Category: Sectors

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ETFs ETFs Research Sectors

Betashares Western Asset Australian Bond Fund ETF: Diversified Portfolio

Process:

The philosophy of the team is to identify mispricing within sectors and securities, allocating active risk in areas in which it has conviction while ensuring the portfolio remains diversified to avoid singular themes being pervasive through the portfolio. The team takes account of global macro insight from the global investment strategy committee and overlays its domestic market knowledge to come up with a base-case expectation looking forward six to nine months depending upon its conviction. In addition to this, the team develops multiple upside and downside scenarios as a risk-management framework. Based on the base case, the team engages in quantitative and qualitative analysis to determine sector allocation. The quant component is where the team will look at historical and relative spread comparison within and across sectors. The outcomes of this analysis are then overlaid by qualitative insight considering technical demand, credit, and liquidity dynamics. The culmination of this analysis in conjunction with the base-case expectation guides the actual portfolio positions. The fund looks to invest across government, semi government, supranational, credit, inflation-linked bonds, securitised assets, and cash. The team is clear about allocating only active positions where it has a high degree of conviction and an expected positive reward profile. Holdings are disclosed daily. BNDS runs as a separate vehicle to the flagship unlisted fund and has some additional restrictions on the amount of residential mortgage-backed securities it can hold owing to requirements on holdings being issued by a listed entity.

Portfolio:

The portfolio can invest across government, semi government, supranational, credit, securitised assets, inflation-linked bonds, and cash. As of November 2021, more than 40% of the portfolio was invested in investment-grade corporate bonds, around 25% in semi government issues, 20% in government, 10% in supranational, with a small amount of mortgage-backed and asset-backed securities. This allocation has been relatively consistent over time, and cash levels have been low, generally a few percentage points, even in times of stress like the early-2020 market plummet. Relative to the Bloomberg AusBond Composite Index, the fund has been long underweight in government bonds, choosing instead to invest more broadly across spread assets. Given the fund’s constraints, the overall portfolio remains high-quality, with 35% of assets in AAA rated issues, no allocation below investment-grade, and a weighted average credit rating of AA-. Portfolio manager Anthony Kirkham and the Western team have historically been opportunistic within their mandate, though duration is kept within plus or minus 1.0 year relative to the benchmark. Active duration moved short relative to the benchmark around mid-2021 but came back in line with the index around yearend. Like most Australian bond managers, they entered 2021 overweight in credit, indicative of their opportunistic profile. Susquehanna Financial Group is the primary market maker, and bid-ask spreads have remained respectable over its relatively short life, moderately higher than passive Australian bond ETFs, which is to be expected. This vehicle contained about AUD 190 million in February 2022 and can be used as a core defensive allocation.

People:

The fund is managed by a seasoned team of investors who remain dedicated to this strategy. The team is led by Anthony Kirkham, who has had more than 30 years of wider experience, including nearly two decades at Western Asset Management, and leading this strategy since 2002. Kirkham has credit analyst, dealer, and portfolio manager experience working for Commonwealth Bank, Metway Bank, RACV Investments, and Citigroup. He is supported by Damon Shinnick, who is a portfolio manager with a focus on credit portfolios. Shinnick has 22 years of experience within the industry including 11 years at the firm. Shinnick has also held an array of portfolio manager roles previously at Challenger Financial, Lehman Brothers, Pension Corporation LLP, and HSBC. Craig Jendra is also a key member of the team, joining Western in 1996 and being promoted to portfolio manager in 2000. Jendra has 25 years of industry experience with previous roles at Citigroup and JPMorgan. The three portfolio managers are supported by analyst Sean Rogan, who joined in 2002 and has 32 years’ industry experience; dedicated investment dealer Anthony Francis; and portfolio analyst Lawrence Daly, who ensures risk characteristics are maintained and adhered to. Together, the group boasts more than 25 years’ industry experience and is among the most impressive in its peer group.

Performance:

BNDS began in November 2018. It has closely tracked its equivalent unlisted fund strategy, Western Asset Australian Bond, over that span. The long-running unlisted fund has done well over the long term, especially compared with peers. It has delivered returns above the Bloomberg AusBond Composite Index, net of fees, over the past decade. That is ahead of its target return of 75 basis points (gross of fees) over the benchmark and market cycle. A tracking error of 100 basis points is targeted. Perhaps more impressive, though, is that these results put the strategy’s flagship A share class in the first quartile of its Morningstar Category over the trailing three, five, and 10 years to December 2021. Sector allocations and credit exposure continue to drive performance. Most of the outperformance has stemmed from the fund’s allocation to higher-spread assets in lieu of government bonds, especially credit. To put this into context, the portfolio has had around 40%-50%exposure within credit since 2002. Adding the strategy’s allocation to supranationals to the mix, this exposure goes up to almost 60%. While this increases the strategy’s exposure to wider credit spreads, it remains high quality, and the majority of it is shorter-dated to control for spread risk. Owing to the mandate restrictions, the fund can’t and doesn’t take large-duration bets. Duration was the second largest contributor to the portfolio in 2021, but has been a small negative attributor over the long term, largely a result of the fund’s short-duration bias in an environment of shrinking bond yields.

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(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s middle quintile. That’s not great, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will still be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.

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(Source : Morningstar)

About Funds:

BetaShares Western Asset Aus Bd ETF BNDS is a compelling choice for domestic fixed-interest exposure owing to its best-in-class team and straightforward approach. BNDS provides daily holdings to the market and has grown steadily since it began in November 2018 with active external market makers. Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills. Kirkham is supported by an experienced investment team, consisting of Craig Jendra and Damon Shinnick, co-portfolio managers, and Sean Rogan, research analyst. The stability of this group and quality of the research are impressive. There’s appeal to the strategy’s simplistic and relatively conservative investment process, which seeks mispriced domestic fixed-interest securities within various sectors. Sector and issuer limits are applied to help damp volatility in different environments. Still, sector allocation and issuer selection has been strong over the past decade, emphasising the team’s rigourous analysis in these areas. However, this can be a hindrance if yields rise unexpectedly. That said, the portfolio’s active duration was moved around judiciously and contributed strongly in 2021, a testament to the team’s ability to interpret and capitalise on shifting economic conditions. The track record here has also been consistent and solid over multiple time frames, and the annual 0.42% fee is competitive relative to peer

(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
Funds Funds Research Sectors

TIAA-CREF Core Plus Bond Fund Premier Class Bested Almost 70% Of Its Distinct Peers

Process:

Lead manager Joe Higgins continues the thoughtful relative value approach that has been in place both here and on his other charge, TIAA-CREF Core Bond TIBDX. This strategy earns an Above Average Process Pillar rating. Higgins has the ultimate authority in ensuring what holdings go into the portfolio but draws heavily on the strength and expertise offered by the sector managers, analysts, and macroeconomic strategists in identifying relative value opportunities across the fixed-income universe. The strategy can invest in everything from corporate bonds and mortgages to municipal bonds and emerging-markets debt, with the higher-risk sectors like high-yield bonds, bank loans, and emerging-markets debt ranging between 10% and 30% depending on the team’s outlook and risk appetite. The strategy has avoided taking extreme positions in any of those areas and has generated its alpha from a variety of sources instead of relying on any one area. This approach has benefited investors through steady-as-it-goes performance rather than wild swings based on drastic portfolio shifts, and it has worked through a variety of market environments. 

Portfolio:

As of December 2021, the portfolio’s largest exposures were to investment-grade corporate bonds (24.2% of assets), agency mortgage-backed securities (18.6%), and emerging-markets debt (10.2%). The emerging markets exposure rarely if ever broke double-digit threshold, but its allocation has been on the upswing since March 2020 given the portfolio managers’ belief in its ability to outperform over the long term. The emerging markets’ relative lack of direct correlation to domestic corporate moves, as well as premium on offer from new issuance, make them attractive. This overweighting also makes sense to the managers in context of a rising rate environment, as they seek refuge in assets that are not hypersensitive to rate increases. That 10.2% stake in emerging-markets debt is almost 4 times the category peer median, though, and about half of it is rated below-investment-grade. Coupled with 5.6% in high-yield corporates, 4.3% in nonagency mortgages, and 2.7% in senior loans, the “plus” sector exposure of this portfolio amounted to 22.7% at the end of December 2021. This edges toward the higher half of the 10%-30% “plus” budget and represents increased credit risk, but the strategy’s yield (a proxy for risk) has hugged quite closely to the peer median in the past couple of years, indicating a reasonable level of risk-taking.

People:

Joe Higgins, who replaced long time lead manager Bill Martin at the end of 2020, is a seasoned and capable manager supported by three experienced comanagers and a robust analyst team. The strategy earns an Above Average People Pillar rating. Higgins had been leading the Core strategy since 2011, has been with the firm since 1995, and was previously sector lead on asset-backed securities and commercial mortgage-backed securities. He is supported by the same trio of comanagers that backed Bill Martin: government specialist John Cerra, high-yield leader Kevin Lorenz, and emerging-markets expert Anupam Damani. They are backed by a robust investment team that continues to expand following the legacy Nuveen and Symphony merger. The organization now boasts considerable firepower, with 43 portfolio managers and 60 analysts spread across the fixed-income platform. Even though Higgins has the ultimate decision-making power for this strategy, he draws on the strength and expertise of the sector managers in allocating capital to portfolios per mandate requirements. As such, the whole team provides input to help with portfolio construction, and often the managers’ portfolios will rhyme with each other. Additionally, the introduction of an investment committee and strategy groups provided more formalized structures for manager discussions and viewpoint sharing.

Performance:

The strategy under Joe Higgins’ tenure has bested almost 70% of distinct peers in the intermediate core-plus bond category, keeping up with the record his predecessor Bill Martin set during his tenure from September 2011 to December 2020. Over that period, the Institutional share class returned 4.5% annualized and outpaced roughly two thirds of peers. While lagging performance punctuated this record at various points, most notably in March 2020, by and large “measured consistency” was the characteristic on display for this strategy’s performance. Following the rough showing in early 2020 when the strategy lost 8%, almost 200 basis points more than the peer group median, the strategy experienced more bumps all throughout 2021 as rate volatility had a negative impact on mortgage holdings. On the plus side, the strategy had an underweighting in agency mortgages relative to the benchmark (18.6% versus 27.4% at year-end) so the hit was less severe, and an overweighting in high-yield corporates relative to the bogy (5.6% versus 0%) proved rewarding given robust economic conditions.

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(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.

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(Source : Morningstar)

About Funds:

TIAA-CREF Core Plus Bond has an experienced lead manager and the solid process remains intact, while the expansive supporting cast has only broadened. The strategy’s Institutional and Advisor share classes earn a Morningstar Analyst Rating of Silver, while the more-expensive share classes are rated Bronze. The W share class, which does not charge a fee, is unrated. Veteran manager Joe Higgins, who has led the sibling strategy TIAA-CREF Core Bond TIBDX since 2011, took over this strategy at the end of 2020 when long time lead manager Bill Martin retired. Higgins was a natural replacement given that he had been running a similar, more-conservative mandate. He is supported by the same trio of comanagers that backed Martin: government specialist John Cerra, high-yield leader Kevin Lorenz, and emerging-markets expert Anupam Damani. All told, Nuveen’s robust taxable fixed-income group boasts more than 100 portfolio managers, analysts, and traders that help Higgins fulfil his mandate. The strategy’s solid process remains unchanged and peppered with measured risk-taking. Higgins and team execute a relative value process that incorporates a broad opportunity set, with the bulk of assets in investment-grade securities and a smaller subset in higher-risk “plus” sectors like high-yield bonds, bank loans, and emerging-markets debt that will typically amount to 10%-30% of assets depending on Higgins’ outlook and allocation decisions. 

(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
Financial Markets Sectors Technology Technology Stocks

Megaport Ltd – Company achieved 2,455 customers across 768 Enabled Data Centres

The concept of 5G network with magnifying glass on modern circuit board, high-speed mobile internet and new generation networks technology background

Investment Thesis:

  • MP1 is a global Software Defined Network provider, focusing on cloud connectivity. As such, the Company is leveraged to the rapid growth of global cloud and data centres and is in a strong position to benefit from the rollout to new cloud and data centre regions. Key macro tailwinds behind MP1’s sector: (1) adoption of cloud by new enterprises; (2) increased level of investment and expenditure by existing customers; and (3) more and more enterprises looking to use multiple cloud products/providers, which works well with MP1’s business model.  
  • MP1 has a scale advantage over competitors. MP1 has over 600 locations around the globe. MP1 has significant scale advantage over competitors and whilst replicating this scale is not necessarily the difficult task, it will take several years to do so during which time MP1 will continue to add locations and customers using the scale advantage.
  • Strong R&D program ensuring MP1 remains ahead of competitors.
  • Strong cash balance of $104.6m. 
  • Strong relationship with data centres (DC). MP1 has equipment installed in 400 data centres, so MP1 is a customer of data centres. MP1 also drives DCs interconnection revenue. Whilst several data centres like NEXTDC, Equinix provide SDN (Software Defined Network) services, it is unlikely data centres will look to change their relationship with (or restrict) MP1 given they are designed to be neutral providers to network operators. Further, given MP1’s existing customer base and connections with cloud service providers, it would be very difficult for data centres (without significant disruption to customers/cloud service providers) to change the rules for MP1.

Key Risks:

  • High level of execution risk (especially with respect to development). 
  • Revenue, cost and product synergies fail to eventuate from the InnovoEdge acquisition. 
  • Heavy reliance on third party partners (especially data centre providers and cloud service providers). 
  • Data centres like NEXTDC, Equinix provide SDN services and decide to restrict MP1 in providing their services. 
  • Disappointing growth (in terms of expanding data centre footprint, customers, ports, Megaport Cloud Router).

Key highlights:

(1) Revenue increased +42% over pcp to $51.2m, driven by increased usage of services across all regions, with North America delivering strongest growth across all regions, increasing +55% over pcp, followed by Europe (+35% over pcp) and Asia Pacific (+28% over pcp). Monthly recurring revenue (MRR) increased +46% over pcp to $9.2m, driven by strong customer growth compounded with a 5% increase over pcp in services per customer. 

(2) Profit after direct costs improved +69.4% over pcp to $30.9m, driven by revenue growth and a controlled network cost. 

(3) Opex increased +42% over pcp with employee costs increasing +40% over pcp amid investment in headcount to support business growth (employee costs as a percentage of revenue declined -100bps over pcp to 55%), marketing (+126% over pcp) and travel (+1481% over pcp) costs increasing amid a gradual return of travel and conference activities following global easing of Covid-19 restrictions, and IT costs increasing +106% over pcp due to expensing of Software as a Service (SaaS) costs, previously capitalised, following a change in accounting policy. 

(4) The Company achieved 2,455 customers (up +7.4% over 2H21) across 768 Enabled Data Centres (420 located in North America, 208 in EMEA and 140 in Asia Pacific). 

(5) The Company ended the half with cash and equivalents position of $104.6m, down -23.2% over 2H21.

Company Description: 

Megaport Ltd (MP1) is a software-based elastic connectivity provider – that is, it is a global Network as a Service (NaaS) provider. MP1 develops an elastic connectivity platform providing customers interconnectivity and flexibility between other networks and cloud providers connected to the platform. 

(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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Dividend Stocks Expert Insights

Omicron Boost to Healius’ Earnings Appears Short-Lived but Core Pathology Proves Resilient

Business Strategy and Outlook:

As demand for PCR testing surged during the omicron wave, higher positivity rates limited the ability of pathology providers to pool tests, causing significant delays and accelerating adoption of rapid antigen tests. While Healius is improving its turnaround times, management admitted that the sector wouldn’t be able to keep up again if a similar surge were to occur. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Healius continues to increase its exposure to higher-margin modalities, and the company remains on track with its costout initiatives such as digitisation and network optimisation.

Despite Virtus deciding not to proceed with the acquisition of Adora, Healius is still classifying the business as a discontinued operation and suggested a sale to a different party is imminent.

Financial Strength:

Healius’ interim 2022 underlying EBIT rose 177% to AUD 376 million driven by operating leverage from elevated PCR testing. Healius declared a fully franked interim dividend of AUD 0.10 per share. Net debt/EBITDA was 0.4 at half-end, but it is expected that gearing to slightly increase following its Agilex acquisition. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages.

The smaller imaging segment, which contributed just 3% of group underlying EBIT, was weaker than expected. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages. This was despite support labour, excluding radiologists, reducing 4% on average per site.

Company Profile:

Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue is almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.

(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

Orora Ltd strong momentum with ongoing share buyback and balance sheet flexibility

Investment Thesis

  • Trading on fair value relative to our valuation.
  • Exposure to both developed and emerging markets’ growth.
  • Near-term headwinds should be in the price.
  • Revised strategy following recent strategic review.
  • Bolt-on acquisitions (and associated synergies) provide opportunities to
  • supplement organic growth.
  • Leveraged to a falling AUD/USD.
  • Potential corporate activity.
  • Capital management (current on-market share buyback plus potential for
  • additional initiatives).

Key Risks

  • Competitive pressures leading to margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in US, EM and Australia.
  • Emerging markets risk.
  • Adverse movements in AUD/USD.
  • Declining OCC prices.

1H22 Results Highlights

  • Sales revenue increased +9.6% (+10.6% in CC).
  • Underlying EBIT increased +10.4% (+11.1% in CC) driven by significantly improved performance in the North America segment.
  • Operating cash flow increased +0.6% to $145.5m with cash conversion declining -400bps to 75%, with higher earnings offset by an increase in working capital.
  • Net debt increased +13% over 2H21 to ~$512m, primarily reflecting the impact of increased debt arising from the on-market share buyback and increased capex partially offset by stronger earnings. ORA’s current leverage of 1.6x is below management’s targeted level of 2-2.5x EBITDA.

Company Profile 

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.

(Source: BanyanTree)

General Advice Warning

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

Categories
Dividend Stocks Sectors

Orora Ltd strong momentum with ongoing share buyback and balance sheet flexibility

Investment Thesis

  • Trading on fair value relative to our valuation.
  • Exposure to both developed and emerging markets’ growth.
  • Near-term headwinds should be in the price.
  • Revised strategy following recent strategic review.
  • Bolt-on acquisitions (and associated synergies) provide opportunities to
  • supplement organic growth.
  • Leveraged to a falling AUD/USD.
  • Potential corporate activity.
  • Capital management (current on-market share buyback plus potential for
  • additional initiatives).

Key Risks

  • Competitive pressures leading to margin erosion.
  • Input cost pressures which the company is unable to pass on to customers.
  • Deterioration in economic conditions in US, EM and Australia.
  • Emerging markets risk.
  • Adverse movements in AUD/USD.
  • Declining OCC prices.

1H22 Results Highlights

  • Sales revenue increased +9.6% (+10.6% in CC).
  • Underlying EBIT increased +10.4% (+11.1% in CC) driven by significantly improved performance in the North America segment.
  • Operating cash flow increased +0.6% to $145.5m with cash conversion declining -400bps to 75%, with higher earnings offset by an increase in working capital.
  • Net debt increased +13% over 2H21 to ~$512m, primarily reflecting the impact of increased debt arising from the on-market share buyback and increased capex partially offset by stronger earnings. ORA’s current leverage of 1.6x is below management’s targeted level of 2-2.5x EBITDA.

Company Profile 

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.

(Source: BanyanTree)

General Advice Warning

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

Categories
Shares Small Cap

Qube Working Towards Cost Effective Supply Chain

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook

Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains. 

It is alleged Qube to generate robust earnings growth over the long term on acquisitions, developments and organic growth. The domestic port logistics industry has traditionally been very fragmented, highly competitive, and inefficient. Currently, there are more than 250 operators providing port logistics services in one segment of the market. These are typically small operators with limited geographic scope offering limited point-to-point services. Qube’s strategy is to provide a broad range of services nationwide, touching multiple segments of the import/export supply chain. Analysts are supportive of this strategy and believe there is significant scope for further industry rationalisation. 

Consolidating the fragmented logistics chain should significantly improve Qube’s competitive position. Qube has already established a dominant market share in some specific port logistics offerings, particularly with regards to rail haulage services to and from Port Botany. Successfully developing its strategic land holdings into inland intermodal terminals should add materially to Qube’s future earnings and support cost advantages to less efficient peers. Qube aims to develop inland rail terminals as an alternative to moving container volumes from port via road. When fully developed, Moorebank will be Australia’s largest inland intermodal terminal. The bulk and general segments are highly fragmented and competitive but Qube is one of the largest players, with operations at 28 city and regional ports. The automotive stevedoring business operates in a duopoly market structure, holding long-term off-ship transportation, processing and storage contracts with major foreign vehicle manufacturers.

Financial Strength

Following the sale of Moorebank warehouses, Qube is in strong financial health. Gearing (net debt/net debt plus equity) was 10% in December 2021, well below Qube’s 30%-40% long-term target range. It has less than AUD 400 million in debt after receiving the upfront component of Moorebank sale proceeds, providing ample headroom to fund developments and bolt-on acquisitions. A special dividend or share buyback is likely in 2022. It is projected net debt/EBITDA to fall from 3.8 at June 2021 to below 2 times in 2022 and for the medium term. Qube’s businesses have delivered steadily increasing operating cash flow in recent years, though operations remain cyclical. Recent growth initiatives should generate strong future cash flow, though a large-scale acquisition or development project may require new equity funding. Qube has significant capital expenditure requirements including Moorebank development. Qube is committed to paying 50%-60% of earnings per share before amortisation as dividends.

Bulls Say’s

  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration. 
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving strong returns for Qube. 
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders

Company Profile 

Qube has three main divisions: operating; property; and Patrick. Operating undertakes road/rail transportation of containers to and from port, operation of container parks, customs/quarantine services, warehousing, intermodal terminals, international freight forwarding, domestic stevedoring, and bulk transport. Patrick is the container terminals business acquired from Asciano, and the property division includes tactical land holdings in Sydney. 

(Source: MorningStar)

General Advice Warning

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

Categories
Shares Small Cap

Temple & Webster Group strong focus on reinvesting earnings back into business

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

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(Source: BanayanTree)

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
Sectors Small Cap

Temple & Webster Group strong focus on reinvesting earnings back into business

Investment Thesis

  • Operates in a large addressable market – B2C furniture and homewares category is approx. $16bn. 
  • Structural tailwinds – ongoing migration to online in Australia in the homewares and furniture segment. At the moment less than 10% of TPW’s core market is sold online versus the U.S. market where the penetration rate is around 25%.  
  • Strong revenue growth suggests TPW can continue to win market share and become the leader in its core markets. 
  • Active customer growth remains strong, with revenue per customer also increasing at a solid rate. 
  • Successful execution in new growth pillars – Trade & Commercial (B2B) and Home Improvement. 
  • Management is very focused on reinvesting in the business to grow top line growth and capture as much market share as possible. Whilst this comes at the expense of margins in the short term, the scale benefits mean rapid margin expansion could be easily achieved. 
  • Strong balance sheet to take advantage of any in-organic (M&A) growth opportunities, however management is likely to be very disciplined. 
  • Ongoing focus on using technology to improve the customer experience – TPW has invested in merging the online with the offline experience through augmented reality (AR). 

Key Risks

  • Rising competitive pressures.
  • Any issues with the supply chain, especially because of the impact of Covid-19 on logistics, which affects earnings / expenses. 
  • Rising cost pressures eroding margins (e.g., more brand or marketing investment required due to competitive pressures).
  • Disappointing earnings updates or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower. 
  • Trading on high PE-multiples / valuations means the Company is more prone to share price volatility. 

1H22 Result Highlights

  • TPW delivered strong top line growth of +46% YoY for 1H22, despite experiencing some supply chain and product availability issues (which also impacted customer satisfaction metrics). Hence the growth rate would have likely been stronger in our view. The Company also saw some inflationary pressures on product and freight, which saw 1H22 delivered margin decline to 30.5% (from 33.0% in pcp) and was in line with management’s previous guidance.
  • Advertising & Marketing costs were up +55% YoY and increased as a percentage of revenue to 13.6% (from 12.8% in pcp), driven by a step up in both performance and brand marketing. TPW’s brand awareness continues to increase, now above 60%. Management also spoke about pushing the brand awareness strategy nationally.
  • TPW’s ongoing investment in the business (people and technology, new growth horizons in B2B and home improvement) saw fixed cost increase YoY and hence saw EBITDA decline -19% YoY to $12.0m.
  • TPW posted the sixth straight quarter of revenue per active customer growth, which was up +10% YoY. This was driven by higher average order value and the repeat rate. 

Company Profile 

Temple & Webster Group (TPW) is a leading online retailer in Australia, which offers consumers access to furniture, homewares, home décor, arts, gifts, and lifestyle products. 

(Source: BanayanTree)

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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Marriott’s Strong Brand Intangible Asset Positioned Well for a Travel Rebound

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Business Strategy and Outlook:

While COVID-19 is still materially impacting near-term travel demand in many regions of the world, we expect Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, we believe the acquisition of Starwood (closed in September 2016) has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.

Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages. With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.

Financial Strength:

Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As travel demand recovered in 2021, so too did Marriott’s debt leverage, with debt/adjusted EBITDA ending the year at 4.5 times. If demand once again plummeted, we think Marriott has enough liquidity to operate at zero revenue into 2023.

Bulls Say:

  • Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element. 
  • Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to continue to work from remote locations. 
  • Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.

Company Profile:

Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents 10% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.

(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.