have several demographic trends working in favor of insurers, especially with wealth- and asset-management businesses, as an aging population increasingly looks to manage its savings. However, areas of growth remain fiercely competitive, and life insurance will remain structurally difficult, making it hard for Sun Life to maintain any excess returns. Sun Life is also focused on expanding its operations in Asia, though it is skeptical of this initiative ultimately providing significant value, given the subpar returns on equity so far. 

It is also held for Sun Life to continue to invest in digital tools and apps. In 2018, Sun Life acquired Maxwell Health, a startup that offers a digital employee-benefits platform. On the distribution side, Sun Life is working to sell insurance through mobile banking apps in Asia. Sun Life has a “four-pillar” acquisition strategy in which any deal needs to meet at least one of the following: It must add scale, add capabilities, deliver lifetime return on equity with the firm’s medium-terms objective, or be accretive to earnings over a reasonable time frame. In asset management, it is alleged for more consolidation in the industry and expect Sun Life to participate. In 2019, it acquired real estate investment firm BentallGreenOak and in 2020 announced a majority stake in Crescent Capital and Infrared Capital Partners, both of which are alternative asset managers. While a large acquisition in the asset-management industry is possible, Sun Life would have to carefully weigh the capital required and the potential for disruption to its existing operations. In the insurance space, Sun Life swung big with its $2.5 billion acquisition of DentaQuest, which is expected to close midyear 2022.

Financial Strength

The life insurance business model typically entails significant leverage and potentially exposes the industry to outlier capital-market events and unanticipated actuarial changes. Sun Life was not immune to these risks and was hurt, like many of its peers, during the financial crisis. Since then, Sun Life has done a reasonably good job of reducing its debt by growing back its equity base while reducing absolute debt levels.As of Dec. 31, 2021, Sun Life has a total financial leverage ratio (the ratio of debt and preferred shares to total capital) of 25.5%, consistent with management’s long-term target of 25%. As of Dec. 31, 2020, Sun Life’s LICAT ratio was 145%. The Life Insurance Capital Adequacy Test is the sum of the available capital, surplus allowance, and eligible deposits divided by the firm’s base solvency buffer. Life Insurers in Canada must have a minimum of 90%, suggesting that Sun Life has an adequate buffer from a regulatory perspective.

Bulls Say’s

  • Over the next 20 years, the retirement-age population will grow to about one in five, significantly increasing the demand for financial-protection products. 
  • When interest rates rise, earnings for insurers like Sun Life should increase. 
  • Given its strong operating margins, Sun Life’s MFS asset-management franchise should drive earnings growth during an equity market recovery.

Company Profile 

Sun Life Financial is one of Canada’s Big Three life insurance companies along with Great-West Lifeco and Manulife. Sun Life provides insurance, retirement, and wealth-management services to individual and corporate customers in Canada, the United States, and Asia. It also owns MFS Investment Management, a Boston-based asset-management firm. Sun Life generates about a third of its profit from asset-management operations. 

(Source: MorningStar)

General Advice Warning

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

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Global stocks Shares

We Expect Avery Dennison Will Enjoy Another Year of Strong Growth in 2022

Business Strategy and Outlook

 Avery Dennison is the largest supplier of pressure-sensitive adhesive materials and passive radio frequency identifiers in the world. Rising consumer packaged goods penetration in emerging markets should add to label growth, while growth in omnichannel retailing will aid RFID sales at Avery Dennison.

Avery sells pressure-sensitive materials to a highly fragmented customer base that converts specialty film rolls into labels for companies such as Kraft Heinz or Amazon. The concentrated market positions of Avery and competitor UPM Reflactac give each bargaining power over their customers. The labels and graphics materials, or LGM, and industrial and healthcare materials, or IHM, segments account for roughly 74% of company revenue. They convert paper, vinyl, and adhesives into composite films that become shipping labels, automotive graphics, and special-use tapes and films. While demand for these products is stagnant in developed markets, and expect Avery’s large emerging market footprint (around 40% of revenue for these segments) to drive mid-single-digit revenue growth.

 Avery’s Retail Branding and Information Systems segment, or RBIS, makes up 26% of sales and produces a mixture of apparel graphics, product tags, and passive radio frequency identifiers or RFID. While RFID accounts for around 25% of the segment’s revenue, it has grown rapidly in recent years and has increasingly become the focus of Avery’s RBIS segment. RFID products are typically integrated into product tags in industries which have both a diverse inventory and where UPC scanning is cumbersome or labour-intensive, such as apparel. Avery’s recent strategy shift to focus on reducing both costs and prices of the technology in order to gain share demonstrates the commoditized nature of these products. Even so, and think Avery will at least be able to grow with the market, or between 15% and 20% per year. The remainder of segment revenue comes from the application and production of apparel graphics and tags. It is expected expect revenue growth of these end uses to remain mixed, dependent largely on shifting fashion preferences.

Financial Strength

Avery Dennison is in very good financial health. The company ended 2021 with net debt/EBITDA of roughly 2.2, which gives the firm room to manoeuvre with regard to additional acquisitions, opportunistic share buybacks, or to boost its dividend. This remains just below management’s target range of 2.3-2.6, aimed at preserving its BBB credit rating. Avery’s target range of debt remains manageable, and shouldn’t become a material burden even if economic conditions worsen. Thanks to the amount of business Avery derives from consumer staples, cash flows usually remain relatively stable throughout the economic cycle.

Bulls Say’s

  • Emerging-market adoption of consumer-packaged goods will provide a long runway for sales growth. 
  • As RFID technology becomes widely adopted, Avery’s growth should receive a hefty tailwind. 
  • Avery’s dominance in retail branding information systems should lead to widening segment margins

Company Profile 

Avery Dennison manufactures pressure-sensitive materials, merchandise tags, and labels. The company also runs a specialty converting business that produces radio-frequency identification inlays and labels. Avery Dennison draws a significant amount of revenue from outside the United States, with international operations accounting for the majority of total sales.

(Source: MorningStar)

General Advice Warning

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

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Dividend Stocks

Positive Flows Should Help Franklin Resources Navigate More Recent Market Volatility

Business Strategy and Outlook

A confluence of several issues-poor relative active investment performance, the growth of low-cost index-based products, and the expanding power of the retail-advised channel–has made it increasingly difficult for active asset managers to generate organic growth, leaving them more dependent on market gains to increase their assets under management, or AUM. While we believe there will always be room for active management, we feel the advantage for getting and maintaining placement on platforms will go to those managers that have greater scale, established brands, solid long-term performance, and reasonable fees. 

However, have to admit that a combination of narrow-moat Franklin Resources with no-moat Legg Mason was not even on the radar-believing both firms were more likely acquirers of smaller asset managers as opposed to either one being an acquisition target.The new Franklin provides investment management services to retail (53% of managed assets), institutional (45%) and high-net-worth (2%) clients and is one of the more global firms of the U.S.-based asset managers , with more than 35% of its AUM invested in global/international strategies and just over 25% of managed assets sourced from clients domiciled outside the U.S. 

Morningstar analysts expect the Legg Mason deal to keep margins from deteriorating in the face of industrywide fee compression and rising costs (necessary to improve investment performance and enhance product distribution), near-term organic growth will struggle to stay positive (albeit better than the negative growth profile for a stand-alone Franklin).

Financial Strength 

Franklin entered fiscal 2022 with $3.2 billion in principal debt (including debt issued/acquired as part of the Legg Mason deal)–$300 million of 2.8% notes due September 2022, $250 million of 3.95% notes due July 2024, $400 million of 2.85% notes due March 2025, $450 million of 4.75% notes due March 2026, $850 million of 1.6% notes due October 2030, $550 million of 5.625% notes due January 2044, and $350 million of 2.95% notes due August 2051. At the end of December 2021, the firm had $5.9 billion in cash and investments on its books. More than half of these types of assets have traditionally been held overseas, with as much as one third of that half used to meet regulatory capital requirements, seed capital for new funds, or supply funding for acquisitions. Assuming Franklin closes out the year in line with our expectations, the firm will enter fiscal 2023 with a debt/total capital ratio of around 22%, interest coverage of more than 20 times, and a debt/EBITDA ratio (by our calculations) of 1.4 times.Franklin has generally returned excess capital to shareholders as share repurchases and dividends. During the past 10 fiscal years, the firm repurchased $7.4 billion of common stock and paid out $7.1 billion as dividends (including special dividends). While Franklin’s current payout ratio of 30%-35% is lower than the 40% average payout (when excluding special dividends) during the past five years, we expect only low-single digit annual increases in the dividend until the integration of the Legg Mason deal is well behind them. As for share repurchases, Franklin spent $208 million, $219 million, and $755 million buying back 7.3 million, 9.0 million, and 24.6 million shares, respectively, during fiscal 2021, 2020, and 2019. Given the likelihood that Franklin may decide to pay off some of its debt as it comes due the next several years, we don’t expect see see a large level of share repurchases in the near term.

Bulls Say

  • Franklin Resources is one of the 20 largest U.S.-based asset managers, with more than two thirds of its AUM sourced from domestic clients. It is also the fifth largest global manager of cross-border funds. 
  • The purchase of Legg Mason has lifted Franklin’s AUM to more than $1.5 trillion, hoisting it into the second largest tier of U.S.-based asset managers, which includes firms like Pimco, Capital Group and J.P. Morgan Asset Management. 
  • Franklin maintains thousands of active financial advisor relationships worldwide and has close to 1,000 institutional client relationships.

Company Profile

Franklin Resources provides investment services for individual and institutional investors. At the end of December 2021, Franklin had $1.578 trillion in managed assets, composed primarily of equity (36%), fixed-income (40%), multi-asset/balanced (10%) funds, alternatives (10%) and money market funds. Distribution tends to be weighted more toward retail investors (53% of AUM) investors, as opposed to institutional (45%) and high-net-worth (2%) clients. Franklin is also one of the more global firms of the U.S.-based asset managers we cover, with more than 35% of its AUM invested in global/international strategies and just over 25% of managed assets sourced from clients domiciled outside the United States.

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks

Pact Group Holdings Ltd – The Board declared a 65% Franked Interim Dividend of 3.5cps, down -30%

Investment Thesis:

  • Solid market share in Australia and growing presence in Asia. Hence provides attractive exposure to both developed and emerging markets’ growth.
  • Valuation is fair on our forward estimates.  
  • Management appears to be less focused on acquired growth going forward, which means there is a less of a chance for the Company to make a value destructive acquisition. 
  • Reinstatement of the dividend is positive and highlights management’s confidence in future earnings growth.  
  • Focusing on sustainable packaging in an environmentally friendly market.

Key Risks:

  • Competitive pressures leading to further margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in Australia and Asia.
  • Emerging markets risk.
  • Poor acquisitions or not achieving synergy targets as PGH moves to reduce its dependency on packaging for food, diary, and beverage clients to more high growth sectors such as healthcare.
  • Adverse currency movements (purchased raw materials in U.S. dollars)

Key Highlights:

  • Revenue increased +3.7% to $927.2m, with Packaging and Sustainability up +7.4% driven by volume growth and the pass through of higher material and other input costs and Materials Handling and Pooling up +5.3% driven by growth in pooling and infrastructure demand and resilient hanger reuse service volumes, partially offset by -10.9% decline in Contract Manufacturing
  • Underlying EBITDA declined -8% to $151m with margin compressing by -200bps to 16.3% and underlying EBIT declined -16% to $83m with margin compressing by -210bps to 9%, primarily due to lower earnings in the Contract Manufacturing amid lower volumes and lags in recovering raw material costs. PGH saw almost flat earnings in Packaging & Sustainability and Materials Handling & Pooling as significant raw material and freight cost inflation was mitigated through strong pricing discipline and efficiency programs.
  • Underlying NPAT declined -25% to $39m and reported net loss of $21m amid net after-tax expense for underlying adjustments of $60m mostly related to non-cash impairments and write-downs in the Contract Manufacturing segment of $65m (after tax).
  • Operating cashflow declined -19% to $110.4m and FCF declined -72% to $13m.
  • Net debt increased +0.3% to $601m, driven by lower earnings in the Contract Manufacturing segment along with an increase in working capital, leading to gearing increasing +0.3x to 2.7x vs target range of <3.0x.
  • Liquidity remained strong with $288.9m in committed undrawn facilities, with the Company extending the maturity of the debt portfolio to an average of 3.4 years and introducing new lenders, increasing diversification and reducing refinancing risk.
  • The Board declared a 65% franked interim dividend of 3.5cps, down -30%

Company Description:

Pact Group Holdings Ltd (PGH) was established by Raphael Geminder in 2002 (Mr. Geminder remains a major shareholder with ~44% and is the brother-in-law of Anthony Pratt, Chairman of competitor Visy). Pact has operations throughout Australia, New Zealand and Asia and conceives, designs, and manufactures packaging (plastic resin and steel) for many products in the food (especially dairy and beverage), chemical, agricultural, industrial and other sectors.

(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.

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Technology Stocks

Praemium 1H22 FUA was up by 43% to $49bn; Merger with Powerwrap brings significant opportunities for synergies

Investment Thesis

  • Merger with Powerwrap creates a much better capitalized and resourced competitor in the market, with significant opportunities for synergies. 
  • Increasing diversification via geography and product offering. 
  • Increasing competition amongst platform providers such as Hub24, Wealth O2, BT Panorama, Netwealth, North Platform etc.
  • Very attractive Australian industry dynamics – Australian superannuation assets expected to grow at 8.1% p.a. to A$9.5 trillion by 2035. 
  • Disruptive technology and hold a leading position to grow funds under advice via SMAs. 
  • The fallout from the Royal Commission into Australian banking has led to increased inquiries for PPS’ products/services. 
  • Growing and maturing SMSF market = more SMSFs demand for tailored and specific solutions.  
  • Bolt-on acquisitions to supplement organic growth 
  • pFurther consolidation in the sector could benefit PPS. 

Key Risk

  • Execution risk – delivering on PPS’s strategy or acquisition. 
  • Contract or key client loss. 
  • Competitive platforms/offering (new technology). 
  • Associated risks in relation to system, technology and software.
  • Operational risks related to service levels and the potential for breaches.
  • Regulatory changes within the wealth management industry.
  • Increased competition from major banks and financial institutions

1H22 results summary: Compared to pcp 

  • Australian business saw revenue increased +21% to $30.3m, with Platform revenue up +31% to $21.7m driven by FUA increase of +28% to $21.1bn and Portfolio Services revenue up +7% to $8.5m driven by VMA software and VMA admin revenue growth of +5% and +28%, respectively. EBITDA (excluding corporate costs of $0.6m) declined -6% to $8.2m with margin declining -700bps to 27% amid investments in operations to support client growth and R&D to drive continued innovation in proprietary technology. Powerwrap contributed $10.1m in revenue, $0.8m in EBITDA and delivered $3.3m in annualized cost synergies. 
  • International (discontinued operations): revenue was up +41% to $8.9m with platform revenue up +53% to $5.4m from accelerating momentum in platform FUA which increased +58%, Planning software revenue up +91% to $2.1m amid increase in WealthCraft CRM and planning software licences in 2021 which grew +41% internationally, and Fund revenue down -24% to $0.6m. EBITDA loss declined -94% to a breakeven, comprising UK’s EBITDA of $0.1m, Hong Kong’s EBITDA profit of $0.8m and Dubai’s EBITDA loss of $1m.

International business divested – surplus net proceeds to be returned to shareholders. Management completed the sale of International business to Morningstar for $65m, with the transaction expected to be completed during Q2/Q3 of CY22 and the Board intending to return surplus net proceeds to shareholders. 

Expense growth to stabilize. Management expects further Powerwrap synergies post scheme migration ($4m in annualised synergies by 30 June 2022, with a further $2m annualised in FY23 from efficiencies and natural attrition). 

Company Profile

Praemium Limited (PPS) is an Australian fintech company which provides portfolio administration, investment platforms and financial planning tools to the wealth management industry.

 (Source: Banyantree)

  •                    Given the

shareCompany Profi                             General Advice Warning

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

Categories
Dividend Stocks

Treasury Wine Estates – The Board declared an Interim Dividend of 15cps, representing a NPAT Payout Ratio of 66%

Investment Thesis:

  • Better than expected China investigation outcomes.  
  • Significant opportunity to grow its Asian business (reallocation opportunities) which will provide a more balanced exposure to the region rather than one specific country. 
  • Group margin expansion opportunity from premiumization and good cost control. 
  • The turnaround in Americas business could lead to significantly higher margins.
  • Favorable currency movements (leveraged to a falling AUD/USD).
  • Further capital management initiatives. 

Key Risks:

  • Further deterioration (or worse than expected) outcome from China tariffs / investigation.
  • U.S. turnaround disappoints. 
  • Slowdown in wine consumption in key markets. 
  • Adverse movement in global wine supply and demand. 
  • Increase competition in key markets. 
  • Unfavorable currency movements (negative translation effect).
  • Policy and / or demand changes in China leading to an impact on volume growth. 

Key Highlights:

  • Group net sales revenue (NSR) of $1.27bn were down -10.1% YoY, driven by the divestment of the U.S. Commercial portfolio, lower shipments to Mainland China and reduced commercial wine portfolio volumes in Australia and the U.K.
  • NSR per case of A$95.60 was up +16.1% YoY due to the premiumization of the portfolio.
  • Management noted that 83% of global sales revenue now comes from the Luxury and Premium portfolios, an increase of +8% YoY.
  • Group operating earnings (EBITS) were down -3.6% to $262.4m, however excluding the Australian country of origin sales to Mainland China, EBITS was up +28.3% highlighting solid momentum in other parts of the business. EBITS margin of 20.7% was up +140bps and management continues to work towards their group EBITS margin of >25%.
  • The Board declared an interim dividend of 15cps (fully franked), representing a NPAT payout ratio of 66% (vs target of 55 – 70%).
  • TWE balance sheet is in a solid position with leverage (net debt / EBITDAS) of 1.8x and interest cover of 13.5x. 
  • Company has ample liquidity of $1.4bn available.
  • In Penfolds division EBITS of $165.1m was down -17.4% YoY and margin was down -60bps to 43.1%The performance was largely driven by decline in shipments to Mainland China, with Asia NSR down -31.5% YoY to $203.8m. However, segment NSR and EBITS excluding China were up +49.1% and +32.1%, respectively.
  • In Treasury Americas division EBITS of $85.2m was up +26.9% YoY and margin was up +500bps to 18.3%. Volume and NSR decline of -39% and -7.7%, respectively, was driven by the divestment of the U.S. Commercial brand portfolio in Mar-21.
  • In Treasury Premium Brands division EBITS of $39.0m was up +32.3% and margin improved +210bps to 9.3%. Volumes and NSR declined -11.7% and -6.3%, respectively, driven by the reduced demand seen during 1H22 vs pcp which saw increased pandemic related demand. Margins improved on the back of a +6.1% increase in NSR per case (improved portfolio mix) and improved CODB.

Company Description:

Treasury Wine Estates (TWE) is one of the world’s largest wine companies listed on the ASX. As a vertically integrated business, TWE is focused on three key activities: grape growing and sourcing, winemaking and brand-led marketing. Grape Growing & Sourcing – TWE access quality grapes from a range of sources including company-owned and leased vineyards, grower vineyards and the bulk wine market. Winemaking – in Australia, TWE’s winemaking and packaging facilities are primarily located in South Australia, NSW and Victoria. The Company also has facilities in NZ and the US.  Brand-led Marketing – TWE builds their brands through marketing and distributes its products across the world.

(Source: Banyantree)

General Advice Warning

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

Categories
Dividend Stocks

Link Administration Holdings Ltd to Maintain its Dividends and Reduce its Debts

Business Strategy and Outlook

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends. The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, which sold its remaining holding in the company in 2016. 

It is considered the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years. 

Link’s only significant competitor in fund administration is Marsh & McLennan-owned Mercer, which has a 10% market share following its acquisition of Pillar, previously group revenue, grows at around 4% per year, comprising 1.5% population growth and 2.5% inflation. Experts assume corporate markets revenue grows at 3% per year, reflecting inflation, and assume no market share gains due to the strength of major competitor Computershare. According to analysts EBIT margins grow from 12% in fiscal 2021 to 21% by fiscal 2031 partly due to cost-cutting. Over the next decade, an EPS CAGR, excluding amortisation of acquired intangible assets, of 9%. The capital-light nature of the business model means it is anticipated cash conversion to be strong, enabling dividends to be maintained and net debt gradually reduced, assuming no further acquisitions. Experts discounted cash flow valuation assumes a weighted average cost of capital of 7.7%.

Financial Strength

Link’s balance sheet is in good shape with a net debt/EBITDA ratio of around 2.6 as at Dec. 31, 2021, which is within the company’s target range of 2 to 3. From an interest coverage ratio perspective, Link has a manageable interest coverage ratio of around 14.

Bulls Say’s

  • It is alleged Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage. 
  • Experts base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years. 
  • The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Profile 

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong. 

(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

CPU Group – The Board declared a 40% franked interim dividend of 24cps, up +4%.

Investment Thesis:

  • Current expectations of aggressive interest rates increase globally. 
  • CPU is globally diversified with a revenue model that generates predictable recurring revenues and strong free cash flow generation.
  • Two main organic growth engines in mortgage servicing and employee share plans should lead to organic EPS growth.
  • Expectations of margin improvement via cost reductions program. 
  • Leveraged to rising interest rates on client balances, corporate action and equity market activity.
  • Potential for earnings derived from non-share registry opportunities due to higher compliance and IT requirements.
  • Solid free cash flow and deleveraging balance sheet.

Key Risks:

  • Increased competition from competitors such as recently listed Link and Equiniti which affect margins.
  • Cost cuts are not delivered in accordance with market expectations.
  • Sub-par performance in any of its segments, especially mortgage servicing (Business Services) as a result of higher regulatory and litigation risks; Register and Employee Share Plans as a result of subdued activity.
  • Exchanges such as ASX are exploring blockchain solutions to upgrade its clearing and settlement system (CHESS). This distributed ledger technology can bring registry businesses in-house and disrupt CPU.

Key Highlights:

  • Group Revenue (ex-MI) was up +4.5% (adjusting for the CCT acquisition, organic operating revenue growth was down -2.2% and excluding event-based revenues and CCT, operating revenue ex MI was up +3.6%) and including Margin Income as well as CCT, total revenue rose +4.6%.
  • EBIT increased +14.2% to $217.9m whilst EBIT excluding Margin Income increased +16.7% to $157.8m (adjusting for CCT, it was up +15.5% to $156.1m) with EBIT ex MI margin up +150bps to 14.4%, largely due to the growth in Employee Share Plans supported by cost management initiatives.
  • Management NPAT was up +16.5% to $137.4m and Management EPS increased by +4.5% to 22.76cps (excluding dilution from the Rights Issue and the contribution from CCT, legacy EPS increased +10.6%).
  • Net operating cash flow increased +63.8% to $203.3m, representing an EBITDA to cash conversion rate of ~66%, up +20%, which combined with capex and net MSR spend, delivered FCF $181.5m.
  • Net cash outflow was $633.4m, after spending $713m on acquisitions net of disposals and $101.9m on dividends.
  • Net debt +99.2% over FY21 to $1342.2m, increasing Net Debt/ EBITDA by +0.95x to 2.02x, at the higher end of target range.
  • The Board declared a 40% franked interim dividend of 24cps, up +4%.
  • Management continues to refine the portfolio and have reclassified the UK Mortgage Services business as an asset held for sale, anticipating the sale of the business in the foreseeable future.

Company Description:

Computershare Ltd (CPU) is a global market leader in transfer agency and share registration, employee equity plans, mortgage servicing, proxy solicitation and stakeholder communications. CPU also operates in corporate trust, bankruptcy, class action and a range of other diversified financial and governance services. 

(Source: Banyantree)

General Advice Warning

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

Categories
Dividend Stocks

Western Union Is Shifting to Digital

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Business Strategy and Outlook

Western Union’s primary macroeconomic exposure is to employment markets in the developed world, as the search for better economic opportunities is the fundamental driver for money transfers. While conditions have improved over time in the United States and Europe, with new entrants adding to the issues for legacy operators like Western Union. At this point, we don’t see a catalyst to improve the situation, and pandemic-related headwinds appear to be lingering. Recent geopolitical events could be an additional headwind. Another major issue for Western Union is the industry shift toward electronic methods of money transfer. The company has been actively building out its presence in electronic channels in recent years to adapt to the change in the industry. Western Union saw a sharp spike in digital transfers at the beginning of the pandemic, and growth has remained strong. Western Union achieved a 32% year-over-year increase in transaction growth in 2021 as this area of the company’s business jumped to about a quarter of revenue. 

Morningstar analysts believe the firm’s aggressive approach is the best strategy as Western Union positions itself to maintain its scale advantage despite the shift. From Morningstar analyst view, scale and market share across all channels will be the dominant factor in long-term competitive position, and Western Union appears to be maintaining its overall position. However, the growth that the company is seeing in digital transfers does not appear to be leading to strong overall growth.

Western Union Is Shifting to Digital

Western Union’s third-quarter results weren’t particularly impressive, as the company continues to battle some pandemic-related headwinds. However, from a long-term point of view,  focus is more on the company’s digital channel results, as Morningstar analysts believe sharing in this channel’s growth is key to maintaining the company’s scale advantage and wide moat over time. On that front, Western Union maintains double-digit growth in digital. Morningstar analysts view the company’s shares as undervalued, as the company has the potential to adapt to a shifting market. Thus, maintain a $26 fair value estimate.

Digital channels considered as the bright spot for the company. Growth in digital channels did moderate as the company lapped the spike it saw last year. However, year-over-year transaction and revenue growth of 19% and 15%, respectively, can be considered as a solid result. Digital transfers now account for about one quarter of revenue, and management believes it is on track to exceed $1 billion in digital revenue in 2021. As per Morningstar analysts perspective, Western Union’s ability to scale across both cash and digital channels is a significant advantage as the overall market shifts to digital.

Financial Strength 

Financial Strength Western Union’s capital structure is fairly conservative, as management sees a strong credit profile as an advantage in attracting agents. The company carried $3.0 billion in debt at the end of 2021, resulting in debt/EBITDA of 2.3 times; this is a reasonable level, given the stability of the business. Western Union also typically holds a substantial amount of cash. Net debt at the end of 2021 was approximately $1.8 billion, and we expect the company to hold a net debt position of about $2 billion over time. Given recent changes to tax laws, it’s possible Western Union might not hold as much cash as it has historically, as it will no longer incur a tax penalty upon repatriation. This could help free management’s hand, as the company historically has returned the bulk of its free cash flow to shareholders through stock repurchases and dividends

Bulls Say

  • The demographic factor that has historically driven industry growth–namely, the differential between population growth in developing and developed countries–remains in place for the foreseeable future. 
  • Western Union didn’t see a major drop-off during the last recession or the pandemic, highlighting the stability of the business. 
  • While the motives for immigrants to relocate to wealthier countries are well understood, developed countries also have incentive to open their borders, as negligible native population growth makes immigration a necessity for long-term GDP growth.

Company Profile

Western Union provides domestic and international money transfers through its global network of about 500,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network.

(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.