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Dividend Stocks Expert Insights

Suncorp’s Battered Bottom Line Masks Positive Momentum Across the Group

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy and Outlook:

There are positive signs for the future of Suncorp and perhaps early validation of management’s strategic investments though. Australian gross written premiums, or GWP, increased 5%, with the insurer benefiting from premium rate increases as well as growth in policy numbers. In New Zealand, increases were even larger, with GWP up 14%. Improved digital sales and service capabilities, including claims lodgment and tracking, should bring cost savings and improve the customer experience. Lifting marketing of key brands and simplifying product offerings are also likely helping. Cost inflation in home and motor insurance in the mid-single digit percent range has so far been offset by rate increases and further negated by work the insurer is doing to manage costs. Tools to better allocate work to builders and benchmark repair costs are examples.

Suncorp has a point with areas government should focus on. Improve public infrastructure, provide subsidies to improve resilience of private dwellings, address planning laws and approval processes, and remove inefficient taxes and charges on insurance premiums.

Financial Strength:

Suncorp has a track record of returning surplus capital to shareholders via special dividends and share buybacks. The fully franked final dividend of AUD 23 cents is down from AUD 26 cents per share last year, with the payout ratio at the top end of the 60%-80% target range. Home loans grew at an annualised rate of 5.3%, but net interest margins, or NIM, tumbled 12 basis points to 1.97%. Growth in premiums and home loans have come at cost. Operating expenses increased 5.8% as Suncorp ramps up spend on digital initiatives and marketing, and insurance commissions grow with premiums. Digital sales made up 38% of Australian insurance sales in the half, up from 33% in first-half fiscal 2021, with some brands already at 50%.

Company Profile:

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(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

Raising FMC’s Fair Value Estimate to $135 on Improved Outlook; Shares Slightly Undervalued

Business Strategy and Outlook

FMC is a pure play crop chemicals producer. The company is one of the five largest patented crop protection companies globally. FMC acquired Cheminova in 2015, increasing exposure to Europe and expanding its portfolio of crop chemicals. In late 2017, FMC acquired DuPont’s divested crop chemicals portfolio, which included blockbuster insecticide Rynaxypyr. At the same time, the company divested non-crop chemicals businesses. FMC is fairly balanced from a geographical standpoint among North America; Latin America; Asia; and Europe, the Middle East, and Africa. Latin America is the largest region, contributing over 30% of revenue, while the remaining regions typically account for 20% to 25% each. The company is also balanced from a crop exposure standpoint, with soybeans being the largest at nearly 20% of total revenue.

As emerging-market food consumption rises, demand for patented crop chemicals should rise to facilitate yield improvements. FMC’s pipeline of new premium products should generate sales growth above the general crop chemical industry. Both acquisitions greatly enhanced FMC’s research and development pipeline, which should allow the company to continue producing new crop chemicals as older products roll off patent. The company plans to launch 10 new molecules over the next decade that feature new modes of action. FMC also plans to launch new biologicals, or environmentally friendly pesticides. These new products should help farmers fight resistant pests, which are increasingly rendering older crop chemicals ineffective and require new crop chemicals.

Financial Strength

FMC is in good financial health. FMC’s leverage ratios fluctuate throughout the year as the company is subject to seasonality. However, unless the firm makes a transformative acquisition, It is expected that leverage ratios will generally remain healthy. With no large planned capital additions, the company should maintain its financial health and should be able to meet all its financial requirements, including dividends, going forward. FMC reported solid fourth-quarter results as adjusted EBITDA was up 30% year on year versus the prior-year quarter driven by higher volumes, a mix shift toward premium products, and increased prices.

On a qualitative basis, the results were in line with our thesis that FMC will continue to benefit from an increased proportion of new premium products that will drive revenue growth and margin expansion. FMC shares rallied on the company’s strong results and solid guidance for further profit growth in 2022. At current prices, we view shares as slightly undervalued, with the stock trading slightly below our updated fair value estimate but in 3-star territory. A major driver of our improved outlook comes from FMC’s growth of its Biologicals portfolio. Biologicals are pesticides, fertilizers, and other plant health inputs that are made from living or naturally occurring materials, versus traditional synthetic crop chemicals.

Bulls Say’s

  • FMC has transformed its portfolio to focus on crop chemicals, which should see strong growth prospects as yield gains are needed to support rising food consumption from emerging markets.
  • FMC has a large presence in Brazil, one of the few places with meaningful growth potential in arable land.
  • FMC’s pipeline should allow the company to continue expanding profits as the patents expire for its two largest molecules over the next decade.

Company Profile

FMC is a pure-play crop chemical company. The company has diversified its sales to create a balanced crop chemical portfolio across geographies and crop exposure. Through acquisitions, FMC is now one of the five largest patented crop chemical companies and will continue to develop new products through its research and development pipeline.

(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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Technology Stocks

Netflix Inc Subscriber Growth Slows Down; while Reported Improved profitability in 4Q21

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Investment Thesis

  • Trades on multiples which are susceptible to de-rating should growth rates miss expectations.
  • An increase and escalation of intense competition by rivals such as Walt Disney (Disney+) and Apple Inc (Apple TV+).
  • NFLX is transitioning from solely content distribution to content creation which presents execution risk.
  • Significant existing user base, which is continuing to grow strongly, particularly in the International market. 
  • Competitive positioning globally, as a market leader not only in the industry but starting to carve a leading position against cable television.  
  • International expansion opportunities across emerging markets as well as solidified position in established markets (US). 
  • Exclusive contracts with best producers including Sony Entertainment, Warner Bros and Universal Pictures. 
  • Growing demand for Netflix exclusives.
  • Flexibility to pick up content driven away by TV to customize viewing according to user tastes and preferences. 

Key Risk

  • High valuation and trading multiples which are susceptible to de-rating should growth rates miss expectations.
  • Escalation of intense competition and streaming wars, especially with Walt Disney(DIS) who own a strong content portfolio covering Disney, Pixar, Marvel, Star Wars, and National Geographic brands and sports streaming service ESPN+. DIS also holds a majority stake in Hulu, which is an online streaming service provider.
  • Execution risks around content creation versus content distribution.
  • Increasing competition based on price or exclusive content contracts.
  • Investment into original content creation fails to live up to the success of exclusive contract deals of existing content. 
  • Bandwidth issues in emerging economies posing difficulties in penetrating these markets.
  • The long-term and fixed cost nature of content commitments hinder NFLX’s operating flexibility.

FY Q21 Results Summary

  • Revenue grew +16% over pcp with a +8.9% increase in average paid memberships and +7% increase in ARM (average revenue per membership) on both a reported and FX neutral basis. The Company ended the quarter with 222million paid memberships with 8.3million paid net adds in the quarter, with UCAN region adding 1.2million paid memberships (vs 0.9million in pcp), marking strongest quarter of member growth in this region since the early days of Covid-19 in 2020. APAC grew paid memberships by 2.6million (vs 2million in pcp) with strong growth in both Japan and India. EMEA was the largest contributor to paid net adds adding 3.5million vs 4.5million in pcp and LATAM delivered paid net adds of 1million vs 1.2million in pcp. 
  •  Operating margin of 8.2% was down -620bps over pcp driven by large content slate in the quarter (margin was above beginning of quarter forecast of 6.5% due to slightly lower than forecasted content spend), resulting in FY21 operating margin of 20.9%, above management’s 20% guidance forecast. 
  • EPS increased +11.8% over pcp to $1.33 and included a $104m non-cash unrealized gain from FX remeasurement on Euro denominated debt. 
  •  Net cash generated by operating activities was an outflow of $403m vs outflow of $138m in pcp resulting in FCF of negative $569m vs negative $284m in pcp (for FY21, FCF amounted to negative $159m, in-line with management’s expectation for approximately break-even).

Company Profile

Netflix Inc (NASDAQ: NFLX) is an American company operating a global entertainment streaming service, which provides subscription video on demand to movies and television episodes over the Internet. The Company operates in three different segments, Domestic Streaming (US market comprising almost half of the business), International Streaming and Domestic DVD (1% of revenue). These businesses generate membership fees as well as revenues from DVD by mail. Netflix provides its services in over 190 countries with over 150 million members, distributing user focused content that fits consumer tastes and preferences.

(Source: Banyantree)

  • Relative to the pcp: (1) 

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

Stevanto’s Near Term Outlook Foresight Uncertain

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

Business Strategy and Outlook

Stevanato is the market leader in pen cartridges and presterilized vials and holds the number position in prefillable syringes (behind Becton Dickinson). The company is a key supplier in the drug delivery supply chain, and provides drug containment and primary packaging solutions to 41 of the top 50 global pharma companies. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products. 

Stevanato aims to increase the percentage of product sales from high value solutions, which refers to products with proprietary intellectual property and greater complexity, such as presterilized drug containment and integrated self-injector pen and wearable devices. The company is prioritizing investment in research and development and broadening its offering through M&A. Capacity expansion is also a key component of Stevanato’s long-term strategic plan, and capital expenditures are likely to remain elevated over the next year or two. Competition for skilled employees is extreme, and future growth will depend on effectively hiring and retaining talent. 

Both the biopharmaceutical and diagnostic segments are expected to benefit from an increased contribution in high value solutions over time, which has been growing 20% year over year and now represents about 23% of consolidated revenue. It is anticipated the ongoing shift to high-value will provide a material tailwind for margin over the next five to 10 years, and also contribute to robust top line growth. It is seen an uncertain near-term outlook for the business, with both positives and negatives related to the ongoing pandemic. Some drug trials have postponed or delayed, leading to lower sales growth for some customers’ drug portfolios. However, this has been mitigated by the pressing need for vaccines and treatments, which has allowed Stevanato to enjoy compound annual top line growth near 25% over the last two years. The company supplies vials and syringes to about 90% of currently approved vaccines.

Financial Strength

Stevanato has a sound financial position.As of September 2021, total cash position in excess of long-term debt on the balance sheet was EUR 154 million. This was mainly related to the firm’s IPO from July 2021, which raised EUR 154 million. In analysts’ view, Stevanato has more than sufficient capital to fund increasing capacity investment, and it can also be seen the potential for tuck-in acquisitions to broaden the firm’s value proposition in the drug delivery supply chain.In the near term, however, Stevanato’s expansion plan is likely to be the focus of capital deployment. Because of a higher level of capital investment, the company reported free cash flow of negative EUR 9.9 million for the third quarter of 2021. It is anticipated significant earnings and cash flow growth over the next few years, and while free cash flow is likely to be close to flat in 2022, it is anticipated free cash flow above EUR 20 million in 2023. It is believed that it’s possible that some additional debt might be needed to cover cash flow needs, but, considering Stevanato’s current low degree of financial leverage, it is not to be concerned with an increase in debt at or below EUR 500 million.

Bulls Say’s

  • Stevanato has room to bring customers up the value chain to higher-value products and services, giving it a lengthy tailwind for earnings growth and margin expansion. 
  • In contrast to peers, Stevanato can use in-house produced glass vials and syringes for integrated selfinjector systems, reducing the number of vendors for customers and providing Stevanato with a possible cost advantage. 
  • As large economies such as India and China implement more stringent pharmaceutical standards, Stevanato stands to become a key cog in the supply chain in those countries.

Company Profile 

Italy-based Stevanato Group is a provider of drug containment, drug delivery and diagnostic solutions to the pharmaceutical, biotechnology and life sciences industries. It delivers an integrated, end-to-end portfolio of products, processes, and services that address customer needs across the entire drug life cycle including development, clinical, and commercial stages. Stevanato’s revenue is geographically diversified, with 60% of sales from Europe, the Middle East and Africa (EMEA), 27% in North America, 10% in Asia-Pacific (APAC), and 3% in South 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

TransDigm’s Commercial Aerospace Business Seen Performing Well During First Quarter

Business Strategy and Outlook

TransDigm Group operates as a holding company with a clear, consistent strategy: acquire businesses with proprietary aircraft components, primarily sole-source products, with high aftermarket content. TransDigm’s businesses manufacture and sell replacement parts for ignition systems, pumps, actuators, and flight controls, among other things. Since aircraft must be fully maintained to be operational and TransDigm is the only provider of many of their products, the company has significant pricing power. The firm operates with a high degree of financial leverage to amplify operating results. 

This strategy works because potential competing spare parts must be licensed by the Federal Aviation Administration to be identical to the original product. Since TransDigm’s designs are proprietary, it is challenging for would-be competitors to prove that their design is identical. This barrier to entry allows TransDigm to extract value from regulator-required maintenance and enables the firm to aggressively price spare parts. TransDigm had its IPO in 2006, after 13 years of private ownership, and it still uses private equity strategies of creating value. The firm aims to improve the operations of its target companies by increasing prices, productivity, and encourage employees to generate new business. TransDigm is highly decentralized and has numerous business units. It encourages business unit leaders to think like owners by setting aggressive targets for managers and allowing them to achieve these goals however they choose to. 

The coronavirus pandemic has substantially reduced travel and consequently grounded a large chunk of the global passenger fleet, though domestic air travel is rebounding. The progression of the global fleet age remains an open question with large ramifications for TransDigm. If airlines use the current fleet to bring back capacity during a potential commercial aviation recovery, TransDigm would benefit from the continued maintenance of these aircraft. If airlines take delivery of new aircraft and use newer, under-warranty aircraft to bring back capacity, it is likely to reduce TransDigm’s addressable market for several years.

Financial Strength

TransDigm considers itself a private-equity-like public company, so its capital allocation is meaningfully different than most aerospace and defense companies that are covered. TransDigm continuously utilizes financial leverage–gross debt is usually 7-8 times unadjusted EBITDA. While Analysts’ are normally concerned about such high leverage, it is alleged TransDigm’s private equity roots make it quite capable of handling debt. Management has been in place and using the same leveraged strategy since the founding of the firm in 1993. It is not anticipated that the company will reduce leverage meaningfully. The company has been diligent at keeping debt maturities several years away. The company does not have a material debt maturity coming due until 2024, which is seen, gives the company ample time to recover from the COVID-19 challenges to aviation. TransDigm was able to raise debt during April 2020, when airlines were struggling the most. It is alleged that TransDigm would be able to raise additional debt from capital markets if necessary because of the highly visible pricing power and intellectual property backing the firm.

Bulls Say’s

  • Roughly three quarters of TransDigm’s sales are solesource, which gives it immense pricing power. 
  • About 90% of TransDigm’s products are proprietary, which protects its sole-source incumbency. 
  • TransDigm has historically been able to acquire companies at reasonable prices and meaningfully improve operations

Company Profile 

TransDigm manufactures and services a diverse set of components for commercial and military aircraft. The firm organizes itself in three segments: a power and control segment, an airframe segment, and a small nonaviation segment. It operates as an acquisitive holding company that targets firms with proprietary, sole-source products with substantial aftermarket content. TransDigm regularly employs financial leverage to amplify operating results. 

(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

Aecom Poised To Benefit From Favourable Long-Term Tailwinds In Infrastructure and Sustainability Solutions

Business Strategy and Outlook

In recent years, Aecom has transformed its portfolio and focused on growing its professional services business. The firm is in the process of exiting several business lines including fixed-price combined cycle gas power plant construction, at-risk oil and gas construction, and international at-risk construction projects. Furthermore, in January 2020, Aecom completed the sale of its management services business. It is seen Aecom’s transformation favourably and believe that the strategic shift will result in a less volatile and more profitable portfolio.

Furthermore, Aecom has improved its profitability thanks to several recent initiatives, including a $225 million general and administrative cost reduction plan completed in fiscal 2019, real estate consolidation, and a plan to exit over 30 countries to focus on the most profitable markets. It is encouraging that Aecom’s margin expansion thus far and see room for further upside, especially in the international business. It can be noted that there is a significant difference in profitability between the Americas and international segments: the adjusted operating margins on a net service revenue basis are in the mid-teens in the former but only mid-single digits in the latter. Considering an over 1,000-basis-point differential, it is viewed as room for further margin expansion in the international segment, and it is alleged the firm will continue to work to narrow the gap by further simplifying the business and completing its planned 30 country exits to focus on higher-margin markets. 

Analysts remain optimistic about the long-term outlook for Aecom as it is alleged that it’s poised to benefit from favourable long-term tailwinds in infrastructure and sustainability solutions. The company has a strong competitive position in the transportation, water, and environment end markets. As such, it is likely, Aecom is well positioned to capitalize on opportunities created by a growing focus on ESG concerns, including areas such as electrification of transit, clean water, and PFAS.

Financial Strength

At Dec. 31, 2021, the company owed roughly $2.2 billion in long-term debt while holding approximately $1.1 billion in cash and equivalents. Debt maturities are reasonably well laddered over the next few years. Additionally, Aecom can tap into its $1.15 billion revolving credit facility. It is projected that Aecom will generate average annual operating cash flow of approximately $700 million over the next five years. Considering that an investment-grade credit rating can have strategic importance for E&C firms and boost competitiveness in winning new awards, it is likely, Aecom to prioritize paying down its debt balance. In the long-run, it is anticipated the firm to maintain its leverage ratio within management’s target range of 2.0 times to 2.5 times. Additionally, it is alleged that management will continue to allocate excess capital to opportunistic stock repurchases.

Bulls Say’s

  • Thanks to its diversified portfolio, it is anticipated Aecom to take advantage of growth opportunities in sectors with favourable long-term prospects, including transportation and water. 
  • Through its Aecom Capital segment, the firm should be able to capitalize on growth in public-private partnerships (P3), which I said to have some economic moat potential due to customer switching costs. 
  • Following the 2015 acquisition of Hunt Construction, Aecom became the leading nationwide builder of iconic sports arenas, such as the Los Angeles Rams NFL stadium.

Company Profile 

Aecom is one of the largest global providers of design, engineering, construction, and management services. The firm serves a broad spectrum of end markets including infrastructure, water, transportation, and energy. Based in Los Angeles, Aecom has a presence in over 150 countries and employs 51,000. The company generated $13.3 billion in sales and $701 million in adjusted operating income in fiscal 2021

(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

Freight Demand To Remain Strong In Near Term, Benefitting Cummins

Business Strategy and Outlook

It is viewed Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation. 

The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. It is likely, Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to growing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, it is probable the truck market to also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. It is viewed this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. It is seen, some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins. 

Cummins has exposure to end markets that have attractive tailwinds. In trucking, it is likely new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, it is alleged Cummins will continue to invest in BEVs and fuel cells to power future truck models. It is foreseen a zero-emission world is inevitable, but is believed Cummins can use returns from its diesel business to drive investments.

Financial Strength

Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, it is seen the company can meet its near-term debt obligations given its strong cash balance. It is also viewed, comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities. Cummins can also generate solid free cash flow throughout the economic cycle. It is alleged the company can generate over $2 billion in free cash flow in Analysts’ midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, it is likely management is determined to improve its distribution business following its transformation efforts in recent years. It is probable Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. In Analysts’ view, Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth. 
  • Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions. 
  • Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.

Company Profile 

Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry.

(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

Stevanto’s Near Term Outlook Foresight Uncertain

Business Strategy and Outlook

Stevanato is the market leader in pen cartridges and presterilized vials and holds the number position in prefillable syringes (behind Becton Dickinson). The company is a key supplier in the drug delivery supply chain, and provides drug containment and primary packaging solutions to 41 of the top 50 global pharma companies. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products. 

Stevanato aims to increase the percentage of product sales from high value solutions, which refers to products with proprietary intellectual property and greater complexity, such as presterilized drug containment and integrated self-injector pen and wearable devices. The company is prioritizing investment in research and development and broadening its offering through M&A. Capacity expansion is also a key component of Stevanato’s long-term strategic plan, and capital expenditures are likely to remain elevated over the next year or two. Competition for skilled employees is extreme, and future growth will depend on effectively hiring and retaining talent. 

Both the biopharmaceutical and diagnostic segments are expected to benefit from an increased contribution in high value solutions over time, which has been growing 20% year over year and now represents about 23% of consolidated revenue. It is anticipated the ongoing shift to high-value will provide a material tailwind for margin over the next five to 10 years, and also contribute to robust top line growth. It is seen an uncertain near-term outlook for the business, with both positives and negatives related to the ongoing pandemic. Some drug trials have postponed or delayed, leading to lower sales growth for some customers’ drug portfolios. However, this has been mitigated by the pressing need for vaccines and treatments, which has allowed Stevanato to enjoy compound annual top line growth near 25% over the last two years. The company supplies vials and syringes to about 90% of currently approved vaccines.

Financial Strength

Stevanato has a sound financial position.As of September 2021, total cash position in excess of long-term debt on the balance sheet was EUR 154 million. This was mainly related to the firm’s IPO from July 2021, which raised EUR 154 million. In analysts’ view, Stevanato has more than sufficient capital to fund increasing capacity investment, and it can also be seen the potential for tuck-in acquisitions to broaden the firm’s value proposition in the drug delivery supply chain.In the near term, however, Stevanato’s expansion plan is likely to be the focus of capital deployment. Because of a higher level of capital investment, the company reported free cash flow of negative EUR 9.9 million for the third quarter of 2021. It is anticipated significant earnings and cash flow growth over the next few years, and while free cash flow is likely to be close to flat in 2022, it is anticipated free cash flow above EUR 20 million in 2023. It is believed that it’s possible that some additional debt might be needed to cover cash flow needs, but, considering Stevanato’s current low degree of financial leverage, it is not to be concerned with an increase in debt at or below EUR 500 million.

Bulls Say’s

  • Stevanato has room to bring customers up the value chain to higher-value products and services, giving it a lengthy tailwind for earnings growth and margin expansion. 
  • In contrast to peers, Stevanato can use in-house produced glass vials and syringes for integrated selfinjector systems, reducing the number of vendors for customers and providing Stevanato with a possible cost advantage. 
  • As large economies such as India and China implement more stringent pharmaceutical standards, Stevanato stands to become a key cog in the supply chain in those countries.

Company Profile 

Italy-based Stevanato Group is a provider of drug containment, drug delivery and diagnostic solutions to the pharmaceutical, biotechnology and life sciences industries. It delivers an integrated, end-to-end portfolio of products, processes, and services that address customer needs across the entire drug life cycle including development, clinical, and commercial stages. Stevanato’s revenue is geographically diversified, with 60% of sales from Europe, the Middle East and Africa (EMEA), 27% in North America, 10% in Asia-Pacific (APAC), and 3% in South 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
Shares Small Cap

Resale looks like a bargain as Poshmark has $26 fair value estimate

Business Strategy and Outlook:

Poshmark is among the largest apparel resale platforms on the market, boasting an interactive marketplace that benefits from a triumvirate of secular tailwinds: social commerce, an ongoing mix-shift toward online retail sales, and the stratospheric growth of the apparel resale market. The firm’s strategy coalesces around four key priorities: product innovation, category expansion, international growth, and buyer acquisition. We take a neutral view of management’s roadmap, with our research leaving us unconvinced that Poshmark’s international thrusts are poised to generate excess returns for investors, and surmise that purportedly adjacent categories like consumer electronics, art, or pets may not be concordant with the firm’s apparel core competency.

As a slew of firms have entered the resale space, competition has arisen around exclusive access to customers, inventory assortment, and distribution channels, with long-term equilibrium remaining uncertain. Consolidation looks inevitable, particularly as the scope of those companies’ offerings see increasing overlap, commensurate with category, price point, and geographic expansion. Poshmark’s right to win hinges on its ability to convincingly answer the “why Poshmark?” query, attracting platform participants with some combination of competitive seller services, frictionless listing, quick inventory turnover, attractive fees, broad assortment, and authentication services.

Financial Strength:

Poshmark’s financial strength is viewed as sound. The firm carries no long-term debt, has $236 million in cash and cash equivalents on its balance sheet as of the third quarter of 2021, and figures to be free cash flow positive over two of the next three years. The management has adequate wiggle room to pursue moat-bolstering investments, while narrowing operating losses should provide a route to enduring profitability by our midcycle (2025) forecasts. Following its IPO, the firm’s capital structure has simplified meaningfully, retiring $50 million in convertible notes issued during the third quarter of 2020 that carried a panoply of derivative clauses. Shareholder dilution hereafter should be limited to those shares issued in the normal course of business, with approximately 8.6 million options and RSUs outstanding (just north of 11% of free float) as of the third quarter balance sheet date. Poshmark’s waterfall of investment priorities is viewed as consistent with other high growth firms: pursuing internal investments and strategic mergers and acquisitions.

Bulls Say:

  • Five straight quarters of operating profitability (ending in the third quarter of 2021) suggest a strong underlying business model once acquisition costs normalize. 
  • Early traction in Australia and Canada could augur well for long-term success in those markets. 
  • Adding APIs and analytics tools for wholesalers and liquidators could add another platform use case, while generating higher units per transaction, average order values, and fulfillment cost leverage.

Company Profile:

Poshmark is one of the largest players in a quickly growing e-commerce resale space, connecting more than 30 million users on a platform that sells men’s and women’s apparel, accessories, shoes, and more recently consumer electronics and pet products. The marketplace operates in four countries–the U.S., Canada, Australia, and India–with a capital-light, peer-to-peer model that dovetails nicely with prevailing trends toward social commerce, apparel resale, and an ongoing pivot toward the e-commerce channel. With $1.4 billion in 2020 gross merchandise volume, or GMV, we estimate that the firm captured just shy of 10% of the global resale market, as rolling lockdowns and tangled supply chains provided a meaningful impetus for channel trial during 2020 and 2021.

(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
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La Nina and Investment Markets Wipe Out Profits, but Suncorp Inches Closer to Management Targets

Business Strategy and Outlook

Suncorp is a well-capitalised financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons and Terri Scheer. In New Zealand key brands include Vero, AA Insurance and Asteron Life. Some brands are specific to certain states, but at a group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia. 

The group’s exposure to the Queensland market, where large natural peril events have tended to be larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events. Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounting for more than half of total lending. Suncorp Bank’s smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors.

Financial Strength 

Suncorp Group is in good financial health. As at Dec. 31, 2021, Suncorp Insurance had a prescribed capital amount, or PCA, multiple of 1.71 times the regulatory minimum. Following the payment of the final dividend, a special dividend, and AUD 250 million buyback, at a group level that leaves Suncorp with AUD 492 million of capital in excess of its common equity Tier 1 target. This excess capital provides a buffer for unforeseen insurance and bad debt events. The common equity Tier 1 ratio for the insurance business was 1.28 times post the final dividend payment, within the target range of 1.08-1.28 times the PCA, and well above the regulatory minimum of 0.6 times. The bank’s common equity Tier 1 ratio as at Dec. 31, 2021 was 9.9%, above Suncorp’s 9% to 9.5% target range. Suncorp targets a dividend payout of 60-80% cash earnings (excluding special dividends).

Bulls Say’s

  • Suncorp owns a portfolio of well-known insurance brands and a regional bank that lacks switching or cost advantages. A focus on processes and systems, largely digitising customer interactions, should support underlying earnings growth. 
  • General insurance is inherently risky, with factors such as weather, natural disasters, and investment markets affecting earnings and capital adequacy. 
  • Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but customers are price sensitive.

Company Profile 

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(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.