Category: Sectors

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Technology Stocks

Amphenol Expanding Technological and Geographical Breadth through M&A

Business Strategy and Outlook

It is seen Amphenol is a differentiated connector supplier, an excellent operator, and an exceptional steward of shareholder capital. Amphenol competes against myriad competitors in the fragmented electrical component industry, but its broad array of diverse end markets allows it to grow the top line even in the midst of an individual market downturn. It is also viewed the firm’s unique ability to effect cost controls gives it the highest operating margins of its peer group, and allows it to quickly bring its numerous acquisitions up to firmwide profitability. 

It is held, Amphenol provides connectors with high performance and reliability that are specialized for mission-critical applications in harsh environments. As such, it is alleged its customer relationships tend to be very sticky, with customers facing high financial and opportunity costs from switching to another component supplier, as well as higher risk of component failure. It is supposed Amphenol’s customers rely on the firm as a design partner to supply cutting-edge products and enable new capabilities in end applications. As older products become commoditized, the firm is able to maintain high prices with new designs for new sockets. As a result of these switching costs and pricing power, it is made-up Amphenol possesses a narrow economic moat. 

Going forward, it is likely Amphenol to maintain its diversified end market structure and expand its technological and geographic breadth through M&A, which has funded about one third of historical top line growth for the firm. Specifically, it is potential the firm will focus its resources on opportunities that expand its content in individual end products, allowing it to grow revenues at a faster pace than the underlying markets it serves. As Amphenol grows, it is observed it will maintain its best-in-class operating margins by expanding its decentralized organizational structure. The firm operates through more than 125 general managers that operate with great autonomy to respond to end customers’ needs and manage costs, and it is pragmatic this count will grow as the firm adds acquisitions and expands into new markets.

Financial Strength

It is perceived Amphenol is in good financial shape. As of its fiscal year-end on Dec. 31, 2021, the firm carried $4.8 billion in total debt, compared with $1.2 billion in cash and short-term investments. While the firm is leveraged, it is alleged, it generates ample cash to fulfil its obligations. Amphenol has less than $500 million due annually over the next four years, and it has averaged over $1 billion in free cash flow since 2017, generating $1.2 billion in free cash flow in 2021. It is foreseen the firm to average $2 billion in free cash flow over explicit forecast. If the firm were to run into a liquidity squeeze, it has a $2.5 billion revolver available that is currently untapped. It is not anticipated the firm needing to drawdown this credit line, though it has the option to if it wanted to supplement its cash for a larger acquisition. It is believed it will use the excess cash it generates over the next five years to maintain its dividend, conduct opportunistic share repurchases, and make tuck-in acquisitions.

 Bulls Say’s

  • No industry vertical represents more than 25% of Amphenol’s revenue, which insulates it from individual end market downturns. 
  • Amphenol’s organizational structure, featuring more than 120 general managers who operate with high levels of autonomy, gives it an unparalleled ability to control costs and maintain industry-leading margins. 
  • Amphenol benefits from sticky customer relationships, arising from its specialization in mission-critical applications for harsh conditions.

Company Profile 

Amphenol is a leading designer and manufacturer of electrical, electronic, and fiber-optic connectors and interconnect systems, sensors, and cable. The firm sells into a broad array of industries, including the automotive, industrial, communications, military, and mobile device markets, and no single market makes up more than 25% of the firm’s total annual revenue.

(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

Oshkosh to Focus on Driving Product Innovation and Aftermarket Offering

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

Business Strategy and Outlook

It is alleged, Oshkosh will continue to be a leading player across its end markets. The company’s enviable competitive positioning is underpinned by its ability to produce strong performing products that exhibit high durability. Remarkably, Oshkosh has been able to replicate its brand strength in unrelated end markets, such as aerial lifts and commercial vehicles (military, fire, and emergency). Despite having very few synergies between its businesses, Oshkosh has been adept at implementing its technology across vehicle platforms. 

Going forward, it is foreseen the company’s strategy will largely be focused on driving product innovation and improving its aftermarket offering. In defense, Oshkosh has proven that it can develop innovative products for military customers. The joint light tactical vehicle, or JLTV, program is a prime example of its strength in the segment, which is essentially the replacement to the Humvee. Research and development investments allowed the company to win a lucrative contract from the U.S. Department of Defense in 2015. The contract is expected to be up for a recompete in late 2022, upon which the U.S. DOD will then reconsider alternatives. It is held, Oshkosh will win an extension given its strong product capabilities and performance. In addition, it is likely, the company is focused on growing its aftermarket business, which will help improve the profitability of its largely cyclical businesses. 

Finally, the company has exposure to end markets with near-term, attractive tailwinds. In access equipment, the recently passed infrastructure legislation will create demand for its aerial equipment over the medium term. Many of its customers are construction companies, which are direct beneficiaries of increased infrastructure spending. It is also understood, Oshkosh’s aerial equipment benefits from a replacement cycle. Rental customers typically refresh their fleet every 7-8 years, setting up strong revenue growth in the near term. It is regarded, the company’s emergency and commercial vehicle businesses will benefit from the replacement cycle. In defense, it is projected the JLTV program to drive steady sales growth, as military customers ramp up their vehicle fleet.

Financial Strength

Oshkosh maintains a sound balance sheet. Total debt at the end of 2021 stood at $819 million, which is roughly where the company’s debt balance has been over the past decade. It is unforeseen for Oshkosh to increase its debt levels, as management looks to be set on keeping its net leverage ratio under 2 times for the foreseeable future. It is often seen net leverage ratios spike when companies make large acquisitions, but in Oshkosh’s case, management will likely pursue small tuck-in deals. This will allow the company to expand its product capabilities, without stressing its balance sheet. Oshkosh’s 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. It is believed Oshkosh can generate solid free cash flow throughout the economic cycle. By midcycle year, it is projected the company to generate over $500 million in free cash flow, supporting its ability to return free cash flow to shareholders. Oshkosh’s capital allocation strategy includes both dividends and buybacks. The company began paying out a dividend in 2014 and has steadily grown it over time. With respect to repurchases, Oshkosh has returned $1.7 billion to shareholders since 2010. Looking ahead, it is anticipated more of the same from management, in addition to a greater focus on tuck-in deals to acquire new product capabilities. In terms of liquidity, it is held, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at just under $1 billion on its balance sheet. It is also found comfort in Oshkosh’s ability to tap into available lines of credit to meet any short-term needs. The company has access to $833 million in credit facilities. It is regarded, Oshkosh maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

 Bulls Say’s

  • Increased infrastructure spending in the U.S. and emerging markets could result in more aerial equipment purchases, driving higher revenue growth for Oshkosh. 
  • The U.S. DOD elects to stay with Oshkosh’s JLTV program following the recompete process in late 2022, providing strong revenue visibility through 2030. 
  • The average fleet age of Oshkosh’s emergency and commercial vehicles could lead customers to refresh their fleet with newer models, boosting Oshkosh’s sales.

Company Profile 

Oshkosh is the top producer of access equipment, specialty vehicles, and military trucks. It serves diverse end markets, where it is typically the market share leader in North America, or, in the case of JLG aerial work platforms, a global leader. After winning the contract to make the Humvee replacement, the JLTV in 2015, Oshkosh became the largest supplier of light defense trucks to the U.S. military. The company reports four segments—access equipment (42% of revenue), defense (32%), fire & emergency (15%), commercial (12%)—and it generated $7.9 billion in revenue in 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
Technology Stocks

TE Connectivity Ltd. to grow its midcycle operating margins and enhance its cash flow

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

Business Strategy and Outlook

TE Connectivity is a leading designer and manufacturer of connectors and sensors, supplying custom and semicustom solutions to a bevy of end markets in the transportation, industrial, and communications verticals. TE has maintained a leading share of the global connector market for the last decade, specifically dominating the automotive connector market, from which it derives more than 40% of revenue. While the firm’s entire business benefits from trends toward efficiency and connectivity, these are especially notable in cars, where shifts toward electric and autonomous vehicles provide lucrative opportunities for TE to sell into new vehicle sockets, like an onboard charger or advanced driver-assist system. 

TE’s products offer high performance and reliability for mission-critical applications in harsh environments. As such, its customer relationships tend to be very sticky, with customers facing high financial and opportunity costs from switching to another component supplier, as well as the risk of component failure in new products. TE’s customers also rely on the firm supplying cutting-edge products to power new capabilities in end applications. As older products become commoditized, the firm can maintain high prices with new innovations. As a result of these switching costs and pricing power, TE Connectivity possesses a narrow economic moat.

In the future, TE Connectivity will focus on increasing its dollar content in end applications across its end markets. TE’s products pave the way for greater electrification and connectivity in vehicles, planes, and factories, which allows the firm to occupy a greater portion of these end products’ electrical architectures. TE will remain a serial acquirer, bolting on smaller components players to expand its geographic and technological reach. Finally, TE is expected to continue expanding its margins via footprint consolidation, as it streamlines the fixed-asset portfolio it has gained over a decade of acquisitions

Financial Strength

TE Connectivity is expected to remain leveraged, using strong free cash flow to invest organically and inorganically, and to send capital back to shareholders. As of Sept. 24, 2021, the firm carried $4.1 billion in total debt and $1.2 billion in cash on hand. While the firm is leveraged, its cash flow generation will be more than able to fulfil its obligations. TE has less than $700 million a year in payments due through fiscal 2026, and it is projected to generate more than $2 billion in free cash flow annually over the next five years. Even in a severely soft macro environment in 2020, the firm generated $1.4 billion in free cash flow. After fulfilling its obligations, TE is expected to use the remainder of its cash to maintain its dividend and conduct share repurchases. The firm will remain leveraged, using extra capital for opportunistic acquisitions while using its heady cash flow to pay off its principal and interest.

Bulls Say’s

  • TE Connectivity is a leader in the automotive connector and sensor market, enabling OEMs to build more advanced and efficient electric and autonomous vehicles. 
  • TE’s products are specialized for mission-critical applications in harsh environments, where reliable performance creates sticky customer relationships. 
  • TE’s ongoing footprint consolidation should allow it to expand its midcycle operating margins and improve its cash flow.

Company Profile 

TE Connectivity is the largest electrical connector supplier in the world, supplying interconnect and sensor solutions to the transportation, industrial, and communications markets. With operations in 150 countries and over 500,000 stock-keeping units, TE Connectivity has a broad portfolio that forms the electrical architecture of its end customers’ cutting-edge innovations.

(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

Corning’s Q4 Reaffirms Expectations for Long-Term Growth Despite Short-Term Margin Pressure

Business Strategy and Outlook

Corning is a materials science behemoth with differentiated glass products for televisions, notebooks, mobile devices, wearables, optical fiber, cars, and pharmaceutical packaging. In its 170 years of operation, the company has constantly innovated (including inventing glass optical fiber and ceramic substrates for catalytic converters) and oriented itself toward evolving demand trends that it can serve through its core competency of materials science. 

Corning is able to use its scale to invest heavily in research and development–$1 billion or more per year–and spread these expenses across its five segments. Centralizing R&D allows the firm to manufacture products for a materially lower cost than its competitors, all while using this hefty investment to maintain an innovation lead that results in leading share positions in its end markets. Corning’s cost advantage and intangible assets result in a narrow economic moat.

Financial Strength

Narrow-moat Corning capped off the year with strong fourth-quarter results, coming in at the top end of its guidance ranges for the top and bottom lines. Corning’s fourth quarter–and 2021 in general–show the firm reaping the benefits of its diverse end-market exposure and enjoying broad-based demand. The firm uses a combination of debt and strong operating cash generation to fund its capital and debt obligations, and this trend to continue. As of Dec. 31, 2021, Corning had $7 billion in total long-term debt and $2.1 billion in cash on hand. While the firm is highly leveraged, it has the longest debt maturity of any S&P 500 company, with debt maturities upward of 20, 30 and 40 years.

Through 2026, the company has barely $1 billion coming due. Corning is a reliable generator of free cash flow, despite capital-intensive businesses. Since 2016, Corning has averaged more than $700 million in free cash flow each year, even with the impact of COVID-19 in 2020. After $1.8 billion in free cash flow in 2021, it is expected that at least $1 billion in annual free cash flow over our explicit forecast.

Bulls Say’s 

  • Corning boasts a leading share in four distinct end markets: display glass, optical fiber, cover glass, and emissions substrates/filters. 
  • Corning’s portfolio is aligned toward global secular trends of increasing connectivity and efficiency. 
  • Corning’s debt has the longest average time to maturity of the entire S&P 500, giving it ample time and liquidity to fulfill its obligations.

Company Profile 

Corning is a leader in materials science, specializing in the production of glass, ceramics, and optical fiber. The firm supplies its products for a wide range of applications, from flat-panel displays in televisions to gasoline particulate filters in automobiles to optical fiber for broadband access, with a leading share in many of its end 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.

Categories
Shares Small Cap

oOh!media entire business model hinges on its portfolio of leasehold concessions

Business Strategy and Outlook

OOh!media is strongly-positioned to benefit from the positive dynamics driving the Australian (and New Zealand) outdoor advertising industry. This has seen outdoor’s share of the total advertising pie lift from 3.5% in 2009 to 5.7% prior to COVID-19. A key Achilles heel for the outdoor advertising industry was the lack of reliable audience measurement. However, with the 2010 launch of measurement of Outdoor Visibility and Exposure, or MOVE, the medium now has greater legitimacy and offers a more robust way for marketers to assess the return on money allocated to outdoor advertising. Converting a traditional outdoor advertising site to a digital one is attractive to marketers as it allows creative flexibility, immediacy and premium presentation. Digital conversion also benefits the outdoor advertising operator as it attracts new clients, allows greater inventory utilisation and offers yield management flexibility. 

Financial Strength

oOh!media’s 2021 full-year result release in February with our unchanged AUD 1.40 fair value estimate 7% below the current stock price. This is despite a 24% stock price fall from the recent high on Oct. 20, 2021, compared with an 8% fall for the S&P/ASX 200 index over the same period. Radio finished the quarter up just 10%, after increasing 6% and 14% in October and November, respectively. Even digital advertising growth is likely to have slowed to mid-teens level in the December quarter−solid but down from circa 40% growth in the first three quarters of 2021. It is forecasted that no-moat rated oOh!media to report a 17% revenue increase in 2021 to AUD 499 million, implying second-half growth of 12% to AUD 247 million. This is significantly down from the 23% recorded in the first half, and market growth of 51% in the third quarter

At the end of June 2021, net debt/EBITDA was 1.1 times, pre AASB 16. It is forecast that this to fall to 1.0 by the end of 2021, within the renegotiated 3.25 covenant limit. The current dividend payout policy is reasonably conservative at between 40% and 60% of net profits after tax but before amortisation acquired intangibles, allowing further investment in inventory digitisation. However, due to the uncertain impact of the coronavirus outbreak, there were no dividends in 2020 and resumption of just AUD 0.04 in 2022.

Bulls Say’s 

  • Outdoor advertising is a growth industry, aided by structural tailwinds such as increasing audience, more reliable measurement and conversion to digital. OOh! media has the operating expertise and the strategic nous to exploit these dynamics. 
  • Like all players in the outdoor advertising space, oOh! media’s business hinges on its portfolio of leasehold contracts with owners of sites and properties, exposing the group to periodic renewal risks. 
  • The outdoor advertising industry is both highly competitive and highly leveraged to economic conditions, marketing budgets, and consumer confidence.

Company Profile 

OOh!media operates a network of outdoor advertising sites with a commanding share of the Australian market of around 30%, and has also presence in New Zealand. It boasts a diverse portfolio of locations to service the needs of outdoor advertisers, and is particularly strong in the roadside billboard and retail (such as shopping malls) segments. OOh!media offers these services by entering into lease arrangements with owners of outdoor sites–effectively an intermediary allowing site owners to monetise their visible space in high-traffic areas. In late September 2018, the group completed the acquisition of Adshel from HT&E for AUD 570 million, a deal that cements its competitive position in the face of industry consolidation. 

(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

Abbott benefits from Omicron surge, but Covid-19 could turn to headwind in 2022

Business Strategy and Outlook:

Since 2013, Abbott has continued to improve the profitability of its four segments: nutritionals, devices, diagnostics, and established pharmaceuticals. Although the company has made progress over the last nine years, it still lags key rivals on profitability measures despite competing in businesses that are characterized by attractive margins. Abbott’s efforts to improve efficiency, including streamlining its distribution channels and building facilities in lower-cost locations like China and India, have demonstrated some success. But there is still room for improvement as we look at the company’s consolidated profitability.

As with all medtech companies, Abbott’s big challenge, over the longer term, is to fuel innovation. The bar for securing reimbursement for new technology has risen as payers have become more stringent about clinical data before committing to payment. While Abbott has seen recent success with FreeStyle Libre, we’re less impressed with its historical record on new product launches. Compared with key medical device competitors, including Boston Scientific, Medtronic, and Edwards Lifesciences, Abbott hasn’t cultivated similar revolutionary advancements. The firm’s forte seems to focus on incremental improvements to the existing technology platforms it has acquired over the last 15 years.

Financial Strength:

The fair value estimate of Abbott remains same at $104 per share, which assumes rapid diagnostics revenue will decline by 23% in 2022 as COVID-19 transitions to an endemic disease. That decline will be offset by ongoing recovery in non-pandemic procedure volume, and Abbott’s latest new product launches, including Amplatzer Amulet for left atrial appendage closure.

Abbott’s balance sheet is a pillar of strength and can weather the COVID-19 crisis with ease. The large acquisitions of St. Jude Medical and Alere increased leverage, and Abbott enjoyed relatively less financial flexibility during 2016-17 but remained steady enough to meet its debt obligations and continued to raise its dividend. More recently, Abbott’s debt/EBITDA has hovered just over 2 times, which reflects the firm’s ability to generates $4 billion-$5 billion in annual free cash flow, and closer to $7 billion thanks to the COVID-19 windfall. This also means Abbott can handily engage in more tuck-in acquisitions while also supporting sizable increases in its dividend.

Bulls Say:

  • Abbott has been investing in structural heart products and recently entered the left atrial appendage closure market. 
  • Early results from an investigational clinical trial on the Tendyne transcatheter mitral valve were favorable. If the pivotal trial results are favorable, this could give a boost to Abbott’s structural heart unit. 
  • Abbott’s sale of its established pharma business in developed markets to Mylan and its acquisition of CFR and Veropharm have put the branded generics business in a strong position to benefit from growing demand in emerging markets.

Company Profile:

Abbott manufactures and markets medical devices, adult and pediatric nutritional products, diagnostic equipment and testing kits, and branded generic drugs. Products include pacemakers, implantable cardioverter defibrillators, neuromodulation devices, coronary stents, catheters, infant formula, nutritional liquids for adults, molecular diagnostic platforms, and immunoassays and point-of-care diagnostic equipment. Abbott derives approximately 60% of sales outside the United States

(Source: Morningstar)

General Advice Warning

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

Categories
LICs LICs

Clime Capital Limited: LIC with returns higher than market yield and regular income through dividends

Clime Capital Limited (ASX: CAM) is a Listed Investment Company (LIC), which listed on the ASX in February 2004. The portfolio is managed by Clime Asset Management Pty Limited, a wholly owned subsidiary of Clime Investment Management Limited (ASX: CIW), an ASX-listed asset management company with $1.18b funds under management (FUM) and $5.1b funds under management and advice (FUM&A) as at 30 June 2021.

The Company’s primary objective is to provide an above market yield. In addition to this, the Company seeks to provide higher risk-adjusted returns to the benchmark index (ASX All Ordinaries Accumulation Index) in comparison to its peers. It provides exposure to a portfolio that is divided into three classes: (1) Australian equity exposure; (2) Unlisted fixed income; and (3) Cash. 

The portfolio will predominantly provide exposure to an all cap Australian equities portfolio.

The Manager has the ability to keep safe the cash in case the attractive investment opportunities cannot be identified. While there are no mandated limitations, the Manager will typically hold no more than 30% cash at any given time. The portfolio will comprise 35-55 securities. The Manager is paid a management fee of 1.0% per annum of the gross assets of the Company and is eligible for a performance fee of 20% of the outperformance of the ASX All Ordinaries Accumulation Index, subject to performance being positive.

An investment in CAM is suitable for those investors seeking an above market yield and regular income with the Company paying quarterly dividends. The Company will seek to generate the above market yield from a portfolio of all cap domestic equities and a portfolio of fixed income securities.

CAM provides a slightly unique exposure to other LICs with the addition of the unlisted fixed income exposure combined with the all cap domestic equities exposure.

About the company:

Clime Capital Limited (ASX: CAM) is a Listed Investment Company (LIC) with a long history, with the Company listing on the ASX in February 2004. The portfolio is managed by Clime Asset Management Pty Limited, a wholly owned subsidiary of Clime Investment Management Limited (ASX: CIW), an ASX-listed asset management company with $5.1b funds under management and advice (FUM&A) as at 30 June 2021. The Company’s market cap has grown over seven-fold since listing. Upon listing, the Company had a market cap of $17.64m. The Company has a relatively open-ended mandate and the portfolio composition has changed over time. The portfolio can currently broken down into three sleeves: (1) Australian equity exposure; (2) Unlisted fixed income; and (3) Cash. The portfolio will predominantly be exposed to domestic equities with exposure to stocks of all sizes with a small exposure to unlisted fixed income investments, which provides additional income to the portfolio and satisfies the interest payments for the Convertible Notes.

(Source: IIR, FNArena)

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

IFF Positioned for Long-Term Success as the Largest Global Specialty Ingredient Producer

Business Strategy and Outlook

International Flavors & Fragrances is a global leader in the specialty ingredients space. The company has grown rapidly via acquisition, having added DuPont’s nutrition and biosciences business in 2021 and Frutarom in 2018. IFF holds an enviable asset portfolio focused on value-added products used in food and beverages, fragrances, personal care, enzymes, probiotics, and pharmaceuticals. Its legacy business operated in the $20 billion-plus flavors and fragrances industry with a roughly 25% market share. Key competitors include Givaudan (25%), Firmenich (16%), and Symrise (12%). These four flavor and fragrance companies command roughly three fourths of the global market. IFF’s products affect the desired taste, smell, or mouth feel based on customer specifications.

IFF has four reporting segments divided by end market. Nourish is the largest segment, which generates a little over half of revenue. This segment holds IFF’s legacy taste segment and DuPont’s ingredients business, including plant-based protein formulations and other vital ingredients like texturants and emulsifiers.

Health and biosciences, which generates a little over 20% of revenue, is mostly the legacy Danisco industrial enzymes and cultures (probiotics) businesses. IFF has a roughly 20% share in both the enzymes market and the cultures market. 

The scent segment, consisting of IFF’s legacy fragrances business, generates a midteens percentage of revenue. IFF’s smallest component is pharma solutions, producing inactive ingredients such as excipients (pill binders) and time-release polymers.

 Proprietary formulations are critical drivers of revenue growth. For example, rather than supplying simple flavor solutions, IFF can deliver innovative solutions that modulate the consumer experience. These “fine-tuning” solutions can reduce costs for customers, allowing for the use of cheaper ingredients, extend a product’s shelf life, or add probiotic nutrition. Additionally, the company’s offerings help customers remove undesirable content (fat, sugar, and sodium) from a product without sacrificing the consumer experience.

Financial Strength

IFF has an elevated debt level, thanks to the roughly $10 billion in debt that the company raised to fund the DuPont nutrition and biosciences and Frutarom acquisitions. As of Sept. 30, 2021, total debt was a little over $11.5 billion and the company held roughly $0.8 billion in cash and cash equivalents. Management reported a net financial debt/adjusted EBITDA ratio of 4.1 times as of Sept. 30, 2021. However, management plans to use excess cash flow to repay debt, toward the goal of achieving a net debt/EBITDA ratio of less than 3 times by early 2024, or 36 months after the DuPont nutrition and biosciences acquisition closed. While IFF will carry elevated leverage, its indebtedness should prove manageable, given the relatively stable cash flows we expect the company to generate. Further, IFF is undergoing a portfolio review to divest noncore assets as a way to accelerate debt reduction, such as the microbial control divestiture in 2022 for $1.3 billion. As such, we believe IFF should be able to meet all of its financial obligations, including dividends, pensions, and postemployment benefit liabilities.

Bulls Say’s

  •  As the largest specialty ingredients producer globally, IFF holds an enviable portfolio of market-leading products spanning multiple industries.
  • The company is well positioned to capitalize on further growth in developing markets, where it generates the most sales.
  • IFF’s high R&D spending (around 6% of sales) acts as a barrier to entry, underpins innovation, and promotes future growth

Company Profile 

International Flavors & Fragrances produces ingredients for the food, beverage, health, household goods, personal care, and pharmaceutical industries. The company makes proprietary formulations, partnering with customers to deliver custom solutions. The nourish segment, which generates roughly half of revenue, is a leading flavour producer and also sell texturants, plant-based proteins, and other ingredients. The health and biosciences business, which generates around one fourth of revenue, is a global leader in probiotics and enzymes. IFF is also one of the leading fragrance producers in the world. The firm also sells pharmaceutical ingredients such as excipients and time-release polymers.

(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

A strong option for investors seeking a low-volatility approach to investing

Fund Objective

The fund aims to achieve capital growth equal to, or greater than the Benchmark with lower volatility over the long term by investing globally in listed securities of companies having their registered office or exercising a preponderant part of their economic activities in emerging countries through the underlying fund.

Approach

The strategy’s robust foundation and consistent execution remain attractive features. The rules based, quantitative process is built on academic research demonstrating low-risk stocks leads to better risk adjusted returns. After an initial liquidity filter, Robeco’s quant model ranks the 2,000-stock universe on a multidimensional risk factor (volatility, beta, and distress metrics), combined with value, quality, sentiment, and momentum factors. In recent years, enhancements to refine the model have been added, including short-term momentum-driven signals that can adjust a stock’s ranking up or down by a maximum 10 percentage points. This should prioritise buy decisions for stocks that rank high in the model and score well on short term signals, and vice versa. From 2020 the team also allows liquid mega-caps to have more weight in the portfolio. Top-quintile stocks are typically included in an optimisation algorithm that considers liquidity, market cap, and 10-percentage-point country and sector limits relative to the MSCI Emerging Markets Index. A 200- to 300-stock portfolio is constructed with better ESG and carbon footprints than the index; rebalancing takes place monthly, generating annual turnover of about 25%. Stocks are sold when ranking in the bottom 40% of the model.

Portfolio

The defensive nature of the strategy translates into a higher allocation to low-beta and high-yielding stocks in the utilities, consumer staples and communication services sectors, while consumer discretionary stocks are a large underweight. The valuation factors embedded in the model have steered the fund clear from index heavyweight Meituan, while positions in Alibaba and Tencent were sold in August and September 2021, respectively. The quant approach gives management wide latitude to invest across the market-cap spectrum, and the diversified 200- to 300-stock portfolio has long exhibited a small/mid-cap bias compared with the index. However, the team’s decision to increase the maximum absolute weight in mega-caps to 4% from 3% for liquidity purposes has increased top-10 concentration to around 20%, double the level at inception. Still, 29% of assets remain invested outside of large- and mega- caps, about three times the MSCI Emerging Markets index’ allocation.

Performance

This defensive strategy has generally offered good volatility reduction during turbulent markets, capturing 67.77% of the losses of the MSCI Emerging Markets Index since inception, and 76.89% of the upside return. It did not live up to expectations in the coronavirus-dominated markets of 2020, falling more than the index, explained by market dynamics that did not work in its favour. Exposure to dividend stocks and traditional low-risk stocks did poorly compared to high-growth and momentum stocks; the tilt to mid and small caps also detracted. The portfolio lagged during the subsequent recovery that benefited underweight technology and e-commerce stocks. While the value rally in the final quarter did help, cyclical value stocks that are not favoured rallied the most. Consequently, the fund underperformed the Emerging Markets Minimum Volatility Index by 11 percentage points. Things changed in 2021, benefiting from low risk exposure and value tilt during the correction of Chinese e-commerce stocks following a regulatory crackdown. Taiwanese financials and Indian IT stocks aided returns, helping to recoup lost grounds. The fund’s alpha since inception versus the MSCI EM index remains positive, yet slightly behind the minimum volatility index. Although three- and five-year absolute returns have been below index, Sharpe ratios are broadly similar to index with a lower drawdown since inception.

About the fund

The fund aims to achieve capital growth equal to, or greater than the Benchmark with lower volatility over the long term by investing globally in listed securities of companies having their registered office or exercising a preponderant part of their economic activities in emerging countries through the underlying fund.

The investment strategy of the underlying fund seeks to capture the low risk anomaly. Analysis by Robeco has shown that low-risk stocks (in terms of volatility and beta) are able to generate returns equal to, or greater than, the market with lower associated risks. The beta of a stock or portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that the asset is being compared to.

(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

American Airlines Group Inc. : An 80%-90% recovery in business travel that consequently increases at GDP levels over the average term.

Business Strategy and Outlook

American Airlines is the largest U.S.-based carrier by capacity. Before the coronavirus pandemic, much of the company’s story was based on realizing cost efficiencies from its transformational 2013 merger with U.S. Airways and strengthening the firm’s hubs to expand margins. While we think that American Airlines has done a good job at limiting unit cost increases, we note that the firm lagged peers in unit costs over the previous aviation cycle. Management sees the pandemic crisis as an opportunity to structurally improve the firm’s cost position relative to peers.

In the leisure market, it is expected low-cost carriers to prevent American Airlines from increasing yields with inflation. American’s basic economy offering effectively serves the leisure market, it is not expected that the firm to thrive in this segment. A leisure-led recovery in commercial aviation is anticipated, reflecting customers being more willing to visit friends and family and vacation in a pandemic than they are to go on business travel.

American Airlines will participate in the recovery of business and international leisure travel after a vaccine for COVID-19 becomes available. It is suspected that a recovery in business travel will be critical for American, as the firm’s high-margin frequent-flier program is closely tied to business travel. Business travellers will often use miles from a co-branded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks pay top dollar for frequent-flier miles, which gives American a high-margin income stream.

The COVID-19 pandemic has presented airlines with the sharpest demand shock in history, and many of our projections are based on our assumptions around how illness and vaccinations affect society. We’re expecting a full recovery in capacity and an 80%-90% recovery in business travel that subsequently grows at GDP levels over the medium term.

Financial Strength

American is the most leveraged U.S.-based major airline due to its fleet renewal program and from the COVID-19 pandemic. As the pandemic has wreaked havoc on air travel demand and airlines’ business model, liquidity has become more important in 2020 than in recent years. American Airlines, more than peers, increased leverage, and diluted equity during the COVID-19 pandemic. We think American Airlines’ comparably higher financial leverage will make it difficult for the firm to maneuver going forward, and that management will have few capitals allocation options other than deleveraging post-pandemic. American Airlines came into the crisis with considerably more debt than peers, with gross debt to EBITDA sitting at roughly 4.5 times in 2019. American ended 2021 with $38.1 billion of debt and $13.4 billion of cash. It is expected that American Airlines will use incremental free cash flow to deleverage after the crisis. We anticipate EBITDA expansion and debt reductions will reduce gross debt/EBITDA to roughly two to three turns in the 2025-26 timeframe. The firm has $2.6 billion of debt coming due in 2022, and we expect that the firm will use cash on the balance sheet to pay the debt.

Bulls Say’s

  • American Airlines has the youngest fleet among U.S. major airlines, which should dampen fuel expense and maintenance going forward.
  • American Airlines has largely completed its fleet renewal, which should decrease capital expenditures going forward.
  • Leisure travellers are becoming more comfortable with flying during the COVID-19 pandemic

Company Profile

American Airlines is the world’s largest airline by scheduled revenue passenger miles. The firm’s major hubs are Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C. After completing a major fleet renewal, the company has the youngest fleet of U.S. legacy carriers.

(Source: Morningstar)

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