Category: Sectors

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Global stocks Shares

Paylocity Wins Amid the War for Talent and a Bounce-Back in Labor Markets

Business Strategy and Outlook:

Paylocity delivered strong second-quarter fiscal 2022 results underpinned by a continued normalization of employment levels and growing demand for solutions to attract, manage, and retain employees amid fierce competition for labor and dispersed workforces. Amid tight labor markets and an intensifying war for talent, businesses are seeking solutions to attract and retain employees, which is creating industry tailwinds for all payroll and human capital management (HCM) players. Additionally, a sustained shift to dispersed workforces in a post-COVID-19 world is driving demand for HCM software that helps employers connect and manage remote employees or employees across multiple jurisdictions. Paylocity is expected to have capitalized on these tailwinds over the quarter through the appeal of the platform’s unique complimentary collaboration features such as social collaboration platform Community, and video and survey functionality. As with payroll and HCM peers, it is expected to uptake of these features aimed at driving higher employee engagement will entrench the software further into the client’s business and strengthen the customer switching.

Paylocity’s target market has naturally skewed upmarket in recent years as the platform and its embedded modules have evolved. Recent acquisitions including software integration tool Cloudsnap in January 2022 and global payroll provider Blue Marble in September 2021 position Paylocity well to cater for the needs of larger clients. To reflect this shift, the company has formally raised the upper limit of its target client to 5,000 employees, from 1,000 employees previously. At this stage, analysts maintain our longterm forecasts and take the announcement as a formalization of the current client mix, instead of a strategic shift upmarket.

Financial Strength:

The revenue growth estimated at a compound annual growth rate of 23% over the five years to fiscal 2026, driven by mid-single-digit industry growth, market share gains, and mid-single-digit revenue per client growth on greater uptake and monetization of modules. Over the same period, operating margins are expected to increase to about 20% from 9% in a COVID-19-affected fiscal 2021. This uplift is anticipated to be driven by operating leverage from increased scale, greater uptake of high margin modules, higher interest on client funds, and operating efficiencies from increased digital sales and service. Paylocity’s revenue increased an impressive 34% on the prior year. Following strong sales activity during the quarter and robust client retention, analysts have marginally lifted their full-year revenue and adjusted EBITDA forecasts 1% and 4%, respectively, to align with updated near-term guidance. EPS is expected to increase 14% to $1.48 in fiscal 2022, before growing at a CAGR of 32% to fiscal 2031 as Paylocity continues to grow scale and achieves operating leverage. 

Company Profile:

Paylocity is a provider of payroll and human capital management, or HCM, solutions servicing small- to mid-size clients in the United States. The company was founded in 1997 and targets businesses with 10 to 5,000 employees and services about 28,750 clients as of fiscal 2021. Alongside core payroll services, Paylocity offers HCM solutions such as time and attendance and recruiting software, as well workplace collaboration and communication tools.

(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 Shares

Capable Hands Remain at the Helm of Magellan; Valuation Upside High as Shares Lose Steam

Business Strategy and Outlook

Magellan is an active manager of listed equities and infrastructure. The firm has a fundamental, high-conviction investment approach. Its flagship Global strategy has historically tilted toward IT, e-commerce platforms, and consumer franchises; preferring large, developed market multinationals. FUM have been attracted by consistently achieving excess returns with lower volatility and drawdowns relative to peers.

Magellan’s products are well-distributed. Its funds are featured across platforms.There is a focus on targeting retail investors, with product expansion an increasingly common driver of growth. After pioneering the first active ETF in Australia in 2015, Magellan has worked on attracting new FUM via its partnership initiatives, launching its own low-cost active ETFs, and introducing a new equity fund that caters to retirees seeking predictable income.

Morningstar analysts think Magellan has built the foundations for ongoing earnings growth, supported by its economic moat, product variety, and historically strong track record. Regardless, the potential earnings upside from these positive traits will take time to manifest. In light of Magellan’s recent underperformance, Mornigstars analysts believe a sustained improved track record will be the precursor to stronger fund inflows.

Morningstar analysts anticipate fee margin compression from investors trading down from Magellan’s core funds in preference for its low-cost ETFs, mix shift to other asset classes, and industry wide fee pressure. Continued strong performance is key to sustaining margins, as future FUM growth is likely to hinge more on market movements rather than net inflows given Magellan’s maturity and scale.

Capable Hands Remain at the Helm of Magellan; Valuation Upside High as Shares Lose Steam

Magellan has historically delivered above market returns with relatively low drawdowns. This has allowed it to rapidly scale in FUM to over AUD 93 billion and provides the foundation for continued earnings growth. While Morningstar analysts don’t believe it will be immune from the structural trend of investors moving to passive investments, ongoing competition among fund managers and major institutions in-housing their asset management, and is better placed than most active managers to address these headwinds. Magellan is moving beyond just managing money, to implementing new initiatives such as product expansion to attract new money. Morningstar analysts  believe shares are undervalued, but concur there are limited near-term earnings and share price catalysts due to recent underperformance. 

Chairman and CIO Hamish Douglass’ indefinite leave from Magellan . But morningstar analysts  don’t believe this is overly value-destructive for shareholders. In the interim, Chris Mackay and Nikki Thomas will work with Magellan’s investment team to manage its flagship Global Equity strategies. The strategies are in good hands. Mackay is Magellan’s co-founder, and was its chairman and CIO until 2012. Despite analysts’ conviction in Magellan, Morningstar’s analyst concern is not all investors may be willing to ride out this storm. Thus Morningstar analysts have lowered its fair value estimate to AUD 34.50 per share from AUD 38, after factoring in 3% more net outflows than before and further trimming our retail fee forecasts.

Financial Strength 

Magellan is in sound financial health. The firm has a conservative balance sheet with no debt, with its financial position also boosted by solid operating cash flows. As of June 30, 2021, Magellan had cash and equivalents of about AUD 212 million and financial investments with a net fair value of around AUD 453 million mainly invested in its own unlisted funds and listed shares. This should provide it with enough liquidity to cope with most market conditions. Its high dividend payout ratio of: (1) 90%-95% of the net profit after tax of its core funds management business before performance fees; and (2) annual performance fee dividend in the range of 90%-95% of net crystallised performance fees after tax reflects the capital-light nature of asset management.

Bulls Say

  • Magellan retains an intangible brand, supported by historically strong performance, which it has leveraged to hold on to client funds, attract new money and charge premium fees. 
  • Due to structural market trends and product expansion initiatives, the prospects for organic FUM growth is strong, notably from investors seeking to diversify exposure to international equities or gain a steady retirement income stream. 
  • Aside from domestic tailwinds from superannuation, Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. should support growth.

Company Profile

Magellan Financial Group is an Australia-based niche funds manager. Established in 2006, the firm specialises in the management of equity and infrastructure funds for domestic retail and institutional investors. Magellan has been particularly successful in winning mandates from global institutional investors. Current FUM is split across global equities, infrastructure and Australian equities.

(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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Funds Funds

One of the cheapest funds tracking the broadly diversified S&P 500.

Investment Objective

Vanguard 500 Index Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks.

Approach

This broadly diversified portfolio is representative of the opportunity set in the large-blend category. It relies on the market’s collective wisdom to size its positions and enjoys low turnover as a result. It earns a High Process Pillar rating. The index pulls in stocks of the largest 500 U.S. companies that pass its market-cap, liquidity, and profitability screens.An index committee selects constituents from this eligible universe, allowing for more flexibility around index changes compared with more-rigid rules based indexes. The index committee aims to avoid unnecessary turnover, and it reconstitutes the index on an as-needed basis. The committee may temporarily deviate from these rules. It may not delete existing constituents that violate eligibility criteria until an addition to the index is warranted.The portfolio managers reinvest dividends as they are paid and use derivatives to equitize cash and keep pace with the benchmark. They have also historically used securities lending to generate additional income for the fund, which has helped tighten the fund’s tracking difference and make up for some of its annual expense ratio.

Portfolio 

Market-cap weighting allows the fund to harness the market’s collective view of each stock’s relative value, and it keeps turnover low. As of January 2022, stocks representing around 90% of the portfolio enjoy either a narrow or wide Morningstar Economic Moat Rating. This weighting scheme pushes the work of sizing positions onto the market. Over the long term, this has been a winning proposition. But the market has manic episodes from time to time. Over shorter time frames, investors’ enthusiasm for a particular stock or sector can make the portfolio top-heavy as it tilts toward recent winners. This has been the case with technology stocks in recent years. The portfolio’s top 10 holdings represented approximately 29% of its assets as of January 2022, higher than its historical average but much lower than the category average. Nonetheless, the fund is still representative of the opportunity set available to its actively managed peers in the large-blend category, and its sector and style characteristics are similar to the category average. As of December 2021, the fund was slightly overweight in tech stocks and made up the difference with a smaller allocation to industrials.

Performance 

From its inception in 2010 through January 2022, the exchange-traded share class outperformed the category average by 2.35 percentage points annualized. Its annual returns consistently ranked in the category’s better-performing half. The fund’s risk-adjusted returns also held up well against category peers, while its Sharpe ratio maintained a top-quartile ranking in the category over the trailing one-, three-, five-, and 10-year periods. Most of this outperformance can be attributed to its low cash drag and competitive expense ratio.

The portfolio tends to perform as well as its category peers during downturns while outperforming during market rallies. It captured 96% of the category average’s downside and 106% of its upside during the trailing 10 years ending in 2022. During the initial coronavirus-driven shock from Feb. 19 to March 23, 2020, the fund outperformed the category average by 9 basis points. It then bounced back faster than peers during the recovery phase from late March through December 2020, gaining 3.29 percentage points more than the category average. 

Tracking performance has been solid. Over the trailing one-, three-, five-, and 10-year periods ended January 2022, the fund trailed the S&P 500 by an amount approximating its annual expense ratio.

Top 10 Holdings

About the fund

The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The 500 Index Fund is a low-cost way to gain diversified exposure to the U.S. equity market. The key risk for the fund is the volatility that comes with its full exposure to the stock market. Because the 500 Index Fund is broadly diversified within the large-capitalization market, it may be considered a core equity holding in a portfolio.

(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
Small Cap

GrainCorp’s Bumper 2022 Is Set to Be Even More Lucrative Than Record 2021

Business Strategy and Outlook

GrainCorp enjoys significant market shares in grain storage, handling, and port elevation services along the eastern seaboard of Australia. Earnings are heavily affected by seasonal conditions, but the diversification into oilseed crushing and refining reduces earnings volatility and provides growth opportunities. GrainCorp’s core Australian grain storage and logistics business is heavily reliant on favourable weather patterns. Beyond storage and logistics, the grain marketing segment competes domestically and internationally against other major commodities trading houses such as Cargill and Glencore.

The firm will likely remain at the mercy of Australian grain competitiveness relative to global pricing. Similarly, GrainCorp’s oil crushing and refining business remains competitive. While we expect profitability in this segment to improve due to cost-savings measures and ongoing growth, we don’t believe the segment enjoys durable competitive advantages. 

Financial Strength

GrainCorp’s capital structure is reasonable. It comprises debt and equity, with noncore debt associated with the funding of grain marketing inventory. As a result of swings in crop prices, GrainCorp’s cash flow and working capital requirements can be volatile, so the company will need to drawdown on debt on demand. As at Sept. 30, 2020, core debt (net debt less commodity inventory) was AUD 37 million and total net debt was AUD 239 million. There’s a risk that earnings pressure in drought-affected years could test debt covenants with its bank lenders. 

The primary metrics are its net debt/capital gearing ratio and EBITDA/interest ratio. Gearing ratios can be volatile, given the swings in inventory levels. The net debt gearing ratio (net debt/net debt plus equity) sat at a reasonable 33% as at Sept. 30, 2021. Similarly, core debt gearing (core debt/core debt plus equity) was below 5%. Management doesn’t disclose the minimum EBITDA/interest ratio. In fiscal 2020, this ratio was about 4 times on an adjusted basis, but improved to 13 times in fiscal 2021.

Bulls Say’s 

  • With strategic processing, storage, and transportation assets, GrainCorp’s size gives the company scale advantages over regional competitors. 
  • Global thematics, such as increased food demand, particularly in Asia, should benefit agribusinesses such as GrainCorp. 
  • Despite divesting the malt business, GrainCorp has entered into a new grains derivative contract which assists with smoothing out earnings through the cycle.

Company Profile 

GrainCorp is an agribusiness with an integrated business model operating across three divisions. The company operates the largest grain storage and logistics network in eastern Australia. GrainCorp provides grain marketing services to all major grain-producing regions in Australia, as well as to Canadian and U.K. growers. The company has also diversified into edible oil refining and supply, and bulk liquid storage.

(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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Shares Small Cap

Capri Has Suggested The Two Brands (Jimmy Choo and Versace), When Mature, Could Combine For Operating Profit Of $450 Million

Business Strategy and Outlook

It is probable Michael Kors lacks the brand strength (and ultimately pricing power) to provide an economic moat for Capri. Powered by store openings and retail expansion in the 2010-15 period, Michael Kors became one of the largest American handbag producers in sales and units. However, its sales have declined from peak levels due to markdowns at third-party retail, store closures, and weakness in some categories. While Capri has reduced distribution to limit discounting of its bags, competition in the American handbag market is fierce, and store closures in the region continue. Michael Kors, though, has good potential in Asia, which Bain & Company expects will compose 50% (up from 37% at present) of the worldwide luxury market by 2025. It is foreseen the brand stands to win favor with Chinese consumers, but it is not foreseen for the brand to reach Capri’s $1 billion Asia sales target (up from $448 million in fiscal 2021) in the next 10 years given its limited tenure in the region relative to Coach and others. 

Capri spent a steep $3.4 billion to purchase Jimmy Choo and Versace to boost its status as a luxury house and reduce its dependence on Michael Kors. However, it is not likely these deals have changed Capri’s no-moat status as the acquired brands have more fashion risk, less profitability, and narrower appeal than Michael Kors. Capri is investing in store remodels, store openings, and expanding the set of accessories for both Jimmy Choo and Versace, but it is not seen these efforts will yield the intended gains, particularly given the severe interruption it is probable from COVID-19. While Capri has suggested the two brands, when mature, could combine for operating profit of $450 million and account for 30% of its total, it is not probable for this to happen until the end of this decade.

Financial Strength

Capri has debt, but it is seen as it is very manageable. The firm took on significant debt to fund its Jimmy Choo and Versace acquisitions, which came with a combined price tag of $3.4 billion. At the end of December 2021, it had total short- and long-term debt of $1 billion, but it also had more than $261 million in cash and $1 billion in available borrowing capacity. Moreover, during the COVID-19 crisis, it amended its revolving and term loan credit agreement so that most of its term loan that was due in December 2020 was extended to December 2023. Thus, Capri has no significant debt maturities prior to 2023. The firm’s debt/adjusted EBITDA was a very manageable 2.3 at the end of fiscal 2021, and it is foreseen this will fall to 0.8 at the end of fiscal 2022 on greater EBITDA and debt reduction. Capri has resumed share repurchases, which were suspended during the pandemic. The firm averaged more than $500 million in annual buybacks in fiscal 2015-20. It is now foreseen its share repurchases at an annual average of about $740 million over the next decade. However, Capri does not pay dividends.Capri plans to open new stores and remodel existing stores for all three of its brands, although these efforts stalled in fiscal 2020 due to COVID-19. Analysts forecast its fiscal 2022 capital expenditures will rise to $205 million (3.7% of sales) from just $111 million (2.7% of sales) last year. Long term, Analysts forecast Capri’s annual capital expenditures as a percentage of sales at 4.1% as management works to improve the performance at Jimmy Choo and Versace.

Bulls Say’s

  • Michael Kors is one of the largest brands in terms of units and sales in the high-margin handbag market, and it is likely, this positioning should aid its prospects as it looks to grow in complementary categories like footwear. 
  • Michael Kors has reduced its dependence on wholesale customers, which is viewed favorably as increased direct-to-consumer sales allow for better pricing and control over marketing. 
  • The acquisitions of Jimmy Choo and Versace afford diversification opportunities by bringing two luxury brands that maintain products with high price points into the fold.

Company Profile 

Michael Kors, Versace, and Jimmy Choo are the brands of Capri Holdings, a marketer, distributor, and retailer of upscale accessories and apparel. Kors, Capri’s largest brand, offers handbags, footwear, and apparel through more than 800 company-owned stores, wholesale, and e-commerce. Versace (acquired in 2018) is known for its ready-to-wear luxury fashion, while Jimmy Choo (acquired in 2017) is best known for women’s luxury footwear. John Idol has served as CEO since 2003 but will be replaced in the position by Joshua Schulman in late 2022. (Source: MorningStar)

General Advice Warning

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

Categories
Global stocks Shares

Grainger Shows Strong End Market Growth to Close out 2021; but We See Shares as Still Overvalued

Business Strategy and Outlook

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $13 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 287 in 2020 and added distribution centres in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019.

Grainger continues to expand its endless assortment strategy, albeit skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. Still, Grainger has distinct competitive advantages in its traditional business, such as its long-standing relationships with large customers and its inventory management solutions, which should help it earn excess returns over the next 10 years.

Financial Strength

As of the fourth quarter of 2021, Grainger had $2.4 billion of debt outstanding, which net of $241 million of cash, represents a leverage ratio of about 1.2 times our 2022 EBITDA estimate. Grainger’s leverage ratio is relatively conservative for the industry, in our view. We believe the company certainly has room to increase leverage if needed, but management looks to be committed to keeping its net leverage ratio between 1-1.5 times. Grainger’s outstanding debt consists of $500 million of 1.85% senior notes due in 2025, $1 billion of 4.6% senior notes due in 2045, $400 million of 3.75% senior notes due in 2046, and $400 million of 4.2% senior notes due in 2047.Grainger has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow every year since 2000, and its free cash flow generation tends to spike during downturns because of reduced working capital requirements. By our midcycle year, we forecast the company to generate over $1 billion in free cash flow, supporting its ability to return free cash flow to shareholders. Given the firm’s reasonable use of leverage and consistent free cash flow generation, we believe Grainger exhibits strong financial health.

Bulls Say’s

  •  With a more sensible, transparent pricing model, Grainger should continue to gain share with existing customers and win higher-margin midsize accounts. 
  • As a large distributor with national scale and inventory management services, Grainger is well positioned to take share from smaller regional and local distributors as customers consolidate their MRO spending. 
  • Grainger operates a shareholder-friendly capital allocation strategy; it has increased its dividend for 49 consecutive years and has reduced its diluted average share count by nearly 45% over the last 20 years.

Company Profile 

W.W. Grainger distributes 1.5 million maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves about 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 400 global branches. In recent years, Grainger has invested in its e-commerce capabilities and is the 11th-largest e-retailer in North America.

 (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

2021 a Year of Strong Growth for C.H. Robinson; Outlook Positive, but Expect Normalization in 2022

Business Strategy and Outlook

C.H. Robinson dominates the $80-plus billion asset-light highway brokerage market, and its immense network of shippers and asset-based truckers supports a wide economic moat, in our view. Although the company isn’t immune to freight downturns, its variable-cost model helps shield profitability during periods of lack lustre demand, as evidenced by a long history of above-average profitability. The firm does not own transportation equipment, and a large portion of operating expenses are tied to performance-based variable compensation, which tends to move in line with net revenue growth. The firm is thought to be well positioned to capitalize on truck brokerage industry consolidation (including market share gains) despite intensifying competition.

Over and above underlying shipment demand trends, share gains will probably remain the key growth driver for Robinson long term. For perspective, it is estimated that Robinson’s stake of the domestic freight brokerage industry at roughly 18% in recent years, up from 13% in 2004, based on market data from Armstrong & Associates. The truck brokerage business is still vastly fragmented, and small, less sophisticated providers are finding it increasingly difficult to keep up with rising demand for efficient capacity access and the need to automate processes. Robinson’s industry-leading network of asset-based truckload carriers (most small) should remain highly valuable to shippers over the long run. This is particularly because truckload-market capacity will probably continue to see growth constraints due in part to the stubbornly limited driver pool.

Robinson has also positioned its air and ocean forwarding unit to contribute to growth. In this segment, it competes with other top-shelf providers like Expeditors International. In 2012, it purchased Phoenix International, which doubled Robinson’s forwarding scale, and organic growth has continued (on average), along with additional tuck-in deals that have boosted the firm’s global footprint. Buying scale and lane density are important in order to secure adequate capacity for shippers, particularly during the peak season.

Financial Strength

C.H. Robinson has taken a more active stance with its balance sheet over the past decade, increasing leverage in part to fund occasional opportunistic acquisitions. Before 2012, the firm was largely debt free. That said, its capital structure remains quite healthy. At the end of 2021, the firm had a manageable total debt load near $1.9 billion and $257 million in cash. Debt/EBITDA was near 1.6 times (versus 1.4 times in 2019 and 2020), and in line with management’s targeted range of 1.0-1.5 times. Interest coverage (EBITDA/interest expense) in 2021 was a comfortable 20 times. Importantly, as a well-managed asset-light 3PL, Robinson has a long history of consistent free cash flow generation, averaging more than 3.0% of gross revenue over the past five years (20% of net revenue). Note that truck brokers’ free cash flow tends to be lowest in strong years of growth by nature of the intermediary business model and related spike in accounts receivable. It is expected that free cash flow to approximate 3%-4% of gross revenue over our forecast horizon. Robinson is expected to have no issues servicing its long-term obligations, given its top-tier profitability, and the firm’s liquidity should be more than ample to weather cyclical demand pullbacks

Bulls Say’s

  •  C.H. Robinson enjoys a long history of impressive execution throughout the freight cycle, and it has thwarted a host of competitive threats over the years. 
  • It is estimated that C.H. Robinson has gradually increased its share of the truck brokerage industry to roughly 17% from 13% in 2004. 
  • Robinson’s non-asset-based operating model has generated average returns on capital near 27% during the past decade and 21% since 2017 (around 23% in 2021)–well above returns generated by most traditional asset-intensive carriers.

Company Profile 

C.H. Robinson is a top-tier non-asset-based third-party logistics provider with a significant focus on domestic freight brokerage (57% of 2021 net revenue), which reflects mostly truck brokerage but also rail intermodal. Additionally, the firm also operates a large air and ocean forwarding division (34%), which has grown organically and via tuck-in acquisitions. The remainder of revenue consists of the European truck-brokerage division, transportation management services, and a legacy produce-sourcing operation.

(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 Expert Insights

New Jersey Resources Starts Fiscal Year with Good Momentum

Business Strategy and Outlook

New Jersey Resources remains primarily a regulated gas utility even as it invests heavily in nonregulated energy businesses such as solar and natural gas midstream. NJR’s regulated utility business will continue to produce more than two thirds of earnings on a normalized basis for the foreseeable future as New Jersey’s need for infrastructure safety and decarbonization investments provide growth opportunities. 

NJR’s constructive regulation and customer growth has produced an impressive record of earnings and dividend growth. The expected NJR’s regulated distribution utility can grow earnings 6% annually based on 1% customer growth and planned infrastructure investments. NJR’s clean energy business should grow even faster, leading to consolidated earnings growth near the top half of management’s 7%-9% annual growth target.

 New Jersey’s historically constructive regulation allows NJR to support a high payout ratio and dividend growth in line with the utility’s earnings growth. That regulatory support was confirmed in November 2021 when regulators approved a settlement that raises rates to account for NJR’s infrastructure investments and maintains its 9.6% allowed return on equity from NJR’s 2016 and 2019 rate cases. Although this allowed ROE is lower than other utilities, NJR enjoys other rate mechanisms that support good cash flow generation. 

NJR’s gas distribution business faces a potential long-term threat from carbon-reduction policies. To address that threat, NJR plans to invest $850 million in its solar business in 2022-24 and pursue hydrogen and renewable natural gas projects. These projects support aggressive clean energy goals in New Jersey and other states. NJR’s $367.5 million acquisition of the Leaf River (Mississippi) Energy Center in late 2019 paid off big in early 2021 when extreme cold weather allowed NJR to profit from its gas in storage. However,  don’t expect windfalls like this to continue as management derisks its energy-services business, reducing the earnings sensitivity to volatile gas prices, basis spreads, and winter weather.

Financial Strength

NJR has maintained one of the most conservative balance sheets and highest credit ratings in the industry. We don’t expect that to change even with its large capital investment plans. The is forecast an average debt/total capital ratio around 55% and EBITDA/interest coverage near 5 times on a normalized basis after a full year of earnings contributions from its midstream investments. Management has a history of using large cash inflows during good years at its non-utility businesses to offset equity needs at the utility. NJR’s $260 million equity raise in fiscal-year 2020 will primarily go to fund the Leaf River acquisition and midstream investments. We don’t expect NJR will need any new equity through at least 2024. In mid-2019, it issued $200 million of 30- and 40-year first mortgage bonds at interest rates below 4%, among the lowest rates of any large U.S. investor-owned utility at the time. It has raised two low-cost green bonds to support solar investments. Up until 2020, NJR had been able to avoid issuing equity in part due to cash it has collected from its unregulated businesses. Extreme winter conditions in 2014 and 2018 provided a timely source of cash ahead of NJR’s uptick in utility and midstream investments. The success of the nonutility businesses and divesture of the wind investments also brought in cash to fund what is expected will be more than $2 billion of investment in 2022-24 without new equity. NJR’s board took a big step by raising the dividend 9% to $1.45 per share annualized in late 2021. The expected dividend growth to follow at least in line with earnings now that NJR has reached a pay-out ratio near 65%, which is reasonable for a mostly regulated utility.

Bulls Say’s

  •  NJR’s customer base continues to grow faster than the national average and includes the wealthier regions of New Jersey. 
  • NJR raised its dividend 9% for 2022 to $1.45 per share, its 26th consecutive increase. It is expected that streak to continue. 
  • NJR’s distribution utility has received three constructive rate case outcomes and regulatory approval for nearly all of its investment plan since 2016.

Company Profile 

New Jersey Resources is an energy services holding company with regulated and nonregulated operations. Its regulated utility, New Jersey Natural Gas, delivers natural gas to 560,000 customers in the state. NJR’s nonregulated businesses include retail gas supply and solar investments primarily in New Jersey. NJR also is an equity investor and owner in several large midstream gas projects.

(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

Virgin Money Margins on the Rise, but the Loan Books a Little Lighter

Business Strategy and Outlook

Virgin Money UK consists of the CYBG business (demerged from National Australia Bank, or NAB), and the more recently acquired Virgin Money UK. In 2016, NAB demerged its U.K.-based operations in Clydesdale Bank and Yorkshire Bank, collectively known as CYBG. The CYBG merger with Virgin Money UK virtually doubled the size of the bank’s loan book and provided a foothold in the larger and faster growing London region. The bank’s loan book is split 80% mortgages, 12% business loans, and 8% personal (including cards) as at September 2021. 

Acquiring Virgin Money in 2018 was transformative for CYBG. A larger and more geographically diverse mortgage book lowers risk and presents cost saving opportunities, but also presents the opportunity to grow its business loan book under the Virgin Money banner. Aiming to maintain its share of the mortgage market, the bank wants to reduce its weighting to mortgages to 75% as it grows its business loan book.

Financial Strength

The capital structure and balance sheet are sound. Common equity Tier 1 capital was 15.2% as at Dec. 31, 2021, well above the 9.5% minimum capital benchmark. The bank has a longer-term dividend payout goal of up to 50%. The percentage of funding sourced by customer deposits was 83% as at Sept. 30, 2021, the elevated savings rate in 2021 helped the bank increase the weight of funds to cheaper business and personal current accounts materially. These current accounts and linked savings increased 19% in the fiscal 2021, making up 38% of funding as at Sept. 30, 2021 and up from 31% at end of fiscal 2020. Virgin Money UK received internal ratings-based, or IRB, accreditation from the U.K. regulator for its mortgage and SME/corporate loan portfolios mid-October 2018. Virgin Money UK is now authorised to use its own risk models in determining risk weighted assets, resulting in a reduction in risk weighted assets for the two portfolios and thereby improving its capacity to grow share.

Bulls Say’s 

  • Virgin Money UK is a well-capitalised and well-funded retail and small-business bank with long-established franchises in core regional markets. 
  • Management’s ability to successfully integrate the merger with Virgin Money is critical to our thesis. 
  • Legacy conduct issues have caused pain for shareholders despite balance sheet provisions and conduct indemnities provided by National Australia Bank. It have made no allowance for large penalties or customer remediation in our forecasts.

Company Profile 

Virgin Money UK was formed through the merger between CYBG PLC and Virgin Money. After being divested by National Australia Bank in 2016, CYBG went through a restructuring and recapitalisation process, with mortgages accounting for around 75% of its loan book. Following CYBG’s merger with Virgin Money, the loan book has been reshaped again, with mortgages now accounting for more than 81% of total loans, personal loans around 7%, and SME and business loans around 12%. The merger with Virgin Money does provide upside earnings potential, but operating conditions are tough, with business momentum slowing. An upturn in the earnings outlook is needed after several years of disappointment.

(Source: Morningstar)

General Advice Warning

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

Categories
Technology Stocks

Aptiv Sees Q4 Results Take Chip Crunch Hit, Sets New Revenue Growth Target

Business Strategy and Outlook:

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

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

Financial Strength:

Aptiv’s financial health is in good shape. Total debt/total capital has averaged 16.9% while total debt/EBITDA has averaged 2.9 times. Most of Aptiv’s capital needs are met by cash flow from operations. However, the COVID-19 pandemic necessitated the drawdown of the company’s $2.0 billion revolver on March 23, 2020. The revolver was repaid after the company raised capital through share issuance and a mandatory convertible preferred in June 2020. Aptiv’s liquidity remains healthy at $5.2 billion, with around $2.8 billion in cash and equivalents at the end of December 2020. The company was also granted covenant relief, with a debt/EBITDA ratio of 4.5 times through the second quarter of 2021, up from 3.5 times. With the exception of the credit line that includes the revolver and a term loan, which expires in August 2021, the company has no other major maturities until 2024. The company has approximately $4.1 billion in senior unsecured note principal outstanding with maturities that range from 2024 to 2049, at a weighted average stated interest rate of 3.2%. Aptiv issued $300 million in 4.35% senior notes due in 2029 and $300 million 4.4% notes due in 2046 in March 2019 to redeem senior notes due in 2020 with an interest rate of 3.15%. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say:

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

Company Profile:

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 13% of revenue, including sales to GM’s Shanghai joint venture. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively.

(Source: Morningstar)

General Advice Warning

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