Category: Technology Stocks

Tech stocks refer to any stock involved in the technology sector, from semiconductor producers to software providers. Tech stocks are often a leading indicator for the economy and the stock market. Technology stocks generally follow the pattern of more innovation in the market & new development of product.

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Technology Stocks

Caterpillar Reiterates its Margin, Free Cash Flow and Services Targets at its 2022 Investor Day

The Japan Finance and market, Data Chart.

Business Strategy & Outlook

The Caterpillar will continue to be the leader in the global heavy machinery market, providing customers an extensive product portfolio consisting of construction, mining, energy, and transportation products. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands. Caterpillar’s strong brand is underpinned by its high-quality, extremely reliable, and efficient products. Customers also value Caterpillar’s ability to lower the total cost of ownership. The company’s strategy focuses on employing operational excellence in its production process, expanding customer offerings, and providing value-added services to customers. Since 2014, Caterpillar has taken steps to reduce structural costs and its fixed asset base by implementing cost management initiatives and by either closing or consolidating numerous facilities, reducing its manufacturing floorspace considerably. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Caterpillar provides, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed.

Caterpillar has exposure to end markets that have attractive tailwinds. On the construction side, the company will benefit from the $1.2 trillion infrastructure deal in the U.S. The country’s road conditions are in poor condition, which has led to pent-up road construction demand. In energy, the improvement in the price of oil since COVID-19 lows will encourage exploration and production companies to increase oil and gas capital expenditures, leading to increased sales of Caterpillar’s oil-well-servicing products. That said, mining markets will have limited upside, as fixed-asset investment growth in China starts to slow, likely capping commodity price upside.

Financial Strengths

Caterpillar maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of 2021, coming in at 0.2. Total outstanding debt, including both short- and long-term debt was $9.8 billion. Caterpillar’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. In terms of liquidity, 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 $8.4 billion on its industrial balance sheet. One can also find comfort in Caterpillar’s ability to tap into available lines of credit to meet any short-term needs. Caterpillar has access to $10.5 billion in credit facilities for the consolidated business (including financial services), of which, $2.8 billion is available to the industrial business. Caterpillar’s focus on operational excellence in its industrial operations and improved cost base has put the company on better footing when it comes to free cash flow generation throughout the economic cycle. The company can generate $6 billion in free cash flow in midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $28 billion in 2021, along with $27 billion in finance receivables and $826 million in cash. As per view view, Caterpillar enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, substantially boosting Caterpillar’s sales growth.
  • Higher fixed-asset investment growth in China strengthens support for increased investment in mining capital expenditures, benefiting Caterpillar
  • A continued recovery from the temporary demand shock in oil prices will lead to increased oil and gas capital expenditures, leading to more engine, transmission, and pump sales for Caterpillar.

Company Description

Caterpillar is an iconic manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest manufacturer of heavy equipment with over 13% market share in 2021. The company is divided into four reportable segments: construction industries, resource industries, energy and transportation, and Caterpillar Financial Services. Its products are available through a dealer network that covers the globe with about 2,700 branches maintained by 160 dealers. Caterpillar Financial Services provides retail financing for machinery and engines to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Caterpillar product sales.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Technology Stocks

Tencent Music’s Long-Term Growth is Underpinned by Continuing Increase in Subscribers

Business concept, tablet with information chart

Business Strategy & Outlook:   

With over 600 million monthly active users, or MAU, Tencent Music Entertainment, or TME, is the largest music streaming platform in China. The firm monetizes through live streaming, a high margin business generating over 60% of revenue and over 100% of operating profit, while subscription-based music streaming remains loss-making. A low subscriber-to-user ratio in the mid-teen percentages offers a long runway for paying user growth in music streaming. With platforms putting more content, such as popular songs, behind the paywall, more users would subscribe, and fuel top-line growth. Potential revenue growth also comes from advertising, where the firm’s investments into long-form audio are likely to open up more ad inventory. Even though social entertainment (mainly video live streaming) contributes most of the firm’s revenue, still there will be minimal growth ahead given competition from Douyin and Kuaishou. 

With China’s antitrust laws putting an end to TME’s exclusive music copyright agreements, more competition is anticipated for users. Its peer Cloud Music is aiming to bridge the content gap by signing with previously inaccessible labels. Despite competitive headwinds, TME will remain the largest platform for music streaming, benefiting primarily from network effect and intangible assets that maintain user engagement and stickiness. The subscription prices are unlikely to go lower because: 1) competitors are making losses and have little incentive for price competition; and 2) Chinese streaming platforms offer almost the lowest prices worldwide, so more discounts will be less effective in attracting users. Some margin upside is expected for Tencent Music as growing subscription revenue brings more cost leverage. Unlike developed markets, the supply side of music in China is more fragmented, with just 30% of licensing from top five labels. As licensors sell their content on a mostly fixed cost basis, TME is well-positioned to see margin expansion as revenue grows.

Financial Strengths:  

TME is financially sound. As of the end of 2021, the firm was sitting on a net cash position of CNY 22 billion, more than three times that of peer Cloud Music. Despite some near-term industry challenges, the firm is expected to generate positive free cash flows over the next years. Taking advantage of the low interest environment, the company issued a total of USD 800 million (CNY 5 billion) senior unsecured notes at below 2% interest in 2020. The debt/equity ratio is running at a manageable 30%, and debt/EBITDA is maintained below 1.5 times as at the end of 2021. The firm shall maintain this capital structure. Given positive free cash flow assumptions, the firm can easily fulfill its debt obligations while simultaneously funding future investment initiatives. The business has been generating positive free cash flows since 2016. In 2021, it generated a free cash flow of CNY 3.5 billion. This is significantly better than peer Cloud Music, who will be burning through cash for the next couple of years. TME is expected to remain cash flow positive over the next five years.

Bulls Say: 

  • Compared with Spotify, TME has plenty of room for subscriber growth that should come about as it moves more music content behind the paywall.
  • TME piggybacks off Tencent’s billion-plus user network. This relationship allows for better retention of users while attracting new ones.
  • By investing in independent artists and long-form audio, TME could better manage content cost over the long term.

Company Description:  

TME is the largest online music service provider in China. It was founded in 2016 with the business combination of QQ Music (founded in 2005), Kuwo Music (founded in 2005) and Kugou Music (founded in 2004) streaming platforms. Tencent is the largest shareholder of TME with over 50% shares and over 90% voting rights held. TME also provides social entertainment services, including music live audio/video broadcasts and online concert services through the three platforms mentioned above, and online karaoke through an independent platform WeSing.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Technology Stocks

Envestnet’s Wealth Solutions Had Secular Growth but Margin Expansion Has Been Lackluster

Business Strategy & Outlook:   

Envestnet was founded in 1999 to offer independent advisors access to a comprehensive wealth-management platform. The firm’s founder, the late Jud Bergman, recognized two major trends in the industry. The first was the move away from the wirehouse firms. The second was the move from a commission-based toward a fee-based model. Wealth solutions represents about 75% of the firm’s net revenue.About half of this consists of asset-based fees with the fee rate dependent on the level of services provided. The factors such as product mix, new client onboardings, and switches from an asset-based to subscription model can affect the fee rate. The other half of wealth solutions include the Tamarac platform geared toward registered investment advisors, subscription software to enterprises, recently acquired financial planning software MoneyGuidePro, and professional services.

Tamarac’s popularity with RIAs has been a strong driver of growth. In 2015, Envestnet acquired Yodlee, which makes up the firm’s data and analytics segment. Yodlee’s revenue consists of its core data aggregation, alternative data to asset managers, and analytics to advisory firms. This segment is less moaty, as Yodlee faces competition from Plaid and MX Technologies as well as many alternative data providers. Following Visa’s announced (but ultimately nixed) acquisition of Plaid at a high, media reports have indicated that Envestnet is looking to sell Yodlee. For now, Envestnet is comfortable keeping Yodlee in its product portfolio. Envestnet believes marketplace exchanges can add to growth. In 2019, the company launched an insurance exchange with six national carriers to connect an advisor’s clients with annuity products. In addition to the insurance exchange, Envestnet launched Advisor Credit Exchange to help advisors address the lending needs of their clients. Envestnet is also focusing on growing asset-based revenue by providing value-added services such as impact portfolios, direct indexing, and tax overlays

Financial Strengths:  

Envestnet’s financial strength is sound. The company has used leverage for acquisitions. As of Dec. 31, 2021, Envestnet has approximately $429 million of cash and $849 million in convertible debt. This equates to a net leverage ratio of about 1.6 times EBITDA. While it’s true that the firm’s wealth solutions segment contains asset-based revenue, net of direct asset-based cost of revenue, these fees are less than 40% of the firm’s revenue. In addition, it is estimated that 40% of Envestnet’s AUM/A are not in equities. And given the fact that most of Envestnet’s remaining revenue is essentially recurring, with the company’s debt levels.

Bulls Say:

  • Envestnet has leading market share, and its product suite offers greater breadth than competitors.
  • Envestnet could pursue strategic alternatives with Yodlee.
  • Envestnet should continue to benefit from the trend of advisors leaving wire house firms to start their own practices and the shift from commission-based to fee- based advice.

Company Description:

Envestnet provides wealth-management technology and solutions to registered investment advisors, banks, broker/dealers, and other firms. Its Tamarac platform provides trading, rebalancing, portfolio accounting, performance reporting, and client relationship management software to high-end RIAs. Envestnet’s portfolio management consultants provide research services and consulting services to assist advisors, including vetted third-party managed account products. In November 2015, Envestnet acquired Yodlee, a provider of data aggregation.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Technology Stocks

No-Moat Orica’s First-Half Earnings Improve but Inflation and Freight Weight

Business Strategy and Outlook

Orica has expanded its mining services business around a leading global market share in explosives. Earnings are leveraged to mining volume and commodity prices. The Australian explosives duopoly affords relatively high margins and returns; however, these are coming under pressure as Orica’s more lucrative three- to four-year contracts mature and are replaced with longer-duration and lower-margin contracts. Orica benefits from resources development activity in Latin America, South Africa, and Russia. Non-Australian explosives usage also depends on construction demand, which is somewhat less cyclical. Orica has grown its explosives business by both organic and acquisitive means. In fiscal 2006 it bought the European, Middle Eastern, African, Asian, and Latin American businesses of Dyno Nobel, which helped provide scale and lower costs. This was followed by divestment of a 70% interest in fertiliser business Incitec Pivot. In fiscal 2007, Orica expanded capacity at its Queensland ammonium nitrate plant and increased capacity at Kooragang Island, New South Wales. An ammonium nitrate plant in Bontang, Indonesia started production in 2012, and there were plans to double capacity at Kooragang Island, but timing will depend on market demand.  Orica also participates in an ammonium-nitrate plant joint venture in the Pilbara iron ore region in Western Australia. 

Orica’s Australian explosives market share is an estimated 55%-60%, with the remainder largely held by peer Incitec Pivot. The Incitec Pivot’s Moranbah, Queensland, plant is included in this estimate. In the U.S., the explosives industry is a concentrated market. Orica has a well-established presence with an estimated market share of 30%-35%. The key competitors are Dyno Nobel (owned by Incitec Pivot), which has similar market share, and Austin Powder. The key markets for explosives in the U.S. are coal and metals mining, as well as construction and quarrying. A focus on higher shareholder returns has improved with investment options subjected to disciplined returns criteria. Orica will not invest in new plant unless an 18% return on net assets can be achieved.

Financial Strength

First-half fiscal 2022 cash conversion fell to just 66% with a sharp increase in working capital leading to negative net operating cash flow of AUD 158 million. The cash outflow saw net debt rise to AUD 1.65 billion versus AUD 1.52 billion at end December 2021. Leverage (ND/(ND+E) increased to 38% from 35% and net debt/EBITDA (based on annualised first-half metrics) is at 2.3. While somewhat high, this remains within company targets and all else equal sub-1.0 net debt/EBITDA is expected by as soon as fiscal 2025. There remains significant headroom to gearing covenants of 57.5% and average drawn debt tenor of 4.7 years is healthy. But in the meantime the leveraged balance sheet bears consideration in any investment decision and contributes to the high fair value uncertainty. 

Orica has AUD 1.7 billion in available liquidity, limited near-term refinancing requirements and headroom to covenants of 57.50% gearing at 2.0 times interest cover. But covenants could be rapidly tested in a circumstance where customers can’t pay and Orica says some customers have been unable to process payments due to physical lockdowns. Despite this, Orica hasn’t identified issues with debtors’ ability to pay otherwise.

Bulls Say’s

  • Orica is a global leader in explosives and part of a duopoly in Australia. It is leveraged to ongoing regional resources demand driven by the industrialisation and urbanisation of China and India. 
  • The intensity of explosives and chemicals used in mining is increasing as ore grades decline and strip ratios increase. 
  • There are a number of organic growth opportunities available to the Orica, particularly the expansion of ammonium nitrate capacity and explosives production.

Company Profile 

Orica is a leading global manufacturer and supplier of chemicals and explosives, primarily to the mining industry. It has operations in 50 countries across six continents. Mining services is the lone growth engine now that the chemicals business has been sold. Orica has an approximate 28% share of the global commercial explosives market. It provided resins, steel bolts, and other products for underground mining and tunnelling though this business is now sold. It also supplies chemicals such as sodium cyanide to the mining industry

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Technology Stocks

Cisco’s Demand Metrics Look Solid, but Supply Chain Challenges Can Inhibit Near-Term Growth

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

Business Strategy and Outlook

The networking equipment behemoth Cisco continues to execute on its strategic focus of increasing recurring revenue via selling software and services to supplement its hardware products. Software and services were more than half of fiscal 2020 revenue, up from 43% in fiscal 2017. Cisco embracing software from hardware disaggregation, and even selling networking chips, can help keep demand for its solutions high although some customers rely on cloud-based resources or generic hardware. Cisco’s plan is assessed as the correct direction for maintainable growth and believe the firm’s strategic shifts through organic developments and acquisitions, keep Cisco as mainstay in today’s networks. The company is the dominant supplier of switches, routers, cybersecurity, and complementary networking products. Cisco’s products are mission critical for network performance, stability, and security. Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends, and Cisco is considered as the only one-stop-shop networking vendor. Cisco is deemed uniquely positioned to interweave complimentary necessities, like networking and security, together to provide comprehensive solutions for clients. 

Despite Cisco’s commanding position in switches and routers, IT professionals are increasingly shifting computer workloads to the cloud, in turn buying less data center hardware. Alongside changing its product offerings, Cisco is moving product sales toward subscription-based offerings, which is considered the preferred method of consumption for cloud-based resources. Cisco is rolling this sales model to additional products, with customers looking to purchase bundles with analytics and security. Cisco is evolving its portfolio at a more rapid rate to stay ahead of trends in areas such as switching, communications, cybersecurity management, software-defined wide-area networking, and analytics. Cisco is expected to continue looking to acquisitions to bolster its capabilities in these areas to offset pressure in maturing market segments.

Financial Strength

Cisco is considered a financially healthy company. With a fiscal 2021 debt/capital ratio of 22%, abundant free cash flow generation, and expected on-time debt payments, there are no fiscal concerns. The company could safely lever back up to fund development projects, acquisitions, and shareholder returns if needed. Cisco has continually exceeded its commitment to return at least 50% of free cash flow, calculated as cash from operating activities minus capital expenditures, to shareholders. Cisco initiated its share repurchase program in 2001, has increased the authorization over time, had about $8 billion remaining at the end of fiscal 2021, with no termination date. Cisco is expected to opportunistically look to purchase shares. Cisco has recurrently raised its dividend year over year, and modest annual increases are forecasted. Even after shareholder returns and debt repayments, the company remains financially flexible with plenty of cash to support acquisitions and its large marketing and R&D expenditures. Growing recurring revenue will provide a steadier income stream, and strong operational and free cash flow generation is projected to continue in the future. Cisco is expected to manage its growing war chest with future cash deployments into strategic developments and acquisitions.

Bulls Say’s

  • Cisco’s one-stop-shop ecosystem, from switches to data analytics, should remain valued as more networking customers migrate to hybrid clouds. 
  • Despite the rise of public clouds, Cisco should continue to grow its customer base via hybrid cloud and software offerings. 
  • The expected rapid proliferation of devices to hit networks should drive customer demand for Cisco products. Cisco’s hardware is considered essential for access points, routing, and switching while software is crucial for analytics, security, and intent-based networking.

Company Profile 

Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The secure, agile networks business contains switching, routing, and wireless solutions. The hybrid work division has products for collaboration and contact center needs. The end-to-end security group has products spanning a variety of threat prevention necessities. The internet for the future division has routed optical networks, silicon, and optics. Optimized application experiences offer solutions such as full stack observability. Services are Cisco’s technical support and advanced services offerings. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Xero Continuing to Create Value Despite Technology Sector Malaise

Business Strategy and Outlook

Xero has grown quickly since incorporation in 2006 to become the largest provider of accounting software as a service, or SaaS, to the SME market in Australia and New Zealand. The company is expected to continue leveraging this strong position to expand quickly in other regions such as the United Kingdom and the United States. SME accounting software users have historically shown little inclination to switch providers, and Xero enjoys annual customer retention rates of over 80%. The inconvenience and operational risks of switching accounting software providers have tended to outweigh the relatively modest potential benefits. The highly fragmented nature of SME and accountant customers and the relatively small annual value per customer mean that suppliers need scale to support ongoing research and development and marketing costs.

Incumbent providers typically have economic moats based on customer switching costs, with large enterprise software providers, like SAP and Oracle, reluctant to enter the SME market because of the level of customer fragmentation and switching costs. However, the transition from desktop- to cloud-based products offers a rare opportunity for relatively new providers to win market share via the transition of customers to cloud-hosted SaaS products that offer material productivity improvements. Switching costs are expected to recapture their earlier resilience once customers transfition to cloud products and accounting software becomes more integrated with third-party software. Relatively low profits are an acceptable price to pay for rapid growth and associated strategic benefits. The capital-light business model should enable returns on invested capital, or ROICs, to comfortably exceed the weighted average cost of capital, or WACC, from fiscal 2020, supporting the narrow economic moat rating. A revenue CAGR of 15% is forecasted over the next decade, driven by an 10% CAGR in subscribers, and an average revenue per user, or ARPU, CAGR of 3%.

Financial Strength

Xero is in good financial health but needs to maintain high revenue growth rates to increase profits and justify its market capitalisation. The company had net cash of NZD 51 million and available liquid resources of NZD 1.1 billion as at March 31, 2022. EBIT margins are projected to expand to around 26% by fiscal 2032, in line with peer companies. As the company matures, the capital-light business model is anticipated to enable strong cash generation. Strong customer retention rates of over 80% should mean earnings volatility will be relatively low in the long term.

Bulls Say’s

  • Xero is experiencing strong revenue and customer growth driven by the transition of desktop accounting software to the cloud, a trend projected to continue for at least the next decade. 
  • Xero operates in the software sector, which is typically an industry with low capital intensity and strong cash generation. Xero is expected to generate strong returns on invested capital and free cash flow in the long term. 
  • Xero has already achieved dominant positions in the New Zealand and Australian cloud accounting markets and is a leading competitor in the U.K. and U. S. markets.

Company Profile 

Xero is a provider of cloud-based accounting software, primarily aimed at the small and medium enterprise, or SME, and accounting practice markets. The company has grown quickly from its base in New Zealand and surpassed local incumbent providers MYOB and Reckon to become the largest SME accounting SaaS provider in the region. Xero is also growing internationally, with a focus on the United Kingdom and the United States. The company has a history of losses and equity capital raisings, as it has prioritised customer growth.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Labor Constraints Derailing Norfolk Southern’s Carloads but Improvement Likely and Pricing Healthy

Business Strategy & Outlook

Norfolk Southern is a well-managed enterprise, and from the start of the rail renaissance in 2004 through 2008, it posted the highest margins among U.S. Class I railroads. However, its operating ratio

(expenses/revenue) deteriorated to 75.4% in 2009 and remained stuck between 69% and 73% from 2010 to 2015. This pales in comparison to progress made by peers Union Pacific and Canadian Pacific, which lack Norfolk’s exposure to Appalachian coal. However, by 2017 the rail was back on track, and it has achieved record ORs in each year since, including an adjusted 60.1% in 2021. In recent years, Norfolk renewed its commitment to pricing discipline and margin gains, particularly via precision railroading initiatives, which have driven more efficient use of locomotive assets, labor, and fuel. The incremental gains as the firm continues to refine its PSR playbook. Of note, in late 2019, former Canadian National CEO Claude Mongeau (2010-16) joined Norfolk’s board of directors to help bolster the rail’s PSR efforts.

Norfolk hauls coal from Illinois and Appalachian mines, and transfers Powder River Basin coal eastward from the Western rails. Thus, coal-demand headwinds and changes in environmental regulations will probably remain a factor over the long run, despite near-term improvement off pandemic lows. That said, coal runs in unit trains hauling exclusively coal (often using customers’ cars), thus the rail can continue to adjust its train and crew starts to match demand conditions. Norfolk generated healthy volume growth near 5% on average within its intermodal franchise over the past decade. In fact, intermodal revenue surpassed coal in 2014 and is now the highest-volume segment (roughly 60% of 2020-21 carloads versus 9% for coal). Capital projects targeting capacity and velocity improvement have helped the rail capitalize on net positive truck-to-rail conversion activity over the years. Norfolk’s domestic intermodal volume face labor and congestion-related constraints lingering into first-half 2022, but the intermodal as a key long-term growth opportunity.

Financial Strengths

At year-end 2021, Norfolk Southern held an ample $839 billion of cash and equivalents compared with $13.8 billion of total debt ($12.1 billion in 2020). Historically, the rail generates steady free cash flow, despite investing heavily in its network (capital expenditure averaged 16% of revenue over the past five years). Norfolk deploys this cash on dividends and share repurchases, and occasionally borrows to boost these returns to shareholders. Share repurchases eased briefly 2020 due to pandemic risk to cash flow, but they ramped back up by year-end, and the repurchase activity to remain active in the years ahead. Norfolk Southern operates with a straightforward capital structure composed mostly of senior notes. In terms of liquidity, the rail also has an $800 million revolving credit facility and a $400 million accounts receivable securitization program for short-term needs–both programs are fully available and undrawn as of third-quarter 2021.

Bulls Say

  • Norfolk Southern reignited operating ratio improvement in 2016 after stagnating over the preceding six years. With help from precision railroading, the rail reached OR records in each of the past four years.
  • Norfolk Southern runs one of the safest railroads in the U.S., as measured by injuries per hours worked; this boosts service levels and helps to keep costs down.
  • Compared with trucking, shipping by rail is less expensive for long distances (on average) and is four times more fuel-efficient per ton-mile. These factors should help support longer-term incremental intermodal growth.

Company Description

Class-I railroad Norfolk Southern operates in the Eastern United States. On roughly 21,000 miles of track, the firm hauls shipments of coal, intermodal traffic, and a diverse mix of automobile, agriculture, metal, chemical, and forest products.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Wide-Moat James Hardie’s Fiscal 2022 Largely as Expected; Shares Look Attractive

Business Strategy & Outlook

 The supportive of Hardie’s strategy. Hardie’s primary strategic objectives are to expand fibre cement’s share of the U.S. exterior siding market and to shift its sales mix to higher-margin products. The goals are mutually reinforcing and achievable. Hardie has been a key beneficiary of the secular decline of vinyl siding owing to the durability advantages of fibre cement. Hardie estimates vinyl’s share of the U.S. exterior siding market has declined from approximately 40% in 2008 to around 25% in fiscal 2021.This trend to persist with Hardie continuing to be a major beneficiary. The Hardie will be able to leverage its research and development capabilities to penetrate other siding categories such as brick, stone, and stucco. Hardie’s fibre cement product innovations can mimic the appearance of these product categories while being less labor-intensive to install than brick and stone and resolving the performance issues of stucco. Hardie is tailoring its product innovations towards higher margin product categories by focusing on the aesthetic performance of the product, generating an emotional attachment from the consumer, and stimulating less price elastic demand. This strategy is supplemented by Hardie’s marketing campaign which aims to communicate Hardie’s value proposition directly to homeowners. Overall, the Hardie will be successful in continuing to expand fibre cement’s share of the exterior siding market while simultaneously shifting its sales mix towards higher margin products.

The Hardie’s intention to further integrate operations with customers. Customer integration provides the facilitation of knowledge between Hardie and its customers, unlocking working capital benefits and providing opportunities for strategic initiatives. The Hardie’s entrenched customer relationships as a key aspect of the business’ wide economic moat.

Financial Strengths

Hardie declared a final dividend of USD 30 cents per share, taking its fiscal 2022 dividends to USD 70 cents per share. Dividends will be unfranked for Australian taxation purposes. An annual payout ratio of 60% of underlying earnings, the midpoint of Hardie’s 50%-70% targeted payout range. 

Hardie runs a conservative balance sheet with leverage— defined as net debt/adjusted EBITDA (excluding the impact of asbestos transactions)—typically within a targeted range of 1-2. Net debt/adjusted EBITDA stood at 0.8 at the end of fiscal 2022. Hardie’s asbestos-related liability—the AICF trust—has a gross carrying value at fiscal 2022 year-end of USD 1.1 billion and remains an overhang. However, payments to fund the liability are capped at 35% of operating cash flow after adjusting for asbestos liability-related payments. While this reduces cash flows available to shareholders over the medium term, the liability shouldn’t constrain the business’ ability to reinvest within itself. The liability being extinguished within the next decade, likely by fiscal 2027.

Bulls Say

  • James Hardie is poised to benefit from the secular growth of fibre cement siding at the expense of vinyl, brick, stone, and stucco.
  • James Hardie’s strategy of shifting its sales mix to higher-margin products will expand its EBIT margins and enhance return on invested capital.
  • James Hardie’s wide economic moat should protect its ability to earn above its cost of capital over the economic cycle.

Company Description

James Hardie is a producer of fibre cement construction materials. Hardie predominantly serves the residential construction industry with its flagship fibre cement siding product range. The group’s key segment is North America, where it derives around 70% of group earnings from the sale of fibre cement exterior siding and 10% from the sale of fibre cement interior boards. In 2021, the group acquired Fermacell, an exterior and interior products business headquartered in Germany and with operations throughout Europe

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

JD is seeing signs of Bottoming Out, Downgrading 2022 Estimates

Business Strategy & Outlook:  

JD.com has emerged as a leading disruptive force in China’s retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share has increased from 21% in 2016 to 27% in 2020. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model. JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. JD is the largest retailer in China by revenue. Among listed Chinese peers, JD’s net product revenue in 2020 was two to three times higher than for Suning, the second-largest listed retailer. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. The increase in mix from higher-margin third-party platform business and efficiency of scale will also help lift margins. In the medium term, the investment into community group purchase and JD logistics, and the higher mix of lower-margin supermarket category will hold back some of the margin gains. Starting in April 2017, the logistics business became an independent business unit that opens its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply chain management, integrated warehouse, and delivery services to penetrate into less developed areas. As the logistics business gains scale and reaches higher capacity utilization, the gross profit margin shall improvement. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.

Financial Strengths: 

JD.com had a net cash position of CNY 135 billion at the end of 2020. Its free cash flow to the firm has continued to generate positive FCFF at CNY 8.1 billion in 2020. JD has not paid dividends. JD.com has invested heavily in fulfilment infrastructure and technology in recent years, leading to concerns about its free cash flow profile and margin improvement story. The management will put more emphasis on growing revenue per user, expansion into lower-tier cities and the businesses’ profitability. Therefore, JD will not invest in new areas as aggressively as before, so JD will be able to maintain positive non-GAAP net margin versus being unprofitable before. its financial strength will improve in future. Most of the initial investments in the third-party logistics business have been carried out, and utilization of the warehouses has picked up. Its technology team is already in place without the need to add substantial headcounts. JD will also be cautious in its investment in the group-buying business and new retail, given a profitable business model has not been established in the market. JD has tried to improve its asset-heavy model by transferring a portfolio of warehouses to establish a CNY 10.9 billion logistics property core fund in partnership with the sovereign wealth fund of Singapore, GIC. JD will own 20% of the fund, lease back the logistics facilities, and receive management fees for managing the facilities. The deal will be completed in phases with the majority of them completed in 2019.

Bulls Say: 

  • JD.com’s nationwide distribution network and fulfilment capacity will be extremely difficult for competitors to replicate. 
  • As its first-party business gains scale, cost advantage will lead to lower sourcing costs and higher margin.
  • JD is now the largest supermarket in China, the high- frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.

Company Description: 

JD.com is China’s second-largest e-commerce company after Alibaba in terms of gross merchandise volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Synopsys Outperforms With IP Sales Leading the Way Amid Rising Technical Complexity; FVE Up to $334

Business Strategy & Outlook:   

Synopsys provides electronic design automation (EDA) software, intellectual property (IP), and software integrity (SI) products that are critical to the semiconductor chip design process. As secular trends toward artificial intelligence, 5G communications, autonomous vehicles, and cloud computing, among others, accelerate, Synopsys will benefit from both the rising complexity of chip designs and the advancing digitalization of various end markets. The narrow-moat Synopsys has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform amid a growing semiconductor landscape. Synopsys’ products are transformational in enabling increasingly complex integrated circuit (IC) and system-on-chip (SoC) design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Synopsys is the largest player in the EDA space, and specifically in digital design as well. With a larger digital exposure, and it is discovered that Synopsys privy to higher growth vectors and as a result expect growth greater than that of top competitor Cadence. Outside of core EDA, Synopsys’ IP and SI businesses as benefiting from industry trends. As systems companies increasingly design their own differentiated silicon in-house, and Synopsys to benefit as its customer base expands beyond traditional semiconductor designers. This trend in achieving technological differentiation through chip customization to support IP adoption, as leveraging IP blocks for standardized components allows for significant time and resource savings and reallocation to differentiating components. Further, given the rising complexity of chip design, rising cost of failure, and increasing importance of software security, Synopsys’ growing SI business presents an important point of differentiation for the company. Reflecting the mission criticality of EDA tools, Synopsys exhibits negligible churn, with customer retention consistently at approximately 100%, and has relationships with all major chip design companies in the United States.

Financial Strengths:  

Synopsys is in a very healthy financial position. As of January 2022, Synopsys had $1.1 billion in cash and cash equivalents versus $24 million in debt. The firm repaid its $75 million outstanding term loan balance in 2021 and is now solely liable for a 12-year credit agreement of approximately $33 million in aggregate, of which about $24 million is outstanding as of January 2022. Approximately 90% of Synopsys’ revenue is of a recurring nature, given that the firm primarily sells time-based licenses. Synopsys’ average license length is approximately three years, with periodic software updates delivered throughout the license’s term ensuring continual access to Synopsys’ evolving technology. The ratable revenue of time-based licenses tends to smooth returns compared with utilizing a perpetual license model, allowing for better visibility into the future of the business. Synopsys is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows. Free cash flow margin has grown from 21% in fiscal 2017 to 33% in fiscal 2021, and return on invested capital is increasingly widening its spread above cost of capital. 

Bulls Say:  

  • Secular tailwinds in chip design such as 5G, Internet of Things, AI, and others should increase demand for EDA tools and support growth for Synopsys.
  • The growing Software Integrity business enables a larger TAM for Synopsys and addresses expanding demand for real-time identification of security vulnerabilities across the entire software development lifecycle.
  • Synopsys provides mission-critical EDA software, having relationships with all major domestic chip designers and retention rates of approximately 100%.

Company Description: 

Synopsys is a provider of electronic design automation (EDA) software, intellectual property (IP), and software integrity (SI) products. EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. The firm’s growing SI business allows customers to continuously manage and test the code base for security and quality. Synopsys’ comprehensive portfolio is benefiting from a mutual convergence of semiconductor companies moving up-stack toward systems-like companies, and systems companies moving down-stack toward in-house chip design. The resulting expansion in EDA customers alongside secular digitalization of various end markets benefits EDA vendors like Synopsys.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

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